HRZN

Horizon Technology Finance Corporation (HRZN)

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Horizon Technology Finance Corporation (HRZN)

Q4 2013 Results Earnings Conference Call

March 12, 2014 09:00 AM ET

Executives

Megan Bacon - Marketing Support Manager

Rob Pomeroy - Chairman and CEO

Gerry Michaud - President

Chris Mathieu - Chief Financial Officer

Analysts

Andrew Kerai - National Securities

Troy Ward - KBW

Chris York - JMP Securities

Fin O'Shea - Raymond James

Jon Bock - Wells Fargo Securities

Jim Young - West Family Investments

David Miyazaki - Confluence Investment

Presentation

Operator

Good morning and welcome to Horizon Technology Finance’s Fourth Quarter 2013 Conference Call. Today’s call is being recorded. All lines have been placed on mute. We will conduct a question-and-answer session after the opening remarks; instructions will follow at that time.

I would now like to turn the call over Megan Bacon of Horizon Technology Finance for introductions and the reading of the Safe Harbor statement. Please go ahead.

Megan Bacon

Thank you, and welcome to the Horizon Technology Finance fourth quarter 2013 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Gerry Michaud, President; and Chris Mathieu, Chief Financial Officer.

Before we begin, I would like to point out that Q4 press release is available on the company’s website at www.horizontechnologyfinancecorp.com.

Now, I will read the following Safe Harbor statement. During this conference call, Horizon Technology Finance 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 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, 2013. 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

Good morning and thank you all for joining us. During the fourth quarter and full year 2013, Horizon delivered positive results by actively managing its existing portfolio and capitalizing on profitable liquidity events.

We are pleased to have achieved a strong overall yield on our loan investments which enabled our company to earn net investment income that has exceeded our dividend since implementing our current dividend policy in November 2012. We believe our dynamic venture portfolio positions Horizon well to continue to produce high current pay interest income and attractive fees, while maintaining the opportunity to realize significant warrant gains as we remain focused on providing stable dividends to shareholders.

Some highlights of our performance include net investment income was $3.4 million or $0.35 per share for the fourth quarter and $13.3 million or $1.38 per share for the full year. In the fourth quarter, we originated $19 million in new loans to 8 companies, bringing the total to 18 new companies added to our portfolio for the year. Total originations for the year were $88 million.

In the second half of 2013, we began to structure a majority of our new loans with floating rates. For the fourth quarter, 47% of new debt investments included floating rate adjustments and at year-end, 89% of our committed backlog was floating rate.

We ended 2013 with a venture loan portfolio at fair value of $221 million to 49 companies as well as warrants and equity with an aggregate fair value of $6 million in 73 portfolio companies. Of those 73 portfolio companies, 11 are public with an aggregate fair value of $2 million, providing the potential for near-term realization.

Our portfolio yield was 15.5% for the fourth quarter and 14.4% for the full year, underscoring the stability of the strong returns we achieved on our investment. This portfolio yield consists of double digit coupons, fees and end-of-term payments. Importantly, our full year portfolio yield of 14.4% compared favorably to 14.2% for the full year of 2012, and reflects the earnings stay in power of our venture loan portfolio in a year when interest rate compression had a negative impact on many BDCs.

During 2013, we also reduced our borrowing cost by completing our first investment grade term securitization for the fixed annual interest rate of 3%, and lowering the interest rate on a revolving credit facility from 4.25% to 4%.

We experience liquidity events from 4 portfolio companies in the fourth quarter and 11 portfolio companies for the full year. During the fourth quarter, one of our portfolio companies, Fiberlink Communications was acquired by IBM. In connection with this acquisition, Horizon received $400,000 success fee as well as an accelerated end-of-term payment and prepayment fees, resulting in a fully realized internal rate of return of 25.2%.

We also existed one of our medical device companies to Direct Flow Medical in the fourth quarter. Horizon received the prepayment fee and accelerated end-of-term payments resulting in an IRR on this investment of 17.8%, plus we continued to hold warrants in the company that could result in further upside. This is the case in many of our liquidity events where the loan is prepaid early, since our warrants have 7 to 10 years lives and typically survive the underlying loan providing the ability to augment total returns.

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