Participants

Robert Pomeroy; Chairman of the Board, Chief Executive Officer; Horizon Technology Finance Corp

Daniel Devorsetz; Chief Operating Officer, Executive Vice President, Chief Investment Officer; Horizon Technology Finance Corp

Gerald Michaud; President, Director; Horizon Technology Finance Corp

Daniel Trolio; Chief Financial Officer, Executive Vice President, Treasurer; Horizon Technology Finance Corp

Douglas Harter; Analyst; UBS Investment Bank

Paul Johnson; Analyst; Keefe, Bruyette, & Woods, Inc.

Christopher Nolan; Analyst; Ladenburg Thalmann & Co. Inc.

Presentation

Operator

Greetings, and welcome to the Horizon Technology Finance Corporation's fourth quarter 2024 conference call. (Operator Instructions) As a reminder, this conference is being recorded.
I'll now turn the conference over to Megan Bacon, Director of Investor Relations and Marketing. Thank you, Megan. You may now begin.

Thank you, and welcome to Horizon Technology Finance Corporation's fourth quarter 2024 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 Q4 earnings press release and Form 10-K 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 factors 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.

Robert Pomeroy

Welcome, everyone, and thank you for your interest in Horizon. Today, we will update you on our quarterly and annual 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 some questions.
We ended 2024 with our portfolio growing for the second consecutive quarter. We expect this trend will continue in 2025. While the net investment income we earned in the fourth quarter resulted in our 2024 NII covering our regular monthly distributions, our net asset value was lower at the end of 2024.
This resulted from the underperformance of our stressed investments due to the continuance in 2024 of many of the same conditions that were present in 2023, namely: ongoing stress in the venture capital ecosystem, tightened capital availability, a muted IPO and M&A market and continued pressure on portfolio company valuations.
Our adviser and its experience and expert team remain focused on our portfolio's credit quality and originating high-quality investments in order to maximize the value of our portfolio over the long term.
Recapping our full year 2024 results, we generated net investment income of $1.32 per share, once again, covering our declared and paid regular monthly distributions for the year. We achieved a portfolio yield of nearly 16% on our debt investments for the full year, remaining at or near the top of the BDC industry.
We finished the year with a committed and approved backlog of $207 million. We ended the year with a net asset value of $8.43 per share, primarily the result of the fair value markdowns of our investments.
We continued to strengthen our balance sheet during the year by closing a new $100 million senior secured credit facility with Nuveen, raising additional capital through a $20 million convertible debt offering, and raising over $66 million at a premium to our NAV from the sale of equity through our at-the-market program.
Finally, based on our outlook and our undistributed spillover income of $1.06 per share as of year-end, last week, our Board of Directors declared regular monthly distributions of $0.11 per share payable through June of 2025.
To further align our adviser with shareholders, our adviser agreed this week to waive a portion of its quarterly income incentive fees if after the payment of such portion, the company's net investment income for such quarter would be less than the distributions declared in such quarter.
As the macro environment improves and the venture ecosystem recovers, we continue to support and work closely with our portfolio companies as we focus on maximizing the value of our stressed investments and seeking to increase our NAV.
As we progress through 2025, we remain optimistic about Horizon's prospects for the following reasons. Our portfolio continues to grow, and our portfolio yield remains among the industry's highest, which we expect will lead to increased NII. Our pipeline is full with quality opportunities to invest in new companies. Our liquidity and balance sheet remains strong. And finally, our markets are active, and demand for venture debt capital is growing. 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 fourth quarter results and progress. Dan?

Daniel Devorsetz

Thanks, Rob, and good morning to everyone. We grew our portfolio in the fourth quarter to $698 million as we continue to originate high-quality loans that more than offset prepayments and amortization in our existing portfolio.
In the fourth quarter, we funded seven debt investments totaling $59 million and one equity investment of $2 million. $55 million of the new debt investments for the four new portfolio companies, all well-sponsored companies with growing revenue in our core life science and technology markets.
We continue to see an increasing and healthy volume of high-quality opportunities like these and are well capitalized to execute on these opportunities and originate new loans. We also continue to build a sizable pipeline across our target sectors, which we expect will ensure we continue growing our portfolio throughout 2025.
Looking ahead to Q1, we expect another quarter of portfolio growth. In January and February, we funded seven debt investments totaling $79.4 million and one equity investment of $2 million. We were awarded four new venture loan transactions representing $75.8 million in total commitments which we'll fund over the coming quarters. As we see growth, we will always be disciplined in our approach to originating loans.
During the fourth quarter, we experienced five loan prepayments totaling $13 million in prepaid principal. Net prepayment activity and the associated fee income in the quarter was at the lower end of our recent historical levels, which impacted NII.
Based on prepayment activity already realized in Q1 and anticipated additional prepayment activity in the quarter, we expect a more positive impact on NII in Q1, especially when combined with portfolio growth from Q4.
Our onboarding debt investment yield of 12.6% during the fourth quarter remained consistent with our historical levels. We expect to continue to generate strong onboarding yields with our current pipeline of opportunities, further demonstrating our capabilities to grow our portfolio and generate strong net investment income.
Our debt portfolio yield of 14.9% 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 the profitability of our venture lending strategy and our execution of that strategy across various market cycles and interest rate environments.
As of December 31, we held warrant and equity positions in 104 portfolio companies with a fair value of $44 million. I again remind you that 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 fourth quarter, we closed $106 million in new loan commitments and approvals and ended the year with a committed and approved backlog of $207 million compared to $190 million at the end of the third quarter.
We believe our pipeline, combined with our committed backlog, with most of our funding commitments subject to companies achieving certain key milestones, provides a solid base to prudently grow our portfolio.
As of year-end, 91% of the fair value of our debt portfolio consisted of three and four rated debt investments, comparable with the prior quarter end, while 9% of the fair value of our portfolio continue to be rated to [201]. As we continue to 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 believe we are well positioned to further grow our portfolio in 2025 and to continue to generate 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.

Gerald Michaud

Thank you very much, Dan. Turning to the venture capital environment. According to PitchBook, approximately $75 billion was invested in VC-backed companies in the fourth quarter, a nice spike from the prior quarters and resulting in total investment for the year of $209 billion, above 2023's total, but still off the highs of 2021 and 2022.
We are pleased to see continued signs of improvement in the VC investment environment, but the road to a full investment recovery will require exit markets for VC-backed tech companies to improve, which will lead to a meaningful return of capital to VC funds and their LPs.
The higher investment level in 2024 was mainly driven by a few outsized AI-related deals. Thus, there continues to be a backlog of venture capital-backed technology and life science companies that are positioned for an exit by way of M&A or an IPO. While Q4's total exit value of $37 billion resulted in 2024's exit value surpassing the prior years, the total number of exits and exit value in 2024 remained well below the levels achieved from 2019 to 2021.
On the positive side, the life science exit markets continues to show significant activity, with five IPOs already completed in 2025 and more in the queue. This improvement, combined with investors lowering valuations on many private technology and life science companies over the past two years, is creating an M&A market that is more attractive to potential buyers who have been on the sidelines for the past two years.
In addition, royalty transaction activity in the life science market is reemerging. As examples, [Biogen] closed a $250 million transaction with [Royalty Pharma]. And Castle Creek Biosciences, a Horizon portfolio company, closed a $75 million royalty transaction with Ligand Pharmaceuticals in Q1.
As we progress through 2025, there seems to be a clear flight to quality for investors in technology and life science companies, particularly as AI continues to disrupt industries such as health care, fintech, manufacturing and consumer-related markets.
Based on our existing pipeline of more than $1 billion of debt investment opportunities, Horizon believes there remains a strong opportunity in the coming quarters to provide venture debt financing to high-quality technology and life science companies that will require additional liquidity while preparing for the exit markets to open up.
While the overall VC ecosystem is showing some improvement, we believe that the improving conditions in the VC-backed company exit markets will result in return of capital to VCs and their LPs in 2025, creating a better environment for new VC fund raising.
Other positive factors include the overall macro environment, which appears to be more business friendly, and big pharma companies seeking to acquire new drug candidates as their own drug products come off patent over the next few years.
Accordingly, we remain optimistic about originating new high-quality venture debt investments in the weeks and months ahead. Our optimism is bolstered by our robust pipeline of $1.4 billion of opportunities, a testament to our reputation, brand and sourcing capabilities.
To sum up, we remain committed to sourcing high-quality, well-priced investments as we expect to grow our portfolio throughout 2025, which, when combined with more historically normalized prepayment activity, should generate NII that will continue to cover our regular -- monthly distributions over time, consistent with our historic distribution performance.
With that, I will now turn the call over to Dan Trolio.

Daniel Devorsetz

Thanks, Jerry, and good morning, everyone. As Rob and Jerry noted, in 2024, we generated NII that covered our regular monthly distributions while actively strengthening our balance sheet. In addition, we continue to diligently work with all of our companies in order to optimize our outcomes for our portfolio and further enhance our credit quality.
To recap 2024, our portfolio at the end of the year stood at $698 million, up 2% compared to $684 million as of September 30, 2024. We further strengthened our balance sheet in June by closing a new $100 million senior secured credit facility with Nuveen, which contains an accordion feature to expand the facility to $200 million.
In October, we raised $20 million of debt capital through the issuance of our 7 1/8 unsecured convertible notes due 2031. The notes may only be converted into common stock at a price greater or equal to our NAV. We always seek to add flexibility and diversity to our capital sources, and we believe the convertible notes achieve that.
Finally, we successfully and accretively sold over 6.3 million shares through our ATM program during the year, raising over $66 million, further demonstrating our continued ability to opportunistically access the equity markets. As a result of our actions and our stronger balance sheet, we believe we remain well positioned to further grow our portfolio and create additional value for shareholders in 2025.
As of December 31, we had $131 million in available liquidity, consisting of $101 million in cash and $30 million in funds available to be drawn under our existing credit facility. 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 $75 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 1.4:1 at December 31. And netting out cash on our balance sheet, our net leverage was approximately 1.1:1, which was well within our target leverage. Based on our cash position and our borrowing capacity on our credit facilities, our potential new investment capacity as of December 31 was $342 million.
Turning to our operating results for the fourth quarter. We earned investment income of $24 million compared to $28 million in the prior year period, primarily due to lower interest income and fee income on our debt investment portfolio. Our net investment portfolio on a net cost basis stood at $678 million as of December 31, up 4% compared to $654 million as of September 30, 2024.
For the fourth quarter of '24, we achieved onboarding yields of 12.6% compared to 13.2% achieved in the third quarter. Our loan portfolio yield was 14.9% for the fourth quarter compared to 16.8% for last year's fourth quarter.
Total expenses for the quarter were $12.8 million compared to $12.2 million in the fourth quarter of '23. Our interest expense increased to $8.2 million from $7.6 million in last year's fourth quarter due to an increase in our average borrowings.
Our base management fee was $3.1 million, down from $3.2 million in the prior year period. We received no performance-based incentive fees in the fourth quarter as we continue to experience the deferral of incentive fees, otherwise earned by our adviser 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 adviser will return to earning incentive fees, as Rob mentioned, the adviser 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 fourth quarter of '24 was $0.27 per share compared to $0.32 per share in the third quarter of '24 and $0.45 per share for the fourth quarter of '23. For the full year of 2024, we generated NII of $1.32 per share, covering our regular monthly distributions during 2024 of the same amount. The company's undistributed spillover income as of December 31 was $1.06 per share.
We anticipate that the size of our portfolio, along with our portfolio's higher interest rate and our predictive pricing strategy, will enable us to continue generating NII that covers our distribution over time. While the macro environment is gradually improving, we expect repayment activity will remain modest in the near term.
To summarize our portfolio activities for the fourth quarter, new originations totaled $61 million, which were partially offset by $12 million in scheduled principal payments and $13 million in principal prepayments and partial paydowns. We ended the year with a total investment portfolio of $698 million. We expect to further grow our portfolio during the first quarter.
At December 31, the portfolio consisted of debt investments in 52 companies with an aggregate fair value of $639 million, and a portfolio of warrant, equity and other investments in 109 companies with an aggregate fair value of $59 million.
Based upon our outlook, our Board declared monthly distributions of $0.11 per share for April, May and June 2025. We remain committed to providing our shareholders with distributions that are covered by our net investment income over time. Our NAV as of December 31 was $8.43 per share compared to $9.06 as of September 30, 2024, and $9.71 as of December 31, 2023.
The $0.63 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 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.

Question and Answer Session

Operator

(Operator Instructions) Doug Harter, UBS.

Douglas Harter

Hoping you could walk through what you think the key drivers to get from the $0.27 back above the $0.33 dividend rate, how you think about that path back to covering the dividend?

Daniel Trolio

Yeah. Jerry, good morning. When we look at the NII we projected over through the entire year, one thing we comment probably every quarter is with a venture debt portfolio, you always will receive some prepayments throughout the year. How they happen each quarter will fluctuate. As we noted in our remarks, the fourth quarter was very light on the amount of prepayments and the associated fee income that's related to those prepayments and kind of drove the lower NII this quarter.
So we look to harvest the prepayments and we look to grow the balance sheet as we have over the past two quarters and continue to do that through 2025, and those will be really the key drivers to getting back to covering the distribution for -- on a quarterly basis.

Douglas Harter

Got it. Appreciate that. I guess, how do you think about -- what is -- obviously, there's no one period that is normal, but what is a normalized level of contribution from kind of that repayment income?

Daniel Trolio

Yeah. Like I mentioned, each quarter will be very different. Normalized, probably about anywhere between $2 million to $4 million of accelerated fee income.

Operator

(Operator Instructions) Paul Johnson, KBW.

Paul Johnson

I was just wondering if you can kind of comment on kind of what primarily drove the portfolio marks this quarter in terms of investments as well as just kind of maybe more broadly, if you can, what -- how much of that's from the debt portfolio versus the equity?

Daniel Devorsetz

Sure. Paul, this is Dan Devorsetz. The marks were -- we go through our fair value process and look at each asset, of course. There are several -- a couple that are in the process of either fundraising or getting themselves acquired, and there's a couple that are in positions where we're unsure of what that outcome is going to be and took some sizable markdowns primarily on the debt investments in the portfolio. That's a high-level answer to the question.
It's really a matter of a continued fundraising and exit market that is a challenge for some companies in our stage. We are seeing a good deal -- we're seeing anecdotal evidence of positive developments in fundraising, but there are still several in the portfolio that are in situations where the markdown was appropriate.

Paul Johnson

And then if I can ask just about two specific credits. I noticed last quarter in the Q, I think that portion of Evelo Biosciences was on [PIK] accrual. I noticed that was taken off this quarter. Just wondering what happened there and if there was any income recorded at all from Evelo in the fourth quarter?

Gerald Michaud

Yeah. This is Jerry. So yeah. We've moved Evelo to the other asset bucket of our assets. The company -- any recovery on Evelo going forward is based on basically the sale or otherwise, contractual transactions that Evelo can do relative to its assets, which would be its intellectual property and some other assets its own.
So it's no longer an active loan. It's more of a recovery asset at this point. And there was some expectation based on contracts that are in place that there will be further recovery on that over the coming quarters and coming years, actually.

Paul Johnson

Appreciate that. And then the other one, just was on nonaccrual last quarter, Swift Health Systems. Looked like it might have been restructuring. I'm wondering if you could just kind of talk about what the outcome of that was and how you were able to resolve that company?

Daniel Devorsetz

Sure. That one, it's not resolved. That's one of the ones that did take a bit of a further markdown. And it's an example of what I was talking about earlier that they are in an extended fundraising process. They -- we we're able to bring in capital last year with some new investors, some new high-quality investors.
But that was the first step in an ongoing process of capital raising, which they are still in. So it is not yet resolved and is an active fundraise as we speak.

Paul Johnson

And then how are you guys feeling, I guess, about the portfolio, maybe particularly like in the life Sciences, about any sort of DOGE risk or spending cuts from the Federal Government?

Gerald Michaud

Great -- interesting question. And it's based on everything that we have seen on other people in the industry that we know well who have a great deal of experience talked about. It's not a clear cut, one way or the other. Clearly, companies that might be involved in vaccine discovery certainly have some reasons for concern based on who the new HHS Secretary is.
On the other hand, there does seem to be a more open and aggressive posture with the HHS relative to drug development and getting those drugs to market both sooner and cheaper. And so the school is definitely still out relative to how all that's going to play out. I think on balance, probably a favorable environment, certainly in the near term. Overall, I think regulatory issues also play into that. I think we could definitely see more M&A activity.
The other thing I would just mention relative to that is between now and 2030, there is -- I think the number I heard was $50 billion of drugs that are going to be coming off of patent by big pharma companies, and those drugs need to be replaced, and they generally get replaced historically by new drug development by biotech companies.
So we think that there could be significant activity in that market over the next couple of years. So on balance, probably a little bit favorable, but like many other things in the market today, it's -- a lot of people are just kind of holding their breadth and waiting to see how this all works out.

Paul Johnson

Got it. Certainly understand things are still in development. And then just last question for me. I was wondering if I could just kind of ask about core sort of debt portfolio yields in the portfolio, how those have kind of held up, I guess, over the last year? We've certainly seen a certain amount of spread compression in the market.
But just wondering how much of kind of the portfolio yield decline this quarter was maybe kind of due to the base rates and sort of what your expectation is for spreads going forward this year?

Daniel Devorsetz

Yeah. So again, Dan Devorsetz. The onboarding yield is still kind of within our normalized range. It's a small sample size on a quarter-to-quarter basis, so you have to look at trends. There is some spread compression due to competitive -- competition, particularly in the flight to quality that Jerry was talking about, which is normal.
But the overall yields are still well within normalized venture portfolio. We benchmarked that on a quarterly basis. And I think that the yield, particularly when you factor in some of the prepayment activity that Dan talked about and that we referenced in our prepared remarks, that we expect and have visibility into that the portfolio yield will be within the range that we've been achieving over the past several quarters.

Daniel Trolio

Yeah. And I'll just add to that. As far as the portfolio yield and where rates are, we mentioned every quarter, our rates float up, but have floors. Today, after the 100 basis points move down last year, 43% of our portfolio are either at or above today's prime rate. And so any continued movement down in overall rates, which seems like it will be towards the latter half of this year, will have a smaller impact on our portfolio.

Paul Johnson

That's very helpful. And then just curious, I mean, end of term fees has -- as that -- if portfolio spreads have been kind of within the normal context, how have the term fees held up, I guess, versus kind of historically, what you received?

Daniel Devorsetz

Those really haven't changed a whole lot over the last several years.

Paul Johnson

Okay. That's all for me.

Operator

Christopher Nolan, Ladenburg Thalmann.

Christopher Nolan

Apologies, I joined the call late. And a follow-up to Paul's question on the yields. How much did the Fed easings in the fourth quarter affect your yields?

Daniel Trolio

It had a -- definitely had an impact, but I would say the third quarter rate cut had a bigger impact in the fourth quarter. If you look at our -- Ks and our Qs, it will show you rate movement and the overall impact if everything is static, and all the rates happened at the beginning of the quarter.
But obviously, that's not how it normally happens. And that would get you about 100 basis points, we show it's about $0.02 a quarter. So that's kind of roughly a static state. But with the cuts in the fourth quarter a little bit towards the latter half of the quarter had a smaller impact.

Christopher Nolan

Great. And then also back to the whole DOGE thing. Given the prospect of tariffs and then the HHS basically looking to improve transparency, at least they'd say that in the sides, but it very well might be on pricing, too, for drugs. Anecdotally, I hear stories where American consumers are paying a multiple for a drug which is priced otherwise overseas. And how is that affecting how some of these portfolio companies you guys have are thinking about their business model?
I mean, is there a lot more uncertainty? Is this affecting their ability to raise new equity? I mean, just a little color around that would be great.

Gerald Michaud

Sure. Hi, this is Jerry. So first of all, the life science industry over the last couple of years, irrespective of who the President was has had kind of a tough goal relative to raising capital for a whole host of reasons. As we look at the market today, there are certain things that are definitely actually providing a tailwind.
One is the lower -- the cost of developing drugs is coming down significantly relative to the technology that can be used today, including AI technology that is reducing the overall cost. So there is definitely going to be going forward, some benefit relative to the cost of developing drugs.
And then on the regulatory side, at least again, it's very early. We're in the early days here. they're talking about being able to streamline regulatory approval relative to drug development, which for one drug can cost $300 million to $1 billion to develop depending on the size of the market, the kind of clinical trials that are needed. So that is kind of all on the positive side.
But you're correct. The cost of the consumer is definitely kind of an anchor that's weighing all of this down. And how these costs are going to be managed going forward, specifically Medicare, Medicaid cost, that is the uncertainty there, just the level of uncertainty there definitely causes significant issues relative to being a drug discovery company and trying to determine how you're going to get paid for this $150 million investment you're about to make going forward.
So unfortunately, we're just in that very uncertain period right now, and everyone's trying to, as best they can, figure out what to do about it. The only thing I would say that is certain is we have seen more IPO activity in the life science sector over the last two quarters, which is a good sign.
The market -- the participants in the market are saying they want to buy into these higher-risk type biotech companies, and that's a positive sign. And as I mentioned, there are other kinds of financing now on the life science side that we have historically seen, but haven't really seen much of it in the last two years that seem to be also picking up some momentum.
So it's an interesting market that has to be carefully thought through literally for every company, depending on where they are in the market relative to the kind of drugs that they're developing and the necessity of it.

Christopher Nolan

Great. That's great color. And I guess just for Dan. What -- how much did share repurchases add to fourth quarter NAV per share, please?

Daniel Trolio

It's about $0.02.

Christopher Nolan

And the remaining spillover, please?

Daniel Trolio

$1.06.

Christopher Nolan

Good. Thank you very much.

Operator

Thank you. At this time, I'll turn the floor back to Mr. Pomeroy for closing remarks.

Robert Pomeroy

Thank you all for joining us this morning. We appreciate your continued interest and support in Horizon, and we look forward to speaking with you again soon. This will conclude our call.

Operator

We thank you for your participation. You may now disconnect your lines at this time.