Greetings and welcome to Horizon Technology Finance Corporation's Second Quarter 2021 Earnings Conference 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 call is being recorded.

I would now like to turn the conference over to your host, Megan Fox. Thank you. You may begin..

Thank you and welcome to the Horizon Technology Finance second quarter 2021 conference call. Representing the company today are; Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President and; Dan Trolio, Chief Financial Officer..

Good morning. Thank you for joining us and for your continued interest in Horizon. Today, I will update you on Horizon's performance and its overall current operating environment. Jerry will then discuss our business development efforts and our markets.

Dan will detail our operating performance and financial condition, and then we will take some questions. We had another strong performance in the second quarter of 2021 and made significant headway during the first half of the year in growing our portfolio.

During the quarter, we grew our portfolio over the $400 million mark, a 6% increase from the end of the first quarter, and up 15% from the end of 2020. We finished the quarter with a record committed backlog of $144 million. We generated net investment income of $0.31 per share in excess of our distribution level for the quarter.

Based on our outlook and our undistributed spillover income of $0.34 per share as of June 30th, we declared monthly distributions through December, which marks 60 consecutive months at $0.10 per share. We achieved another industry-leading portfolio yield on our debt investments of 14.7%.

We kept our portfolio credit profiles stable and ended the quarter once again, with no one-rated loans, and no loans on non-accrual. We are consistently and actively managing our portfolio investments to maintain the credit quality of our portfolio. We ended the quarter with NAV of $11.20 per share, a $0.13 per share increase from March 31st.

And we maintained a strong balance sheet with ample capacity to fund the ongoing growth of our portfolio..

Thanks, Rob and good morning to everyone. We continue to generate strong growth in the second quarter, resulting in our portfolio topping $400 million at the end of Q2. With the robust demand for venture debt, we fund nine transactions totaling $67 million during the quarter.

Meanwhile, our onboarding yield of 12.2% during the quarter once again reflects our disciplined focus on pricing - transactions that we believe will provide strong NII enhanced by our predictive pricing strategy.

We experienced four loan prepayments during the quarter, totaling $38 million and the prepayment fees and accelerated income from the prepayments increased our debt portfolio yield for the quarter to 14.2%, again, among the top of the BDC industry..

Thanks, Jerry and good morning, everyone. As Rob and Jerry mentioned, Q2 was another strong quarter for Horizon as we continue to grow our portfolio and maintain a strong overall balance sheet. As a reminder, during the quarter we successfully reduced our cost to capital to the redemption of our 6.250% notes.

Additionally, through our ATM program, we successfully and accretively sold 361,000 shares, opportunistically raising nearly $6 million. As of June 30th, Horizon had $83 million in available liquidity, consisting of $40 million in cash and $43 million of funds available to be drawn under our existing credit facilities.

As of June 30th, there was $15 million outstanding under our $125 million KeyBank credit facility and $51 million outstanding on our $100 million New York Life credit facility, leaving us with ample capacity to grow the portfolio.

On June 22nd, we amended the credit facility with KeyBank, which among other things, extends the draw period to June 2024 and the maturity date to June 2026. The amendments strengthens our ability to capitalize on compelling opportunities that will allow us to maintain our high portfolio yield and to grow net investment income.

We appreciate our longstanding relationship with Key and our syndicate partners and look forward to continuing this relationship..

At this time, we'll be conducting a question-and-answer session. Our first question comes from Sarkis Sherbetchyan with B. Riley Securities. Please proceed with your question..

Hey, good morning, everyone and thank you for taking my question here..

Good morning..

Good morning..

Good morning..

Yeah. I just wanted to kind of get a sense for the new capacity for investments, Dan, I think you mentioned was close to $200 million. And with your debt to - equity at about 1 time, just want to understand kind of the cadence that you'd like to grow into that new investment capacity figure.

Any kind of help or color you can give on, on that thought process given the strong venture debt environment would be helpful. Thank you..

Yeah, thanks for the question. Here you're, correct. The capacity today is close to $200 million and being at 1:1, you know, we're focused on getting to the 1.2:1. And so we - you know, we analyzed the leverage and our portfolio at the beginning of the quarter, determined how to fund that through the leverage or through equity.

And so, as we continue to build the portfolio, we'll determine how we get to the 1.2 between the leverage and drawing equity on the ATM..

Got it. And just to kind of come back on the prepayment cycle.

Anything unusual that you're seeing currently? Have prepayments started to kind of get some more normalized patterns, if you will? Or do you think that here in the near-term, you know, the prepayment activity still going to be kind of elevated? Just want to kind of get your sense real-time what's happening on that front?.

Yeah, this is Jerry. Very good question. As I mentioned in the script, it's a pretty dynamic market right now. So, we're seeing a number of our portfolio companies that have signed spec agreements. We've had - last quarter we had two companies that went public, one of which paid us off.

We have at least one company that has already filed confidentially to go public this quarter and we know we have a couple of companies that are in very late stage M&A discussions. So we expect for the second half of this year for prepayments to be somewhat elevated from certainly the previous two quarters.

That said, given, if you look at our historically high level of backlog, committed backlog, approved backlog and new opportunities, we still think there'll be plenty of room to grow the portfolio during the second half of the year..

Got it. So just to kind of recap that thought process, right, prepayments still elevated, you think it's going to look more so for your specific outlook here in the second half.

But you have more than enough room to net-net grow the portfolio? Is that the right summary?.

I think that's correct..

Okay, good. And then just kind of want to touch a little bit more on the underwritten yields. It sounded like in your prepared remarks they were up quarter-on-quarter.

Is - was that right? And then, you know, what's kind of driving that? What's the biggest driver of the onboarding yields going up?.

Yeah, so really, you know, it - you know, on a quarter-to-quarter basis, it's not really - we don't really look at significant changes in onboarding yields, because it could be one transaction that kind of skews that number.

What I can tell you is that, as even though there was a significant amount of competition in the market, I think from the overall venture debt perspective, yields have actually held up very, very well.

And, you know, we're pretty pleased about that, you know part of that is always because we're not just being compared to other debt deals, we're being compared to the cost of equity for raising funds through, you know, equity funding through VCs and the like.

And so, you know, that - that's kind of part of the comparison that companies were doing when they're figuring out how to get additional liquidity into the company.

So, you know, I think overall, I think our response to that would be yields have held up pretty well and we kind of expect to see that to continue again during the second half of the year..

Okay, great. So nothing like systemically changing here. It's more so maybe one or two transactions that skew with, but you - generally you think that from a macro perspective, things are business as usual..

That's - that's where we are today. That's exactly how we look at it today. Yes..

Okay, fantastic. I'm going to hop on the queue. Thank you so much for answering the questions..

Thank you..

Thanks, Sarkis..

Our next question comes from Ryan Lynch with KBW. Please proceed with your question..

Hey, good morning, guys. First question I had was you mentioned in your prepared comments two loans were downgraded in the quarter to the level 2 credit rating.

I would just love to get - give any more color on that? I know sometimes companies will be downgraded you know as they start to run closer to a fundraising cycle or capital raise cycle that's taking longer.

Is that what's going on at these companies? Or is there something fundamentally deteriorating at those two to cause those downgrades?.

Yeah. Ryan this is Rob. So the - to your former description it's where these companies are, they are in fundraising or trying to transact the company, that process is you know becoming a bit protracted.

So we for a sense of caution have downgraded these into that bucket, both of them are working with potential sources of new capital that we hope will come to fruition in the second half, but because of our experience, we felt it was appropriate to put them into two bucket..

Okay, understood, that's helpful. You know, your platform has grown pretty meaningfully over the last year or so with both, you know, the on balance sheet growth as well as the additional fund raised, you know, outside of the BDC.

You know, now that you guys are deploying capital, and that fund you know is contributing to that capital deployment and investing alongside the BDC.

Have you guys shifted the way you guys are approaching or the kind of companies you guys are targeting or industries you guys are going into with the additional dry powder you know, kind of across the platform?.

This is Jerry. So, you know, about two years ago, we identified, went out to the market did a significant due diligence and research effort to identify the markets where we believe that venture capital would be putting their money in the future.

And we came up with a kind of a subsectors within our basic markets that we decided to go ahead to follow very closely. And we've been doing that. And sticking to that strategy, it has been extremely successful for us.

We have developed new relationships within those sectors, including new investors that and large funds that are investing in those sectors and they are relying on Horizon for providing debt to these companies. So it has been a very - an effort that we feel like really has worked out quite well for us.

So that has allowed us to access more transactions, I think we're a little bit ahead of where some of the other debt lenders were in the market relative to some of these subsectors that were not as well-known three years ago as they are today.

And so that - that's where that growth and opportunity is combined with the fact that we have expanded our marketing team, again, ahead - a little bit ahead of the curve, started in 2019 through 2020, we've added significant depth on the origination side. So that's where the growth is coming from.

So we think we're in a pretty stable position now relative to our ability to grow, relative to both, obviously, our capital is, Dan has talked about position but also in terms of our bench strength within the advisor. So that's where that growth is coming from. That's where it will continue to come from..

Okay, makes sense. And then, you know, as far as you know, your guys' specific market as well as the broader VC market and even just the general you know, US economy, things seem to be going you know pretty well. The US economy is recovering nicely.

The VC market ecosystem is - you know, has been really resistant, you know, during COVID and showing you know, a lot of strength as you mentioned some of the fundraising numbers today. And you also talked about the venture, you know, the demand for venture debt is really high today.

So things seem to be going very well, you know, in your business and more broadly.

So, you know, what are you guys worried about today? What are the risks that you guys are looking at today as you guys look to the capitalist market? What kind of worries you and keeps you guys looking around the quarter for?.

Okay, so none of it keeps me up at night. I want to be clear on that point. But there are three things that I think that we, you know, we are quite focused on and continue to look at and follow.

Obviously, the new Delta variants of COVID is becoming a concern and getting people vaccinated and the potential impact if that doesn't happen in the - by the fall and winter, which is when you'd probably see - could see potentially significant increases in COVID again. So we're clearly following that.

Inflation is something that we are also looking at, we don't see it as being kind of something we have to be overly concerned with today.

But I can tell you just been talking to companies about it in our own market and talking to VCs, you know, there are some supply problems which is the number three thing that we're a little bit concerned with, which is driving up costs in terms of being able to get parts and chips and things like that.

So those are the issues that we, you know, that we are kind of tracking. I don't think we see any more concern in that than the broader market does. But we anecdotally obviously hear from, you know, our customers on these things. And so we are as part of our due diligence on you know, we're looking at new opportunities right now.

Those are things that we are also taking into consideration..

Okay, understood. Those are all my questions. I appreciate the time this morning..

Thanks, Ryan..

There are no further questions. I would now like to turn the call back to Rob Pomeroy, Chairman and CEO for closing comments..

Thank you for - all for joining us this morning. We appreciate your continued interest and support in Horizon. We hope you and your families continue to remain safe and healthy. Have a great summer and we look forward to speaking with you again soon. This concludes the call..

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation..