Greetings, and welcome to Horizon Technology Finance Corporation Second Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Megan Bacon, Director, Investor Relations and Marketing. Thank you. Ms. Bacon, you may begin.

Thank you, and welcome to Horizon Technology Finance Corporation's Second Quarter 2023 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, the company 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, 2022. 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.

Welcome, everyone, and thank you for your interest in Horizon. As we always do on our quarterly calls, I will update you on our performance and our current overall operating environment. Jerry will then discuss our business development efforts, our portfolio events and our markets, and Dan will detail our operating performance and financial condition. We will then take some questions. We had a solid second quarter at Horizon despite the quarter beginning with the fallout from the banking crisis and the ongoing economic and credit concerns. To that end, our adviser Horizon Technology Finance Management closely focused on the credit quality of our portfolio companies, while we also selectively originated new loans and increased our balance sheet's investment capacity. We are navigating through a challenging period and the macroeconomic environment remains uncertain. Though we've built a resilient and expert team of professionals that positions us well to succeed long term in both maximizing the value of our current portfolio of investments as well as adding attractive new investments to our portfolio. Turning to our specific results for the quarter, we generated net investment income of $0.54 per share well in excess of our declared distribution level, due largely to higher interest rates on our floating rate debt investment portfolio as well as lower incentive fees earned by HTFM. Dan will further discuss the impact of incentive fees on NII in his remarks. Based on our outlook and our undistributed spillover income of $1.02 per share as of June 30, we declared monthly distributions of $0.11 per share through the end of 2023. We once again achieved a portfolio yield of over 16% on our debt investments for the quarter at or near the top of the BDC industry. We raised $44 million of equity from a follow-on offering and…

Thanks, Rob, and good morning to everyone. Given the ongoing macroeconomic banking and VC headwinds in Q2, our portfolio size remained flat from the prior quarter at $715 million as of June 30. In the second quarter, we funded 11 debt investments totaling $50 million, including a $10 million debt investment to a new tech portfolio company focused on security imaging and a $10 million debt investment to a new health care information portfolio company, providing AI-enabled technology for dementia care. We expect to remain selective in originating debt investments in the near term given the environment. However, the top of our pipeline is beginning to reflect greater demand by companies that have raised fresh equity and are demonstrating growth. We believe we are well situated to compete for these opportunities, having raised $44 million of equity through a follow-on offering in our ATM in the quarter, as well as expanding our borrowing capacity under our credit facilities in the quarter. Our onboarding yield of 13.6% during the quarter remained near our historic highs, reflecting the higher rate environment in our markets as well as our discipline in structuring and pricing transactions, which we expect to produce strong and net investment income. We experienced two loan prepayments, one refinanced loan and one partial paydown during the quarter totaling $30 million. We expect prepayments to remain muted in the third quarter of 2023, compared to our historic levels given the weak IPO and M&A markets. Our debt portfolio yield of 16.3% for the second straight quarter is a first testament to the value of our floating interest rate structures and a rising interest rate environment. We again generated one of the highest debt portfolio yields in the BDC industry. As of June 30, we held warrant and equity positions in 97…

Thanks, Jerry, and good morning, everyone. During the second quarter, the yield generated from our debt investments once again produced NII that more than covered our distributions. In addition, we are very active in the quarter and further strengthening our balance sheet, providing us with significant amount of additional capacity with which we can prudently make new investments. During the quarter, we successfully completed a follow-on offering, raising $39 million in net proceed. We also utilized our ATM program successfully and accretively raised an additional $5 million of capital. In addition to our equity raises, we expanded our KeyBank revolving credit facility by $25 million to $150 million, and increase its accordion feature by $150 million to $300 million. We also expanded our New York Life credit facility by $50 million to $250 million. We continue to believe our proactive and focused balance sheet management keeps us well positioned to thoughtfully grow the loan portfolio and create additional shareholder value in the current environment and beyond. As of June 30, we had $107 million in available liquidity, consisting of $50 million in cash and $57 million in funds available to be drawn under our existing credit facilities. We currently have no outstanding balance under our $150 million KeyBank credit facility and $177 million outstanding on our $250 million New York Life credit facility, leaving us with ample capacity to grow the portfolio. Our debt-to-equity ratio stood at 1.19:1 as of June 30, and netting out cash on our balance sheet, our leverage was 1.05:1, which is below our target leverage of 1.2:1. Based on our cash position and our borrowing capacity on our credit facilities, our potential new investment capacity at June 30 was $274 million. The second quarter, we earned total investment income of $28 million an increase of…

[Operator Instructions]. First question comes from the line of Bryce Rowe with Riley Securities.

Wanted to ask about the portfolio's internal ratings and then also about some of the realized activity in the second quarter and subsequent to the second quarter. So first, on the internal ratings. You highlighted in the prepared remarks that 1- and 2-rated credits fell in absolute numbers. And then the 4-rated credits actually went up. Can you talk a little bit about kind of the dynamic that's driving at least the improvement to the 4-rated credits and then I'm assuming the 1s and 2s kind of came down primarily as you cleared out some of the, I guess, the underperformers here in the quarter.

This is Jerry. Yes, so through the kind of chaos of what happened with the banks and everything, actually, that we're -- some companies in our portfolio that have just been doing extremely well. So it was -- and they were able to continue their growth. They will continue -- they were able to continue to raise capital in an otherwise very difficult market. And so we don't get to talk about our 4-rated credits very much. I'm glad you actually brought it up, but there were a few that definitely did quite well -- have done quite well through this period. And so it's always nice as we go through our evaluations at the end of every quarter to be able to talk about those as well. On the other end of the spectrum, raising capital in this market was extremely difficult, especially in the early part of the second quarter, there was a lot of chaos around the banks. What was happening with the banks, companies were looking to figure out where to put their deposits. They were also looking to figure out how to deal with an orphan loan from a bank that they didn't know how to work with. And so we saw a lot of opportunity on the new side of companies just wanting to refinance debt out of their banks. I think the market basically said that, that is not really -- this is not really the time to be doing that. And so VCs and investors and the boards of these companies had to figure out other ways to finance their businesses. And it was quite chaotic at the beginning of the second quarter, but I would say that we have seen some stabilization. Companies are, I think, have gotten more rational about…

That's helpful, Jerry. Let's see. And then in terms of some of the realizations in the second quarter, you talked about realizing losses on writing off 3 investments look like interior defined and secure transfusion left the portfolio, I assume that was the kind of the major source of the realized losses. Just curious what the third write-off was? And then kind of a related question in terms of the July activity, should we think about, some realized losses coming through with the better place transaction that you noted in the press release.

Yes. So Bryce, as you can see in the schedule investments, the change quarter-over-quarter, you did pick out the interior defined in STS were 2 deals that we realized in the quarter, and I'll just point out that they were 1-rated credit on nonaccrual and the fair value was marked what we basically realized this quarter. So the NAV impact on that was very minimal this quarter. The third deal is a private deal. We don't necessarily name names, but there was a deal basically what Jerry was talking about, not able to raise additional capital and had a transaction on the table, and that just fell through -- and then as far as July goes, we don't give future guidance. We can say we're working through each one of our companies in real time and do not have anything to report on better place specifically or anything in the portfolio that you should expect to happen in the third quarter.

Next question comes from the line of Christopher Nolan with Ladenburg Thalmann.

Following the acquisition of the manager by Monroe Capital. Well, first of all, are you going to start co-investing in Monroe with their family of funds?

So currently, the plan really is to operate as we have been, Christopher, this is Rob. And so our activities are focused primarily on the public company, Horizon HRZN, I think over time, we will be looking for opportunities to both raise additional separately managed accounts that will be dedicated to the Horizon platform under Monroe as well as look -- seek opportunities where there might be an opportunity to co-invest. But initially, we will be focused on the same target customers and transactions that we are today.

And then I guess as a follow-up on that same vein on leverage. Following the Monroe acquisition, is the plan to take up your debt-to-equity target?

No. As Rob mentioned, we're running the public company as normal. So the target leverage will stay around the 1.2, 1.3x.

Okay. And then final question. For the market in general, are you seeing any banks effectively being able to step into the void created by the seizure of Silicon Valley Bank?

I think it's too early to tell. So the answer is -- the short answer would be no, not particularly. But I think it's too early to tell. I think the banks that have made some -- the bank that acquired SEB and some of the other banks that are hiring venture banking people who are available in the marketplace, there's some expectation that they plan on doing something, but we haven't seen any bank really come to the forefront and say, "Oh, this is going to be the next Silicon Valley Bank." I don't think there is going to be a next Silicon Valley Bank. I think that whatever banks do is going to be far more measured just based on the reality of being a bank and being regulated and some of the things that probably SVB got a little bit over the -- a lot over their skis on. So we have -- but we haven't seen that yet. I don't think that's a settled market at all yet.

[Operator Instructions]. Next question comes from the line of Ryan Lynch with KBW.

Just a question on IMV that obviously had a write-down this quarter. I know that's in the process of the bankruptcy process in Canada. Can you just talk about does that mark reflects what you guys expect to receive out of that bankruptcy process? Or what does that markdown sort of reflect?

Yes. I mean, just like any time when we're valuing all of our assets at the end of the quarter, we're making our best estimate of what fair value is based on in a situation like this, different probabilities of different outcomes. And based on the information we have up through the day we file, we go through that and come up with our calculation. So at this point in time, yes, that's our best fair value of what we expect the investment to realize.

Okay. And then can you just remind us, obviously, you guys made some changes in the capital that got paid back, got some equity in Evelo. Can you just remind us what are the next -- since it's the public company, so this information is out there, but it would just be helpful if you could kind of remind us what are the next big test results that we're waiting for? And what's your expectation? Or what are you hopeful to see out of that?

Okay. So you're talking about Evelo. That's a publicly traded biotechnology company. We amended our loan in Q2. In concert with a $25 million pipe transaction that the company did, they repaid $5 million of our $45 million loan. We also converted $5 million to equity at the exact same terms and price that the pipe investors invested in. So the company has capital now for a period of time. They're in the process of running a clinical trial, 2a trial for a psoriasis drug, 2993 is the technical name. And they expect, based on public information, they expect to have results of that in October.

Okay. And then as far as your equity position that you guys have in there, is there any lockup or time restriction of when you could sell that position. Obviously, based on where the stock price is right now, there's quite a substantial gain things I expect gain should go much higher if things work out well, but, obviously, that could also reverse if things don't go well. So just curious, is there any sort of time restriction on that equity position you have? And any thoughts? Is that -- are you going to be able to -- is this not to be a long-term holder otherwise?

Well, the stock is restricted stock right now, Ryan. And there is -- there will be -- the company is going to undertake to get those stocks registered, excuse me. So that process will take place here in probably the next quarter and then we'll evaluate as we always would any asset based on what opportunities present themselves. So we'll see what happens.

Okay. Got you. Yes. That's helpful. That's quite a substantial gain on that you guys currently have on paper right now. Just the last question. I mean I know you gave some commentary on the market. Obviously, the overall venture market is down. It's been down pretty meaningfully over -- throughout 2023. I'm just curious, I'd love to give your sentiment. You guys are obviously operating in that marketplace every day. I know trends haven't changed much. I mean capital raising is down, investments down, exits are down in 2023. But have you seen any sort of meaningful or incremental shift in VC sentiment, either positive or negative since the last time we talked 3 months ago?

I would say that the one thing that has changed, and I basically -- you're basically correct in what you just said. One of the things we have seen change is, VCs now -- they're back to focusing on their portfolio almost laser-focused on each one of their portfolio companies and what the real needs are and what the real expectations are relative to funding the companies until there is a better exit market. And so the one thing I would say is we are seeing more creative, but at the same time, rational financing transactions that are being contemplated. These are things that can really get done. We mentioned the Evelo transaction raising the $25 million. But we're also seeing some interesting kind of M&A and merger opportunities and other kinds of bridge financing and things like that, that VCs are -- they -- it's not as chaotic as it was 90 days ago. They've kind of settled down. They know what they need to do to support the portfolio companies. There are still companies that are going to find it challenging to raise capital in this market because there aren't good exit markets and because valuations on any company in 2021 that raised money in 2021, probably has a valuation that today wouldn't hold and so they have to figure out how to rationalize those valuations to make the companies look more attractive. All of that is going on right now. And so I can't sit here and say that the trends are all going in the right direction. But at least we're getting rational thought process and rational potential solutions to -- and that requires us, by the way, and I mean the venture debt market to also participate in helping these companies get through this kind of cycle into a better cycle where the M&A market starts opening up, the IPO market starts opening up more. It'll be interesting to see. I -- we firmly believe that the -- when the markets turned that the publicly traded biotech market went way to -- the pendulum swung way too far in the wrong direction. And so we do believe there's some real value to be got in those companies where the valuations were just irrational. I mean, Evelo, I think at 1 point was a $10 million valuation and they had $30 million of cash at 1 time. So we think there's opportunity there. But there's still a lot of risk because of markets not being open. So there's still -- we're still about a couple of quarters, I think, of challenging direct markets, but it's also macroeconomic driven in a big way, too. And until we start seeing some improvements overall on a macroeconomic basis, it's going to be difficult for -- it will still be challenging for the IPO markets and M&A markets, trying to work through the macroeconomic situation. So it's still going to be a challenging market for the next couple of quarters.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Robert Pomeroy, Chairman and CEO, for closing comments.

Thank you all for joining us this morning. We do appreciate your continued interest and support in Horizon, and we look forward to speaking with you again soon. This will conclude the call.

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