Greetings. Welcome to Horizon Technology Finance Corporation’s Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.At this time, I’ll turn the conference to Megan Bacon. Ms. Megan, you may now begin.

Thank you. And welcome to the Horizon Technology Finance fourth quarter and full year 2019 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; 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, 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, 2019. 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. The fourth quarter capped off an excellent year for Horizon. Our many highlights for 2019 include growing the size of our venture debt portfolio; increasing our NAV, completing a $100 million securitization, allowing us to lower our cost of capital and increase our capacity to make new venture debt loan, and successfully raising more than $50 million from our equity offering and our at-the-market offering, all at a premium to NAV. Importantly, through all of our efforts, we generated net investment income in 2019 that exceeded our distributions by a record 27%.It was a banner performance for Horizon, and even more exciting is that we believe we are better positioned to grow our portfolio and increase our net investment income than we have ever been as we execute on our strategy in 2020 and beyond.For the fourth quarter, we produced net investment income per share of $0.43. Our NII included accelerated and fee income from liquidity events, as anticipated by our predictive pricing strategy.As we’ve mentioned before, our predictive pricing strategy is based on our historical experience that our dynamic borrowers will experience an event which results in the prepayment of our loans and additional income to Horizon. Events may include a sale of the borrower, refinancing of our debt, achieving development milestones or raising additional capital.With respect to event-driven income, as part of the structure of our investments, we typically receive warrants in our portfolio companies. Warrants are a cashless investment for Horizon, which serve as an additional value generator. Several strong outcomes in recent quarters have proven their value.From early 2019 through today, we have received approximately $10 million in warrant and equity proceeds from 11 of our portfolio companies through the exercise of warrants in connection with M&A…

Thanks, Rob. Good morning, everyone. Our fourth quarter was another exceptional one for Horizon as we made additional and significant progress in growing our portfolio in a disciplined, quality and profitable manner. We made investments to five new portfolio companies and made additional advances to two of our existing portfolio companies, all totaling $65 million. The transactions resulted in an onboarding yield for the fourth quarter of 12.2%.We experienced two loan portfolio exits totaling $22 million during the quarter, which, again, contributed to our NII. In addition, the prepayment and accelerated income from these events helped drive a debt portfolio yield for the quarter of 17.6%, the second consecutive quarter it has yielded greater than 17% and further evidence of the success of our predictive pricing strategy.We continue to maintain a premium yielding debt portfolio, reflected by our leading yield position in the BDC industry. Our portfolio generates a predictable income stream as we continue to grow our portfolio and add investments with new ETPs, prepayment opportunities and warrants.In Q4, we closed $88 million in new loan commitments and approvals and ended the quarter with a committed backlog of $50 million compared to $63 million at the end of the third quarter. Our pipeline of new opportunities as of today is $650 million, which includes over $95 million of term sheets in negotiation.We remain well positioned with our committed backlog and pipeline to continue growing our portfolio and NII, while enhancing NII through our predictive pricing strategy of prepayment fees, accelerated income and other pricing enhancements.As of December 31, we held warrant and equity positions in 75 portfolio companies with a fair value of $14 million. During the fourth quarter, one of our warrant portfolio companies, Sys-Tech, completed an M&A transaction, and Horizon received approximately $2.3 million in warrant proceeds…

Thanks, Gerry. And good morning, everyone. As Rob noted in his remarks, it was an excellent 2019 for Horizon as we significantly enhanced the strength of our balance sheet and the capital structure throughout the year.During 2019, we completed $100 million securitization, which lowered our cost of capital, freed up our credit facility and increased our capacity to make new loans. We also successfully raised $23 million in an accretive capital raise in the first quarter of ‘19. And combined with our ATM program, we raised nearly $50 million in 2019.Specifically, in the fourth quarter, we issued approximately 1.1 million shares and received $14 million of net proceeds, and subsequent to year-end, we raised an additional $15 million in the first quarter of 2020. As Rob and Gerry indicated, we left 2019 in a much stronger position than we started the year, and we are poised to continue to build on that success in 2020.Now let’s turn to our financial results for the first - fourth quarter of 2019. Horizon earned total investment income of $13 million for the fourth quarter, a 47% increase compared to $8.8 million in the prior year period.This increase was primarily due to higher interest income on investments given the larger average size of our loan portfolio and a higher average prepayment fee rate earned.For the fourth quarter of ‘19, we achieved onboarding yields of 12.2%, above the 11.9% achieved in the third quarter. Our loan portfolio yield was 17.6% for the fourth quarter, just under last quarter’s 17.7% and an increase from 16.7% from last year’s fourth quarter.Turning to our expenses, for the fourth quarter, total net expenses were $6.3 million compared to $4.8 million in the fourth quarter of ‘18. Our interest expense was up $374,000 compared to the prior year period primarily…

Thank you. [Operator Instructions] Our first question comes from the line of Tim Hayes with B. Riley FBR. Please proceed with your question.

Hey. Good morning, guys. Congrats on a strong quarter. My first question here, what drove the dividend from the JV this quarter? Was it a function of growth and committing more capital or were there any repayments there that drove yields higher? I’m just wondering how to think about this going forward now that you will not be committing more capital there.

Yeah. Good question. As Rob mentioned, we invested another $1.5 million to three deals in the fourth quarter, but we also did receive prepayment in the amount of about $10 million. And so that - those prepayments, just like I mentioned in our portfolio, accelerated income in the period. So the balance going forward is about $35 million in the JV. And that’s the kind of run rate you should be thinking about going forward.

Understood. And then can you just give us some more color on the non-accrual this quarter SIGNiX [ph]? What triggered you placing a non-accrual and marking it down pretty significantly? And if you could just touch on the outlook and path to recovery there? I know it’s a smaller investment, but just curious there.

Yes, this is Gerry. So SIGNiX [ph] has been kind of a two rated credit for us for quite a while. They’ve been trying to raise capital and look at other strategic opportunities. And we just felt that it got to a point where our confidence level and their ability to get some of these things done isn’t particularly strong.There are some assets that we have as collateral that we certainly believe have value, but given their inability to have been able to get something done by now, we decided that - to look at the underlying collateral value and kind of put that at a level that we felt we had some confidence in.

Okay. Got it. And then I assume that’s 1 of the 2 1-rated investments. Is the other Audacy? Or can you just remind me what the other one is?

Yes. That’s correct.

Yes. Audacy.

Got it. And then as it relates to coronavirus outbreak, are there any companies in the portfolio that we should be keeping an eye on that you would say have more direct or even indirect exposure than others?And then just on the flip side, is there a silver lining here for you guys in terms of increased demand from drug makers or medical device companies, et cetera?

This is Rob, Tim, thanks. First of all, our companies are mostly in the development stage, R&D, so there are not directly, many of them, impacted by consumer demand. There are some that have supply chain issues that go back to China. So we certainly are watching those. Same thing on the drug development side, though.Yes, it certainly draws focus to companies that can develop both vaccines and cures in rapid fashion, it’ll take time to make that happen.

And could you maybe just try to estimate what percentage of your portfolio companies have those supply chain issues?

So we’ve been canvassing all of our portfolio companies and speaking to them directly about this. Of course, we are no different than the rest of the market, which is it’s not so much the virus, it’s the uncertainty of where this is all going. And so everyone is trying to kind of guess at where their issues might be.To Rob’s point, since most of our companies are in the development stage, even the supply chains are not as big an issue as they would be in a middle market company that was relying on product to have significant revenue sales.So we - based on the information that we have received back, there is no company in our portfolio today, as we sit here, that believes that over the next two quarters, their business will be materially impacted by the virus. Again, I think that risk is out there for the whole world and every market.And so we will continue. We are aware of this, obviously, and we will continue to monitor and be in discussions with all of our portfolio companies, but specifically those that we think have any risk whatsoever.But as we sit here today, what we have heard is that, basically, there is no immediate impact to our portfolio or our portfolio companies related to the virus.

Okay. Got it. That’s helpful. And so if I could just pick on that a little bit more, and then I’ll hop back in the queue. But just based on these conversations, are you seeing any changes in demand from your portfolio companies or prospective portfolio companies to take on more debt?And then on the other side, you’ve had some issues in the past with VC sponsors maybe not being as supportive as you would have expected with some of the portfolio companies through some stressful times.Just wondering if communications with VCs today are - how those are going? And if you’re getting any positive affirmation that they will continue to support the portfolio companies if the economic impact from this outbreak escalates?

Yeah. So I think one of the things we’re looking at that helps - I think has helped us is that in our pipeline, as we’re looking at new transactions, this is, obviously, an issue as well as it’s an additional risk that historically hasn’t been there. And so as we do deep dives into some of these portfolio companies and speak to the investors, I think we’re getting the sense that there’s an awareness that it is a risk factor. And to the extent that there is a real potential that a potential prospective transaction could be impacted, I think that, in fact, might cause some hesitation in the marketplace, not just on the debt side but on the equity side as well because of the unknown.But as it relates to our portfolio companies, the discussions we’ve had, everyone is still very supportive. And as we look back at - and I won’t get too deep in this, but as we look back at 2008, we - our portfolio, I think, actually performed significantly better than middle market portfolios because our companies were development stage companies.So yes, there was a capital constraint. There was all kinds of issues going on in the marketplace, but our portfolio company was doing well otherwise, in other words, executing otherwise, they receive funding and the portfolio did fine.We’re not seeing anything in the portfolio today talking to customers, talking to investors that suggests that there’s immediate risk potential here in our portfolio. But again, we are going to keep continuing to monitor this very closely.

Okay. Understood. That’s helpful. Thanks again for taking my questions.

Thank you. Our next question is from the line of Ben Zucker with Aegis Capital. Please proceed with your question.

Thanks and congratulations on the nice 2019 as well. I hate to belabor the point, but I think it’s on everyone’s mind right now. Coming at the coronavirus just from a different way, you’ve mentioned you’ve reviewed your portfolio companies and looked over them, and there’s minimal exposure, which I think is nice to hear.But you also spoke about the uncertainty going forward. And from your perspective as someone who’s kind of a capital allocator, I mean, is that potentially causing you like to kind of pause on or hold back or really be a little bit more careful on where you’re deploying capital as we look ahead over the next, call it, few weeks, potential months until this shakes out? Or is it kind of just the same old steady course of business?

It’s a bit of a double-edged sword, right? Because on the supply chain issues, all of our portfolio companies are U.S.-based company, so we don’t have any companies over in China. So we’re not - we don’t have a particular international risk issue. We have a supply chain - we could potentially have supply chain issues with our technology companies.The other side of that, though, is on the life science side. There’s, obviously, significant amount of capital being deployed not just for coronavirus vaccines but the recognition now, and this is generally when it happens is when something like this happens, that we have to - as being the world’s leader in drug development, we have to do a better job at both - on both the therapeutic side and the vaccine side of developing products. And so there’s more capital going into that side of the market.And so yes, we are, in fact - to answer your question specifically, I think we are being more cautious as we look at our pipeline of new opportunities. We are doing a very deep dive on the corona issue right out of the gate to see if that risk is something that maybe in today’s market isn’t worthy of taking.But on the other side, on the life science side, we are also seeing some significant investment going into that side of the market relative to developing vaccines. And so we will - I think we’re in a very interesting place as it relates to the coronavirus meeting our - the markets that we serve.

Right. And I suppose there’s also always an element where if everyone else is being conservative in a niche market like this, perhaps - I don’t want to put words in your mouth, but perhaps there’s a chance to even get some outsized deals from guys who really need the capital in a timely manner as well.

It’s a reasonable point.

Let’s - just looking at just underlying credit, I appreciate your comments on the risk-rated one loan. I did just notice a slight minor uptick in the risk rating two loans. Not asking you to call anything specifically out there or identify the companies, but could you just maybe just speak to the underlying credit broadly across the portfolio real quickly?

Yes. Really, I think...

I’ll take that one, Ben. It’s Rob. I think we feel like we have - constantly in our portfolio, there are companies that need to raise money or they’re under some stress. And if that persists or is a little bit higher, then we will downgrade the loan to rated two. And that’s, I think, the bucket you’re speaking of specifically.In this case, I think we mentioned IgnitionOne in particular, which represents the major increase in the dollar amount related to that. As I said in my comments that - or I think maybe Jerry did, that we’re in a senior secured position secured by collateral that is multiples of our debt. So we feel like there’s no potential for real loss there, that’s why we rated down at two.

Got you…

And one thing I’d add to that is of 12/31, that loan balance was $12 million, and that’s what you see in the 10-K.

That’s what’s in there.

But as Gerry mentioned, we collected over $4.5 million of principal in the first quarter of 2020. So that principal balance has been reduced.

Has already derisked a little bit. And just for my own - out of curiosity, if you had a company that was risk two just because you thought they needed money, but it’s a company you’re familiar with, they’ve been in the portfolio and you’re comfortable with the underlying credit, could you guys, in fact, be willing to extend or extend more money to that firm, if everything else seems to be going fine with the underlying business?

I think the way - more general than specific, but generally, the way that, that works, it’s a very good question, is we generally will sit with the equity investors when companies get to that point. And to the extent that the equity investors feel the same way we do that the company is viable and should be - and generally speaking, we will work with them where we - they will actually put in the money, but we may provide some interest-only or something like that to help the company get through whatever the trough is that they’re in with the great expectation that they’re going to come out of that.I think a good example, Verve [ph] was a two rated credit in our portfolio at the end of Q3. We knew they were working on a strategic transaction. We worked with them relative to that. That transaction, as I mentioned, was consummated in the first quarter, just recently, and it was upgraded to a three at the end of the year because the deal was actually signed by the end of the year and we knew we’d be getting fully repaid, or it was a high likelihood, and that’s exactly what happened.So that was an interesting transaction. We moved it to a two in the third quarter when there was some stress and there was uncertainty about whether a deal would get done. And then as that transaction happened over the fourth quarter and the first quarter, we moved it back to a three. And we’ve already seen some proceeds, and we’ll see the rest of the proceeds on that deal, including all the interest and fees by the end of this month.

Understood. And then maybe lastly for me. I was looking over your year-over-year results and I saw in the MD&A section that kind of all the fees, particularly prepayment fees, were up big. It was 85% maybe as total fees year-over-year, whereas the portfolio was higher by 22%.So I’m just kind of wondering, was there any specific dynamic at play in the market that led to this kind of outsized jump in prepayment and fee income relative to the total size of the portfolio?And if that’s the case, could that dynamic still be in place as we think about 2020? Or is that kind of - am I over thinking this, and this is just a reflection of how idiosyncratic each discrete investment is?

No. I don’t think you’re over thinking, it’s a good analysis. As we mentioned, we have prepayments every quarter, we just can’t really determine exactly how much each quarter. In 2019, and we mentioned this in the third quarter of last year, we had a significant prepayment that we structured a bit differently.As we always say, we structure deals to meet with the underlying portfolio company is sensitive to and protect our risk. We had in the third quarter a revenue-based payment that was a bit outsized than normal, and so that kind of led probably to the higher percentage than you would normally see.

Got you. That’s helpful, Dan. All right. Well, that was it for me. Again, congrats on the strong year, and also welcome, Diane, to the Horizon team.

Thanks, Ben.

Thank you. [Operator Instructions] The next question is from the line of Ryan Lynch with KBW. Please proceed with your question.

Hey, good morning. Thanks for taking my question. I wanted to follow up with a couple of questions on the JV. So you mentioned strong prepayment in the fourth quarter increasing the fees for that vehicle. So is it more reasonable to expect income from the JV to more look like what we saw in the second and third quarter of 2019 going forward?

I would say that would be more consistent, and just think about a $35 million portfolio and our normal yield off of that volume.

Okay. And then also on that, so can you provide a little more detail and color for the thought process? I want to make sure I fully understand. It doesn’t sound like you plan on funding any additional investments, both on the balance sheet of the JV as well as making new investments into the JV.Please correct me if I’m mischaracterizing that. And also, can you give me a little background of why you’re not intending to continue to grow that vehicle?

So you have it correct. We’re not going to place any new loans into the JV, nor invest any additional equity into the JV. Just to put this in perspective, when we originally pursued the JV, it was pre-October 2018 before the 2:1 leverage was approved. And so this was a vehicle by which we could attach higher yield - I mean benefit from a higher off balance sheet leverage.Frankly, we didn’t grow it as fast as we’d like. But at this point, we’ve just decided to put the transactions on our balance sheet. And I think that’s also a function of the capital we raised, which is pretty efficient capital. We’ll set an equity at the HRZN’s current balance sheet.

So effectively, over time, we will see that JV - as prepayments and repayments come in, that will JV will effectively just wind down?

Exactly. Exactly.

Got you. And then I know we’ve talked about it a lot, but just regarding the coronavirus, I just wanted to - kind of a higher level question on your guys’ thought process with deploying new capital into the market today. Obviously, we’re in very uncertain times. The coronavirus could end up being a big deal. It could end up being a very little deal, that kind of changes day-to-day and, certainly, week-to-week.So as you guys are looking to deploy new capital into the market and given just the fluidity of the situation, how are you guys evaluating deploying new capital? And when you guys are looking to deploy new capital into companies, what sort of baseline case are you guys using to kind of evaluate whether you’re going to have a - whether to make that investment or not? Kind of a baseline case of what the U.S. economy looks like 3 to 6 months from now?

So again, I would use a longer perspective about how we invest and the environment in which we invest, Ryan. These companies that we lend to are in long development stages based on strong support historically from their VCs. We are being absolutely cautious, especially as Gerry said, on new opportunities, but so are the investors. And if the investors are putting the capital in - and our horizon of when we invest is, really, we look out 18 to 24 months.So we’re going to be cautious. We’re impacting - we see the impact potential across the U.S. economy. But I think the ecosystem in which we work will dictate how much we can write, how much we want to write and what the impact is on our existing portfolio. Gerry, do you want to add to that or...

No. I mean I think that, that’s correct on the ground level where every transaction, it comes in the door nowadays, it’s the top of a - it’s one of - it’s going to be the first risk question we’re going to look at before we get too deep into the other qualities or qualifications of an opportunity.So it’s not something that two years from now, we’re going to be looking back and say, boy, we should have been aware of the coronavirus potential impact. We are aware, the market is aware. And it’s still - it’s very early in this process.So we’re taking a pretty fairly cautious approach, especially in new investments, and so we’ll see how it goes. It could impact overall market demand over time. But right now, we’re still seeing great demand, as I mentioned earlier, especially on the life science side, which is less impact and, in fact, there could be ultimately some economic benefit on that side of our markets.

Okay. Got it. Those were all my questions. I appreciate the time today.

Sure.

Thank you. At this time, we have reached the end of our allotted time for question-and-answer session for today, and I will now turn the call back to Rob Pomeroy, Chairman and CEO, for his closing remarks.

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.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.