Earnings Call Transcript - HRZN Q1 2025

Operator, Operator

Greetings and welcome to the Horizon Technology Finance Corporation First Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Megan Bacon, Director of Investor Relations and Marketing. Thank you, you may begin.

Megan Bacon, Director of Investor Relations and Marketing

Thank you, and welcome to Horizon Technology Finance Corporation's first quarter 2025 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; Dan Devorsetz, Chief Operating Officer and Chief Investment Officer; and Dan Trolio, Chief Financial Officer. I would like to point out that the Q1 earnings press release and Form 10-Q are available on the company's website at horizontechfinance.com. Before we begin our formal remarks, I need to remind everyone that during this conference call, the company will make certain forward-looking statements, including statements with regard to the future performance of the company. Words such as believes, expects, anticipates, intends, or similar expressions are used to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are detailed in the risk factor discussion in the company's filings with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31, 2024. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. At this time, I would like to turn the call over to Rob Pomeroy.

Rob Pomeroy, CEO

Welcome everyone and thank you for your interest in Horizon. Today, we will update you on our quarterly performance and our current operating environment. Dan Devorsetz will take us through recent business and portfolio developments. Jerry will then discuss the current status of the venture lending market, and Dan Trolio will detail our operating performance and financial condition. We will then take questions. We began 2025 with guarded optimism that markets were improving and that it was going to be a growth-focused year for Horizon. However, the macro environment, including tariff-related uncertainty over the past several weeks, has dampened our optimism and directly impacted our potential recovery from some of our stressed assets, which was a significant factor in the decrease in our NAV at the end of the quarter. Until the worldwide volatility in the market subsides, the venture capital ecosystem is unlikely to return to the positive path forward, which we had hoped for earlier in the year. Our comments today will focus on our first quarter results and our outlook going forward. Turning to our specific results for the quarter, we generated net investment income of $0.27 per share. As we look to grow our portfolio in future quarters, it is our goal to deliver NII at or above our declared distributions over time. Despite the headwinds, we were able to fund new investments and grow our debt portfolio by $20 million during the first quarter. Based on our outlook and our undistributed spillover income, our Board declared regular monthly distributions of $0.11 per share through September 2025. We once again achieved a portfolio yield on debt investments at or near the top of the BDC industry. We were able to increase our investment capacity early in the year by raising equity from our at-the-market program. We have continued capital support from our lenders under our credit facilities as shown by the recent closing of an increase in the commitment amount and extension of the maturity date of our New York Life credit facility. We increased our committed and approved backlog to nearly $236 million, providing us with a solid base of opportunities to further grow our portfolio over time. As we previously disclosed, in order to further align our advisor and shareholders' interest, our advisor has agreed to waive a portion of its quarterly income incentive fees. If after the payment of that portion, the company's net investment income for the quarter would be less than the distributions declared. Finally, Monroe Capital, the owner of our advisor, completed its partnership with Wendel Group, a French investment company. Monroe and by extension, our advisor, continue to operate independently. As part of the Monroe family, Horizon will benefit from the additional capital, scale, and commitment of the partnership between Monroe and Wendel Group. We are continuing to support more closely with our portfolio companies, as we focus on maximizing the value of our stressed investments and preserving NAV. Moving forward, despite the near-term macro challenges, we remain guardedly optimistic about Horizon's prospects for the following reasons. Our portfolio yield remains among the industry's highest, which we expect will lead to an increased NII over time. Our committed backlog is growing and our pipeline remains full with quality opportunities to invest in new companies. Our liquidity and balance sheet remain strong. And finally, our markets are still active and demand for venture debt capital remains high. We look forward to being a key supplier of such capital. Again, we appreciate your continued interest and support in the Horizon Technology Finance platform. I will now turn the call over to Dan, Jerry and Dan to give you the details of our first quarter results and progress. Dan?

Dan Devorsetz, COO and CIO

Thanks, Rob, and good morning to everyone. Our portfolio at the end of the first quarter stood at $690 million as the high-quality loans we originated during the quarter were offset by prepayments, amortization, and unrealized depreciation in our existing portfolio. In the first quarter, we funded nine debt investments totaling $100 million and two equity investments of $2 million. $31 million of the new debt investments were to three new portfolio companies, all well-sponsored companies with growing revenue in our core life science and technology markets. We also continue to build a sizable pipeline across our target sectors. Looking ahead to Q2, as Rob noted, we are watching the macro environment very closely. We continue to believe we are positioned well for portfolio growth over the long term. But given the current environment, we remain selective in originating loans. During the quarter, we experienced five loan prepayments, including two refinancings totaling $68 million in prepaid principal. Based on anticipated additional prepayment activity in the quarter, we expect a more positive impact on NII in Q2. Our onboarding debt investment yield of 13% during the first quarter remained consistent with our historic levels. We expect to continue to generate strong onboarding yields with our current pipeline of opportunities, which we believe will generate strong net investment income over time. Our debt portfolio yield of 15% for the quarter was once again one of the highest yielding debt portfolios in the BDC industry. Our ability to generate these industry-leading yields continues to be a testament to our bench lending strategy and their execution of such strategy across various market cycles and interest rate environments. As of March 31, we held warrant and equity positions in 105 portfolio companies with a fair value of $32 million. Structuring investments with warrants and equity rights is a key component of our venture debt strategy and a potential generator of shareholder value. In the first quarter, we closed $157 million in new loan commitments and approvals and ended the quarter with a committed and approved backlog of $236 million compared to $207 million at the end of the fourth quarter. We believe our pipeline, combined with our committed backlog with most of our funding commitments subject to companies achieving certain key milestones, provide a solid base to prudently grow our portfolio. As of quarter-end, 89% of the fair value of our debt portfolio consisted of 3 and 4 rated debt investments, while 11% of the fair value of our portfolio was rated 2 or 1. During the first quarter and subsequently in April, we received positive news from several of our portfolio companies, most notably Emalex Biosciences and Kodiak Robotics. Emalex announced that it met the endpoints in its pivotal trial for its drug to treat Tourette syndrome, which trials are the final clinical step to obtain FDA approval. In other positive news, Kodiak, a developer of autonomous trucking technology, became the first company to publicly announce the use of driverless trucks in commercial operations. Kodiak also recently announced its intention to go public via a business combination with a SPAC backed by Ares at a $2.5 billion valuation. Unfortunately, as we have mentioned, we have also experienced negative portfolio events. Most significantly, our investments in both InBrace and Standvast were impacted by the lack of exit markets and the broader macro volatility, including tariffs, resulting in the downgrade of both to one-rated investments and reduction in fair values to zero in the quarter. As we manage our stressed investments, we continue to collaborate closely with all of our portfolio companies and utilize a variety of strategies to seek to optimize returns and create opportunities for potential future value. To summarize, we continue to work diligently on our current portfolio while maintaining an opportunistic approach toward originating new loans in the current environment. Over time and as the macro environment normalizes, we believe we are positioned to grow our portfolio, which should lead to increased NII that covers our regular monthly distributions over time. With that, I'll turn it over to Jerry for a look at the overall venture industry and current environment.

Jerry Michaud, President

Thank you very much, Dan. Turning to the venture capital environment. According to PitchBook, approximately $92 billion was invested in VC-backed companies in the first quarter, up 19% from the fourth quarter of 2024 and the highest level since the first quarter of 2022. However, the elevated deal value was once again due in meaningful part to large AI deals that represented a significant portion of the quarterly value that the tariff-related uncertainty in the marketplace, exit markets for VC-backed tech and life science companies remain nearly shut. Specifically, we saw some momentum for biotech IPOs starting to build in Q4 and continue into January. However, the uncertainty related to policy announcements regarding increasing tariffs on pharmaceuticals, the decrease in NIH and FDA funding and the HHS pause on the development of key vaccines is resulting in significant investor pullback in the life science market and the IPO market all but disappearing. To date, the S&P Biotech Select Industry Index, XBI, is now down 14% year-over-year, reflecting cooling investor sentiment. With continued volatility in the equity markets, investors and M&A acquirers are sitting on the sidelines waiting for greater certainty. That said, with less equity options available to VC-backed tech and life science companies, venture debt is a significant option for early-stage companies to extend liquidity runway while they wait for better market conditions to raise equity or complete M&As. This has created an opportunity for Horizon to seek high-quality, well-sponsored tech and life science companies to add to its portfolio. Q1's total exit value of $56 billion was the highest quarterly total since the fourth quarter of 2021. However, nearly 40% of the total exit value was achieved through just one IPO. Until the tariffs and other macro headwinds clear up, we expect the exit market to remain relatively closed in the near term. With that said, should market conditions persist well past the second quarter with VCs needing to find exits for their long-standing portfolio of companies, it will become even more challenging for VCs to return capital to their limited partners and raise new capital, putting even more pressure on the whole VC ecosystem. To sum up, we remain committed to sourcing high-quality, well-priced investments as we seek to grow our portfolio. We believe market conditions, while very challenging, present a unique opportunity for experienced venture debt firms, including Horizon, to add high-quality, high-yielding debt investments to their portfolios. For Horizon, such opportunities combined with its historical prepayment activity should generate NII that will cover its regular monthly distributions over time. With that, I will now turn the call over to Dan Trolio.

Dan Trolio, CFO

Thanks, Jerry, and good morning, everyone. As Rob and Dan noted, despite headwinds, we were able to grow the portfolio of debt investments in the first quarter as we continue to work towards sustained growth with the goal to continue to cover our regular monthly distributions over time. We also strengthened our balance sheet by completing an amendment to our New York Life facility and by utilizing our ATM program to successfully and accretively sell over 400,000 shares early in the quarter. These actions demonstrate our continued ability to opportunistically access the debt and equity markets. In addition, we continue to diligently work with all of our portfolio companies to optimize outcomes for our investments and improve our credit quality. As such, we believe we remain well positioned to grow our portfolio and create additional value for our shareholders moving forward. As of March 31, we had $126 million in available liquidity, consisting of $77 million in cash and $49 million in funds available to be drawn under our existing credit facilities. We currently have no borrowings outstanding under our $150 million KeyBank credit facility, $181 million outstanding on our $250 million New York Life credit facility and $90 million outstanding on our $100 million Nuveen credit facility, leaving us with ample capacity to grow our portfolio of debt investments. Our debt-to-equity ratio stood at 1.54:1 as of March 31, and netting out cash on our balance sheet, our net leverage was 1.29:1, which was within our target leverage. Based on our cash position and our borrowing capacity on our credit facilities, our potential new investment capacity as of March 31 was $307 million. Turning to our operating results. For the first quarter, we earned investment income of $25 million compared to $26 million in the prior year period, primarily due to lower interest income and fee income on our debt investment portfolio. Our debt investment portfolio on a net cost basis stood at $700 million as of March 31, up 3% compared to $678 million as of December 31, 2024. For the first quarter of '25, we achieved onboarding yields of 13% compared to 12.6% achieved in the fourth quarter of '24. Our loan portfolio yield was 15% for the first quarter compared to 15.6% for last year's first quarter. Total expenses for the quarter were $13.4 million compared to $13.1 million in the first quarter of '24. Our interest expense increased to $8.7 million from $8.2 million in last year's first quarter due to an increase in our average borrowings. Our base management fee was $3.2 million, comparable with the prior year period. We received no performance-based incentive fees in the first quarter as we continue to experience the deferral of incentive fees otherwise earned by our advisor under our incentive fee cap and deferral mechanism. The deferral in the quarter was driven by net realized and unrealized losses on our portfolio. While we expect the advisor will return to earning incentive fees, as we previously mentioned, the advisor has agreed to waive a portion of any incentive fee in a quarter where we do not earn our distributions. Net investment income for the first quarter of '25 was $0.27 per share compared to $0.27 per share in the fourth quarter of '24, and $0.38 per share for the first quarter of '24. The company's undistributed spillover income as of March 31 was $1 per share. We anticipate that the size of our portfolio, along with our portfolios to higher interest rates and our predictive pricing strategy will enable us to continue generating NII that covers our distributions over time. To summarize our portfolio activities for the first quarter, new originations totaled $102 million, which were partially offset by $11 million in scheduled principal payments and $68 million in principal prepayments and partial paydowns. We ended the quarter with a total investment portfolio of $690 million. As of March 31, the portfolio consisted of debt investments in 53 companies with an aggregate fair value of $644 million and a portfolio of warrant, equity, and other investments in 110 companies with an aggregate fair value of $46 million. Based upon our outlook and our undistributed spillover income, our Board declared monthly distributions of $0.11 per share for July, August, and September 2025. We remain committed to providing our shareholders with distributions that are covered by our net investment income over time. Our NAV as of March 31 was $7.57 per share compared to $8.43 as of December 31, 2024, and $9.64 as of March 31, '24. The $0.86 reduction in NAV on a quarterly basis was primarily due to adjustments to fair value in our paid distributions, partially offset by net investment income and accretive sales of equity. As we've consistently noted, nearly 100% of the outstanding principal amount of our debt investments bear interest at floating rates with coupons that are structured to increase if interest rates rise with interest rate floors that will mitigate the impact of decreasing interest rates. This concludes our opening remarks. We'll be happy to take questions you may have at this time.

Operator, Operator

The first question comes from Douglas Harter with UBS. Please proceed.

Unidentified Analyst, Analyst

Hi, this is Cory Johnson filling in for Doug Harter. You mentioned your expectations for covering the dividend in the future, and right now you have $1 in spillover earnings. How are you approaching that? You discussed the uncertain environment and how it might impact growth and your ability to manage that in the interim, but this situation could persist for a while. How are you planning to handle that spillover and how much of it may you return over time?

Dan Trolio, CFO

Yeah. As we mentioned, I think last quarter, a similar question related to the distribution, each quarter, if you look back the last three quarters, we've been able to grow the distribution. And so the plan is to continue to do that through 2025. And as we mention every quarter, we expect to have prepayments. And as you plan out the quarter, you can never determine which quarter that they will happen and the impact on income for the quarter. So this quarter, we had about $68 million in prepayments and refinance. A couple of those were related to refinance and a pay down of revolver. So the fee income was a little bit less than you would normally expect at that level. And as you mentioned, of course, the $1 spillover is something we'll continue to manage throughout the year. We review that every quarter in discussions with the Board and set the distribution. And I'll just point out that we declared distribution through September of '25. And so the confidence is there to continue to cover and pay that distribution as we mentioned over time.

Unidentified Analyst, Analyst

Thank you for the follow-up. You've mentioned that with certain segments of the venture equity market currently closed, venture debt has become a viable alternative for us. As a result, we've expanded our backlog and our debt portfolio has increased. Could you share your perspective on the quality of deals coming your way right now? Are you seeing many promising opportunities, or are there more deals you would prefer to avoid? What does that landscape look like for you at this time?

Jerry Michaud, President

Hi, this is Jerry. Yeah, you kind of hit on it. There's definitely a significantly higher bar relative to selecting the kind of transactions that we would be pursuing in today's market in addition to strong continued equity support based on realistic valuations in today's market versus what they were in '21 and '22, the quality investors, the quality of their funds because many VCs haven't been able to return capital to LPs, and they have limited ability to continue to fund portfolio companies. So just on that side of the equation, the bar has been lifted significantly. But there are a lot of companies or there certainly are companies out there today that are performing very well operationally. They are continuing to be funded by high-quality VCs who do have liquidity. And so those are the kinds of deals that we are looking at. And that does, I have to say, obviously shrink. The pipeline is very wide at the top. It's very narrow at the bottom. And that's the way we have been selecting transactions in this current environment. And that's going to continue, at least as I indicated probably for the next couple of quarters.

Unidentified Analyst, Analyst

Okay. Thank you.

Operator, Operator

The next question comes from Christopher Nolan with Ladenburg Thalmann. Please proceed.