Horizon Technology Finance Corporation (HRZN) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Horizon Technology Finance Corporation Second Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Megan Bacon, Marketing Support Manager. Thank you. You may begin.

Thank you, and welcome to the Horizon Technology Finance second quarter 2019 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Gerry Michaud, President; and Dan Trolio, Chief Financial Officer.I would like to point out that the Q2 earnings press release and Form 10-Q are available on the company’s website at horizontechfinance.com.Before we begin our formal remarks, I remind everyone that 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, 2018. 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.

Good morning, and thank you all for joining us. Today, we highlighted our second quarter results, which showed strong performance across the Board. In the quarter, we grew our portfolio for the fifth consecutive quarter and ended with a total portfolio of $275 million, including $242 million in venture debt investments.We recorded net investment income per share of $0.37, $0.07 above our distribution. NII was aided by a larger earning portfolio and an active quarter for liquidity events, which is an integral part of the design of our predictive pricing strategy. We had a record weighted average debt investment yield for the quarter of 16.8%, which takes into account regularly scheduled interest and fee income, as well as income from liquidity events.Our NAV as of June 30 was $11.60, up $0.05 from the prior quarter-end, driven by our net investment income performance and stable credit quality. We maintained stability in terms of our asset quality, as we continue to proactively manage our portfolio. And based upon our earnings and outlook, our Board declared monthly distributions of $0.10 per share through the end of the year.Overall, our current portfolio continues to perform well, and we remain positioned to build on our success in the second-half of 2019 and beyond.Turning to our investment activity. In the second quarter, we funded eight new loans, totaling $55 million and increased our portfolio on a net basis by $9 million from March 31. We also closed on $79 million in new approvals and commitments and maintained the committed backlog of $58 million at the end of the quarter.While the summer months are normally slower in terms of funding new investments, our overall pipeline remains robust, demand for venture debt continues to be strong, and we look forward to growing the Horizon portfolio and our joint venture in the quarters ahead.During the quarter, we downgraded our loan to Odyssey [ph] to a one rating and placed it on non-accrual. This is the first one-rated credit we’ve had in two years, and it represents 0.6% of the fair value of our total debt portfolio. Because of our ongoing proactive management, our one and two-rated credits continue to comprise less than 5% of our debt portfolio, as we continue to keep the overall asset quality of our portfolio stable on a quarter-over-quarter basis. We have reduced this level from year-end 2018. We will continue to be proactive in our portfolio management activities.Looking at the balance of 2019, we remain confident in our ability to continue to drive sustainable NII above our dividend. Our pipeline and backlog are robust and demand for technology, healthcare tech and life science investments remain active and strong. We continue to be disciplined and thoughtful with our approach to funding investments, as reflected in our steady loan portfolio growth of 12% through the first-half of 2019.Our debt to equity ratio stood at 0.8:1 as of June 30. This places us at the low-end of our targeted leverage range of 0.8:1 to 1.2:1. Thus, with the ability to expand towards the higher-end of that range, we have ample capacity to fund new investments and further grow our portfolio.As a reminder, as our portfolio further expands, our base management fee becomes 1.6% on gross assets less cash that exceed $250 million. This lower marginal base management fee will further enhance NII, as our premium yield loan portfolio grows.To conclude, the power of our predictive pricing strategy was evident in the second quarter, as we generated NII well above our distributions, while still growing the size of our portfolio and maintaining the stability of our credit profile. We remain confident that we will continue to generate additional value for our shareholders.I will now turn the call over to Gerry, who will update you on our business development efforts and market environment and then to Dan, who will detail our operating performance and financial condition.

Thanks, Rob. Good morning, everyone. Our second quarter reflected continued momentum towards disciplined quality and profitable growth. We added eight new floating rate transactions to our portfolio, totaling $55 million. Thus far in the third quarter, we funded an additional $5 million venture loan.We achieved an onboarding yield in the second quarter of 12%, as we maintained our disciplined underwriting approach. We experienced seven loan portfolio exits during the quarter, totaling $31.5 million. The prepayment and accelerated income from these events resulted in a loan portfolio yield for the quarter of 16.8%, our highest quarterly portfolio yield since our inception.In addition, our joint venture funded portions of two portfolio investments totaling $10 million in Q2, which was fully funded by our New York Life debt facility. We continue to maintain a premium yielding debt portfolio, as reflected by our leading yield position in the BEC industry, which generates a predictable income stream, where we continue to grow our portfolio and add investments with new ATPs, prepayment opportunities and warrants.We closed $79 [ph] million in new loan commitments and approvals and ended the second quarter with a committed backlog of $58 million, roughly in line with a backlog of $60 million at the end of the first quarter of 2019.Our committed, approved and awarded backlog as of June 30 was $70.7 million to 12 companies and a pipeline of new opportunities of over $600 million. This robust committed backlog and pipeline sets us up well to execute on growing our portfolio and income stream, while continuing to enhance NII with prepayment and accelerated income.As of June 30, we held warrant and equity positions in 74 portfolio companies, with a fair value of $12.8 million. In Q2, we received proceeds in connection with the termination of our warrants and Powerhouse Dynamics and the sale of our equity investment in TruSignal.Subsequent to the end of Q2, we funded one new investment totaling $5 million. At the end of July, our awarded, approved and committed backlog sits at $66 million, providing us with additional momentum to grow our portfolio for the balance of 2019.Turning now to the venture capital environment. According to PitchBook, approximately $31 million was invested in VC-backed companies in the second quarter of 2019, down from first quarter activity, but still a very strong quarter overall for investment and leaving the industry well on track to achieving a second consecutive year of over $100 billion in VC investing.In terms of VC fundraising, $11 billion was raised in the second quarter of 2019, rebounding from a slowest start in the first quarter and positioning fundraising activity for the full-year 2019 to fall within the five-year average. The big story, of course, was the record level of VC-backed exit activity in the quarter.I’ll end [ph] with 34 venture-backed IPOs in the second quarter of 2019, led by Uber, Pinterest, Slack and Zoom, which helped lead to exit value in the quarter of over $138 billion shattering the previously quarterly record. These IPOs allow VCs the opportunity to generate returns and reinvest their capital, which potentially lead to higher VC fundraising in the second-half of 2019 and into 2020.Importantly, while there were many IPO headlines made by large high-profile companies, the healthcare life science sector IPOs continue to dominate the overall comp, and Horizon continues to believe this segment will show strength over the foreseeable future.Turning now to our core markets. In the second quarter, demand for financing in the life science and healthcare technology markets remain strong. At the beginning of the second quarter, we funded a $15 million venture loan to Encore Dermatology, a specialty pharmaceutical company focused on the U.S. dermatology market.Also, during the quarter, we funded a $6 million venture loan to one of our existing life science portfolio companies, CSA Medical, which develops patent protected cryotherapy medical devices. We additionally funded a $5 million venture loan to our existing portfolio company, Catasys, a publicly-traded leading AI and tech-enabled healthcare company.Subsequent to the quarter-end, we funded $5 million venture loan to a new portfolio company, LogicBio Therapeutics, a specialty genome editing company focused on developing medicines to treat rare diseases. The broader technology sector continues to be very active with funding new and growth-oriented companies.During the quarter, we provided a $12.5 million of funding to Bridge2 Solutions and existing portfolio of SaaS platform tech company and $8 million to OutboundEngine, a new portfolio company focused on B2B marketing. Demand for venture debt generally and our product, specifically, has remained consistently strong, as we’ve been able to effectively use our brand name and relationships to aggressively compete for deals that meet our underwriting standards.However, with respect to the tech companies, select – selectivity remains a significant focus for Horizon. Given the requests we’re seeing for large debt transactions for innovative technologies, we are continuing to be selective, as we seek opportunities where the borrower is positioned to achieve significant technological advancements.Overall, we’re pleased with our investment results in the venture debt environment. We continue to have many opportunities for new investments and for exits, creating value for our shareholders. We will continue to source and identify attractive opportunities to add to our pipeline, apply our knowledge-based ability to win investments, while utilizing our ample capacity and our predictive pricing strategy to deliver additional long-term well-priced portfolio growth.With that, I will now turn the call over to Dan.

Thanks, Gerry, and good morning, everyone. Let’s turn to our financial results for the second quarter of 2019. Horizon earned total investment income of $10.5 million for the second quarter of 2019, a 43% increase compared to $7.3 million in the prior period. This increase was primary due to higher interest income on investments, given the larger average size of our loan portfolio, as well as the income generated from a higher level of prepayments.As of June 30, 2019, our debt investment portfolio had grown to $242 million, a 3% increase from March 2019 and 12% growth from the year-end in 2018. For the second quarter of 2019, we achieved onboarding yields of 12%, a slight increase compared to 11.9% in the first quarter of 2019. Our loan portfolio yield was a record 16.8% for the second quarter of 2019, compared to 14.4% in the first quarter of 2019 and 15.3% for last year’s second quarter.Turning to our expenses. For the second quarter, total net expenses were $5.5 million, compared to $4 million in the second quarter of 2018. Our interest expense was up $660,000 compared to the prior year period due to additional average borrowings and the increase in the one-month LIBOR.Our net incentive fee increased $430,000, due primarily to higher pre-incentive fee net investment income. While our base management fee rose $280,000, driven by an increase in the average size of our portfolio. As a reminder, under the new Investment Management Agreement, Horizon pays a two-tiered management fee, which includes a management fee of 1.6% of gross assets less cash above $250 million in assets.With our successful deployment of our most recent equity raise, we have exceeded the asset hurdle and our shareholders are benefiting from the lower management fee rate. As a note, with the $700,000 of previously deferred performance-based incentive fees waived this past quarter, all the previously deferred incentive fees, our advisor was entitled to receive have now been fully recouped and waived. As a result, beginning with the third quarter of 2019, there are no remaining previously deferred performance-based incentive fees that may be recouped by our advisor.Net investment income for the second quarter was $0.37 per share, compared to $0.28 per share in the first quarter of 2019 and $0.29 per share for the second quarter of 2018. The company’s undistributed spillover income as of June 30, 2019 increased to $0.17, compared with $0.10 as of March 31, 2019.Based upon our outlook for NII, our Board declared monthly distributions of $0.10 per share for October, November and December 2019. We have now declared monthly distributions of $0.10 per share for 36 consecutive months.We remain committed to providing our shareholders with distributions that are covered by our net investment income over time and currently maintained an undistributed spillover of $0.17 per share in support of future distributions.Our NAV as June 30, 2019 was $11.60 per share, compared to $11.55 as of March 31 and $11.60 as of June 30, 2018. $0.05 increase in NAV on a quarterly basis was primarily due to the higher net investment income generated in the quarter, partially offset by net unrealized and realized loss on investments.Summarize our portfolio activities for the second quarter, new originations, including loans funded at our JV totaled $55 million, which were offset by $5 million in principal payments and $31 million in principal prepayments.We ended the second quarter of 2019 with investment portfolio of $275 million, which consists of debt investments in 33 companies with an aggregate fair value of $242 million, a portfolio of warrant and equity positions in 74 companies with an aggregate fair value of $13 million, other investments in three companies with an aggregate fair value of $6 million and an equity interest in our JV with a fair value of $13 million.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 as interest rates rise, while having a specific floor in place.As of June 30, the average interest rate floor on our debt investments is only 50 basis points below the current LIBOR rate and is a 100 basis points above the floor of our KeyBank facility.On the balance sheet, Horizon had $20.1 million in available liquidity as of June 30, consisting of $7.6 million in cash and $12.5 million in funds available to redrawn under our existing credit facility.As of June 30, there was $89 million outstanding under our $125 million KeyBank credit facility with our leverage ratio pointing to one and based on a cash position and the capacity at our key facility, our potential liquidity was $44 million at June 30, 2019.Lastly, with respect to our joint venture, we funded it with two additional investments during the quarter by accessing our New York Life facility and continued to have ample capacity at both the company and the JV to grow our portfolio for the remainder of 2019.This concludes our opening remarks. We’ll be happy to take questions you may have at this time.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Mr. Pomeroy, it appears we have no further questions at this time. I would like to turn the call back over to you for closing comments.

Thank you, and 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 end the call.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.