Greetings, and welcome to Horizon Technology Finance Corporation Second Quarter 2020 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] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Megan Bacon of Horizon. Thank you. You may begin.

Thank you, and welcome to the Horizon Technology Finance second quarter 2020 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 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 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. Thank you for joining us and for your continued interest in Horizon. We hope you and your families remain safe and healthy. As we normally do, I will provide some overall perspective on the company. Jerry will then touch on our business development efforts and the market environment; and Dan will detail our operating performance and financial condition. The last few months have been extremely challenging times for all Americans. At Horizon, we have been hard at work since the beginning of the pandemic, closely managing our portfolio and building on our recent accomplishments to further strengthen our overall financial and credit position. Our efforts in constructing and managing our portfolio, including execution on our predictive pricing strategy produced second quarter results of which we are all proud. During the quarter, we generated net investment income of $0.40 per share, which exceeded our distributions due to our strong onboarding yields, our predictive pricing strategy resulting in significant prepayment activity and our successful efforts to recover value from our underperforming loans. We grew the size of our debt portfolio for the ninth consecutive quarter. We achieved a debt investment portfolio yield of 16.9%. We maintained a stable credit profile despite the ongoing volatility in the market. We increased our net asset value as of June 30 to $11.64, up $0.16 from March 31. Considering the significant persistent economic effects of COVID-19, we're very pleased our NAV increased this quarter. We also further strengthened and diversified our balance sheet by amending our credit facilities with New York Life Insurance and KeyBank, and ended the quarter with over $200 million of capacity to support our portfolio companies and to selectively make new investments. All in we are weathering the storm well and remain confident in our ability to navigate the challenges…

Thanks, Rob. And good morning. I hope everyone has remained healthy and safe since our first quarter investor call. In the second quarter, we operated in a volatile and uncertain COVID-19 environment, which impacted both healthcare and economic conditions. This required Horizon to carefully navigate the environment and execute on its venture lending strategy by relying on its experience and ingenuity. The good news is that the expectations about our markets that we shared on our first quarter investor call largely held true. First, the life science market remained healthy and strong with significant support from both equity and debt providers. The heightened awareness of our country’s need to focus on vaccines and treatments for unmet medical needs is as high it is as it has ever been in my 35 years of financing life science and related companies. Second, as we anticipated, later in the quarter, we saw a significant improvement in the healthcare market, as healthcare facilities reopened and resumed providing non-essential health care treatment. Our confidence remains strong with respect to the life science market, while we are becoming more optimistic with respect to the healthcare technology market. However, while would we continue to remain cautious on the consumer related internet technology markets, we are beginning to observe positive developments in certain sectors, such as online education, which is experiencing significant demands for its products and services, and what may well become the new normal post pandemic learning market. Due to our favorable outlook toward the life science market, at the end of the first quarter and our strong brand, in the second quarter, we originated several quality investments to life science companies with unique technologies, top management, committed investors and ample liquidity. As Rob mentioned, in the quarter, we made a total of $40 million in…

Thanks, Jerry. Good morning, everyone. I'll start by reviewing the steps we took to strength our balance sheet during the quarter, and then I'll provide a quick review of our second quarter 2020 results before opening up for questions. After consolidating the joint venture portfolio onto our balance sheet, by making a joint venture, a wholly-owned subsidiary of Horizon, we worked closely with New York Life to amend the $100 million senior secured debt facility that was initially available to the former joint venture and is now available to Horizon. We were successful. And in June, we extended the investment period of the facility to June, 2022, which allows us the ability to borrow up to $100 million. Interest rate on the facility is based on a three-year swap rate, plus a margin of between 3.5 and 5.1 determined by its rating. The facility provides us with increased lending capacity and low cost capital to fund new originations. Additionally, if further diversifies our sources of debt and enhances our balance sheet to maximize our capital efficiency. We are very pleased with the outcome and with the additional balance sheet flexibility, the facility provides us. As discussed earlier, we amended our KeyBank facility to extend the period by which we could request advances until September 2021. The LIBOR floor is also amended from 75 to 100 basis points. In short, in the quarter, we continue to proactively manage our balance sheet. And as a result, we increased our overall capacity at a low cost of capital, as well as our overall financial flexibility. Further, our strengthened balance sheet enables us to play an integral role with our current portfolio investments to help them navigate successfully through the pandemic. On the balance sheet, as of June 30, Horizon had $60 million in…

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. Hope you’re all doing well. My first question here, just in terms of cash for runway for your portfolio companies, can you maybe just give us a little bit of information here, just how many of your companies have enough cash to get them through the end of the year, or maybe if you can tear it for us in terms of six months or 12 months. I don't know if you have that information in front of you, but I know it's a big, one of the bigger credit metrics you guys look at. So if you could just give us a little bit more color on that and I'd appreciate it.

So, yes. Thanks, Tim. This is Rob. We do tear our portfolio the way you suggest and the great majority of the portfolio companies have cash into 2021. Maybe I'd ask Dan Devorsetz, our Chief Investment Officer just to give you a rundown on the percentages. So I don't have any of it by dollar, but I can tell you that all but six or seven have cash well into 2021. And the ones that are in the process of raising capital, you can look at the Q.

Okay. And when you say well into 2021, does that mean that they have, more than a year's worth of cash runway? Do you know what percentage of the portfolio, or how many companies might be, have enough to get them through 12 months or versus I guess, we're only really four or five months away from the end of the year.

Yes, this is Dan Trolio. So the actual percentages it's up north of 75%, 80% that have cash greater than 12 months on the balance sheet today.

Got it. Got it. That's helpful. Thanks. And then you mentioned, you added two companies to non-accrual status this quarter. I believe Espero Biopharma and Lantos Technologies. What drove you to place these credits on non-accrual status? And can you give us an update on your outlook going forward and how conversations with sponsors have been around these companies?

Yes, so in both cases, actually our outlook and the scenario analysis that we do for companies that are trying to either raise money or sell their businesses changed from where we were at the end of March, Tim. In both cases, they have moved to a date certain auctions. And so those auctions, our confidence that they will return all of our capital is less than it was at March. And so as a result, we placed the business – placed these loans on non-accrual and we valued them based on our scenario analysis of the outcome of those auctions. We think that both of those auctions should come to ahead in the third quarter, maybe get stretched into the fourth quarter.

Okay, got it. And then could you touch on maybe, what encouraging signs if any that you're currently seeing in your portfolio, your companies seem less desperate for cash these days and have forbearance request declined, or is there anything else that you can pass along, whether it's just kind of the tone of management teams as you're catching up?

Hi Tim. It’s Jerry. Yes, we obviously – we're sticking very close to our portfolio companies and their investors. And I got to say that given where we felt things were going in March and even April, we had heightened concern over not just our own portfolio, but the economy in general and the impact of COVID-19. I will say the response both from our management – the management teams of companies and their investors has been extremely positive and along with our help, I might add. So we're feeling very good about where our portfolio companies are now. Dan Trolio just mentioned most of them have cash well into 2021. So we think we have navigated up to this point pretty well, and we think our portfolio companies and their investors have done a great job up to now. Obviously given what we're seeing related to the pandemic, we still think there was some significant headwinds going forward. So we are going to continue to be closely monitoring the portfolio and the companies and continuing to stay in touch with their investors. The good news is investors have a lot of dry powder going into this. So that has been very helpful and they are very focused on making sure that their portfolio companies kind of get through this period. Now, the question is, how long is this period? And that's something that we still have concerns about. And as I think we mentioned in our script, so that's where we are today.

Got it. Appreciate the color there. And then just one more from me and I'll hop back in the queue. How much of the $76 million in unfunded commitments would you say is readily accessible at this point?

So with most of our tranche commitments and unfunded commitments, they are milestone based. And so there's – I would say about 95% of it, and there needs to be a milestone to be hit. And so that's not a concept of where there could be a run on a bank to call some liquidity on a revolver or anything like that. So we're able to plan out and see throughout the year where those commitments will come in and when they'll draw those possible unfunded commitments.

Got it. Got it. Yes, I figured as much, but I just wanted to double check there. Thanks, Dan. And I'll hop back in the queue. Thanks for taking my questions guys.

Thanks Tim.

[Operator Instructions] Our next question comes from the line of Ryan Lynch with KBW. Please proceed with your question.

Hey, good morning and thanks for taking my questions. In your prepared remarks, you gave some statistics. I think you had mentioned about $34 billion invested in VC markets in Q2 and 22 billion of VC capital raised. That feels like a very robust environment. It doesn't really feel like we're operating in a pandemic with those sorts of numbers. We've also seen your portfolio companies add $30 million of prepayment activities. So they're giving money back to you early, repaying capital back to you early, so it doesn't feel like the kind of statistics you would see in a pandemic. And so my question is – a little bit more of a higher level question is from the VC market standpoint there seems to be plenty of liquidity moving around that market for borrowers to have plenty of access to capital, do you feel that really borrowers, portfolio of companies access to capital has really changed significantly during this pandemic versus pre-pandemic?

I think it's a great observation by the way. I think we went into the pandemic really kind of from a very strong market position. And so I think that helped a lot with companies, investors and even the LPs who invest in VC funds feeling like this was something that was temporary, if you will, the pandemic, there would be an end at some point. And so I think the people were basically optimistic still, also quite aware of the pandemic and obviously its impact on the economy with graded double digit unemployment, to continue to get through this, to get committed to getting through this just as we are. My concern is going forward, so – how long can they continue to be optimistic about the circumstances and when do you get to the point where they start looking from a idiosyncratic standpoint at each one of their portfolio companies and saying in this environment as it continues, this great strategy they had when we made the investment maybe isn't going to be successful going forward and so that is what we're watching very closely as we go forward. So we feel good about what has been done relative to the company's cutting costs, relative to investors investing capital and even finding some really good opportunities in the marketplace. But we are quite cautious about how long this is going to last and as it does, what is the investment mentality going to be going forward. So you're correct. Feel good about how we've navigated so far, but I don't – we're not taking the approach that everything is fine and look what happened over the last three months, we're sure that's going to continue. We think at some point, if this continues unmitigated and the pandemic continues to grow that this will become an issue for the country. So we are paying very close attention to the small signs we see in our market and within our own portfolio.

Okay. That's helpful color. And they are kind of on that with the $30 million of prepayments this quarter, is there any way you guys, you can kind of help characterize what was the nature of those companies prepaid, where they with their acquisitions or what was kind of just driving those individual prepayments, guys wanting to give capital back and prepaying loans in this environment.

Yes. Sure, Ryan. There was four prepayments that make up that $30 million. One of the companies, I think we mentioned on our last call where they had – there was an M&A and it was a very positive event and we actually have warrant proceeds and warrant gains from that activity. Then we worked out two of our non-approvals that were on the books as of March and settled one of them very favorably that we've been working on for a number of years. And then the last one, a company we've been working with for a while now, raised some significant capital and made sense for them to pay us off. So it kind of ran the gamut.

Okay. I think you've mentioned your on-boarding yield was 11.1% in the quarter versus prior quarter of 11.2%. So basically unchanged, I know there are other things that are associated that you guys add on: end of term payments, warrants, things like that when you guys are structuring new deals, but given quarter-over-quarter, just the on-boarding yields didn't change. How would you classify the quality of deal terms that you can strike in this environment? I would have thought that on-boarding yields would have been pretty meaningfully higher this quarter. Although as I mentioned, there's other, you know, negotiation terms like end of term payments and warrant you can get?

Yes. So, and the reality is it's still a very competitive market. I know this doesn't – it doesn't feel like that should be the case, but particularly on the life science side, there is companies have lots of different financing options even up until today. Whether it be additional equity from investors, both new and existing investors who have a lot of dry powder and want to make sure that the companies that are doing quite well get full support, it’s even an IPO market for life science companies, as you've probably noticed. We expect that actually to continue into the third quarter as well. And then there are – in the debt market, there is still relatively good competition for high quality transactions. And so that has mitigated some of what you would expect. And even I have to say that we expected maybe in March and April, when things look a little different. That would allow us to get better terms and conditions. I think where we have been able to get better can do in terms of conditions is on the downside. Given what we know about where we are and the pandemic and the uncertainty going forward, we have been able to structure transactions with a little more protection against those – the uncertainty of the market going forward. So that's really where we have been focused. We are given the yields we get in our markets and the spreads that we have, we're pretty comfortable where we are today, especially with our predictive pricing strategy, really over the last couple of years demonstrating that we incrementally get significantly higher portfolio yields. So we're comfortable where we are relative to that. We're really for high quality deals with good investor support and lots of liquidity. Those are the important things for us right now.

Okay. Understood. Those are all my questions. I appreciate this with time today.

Thanks, Ryan.

Thanks, Ryan.

That is all the time we have for questions, I'd like to hand it back to Rob Pomeroy for closing remarks.

So, thank you 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 and we look forward to speaking with you again in the fall. This will conclude our call. Thank you,

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