HRZN

Horizon Technology Finance Corporation (HRZN)

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Horizon Technology Finance Corporation (HRZN)

Q1 2014 Earnings Conference Call

May 7, 2014 9:00 AM ET

Executives

Megan Bacon – Marketing Support Manager

Robert D. Pomeroy Jr. – Chairman and Chief Executive Officer

Gerald A. Michaud – President

Christopher M. Mathieu – Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Troy L. Ward – Keefe, Bruyette, & Woods, Inc.

Casey J. Alexander – Gilford Securities Inc.

Robert J. Dodd – Raymond James & Associates, Inc.

Andrew P. Kerai – National Securities Corporation

Chris J. York – JMP Securities LLC

Ron J. Jewsikow – Wells Fargo Securities LLC

Presentation

Operator

Good morning and welcome to Horizon Technology Finance First Quarter 2014 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 Began – I’m sorry Bacon of Horizon for introductions and the reading of the Safe Harbor statement. Please go ahead.

Megan Bacon

Thank you, and welcome to the Horizon Technology Finance first quarter 2014 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 the Q1 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 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, 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.

Robert D. Pomeroy Jr.

Good morning and thank you all for joining us. During the first quarter, Horizon continued to build its venture debt portfolio having high-quality, high yielding VC-backed loan transactions and increasing the number of warrant positions held to 74. Our NAV increased from $14.14 at the end of 2013, to $14.32 at the end of Q1, as a result of our successfully exiting one of our one rated portfolio companies and the increase in the value of our warrant portfolio. In addition, two of our portfolio companies completed IPOs during the quarter.

Further highlighting our performance for the first quarter, we had an increase in net assets from operations of $5.1 million or $0.53 per share. We achieved the dollar-weighted average portfolio yield of 13.6% during the first quarter. Net investment income was $2.5 million or $0.26 per share. We ended the quarter with a venture loan portfolio at fair value of $218 million, as well as warrants and equity investments with an aggregate fair value of $10.2 million, both representing an increase as compared to the end of the fourth quarter.

And finally, we continue to reduce our exposure to the cleantech sector by selling two of our non-accrual accounts, which I will discuss in more detail later on the call.

in consideration of our first quarter performance and our outlook for the second quarter and beyond, we declared monthly dividends totaling $0.345 per share, payable during the third quarter of 2014. This represents an annualized yield of 9.6% based on our NAV as of March 31. since our IPO, we have now declared cumulative dividends of $5.615 per share.

Our dividend strategy remains to pay monthly dividends that are covered by our net investment income over time. maintaining our commitment to provide shareholders with a steady stream of attractive dividends, we continue to benefit from our remaining undistributed or spillover income of approximately $5.8 million or $0.58 per share as of March 31.

I would now like to turn our attention to credit quality. Overall our asset quality improved during the first quarter. as of March 31, our loan portfolio had a weighted average internal credit rating of 3.1, 90% of our current portfolio is performing at or better than expected at the time of underwriting, which is consistent with our past experience. As previously announced, during the first quarter, we settled our outstanding loans of Solar Bridge technologies, which was on non-accrual status as of December 31.

In addition, we announced last month, the successful exit of our investment in Xtreme Power. The sale of assets to a strategic buyer provided for the full recovery of our investment, including our principal, interest, and fees, resulting in a realized internal rate of return on the transaction of 17.9%. with this favorable asset, we improved Horizon’s NAV by $1.3 million or a $0.13 per share for the first quarter.

The sale allowed us to reverse previously deferred income from the fourth quarter into the first quarter and will enhance the second quarter investment income due to the acceleration of fees, totaling approximately $500,000. During the first quarter, we also acquired substantially all of the assets of PixelOptics in connection with the bankruptcy of this company. and as a result, our investment in no longer classified as eventual loan within our portfolio. we have begun liquidating the assets, which should be completed over the coming quarters.

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