Ladies and gentlemen, good morning. And welcome to the Horizon Technology Finance Corporation Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Megan Bacon, Director of IR and Marketing. Please go ahead.

Thank you. And welcome to Horizon Technology Finance Corporation's second quarter 2024 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; Dan Devorsetz, Chief Operating Officer and Chief Investment Officer; 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 believe, expect, anticipate, intend 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, 2023. The company undertakes no obligation to update or revise any forward-looking statement, 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. Today, we will update you on our performance and our current overall operating environment. Dan Devorsetz will take us through recent business and portfolio developments, Jerry will then discuss the current status of the venture lending market, and Dan Trolio will detail our operating performance and financial condition. We will then take some questions. On our conference call last quarter, I began by speaking about the nature and current status of the venture lending business. Venture debt is driven by the demand for advanced technology and the support of risk-taking venture investors. It is an exciting and rewarding endeavor. The Horizon platform has one of the most experienced team of venture lenders, and we are passionate about the venture industry, the role of venture debt in the industry, and the prospects of both. We seek investment opportunities that drive technological innovation by companies that are backed by committed investors who have already made significant investments. These development stage companies rely on additional investment to provide the financial resources to operate and further advance their technology and businesses, and venture debt provides a critical source of such additional capital. When we underwrite a venture loan, we base our investment thesis on a number of factors, including the strength of the enterprise's technology or market position, its ability to further develop its market and technology, and its ability to grow its revenue or attract additional institutional capital or strategic interest. We understand that business plans and markets of these companies are subject to many kinds of detours, and the agility of management teams and investors is necessary to navigate ever-changing waters. As seasoned venture lenders, we know that plans and the environment are always changing, including jolts to the macro environment, like…

Thanks, Rob, and good morning to everyone. Our portfolio size reduced in the second quarter to $647 million, as modest originations were more than offset by prepayments and normal portfolio amortization, as well as fair value adjustments. In the second quarter, we funded four debt investments totaling $11 million, one of which was to a new portfolio company and the remainder to existing portfolio companies. As we previously anticipated, the market for quality new venture loans remained soft for much of the first half of the year, resulting in fewer prospective lending opportunities in Q2. As such, our focus in the second quarter was to carefully seek new opportunities and continue to focus on supporting our existing portfolio. More recently, we're seeing increased market activity and we are building our pipeline with companies across our target sectors, which possess disruptive technology in large and important markets and are supported by quality investors who have made recent investments. As a result, while the portfolio reduced in size in Q2, we have made considerable progress on some excellent new opportunities, including several awarded transactions, which we are currently underwriting and documenting. We are increasingly confident that we will return to portfolio growth beginning in the third quarter. That said, we will always be disciplined in our approach to originating loans to new companies. We will not chase growth for the sake of growth. During the quarter, we experienced one loan prepayment totaling $34 million in prepaid principal. Since the end of the quarter in July, we also received three prepayments totaling $30 million. These recent prepayments are mostly driven by refinancing activity, including several refinancings resulting from positive revenue performance, allowing the borrowers to graduate from venture debt into more traditional and lower cost forms of debt financing. This is an expected…

Thank you very much, Dan. Turning now to the venture capital environment. According to PitchBook, approximately $56 billion was invested in VC-backed companies in the second quarter, the highest total over the past eight quarters. However, the increase was principally due to a couple of outsized deals and the overall pace of VC investment remained well short of 2021 and 2022 loads. The most challenging issue in the venture ecosystem right now is a significant lack of exit opportunities with VC-backed tech and life science companies. Limited Partners and VC funds are not getting capital returned and are very reluctant to invest more in venture capital funds. According to PitchBook, VC funds are presently managing or have access to approximately $1.2 trillion of LP capital. While there have been a few outsized exits over the last 12 months, they are not reflective of the overall market and do not move the needle on the enormous backlog of the VC-backed companies that would like to find an exit. While valuations have declined significantly over the past 24 months they have not yet created excitement or momentum on the M&A and IPO front until the M&A and IPO markets truly open up for VC backed companies, the rest of the VC ecosystem, including investments in capital raising will be somewhat muted. That said, there are recent positive economic indicators leading into Q3 including the rate of inflation decreasing to 3% in July, while the U.S. GDP grew 2.8%, which barring orders will likely result in a lowering of interest rates in the second half of 2024. To that end, we believe the combination of lower interest rates and a significant reduction in the valuation of VC-backed tech and life science companies over the last two years may result in a vastly improved…

Thanks, Jerry, and good morning, everyone. I'll start with a review of our efforts to strengthen our balance sheet and capital structure in the quarter, and then I'll provide a review of our second quarter results. We took significant steps to enhance our capital resources in the quarter. First, we completed amendments to our key banks and New York Life credit facilities, reducing our cost of capital, increasing our credit availability and extending our investment periods. In addition, we added a new $100 million credit facility, which increases our overall capacity. To be able to match new debt capacity with equity, we continue to opportunistically access our ATM program as we successfully and accretively sold over $1.5 million in shares in the quarter, raising $17 million. We believe these actions will allow us to grow the portfolio in the coming quarters. As of June 30, we had $150 million available liquidity consisting of $117 million in cash and $33 million in funds available to be drawn under our existing credit facilities. We currently have no borrowings outstanding under our $150 million KeyBank credit facility, the $181 million outstanding on our $250 million New York Life credit facility and $50 million outstanding on our new $100 million Nuveen credit facility, leaving us with ample capacity to grow the portfolio. Our debt-to-equity ratio stood at 1.36:1 as of June 30 and netting out cash on our balance sheet, our net leverage was 1:1, which is well within our target leverage. Based on our cash position and our borrowing capacity on our credit facilities, our potential new investment capacity as of June 30 was $386 million. Turning to our operating results. We had another solid quarter from an NII standpoint, once again generating NII that more than covered our distributions. For the second…

Thank you. [Operator Instructions] Our first question is coming from the line of Douglas Harter with UBS. Please go ahead.

Hi, this is actually [Cory Johnson] on for Doug. So this quarter, two rated loans went from one to four loans and one rated loans went from four to five. Could you talk a little bit about the reasons for some of the downgrades?

Sure, Cory, this is Dan Devorsetz. Nice to speak with you. So in our portfolio and in the market right now, it's challenging sometimes to get rounds completed. Some of our deals are, and some of the names on that list are in the process of raising money, or getting acquired. They have disruptive products and technology in large markets, and they're definitely innovating. But there is, in cases where there's some delays, or in commercialization, or some delays in R&D, where in a more normalized or robust market, investors might fund through that and get to the other side. In today's market, those rounds are a bit more challenging, to come by. That's particularly true in cases where there, are multiple investors in the syndicate. And they might have some different priorities, or different challenges that they're seeking. So even if there are some investors that are supportive and willing to invest, if there's one or two in the syndicate that are having challenges, pulling those rounds together can be a bit of a challenge. So, we're seeing that and we're working with these companies to get them properly capitalized, so that they can execute on their plan. So that's kind of the overarching primary reason, is most of them are a function of the macro funding environment.

Thank you. And just one more question. And you had also mentioned earlier that you guys are seeing more activity in markets. Are there any particular sectors in which you're starting to see more activity?

It's really, the pipeline is, as we said in the remarks, it's really quite across our sectors of technology, life science, healthcare services, sustainability. It's quite - it's really across those sectors. We are seeing a lot of use of AI in a number of those sectors. You have to be careful to make sure that they're actually using that for business reasons, and not just using it as a buzzword. But we're seeing a lot of AI enabled technology and sustainability in healthcare, certainly in life science. So it's really a cross section of our markets.

Thanks for taking my question.

Thank you. [Operator Instructions] Our next question comes from the line of Paul Johnson with KBW. Please go ahead.

Yes, good morning. Thank you for taking my questions. In terms of the challenged companies in the portfolio, I mean, in your opinion, is the deterioration that you have seen? Has that, what has driven that for the most part, is it just kind of been this lack of exit opportunities, or lack of kind of available financing? Or as you were mentioning earlier, has it really been this LP kind of, disruption holding up potential refinancing rounds, et cetera. What has been the biggest, biggest challenge with some of these new non-accruals?

So I think - you hit the nail on the head again there. The lack of exit markets, lack of IPOs, although they're starting to happen, but we need a bunch more. And the reduction in strategic M&A bleeds into the willingness and capability of the VC's to continue to fund across their portfolio. So it's really, the exit markets drive a lot of behavior across the ecosystem in terms of funding, in terms of LP's, in terms of companies that are in need of cash, being able to access it. So the exit markets are the macro, and then that leads into deal-by-deal specifics.

Thanks for that. And in terms of all that, I mean, how would you, I guess, describe, the difference in performance here, or perhaps the state of its current recovery in terms of kind of later stage, versus earlier stage companies? Is there a big difference there, or is it all kind of under the same challenges?

So that's a really interesting question. I'd say, in general, earlier stage companies that have yet to prove their business model, on a unit economic basis, but have strong products, which would traditionally be supported, are having a bit more challenges than the later stage companies that are growing and have unit economics, but are still burning capital. Those tend to be a bit more, a bit more successful in the capital raiser exits, but that's not universal by any means.

Yes. I appreciate that. And then I guess, moving over kind of, to the quarter and to the results, I mean how should investors, I guess, be thinking about earnings, given we were at $0.36 this quarter without the incentive fee? If we add that back in, that could potentially put NII below the dividend, although that may not come into play maybe until next year, depending on how the total return hurdle works out. But how should investors kind of, be thinking about earnings as we move forward? And if we get kind of what you're talking about, recovery in M&A potentially less pressure on downward valuations, should we expect earnings to pick up from here, or how should we think about that?

So yes, well, I would look at that based on the portfolio size, and what we've been - we talked about year-over-year, is the venture debt model assumes prepayments every quarter, and prepayments have been picking up from the last couple of quarters than, compared to the prior year. So this run rate is kind of where you could expect it, but it's definitely determined based on prepayments. So it could fluctuate quarter-over-quarter.

Hi Paul, this is the operator.

Sorry about that, I was on mute there. Last one I would ask there, is just kind of, in general, sorry I lost my place in my notes here, but let's just end it there. That's all from me. Thank you.

Thank you. Our next question comes from the line of Bryce Rowe with B. Riley Securities. Please go ahead.

Thank you. Appreciate the time here. Maybe wanted to ask about some of the prepared remarks you made in terms of second half pickup, and trying to maybe size up what that could look like. I mean obviously, you've had some prepayment activity here in the third quarter, so wanted to get a feel for, how that second half pickup could look. Is it kind of, is it dependent on rate cuts, or a strengthening of the economy? And - then wanted to ask a couple other questions after you answer that? Thanks.

Hi, Bryce. This is Jerry Michaud. I'm going to partially answer it. Now I'm going to let Dan jump in with some actual numbers here. So, we have been signaling in the first and second quarter that we wanted to basically hold our fire and make sure markets where we're actually starting to make a significant turn relative, to the venture capital ecosystem. And that's what we've done. And so that's what you have seen so far. However, as we indicated in our remarks, we believe the second half is going to be a significantly better environment overall for venture lending. And in that regard, and again, I'll let Dan give you some numbers here, but I think we noted we've already had about $30 million in prepayments already in July, but we've also had fundings that have exceeded that in July. So and we have a very good pipeline. So both in awards, transactions at being underwritten additional commitments we put in the portfolio. So, we do expect a much stronger second half relative - just to our own environment. What we're doing here at Horizon. We're seeing quality investments. And again, I'll let Dan talk a little bit more about that. But so in addition to prepayment activity, which does generate additional fee income, as Dan Trolio mentioned, we're also expecting fairly reasonable growth in the portfolio over the second half. So we're much more bullish here, as we start the second half of the year. I mean I think it goes almost without saying, but I'll say it anyway, if interest rates do go lower in the second half of the year. I think that that's going to really open up the overall VC ecosystem, and we're going to start seeing better exits. We know we have a lot of late-stage companies in our own portfolio that are looking for exits. So, we're pretty optimistic about that. But I'm going to let Dan give you a little more info on that.

Sure, Jerry. Bryce, so, just specifically, so over the last kind of month or two since the middle of June to really yesterday, we've received seven awards for a total of over $160 million, $170 million of total commitments. A good portion of that $25 million or so would fund - could fund in Q3 if they make it all the way through our process. Those deals, as I said earlier, across our sectors. It's a combination of some portfolio opportunities for deals that are doing well, either current or previous portfolio companies as well as new deals. So - and we have a pipeline of near-term proposals out there that we think will add to that number over the coming weeks. So we funded one yesterday. There's a few more that are scheduled to fund in the coming weeks. So that's just some additional detail that put some specifics around where we are from a pipeline basis.

Excellent. That's helpful. And so when we kind of think about - I mean, you all have been pretty proactive from a capital structure perspective, sitting on a bunch of cash. I mean I don't know if this is a record level of cash in terms of percentage of assets, but I would imagine it's pretty close still raising equity on the ATM. You've got the new credit facility. So just curious with that. With those potential fundings, how should we think about the balance sheet, how will you use the cash to push it down? Will you continue to raise equity on the ATM? And/or would you draw some on the credit facilities to fund? Just trying to think about all those dynamics?

Yes, sure, that would probably, I would say, all of the above. First part of that process would be to use the cash on the balance sheet. And then, when we think about our debt capital and our equity capital and what we have available. We look to what we have lined up for funding in the quarter, and what we need. And so, we'll continue to pull each one of those levers as needed.

Okay. And then maybe last one for Dan. There's a subsequent event in the Q with a - look to be a restructuring or transfer of the Nexii investment. Can you talk about what that's going to look like in terms of debt versus equity? Did you swap some there to get equity? Or are the debt obligations still out there?

Thanks Bryce. So again, Dan Devorsetz. So yes, Nexii was acquired out of the Canadian court process by investor group that is really experienced buyer and operator of construction technology companies. Our loan is, we got a small amount of cash and some senior debt - but the - going forward, we have primarily both preferred and common equity positions, and we are supporting the buyer as they execute their plans.

All right. I think that's it for me. Appreciate the time.

Thank you.

Thank you. [Operator Instructions] Our next question is from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Hi, guys. On Bryce's question on leverage, what flexibility do you have to use cash to paydown the New York Life facility, or this Nuveen facility?

These are structured financing. There's more flexibility in the New York Life facility than there is in Nuveen facility, but we do have the ability to paydown and draw up again.

Okay. And then given you have some - all the extra cash and a lot of moving pieces, but any opportunity to buy your 2026, or 2027 notes from the market?

Yes. I mean we do have the opportunity to do to do that. However, those are price fairly nicely, the 4.78% and 6.25%. So it makes more sense to leave it out today based on what we're putting our debt investments on and the spread we're getting between those.

Okay. And did you guys mention what the spillover was in the quarter?

Yes, it's $1.28.

Okay. That's it from me. Thank you.

Thank you.

Our next question is from Paul Johnson with KBW. Please go ahead.

And just one more for me. Can you just tell me what percent of your companies in the portfolio, I guess, the sole lender in that company versus being a partner or lender perhaps?

You broke up there a little Paul. Can you repeat that? I'm sorry, I couldn't - I didn't hear the question.

I was just asking what percent of your portfolio companies? Are you the sole or kind of lead lender in that company as opposed to being partnered with another lender?

So there are - there's a portion of our portfolio where we are partnered, or sub to bank lending, primarily revolvers. But in terms of our particular position, we are almost always the sole lender. We're about 75% or approximately 75% of our deals are senior in the cap table with no bank partner.

Got it. Thank you very much. That's all from me.

Thank you. Ladies and gentlemen, there are no further questions. I would now hand the conference over to Robert Pomeroy, Chairman and CEO. Please go ahead, sir.

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 conclude our call.

Thank you. The conference of Horizon Technology Finance Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.