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Edited Transcript of HRZN earnings conference call or presentation 30-Oct-19 1:00pm GMT

Q3 2019 Horizon Technology Finance Corp Earnings Call

Farmington Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Horizon Technology Finance Corp earnings conference call or presentation Wednesday, October 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel R. Trolio

Horizon Technology Finance Corporation - Senior VP, Treasurer & CFO

* Gerald A. Michaud

Horizon Technology Finance Corporation - President & Director

* Megan Bacon

Horizon Technology Finance Corporation - Marketing Support Manager

* Robert D. Pomeroy

Horizon Technology Finance Corporation - Chairman & CEO

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Conference Call Participants

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* Paul Conrad Johnson

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Greetings, and welcome to -- greetings, and welcome to Hudson (sic) [Horizon] Technology Finance Corporation Third Quarter 2019 Financial Results Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Megan Bacon. Thank you. You may begin.

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Megan Bacon, Horizon Technology Finance Corporation - Marketing Support Manager [2]

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Thank you, and welcome to the Horizon Technology Finance Third Quarter 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 Q3 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.

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman & CEO [3]

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Good morning, and thank you all for joining us.

We're proud of our third quarter results across every facet of our business as we continue to position ourselves for further growth and strong performance in 2020 and beyond.

In the quarter, we recorded net investment income per share of $0.42. Notably, our NII through September 30 is approximately 20% higher than the distributions we have paid for the same period. Our NII included income from liquidity events as anticipated by our predictive pricing strategy. Just a reminder that 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 debt, achieving development milestones or raising additional capital. Our receipt of this event-driven income on a regular basis validates our loan structuring expertise and the overall earnings power of our portfolio. As we've consistently noted, liquidity events, such as these and the structure of our venture loans, are a feature and integral part of the design of our predictive pricing strategy.

Importantly, even as we were experiencing liquidity events from our existing portfolio, we were still able to grow our portfolio for the sixth consecutive quarter to a total of $282 million as of September 30.

We experienced a record debt investment yield of 17.7% for the quarter, which takes into account regularly scheduled interest and fee income as well as income from liquidity events.

During the quarter, we updated the outlook on 2 of our non-earning royalty agreements. The fair value of one royalty agreement was reduced to a small balance after we received new information in the quarter, which no longer supported our previous fair value.

The other royalty agreement was purchased by one of our current borrowers with the proceeds from the new loan by Horizon. The effect of this transaction was to convert a non-earning asset into an earning asset, collateralized by all of the assets of our borrower.

After giving effect to these changes and in conjunction with other adjustments in the fair value of our assets, we ended the quarter with an NAV of $11.67, up $0.07 from the prior quarter end.

Looking at our credit profile, we believe we are maintaining stable asset quality as we continue to proactively manage our portfolio. Accordingly, based upon our earnings and outlook, our board declared monthly distributions of $0.10 per share through March of 2020.

From a capital markets perspective, it was a particularly busy quarter. In August, we successfully completed a $100 million securitization. This accretive financing allowed us to accomplish several objectives at once, namely, lowering our borrowing cost, increasing our capacity to originate loans, fixing our interest rate in the new lower rate environment, freeing up our KeyBank revolving credit facility for further growth and adding more earnings power to our portfolio.

We also implemented a $50 million at-the-market common stock offering during the quarter, and we're active in issuing and selling stock at a premium to NAV. As of today, we have received $12 million of net proceeds from such issuance, further improving our overall lending capacity.

Turning to our investment activity. In the third quarter, we funded 6 new loans, totaling $47 million, and increased our debt investments on a net basis by $11 million from June 30. We maintain a strong committed backlog and our overall pipeline continues to be robust.

Demand for venture debt remains strong and we look forward to growing the Horizon portfolio in the quarters ahead.

Looking at the balance of 2019, we remain confident in our ability to continue to drive sustainable NII above our distribution. Demand for technology, health care 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 17% thus far in 2019.

And with our debt-to-equity ratio at 0.9:1, well below the high point of our targeted leverage of 1.2:1, we retain the ability to expand our leverage and have ample capacity to fund new investments and grow our portfolio.

To summarize, we continue to successfully execute on all facets of our business as we, once again, generated NII above our distributions, while 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 Jerry, 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.

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Gerald A. Michaud, Horizon Technology Finance Corporation - President & Director [4]

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Thanks, Rob. Good morning, everyone.

Our third quarter successfully built upon the momentum of the first half of the year as we continue to grow our portfolio in a disciplined, quality and profitable manner.

We added 6 new floating rate transactions to our portfolio totaling $47 million. And we achieved an onboarding yield in the third quarter of 11.9% while maintaining our disciplined underwriting approach. We experienced 3 loan portfolio exits during the quarter, totaling $28.5 million, which again, contributed to our near-record NII of $0.42 per share.

In addition, the prepayment and accelerated income from these events helped drive our record loan portfolio yield for the quarter of 17.7%. We continue to add transactions to our joint venture during the quarter as we funded $4 million of 1 portfolio investment through the JV.

We continue to maintain a premium yielding debt portfolio reflected by our leading yield position in the BDC industry, which generates a predictable income stream as we continue to grow our portfolio and add investments with new ETPs, prepayment opportunities and warrants.

We closed $49 million in new loan commitments and approvals and ended the third quarter with a committed backlog of $63 million, an increase from $58 million at the end of the second quarter of 2019. Our committed, approved and awarded backlog as of September 30 was $97.8 million to 12 companies and our pipeline of new opportunities was $644 million.

As these numbers show, we are well positioned with our committed backlog and pipeline to continue growing our portfolio and income stream while enhancing NII with prepayment and accelerated income, it is characteristic of our predictive pricing strategy.

As of September 30, we held warrant and equity positions in 75 portfolio companies with a fair value of $13.1 million. In Q3, we also received proceeds in connection with the termination of our warrants in Food52. In addition, subsequent to quarter end, we received $1.6 million from the exercise and sale of our warrant in Verity Solutions, a former loan portfolio company that have repaid its Horizon loan in 2012.

Turning now to the venture capital environment. According to PitchBook, approximately $28 billion was invested in VC companies in the third quarter of 2019. Another strong quarter overall for investment and leaving the industry on the doorstep to achieving a second consecutive year of over $100 billion in VC investing, with 3 months still to go.

In terms of VC fundraising, $9 billion was raised in the third quarter of 2019, bringing the total raised in 2019 as of September 30 to nearly $30 billion, and essentially, ensuring fundraising activity for the full year 2019 will be near the 5-year average.

In terms of VC-backed exit activity, there were 20 venture-backed IPOs in the third quarter of 2019, which helped lead to exit value in the quarter of over $35 billion and bringing year-to-date total exit value to over $200 billion for the first time ever. These IPOs allow VCs the opportunity to generate returns and to reinvest their capital, which potentially lead to higher VC fundraising and investing as we head into 2020.

Importantly, while there has been much discussion regarding high-profile IPOs, either underperforming or failing to price, the health care life science sector IPOs continue to dominate the overall IP count and we believe this strength will be sustainable for the foreseeable future.

Turning now to our core markets. In the third quarter, demand for financing in the life science and health care technology markets remain strong. During the quarter, we funded a $20 million venture loan to CVRx, a developer of an FDA-approved implantable medical device that addresses advanced cardiovascular diseases, such as hypertension and heart failure.

Also during the quarter, we funded $11.6 million to Maculogix, an existing portfolio life science company, and we funded a $5 million venture loan to LogicBio Therapeutics, a publicly-traded genome editing company focusing on developing medicines to treat rare pediatric diseases.

Finally, we funded $4.8 million to our existing portfolio of company Espero, converting a royalty agreement into a venture loan, and thereby, turning a formerly non-earning asset into an earning asset.

The broader technology sector remains active. During the quarter, we provided funding to 2 of our existing portfolio companies: a $2.7 million venture loan to IntelePeer, a leading provider of business communications; and $2.5 million funding to Bridge2 Solutions, a 4-rated Horizon portfolio company.

Demand for venture debt generally and our product specifically has remained consistently active and strong throughout 2019, particularly in life sciences, as we continue to utilize our brand name and relationships to aggressively compete for deals that meet our underwriting standards.

We also continue to take a cautious and selective posture with respect to potential tech-related investments, particularly given elevated valuations for Internet-related companies.

Overall, we're very pleased with our third quarter performance and the quality of our portfolio. We will continue to source and identify attractive opportunities to add to our pipeline and apply our knowledge-based ability to win investments. Further, our capital markets activity, including lowering our cost of capital this year, this places us in a stronger competitive position to deliver additional long-term, well-priced portfolio growth.

With that, I will now turn the call over to Dan.

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Daniel R. Trolio, Horizon Technology Finance Corporation - Senior VP, Treasurer & CFO [5]

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Thanks, Jerry, and good morning, everyone.

Let's turn to our financial results for the third quarter of 2019. Horizon earned total investment income of $11.4 million for the third quarter, a 46% increase compared to $7.8 million in the prior year period. This increase is primarily due to higher interest income on investments given the larger average size of our loan portfolio as well as the income generated from prepayment activity.

As of September 30, our debt investment portfolio had grown to $253 million, an 18% year-over-year increase. For the third quarter of '19, we achieved onboarding yield of 11.9%, essentially in line with the 12% achieved in the second quarter.

Our loan portfolio yield was a record 17.7% for the third quarter compared to 16.8% in the second quarter and 15% for last year's third quarter.

Turning to our expenses. For the third quarter, total net expenses were $5.6 million compared to $4.4 million in the third quarter of '18. Our interest expense was up $365,000 compared to the prior year period, primarily due to the increase in average borrowings.

Our net incentive fee increased $592,000, due primarily to higher pre-incentive fee net investment income, while our base management fee rose $200,000, driven by an increase in the average size of our portfolio.

As a reminder, under our new investment management agreement, Horizon paid a 2-tiered management fee, which includes a management fee of 1.6% on noncash assets above $250 million. With noncash assets over $250 million, our shareholders are now benefiting from the lower management fee rate and will increasingly benefit as we grow our assets.

Net investment income for the third quarter was $0.42 per share compared to $0.37 per share in the second quarter of 2019 and $0.30 per share for the third quarter of '18. The company's undistributed spillover income as of September 30 increased to $0.29 compared with $0.17 as of June 30.

Based upon our outlook for NII, our Board declared monthly distributions of $0.10 per share for January, February and March 2020. We have now declared monthly distributions of $0.10 per share for 39 consecutive months. We remain committed to providing our shareholders with distributions that are covered by our net investment income over time.

Our NAV as of September 30 was $11.67 per share compared to $11.60 as of June 30 and $11.66 as of September 30, 2018. The $0.07 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.

To summarize our portfolio activity for the third quarter, new originations totaled $47 million, which were offset by $3 million in principal payments and $29 million in principal prepayments. We ended the third quarter of '19 with an investment portfolio of $282 million, consisting of debt investments in 32 companies with an aggregate fair value of $253 million, a portfolio of warrant and equity positions in 75 companies with an aggregate fair value of $13 million, other investment positions in 2 companies with an aggregate fair value of $1 million, and an equity interest in our JV with a fair value of $14 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 interest rate floor. As of September 30, the average of our 30-day LIBOR-referenced rate floors on our debt investments is equal to the current 30-day LIBOR rate and is 100 basis points above the 30-day LIBOR-referenced floor for our KeyBank facility.

On the balance sheet, as of September 30, Horizon had $51 million in available liquidity, consisting of $36.4 million in cash and $14.6 million of funds available to be drawn under our existing credit facility.

As of September 30, there was $15 million outstanding under our $125 million KeyBank credit facility.

Our debt-to-equity ratio stood at 0.9:1 as of September 30, lower than our targeted leverage of 1.2:1. And based on our cash position and the capacity at our KeyBank facility, our potential liquidity was $86 million at September 30.

As Rob mentioned, we were very active this quarter in the capital markets. First, in August, we successfully issued $100 million of Notes rated A+ by Morningstar and backed by $160 million of secured loans originated by Horizon. The Notes bear interest at a fixed rate of 4.2% per year, thereby, further reducing our cost of capital by 100 basis points and increasing our overall capacity to originate new venture loans. The proceeds were primarily used to pay down the outstanding debt of our KeyBank facility.

Second, during the quarter, we also entered into an at-the-market offering program to issue and sell up to $50 million in common stock from time to time. We utilized this program and issued approximately 900,000 shares of common stock in the quarter at a premium to NAV for total net proceeds to the company of $10.2 million. And during October, we sold an additional 158,000 shares, netting an additional $1.8 million in proceeds.

Lastly, with respect to our joint venture, we funded it with an additional investments during the quarter and continue to have ample capacity at both the company and the JV to grow our portfolio further this year and into 2020.

This concludes our opening remarks. We'll be happy to take questions you may have at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Paul Johnson with KBW.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [2]

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I was just hoping you could talk a little bit further on any potential impact that you've seen from your sponsors or on your portfolio companies from, I guess, any sort of hesitation in the IPO market just following the WeWork fallout? And since I think you also mentioned this is something a little more pertinent maybe to the tech sector of the D.C. market, maybe speak a little bit more to that -- how that affected the tech sector as well as maybe your approach to originations in that sector?

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Gerald A. Michaud, Horizon Technology Finance Corporation - President & Director [3]

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Sure. Paul, this is Jerry. Yes, we have absolutely been paying pretty close attention overall to kind of the funding ecosystem for the technology and life science sectors. We actually think the life science sector is still pretty strong, even though there has been a lot of noise on the IPO side. It's been more about a lot of the large technology offerings for unicorn-type companies and some issues that, quite frankly, we expected them to have when they finally decided to go public, and we've seen that play out here in the last few quarters.

We are still seeing pretty strong demand in the IPO sector for life science IPOs. I would just mention relative to that point that more often than not, the private investors in the life science companies are continuing to stay in these transactions when they go public and represent generally between 15% and 30% of the IPO offering proceeds, they are continuing to invest.

So that's something we like to see relative to, certainly, our portfolio of companies. And we're also still seeing plenty of private investment on the life science side in both drug development and medical device, and we're also seeing plenty of dry powder for investment in health care technology companies on the private side, not so much on the public side.

As it relates to the tech sector, your question is right on the mark. We are very cautious about looking at, particularly, Internet-related companies that have high valuations with the anticipation of an IPO. I think that the market is becoming somewhat conservative relative to looking at those companies and more interested in companies that are moving toward profitability than just growth. And so that's something that as we underwrite our transactions, we are watching quite carefully.

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Operator [4]

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(Operator Instructions) There are no questions at this time. I'd like to turn the call back to Rob Pomeroy for closing comments.

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman & CEO [5]

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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.

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Operator [6]

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This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.