Horizon Technology Finance Corporation

Greetings and welcome to the Horizon Technology Finance Corporation first quarter 2020 earnings call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Megan Bacon. Please go ahead.

Thank you, and welcome to the Horizon Technology Finance first quarter 2020 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer, Jerry Michaud, President, Dan Trollio, Chief Financial Officer, and Dan Dvoracic, Chief Investment Officer. I would like to point out that the Q1 earnings press release and Form 10Q 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. These are extraordinary times we are experiencing, and our hearts go out to all of those suffering from both the coronavirus pandemic and the economic shutdown. When we last spoke to everyone in early March, COVID-19 was just beginning to reach the U.S., and we felt the gathering storms. The rapidity and depth of its onset has had a dramatic impact on all of our lives and on businesses worldwide. Everyone now has had a family member or friend touched by the disease and many families are suffering from the loss of income. But life goes on and we must carry on. So I'd like to thank you for taking time today to hear Horizon's update. The events of the first quarter have come on us quickly and unexpectedly. We believe our efforts over the past few years to grow and diversify our portfolio and to strengthen our balance sheet have placed us in a position to navigate through these unprecedented times. Against this backdrop, we did have a productive first quarter. During the quarter, we grew the size of our debt portfolio for the eighth consecutive quarter. We generated net investment income of 26 cents per share below our distribution due to traditionally lower prepayment activity in the first quarter. Our debt investment yield was 13.2%. Our NAV as of March 31st was $11.48, down approximately 3% from year end. Most of this reduction is a result of stress on some of our portfolio companies related to the COVID-19 pandemic and the resulting shutdown's economic impact. We ended the quarter with $119 million of capacity to support our portfolio companies and to selectively make new investments. As it became clear that COVID was going to have a major impact on the economy, we took certain steps to prepare. During early March, we borrowed an additional $30 million on our key credit facility to boost our balance sheet liquidity. In April, we acquired the 50% interest of our partner in our joint venture. The former joint venture is now wholly owned by Horizon, and in future reporting periods, its assets will be consolidated with the assets of Horizon. This acquisition will allow us to fully control the management of these assets through this uncertain time. From a credit standpoint, the COVID situation and the economic shutdown have impacted the credit profile of our portfolio. We have been communicating regularly, as we always do, with all of our portfolio companies. We are prepared to support our portfolio companies as appropriate in concert with their investors' support and their management's necessary cost cutting. The liquidity of our borrowers is paramount in the current environment. Accordingly, the credit ratings and fair values of our investments reflect the increased risks that our borrowers may not be able to access additional capital and their operations may be negatively impacted by the economic shutdown. Turning to our investment activity in the first quarter, we funded six new loans totaling $51 million and increased our debt investments on a net cost basis by $25 million from December 31st. This first quarter activity carried over from the momentum generated in the second half of 2019. Entering the second quarter of 2020, our committed backlog and overall pipeline remain active despite the pandemic. Demand for venture debt within our target industries continues to be strong and, in fact, may be increasing as companies seek additional liquidity and funding sources in these uncertain times. We are selectively pursuing new invest opportunities in companies that meet our high bar of liquidity. New originations may slow if the economic shutdown continues and recession worsens. While our outlook is cautious, we are maintaining our current monthly distribution level at 10 cents per share through September. It is our board's policy to set our distribution where it can be covered by NII over time. The distribution level reflects our outlook for the balance of 2020 and our spillover income at March 31st. I'm proud of the entire Horizon team as they have been working remotely since the start of the pandemic in the U.S. while maintaining the same high level of service to our customers and stakeholders. We will continue to focus on managing our portfolio and supporting our portfolio companies while we look to opportunistically fund new investments. By doing so, we look to continue to generate additional long-term value for our shareholders. We'll 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.

Thanks, Rob. Good morning, everyone. First, let me say that I share Rob's sentiment, and I hope everyone remains safe and healthy. The first two months of the quarter were very active for Horizon. However, activity slowed in March as many technology and life science companies were distracted by the dislocation and complexity of the impact of COVID-19 on their business. From March through today, we have continued to carefully review new opportunities through the lens of the COVID-19 pandemic and the resulting impact of a rapidly changing economic environment. That said, we continue to observe significant activity and competition in the venture lending market for investments in high-quality companies with strong liquidity, management and investor support, as well as products and services that are relevant and in demand today. There are some segments of our market we view with caution, such as consumer-oriented tech companies, while other segments we view with more optimism, such as life science vaccine or drug development companies. These companies appear to be seeing continued demand for new drugs and vaccines and have strong balance sheets to further their development well into 2021. We are seeing some near-term dislocation in the healthcare technology market as hospitals are focused on COVID-19 and private practice physicians are essentially closed for business. But we believe demand for healthcare tech products will bounce back as the economy opens up over the next few months and pent-up demand for healthcare services reemerges. In the quarter, we made a total of $51 million in investments to three new portfolio companies and three existing portfolio companies. This resulted in growth in our portfolio for the eighth consecutive quarter, or $25 million on a net cost basis. The onboarding yield for the investments we made in the first quarter was 11.2%. We experienced two loan portfolio prepayments during the quarter, totaling $16 million, which contributed to our NII. In addition, the prepayment and accelerated income from these events helped drive a debt portfolio yield for the quarter of 13.2%. Our debt portfolio yield continues to lead the BDC industry. Additionally, as Rob noted on our last call, structuring investments with warrants and equity rights is a key aspect of our predictive pricing strategy. Warrants are a cashless investment for Horizon, which serve as an additional value generator. During the quarter, we received proceeds of over $5.5 million from warrants and portfolio companies that experienced M&A transactions and from the equity and public companies. In Q1, We closed $55 million in new loan commitments and approvals and ended the quarter with a committed backlog of $44 million compared to $50 million at the end of 2019. Our pipeline of new opportunities as of today is $440 million. In addition, post-quarter end, we increased our loan approvals and commitments from approximately $44 million to approximately $104 million today. All of the increase in our committed backlog is from life science or healthcare-related transactions with typical milestone-driven or tranche funding patterns. From a portfolio perspective, despite the economic environment, we believe we remain well-positioned with our committed backlog and pipeline to selectively grow our portfolio in the first half of the year. As of March 31st, we held warrant and equity positions and 70 portfolio companies with a fair value of $10 million. During the quarter, one of our warrant portfolio companies, SysTech, whose loan had been repaid in 2017, completed an M&A transaction, and Horizon received approximately $2.3 million in warrant proceeds. Bridge 2 Solutions was also acquired in the quarter, and along with the repayment of our principal balance and accelerated income and fees, Horizon received warrant proceeds of approximately $2.8 million. Post-quarter end, our portfolio company, HealthEdge, was sold to Blackstone, and along with repayment of our principal balance and accelerated income and fees, Horizon received warrant proceeds of approximately $500,000. While the first two months of the first quarter seemed like business as usual, it was very much business as unusual in March. As we've communicated previously, we always engage with all of our venture debt portfolio companies on a regular and as-needed basis. As the economy essentially shut down, the ability of companies to raise additional capital became less certain. Accordingly, we ramped up contact with our portfolio companies and their investors to get a keen sense of their near-term needs, expectations, and financing plans. A few of our portfolio companies have clearly been impacted by the national shutdown. As of March 31st, we have six two-rated credits in our portfolio. We are consistently in touch with those portfolio companies and will work with them as much as necessary to help them manage through the short and medium-term dislocation on their business. One of the ways we have done so is to quickly respond to requests but necessary consents and waivers for our borrowers to access the SBA's Paycheck Protection Program. The COVID-19 situation remains very fluid. Thus, we will continue to closely manage our portfolio. I would now like to provide a brief update on some credits we have discussed last quarter. We collected a $5 million pay down on our Ignition I loan in February and placed it on non-accrual. The balance of the loan remains secured by private stock valued well in excess of our balance. Verizon kept its Odyssey loan on non-accrual as of March 31st and carries the loan at fair value of $1.8 million, an increase from December 31, due to some favorable regulatory approvals. The transaction to acquire Odyssey continues and is expected to close later this year. Subsequent to quarter end, we received proceeds of $600,000 in settlement of our loan to Sinex, which loan was fair valued at $500,000 at March 31st. Turning now to the venture capital environment. According to PitchBook, approximately $34 billion was invested in VC-backed companies in the first quarter of 2020. But as one would expect, the last few weeks are a significant reduction in activity. To be clear, though, Investment activity has not stopped, and we believe there remains opportunities for selective investment despite the market dislocation. In terms of VC fundraising, $21 billion was raised in the first quarter, a strong start to the year. However, we would obviously not expect similar numbers in the near term. A positive note is that VC funds have $120 billion of dry powder available for investing. In terms of VC-backed exit activity, there were 10 venture-backed IPOs in the first quarter, contributing to a total exit value of $19 billion. With COVID-19, we expect 2020 IPO activity will decrease considerably from 2019, although we could still anticipate some healthcare life science sector IPOs later in the year. Turning now to our core markets. In the first quarter, we saw greater activity in our life science and healthcare technology markets, providing funding to two new portfolio companies, a $20 million venture loan to Castle Creek Biosciences, a developer of gene therapies, and a $15 million venture loan to a digital health company providing remote cardiac patient monitoring. We also funded an additional $4 million to CSA Medical, one of our existing life science portfolio companies. Finally, we made one select investment in the technology sector during the quarter, funding a $10 million venture loan to a new portfolio company that is creating access for high-quality online education. As we look ahead, we will continue to closely monitor the economic landscape and prudently originate new loans that meet our current underwriting criteria. while we keep a sharp focus on our current and diverse portfolio of senior secured loans. Our actions to strengthen our balance sheet over the past couple of years, including raising $16 million of equity early in the first quarter under our ATM facility, put Horizon in a solid liquidity position with a leverage below our target. We believe our liquidity position will allow us to navigate through the current environment and ultimately deliver additional long-term shareholder value. With that, I will now turn the call over to Dan.

Thanks, Jerry, and good morning, everyone. I'll start with reviewing our balance sheet and portfolio, and then I'll provide a quick review of our first quarter 2020 results before opening up for questions. On the balance sheet as of March 31st, Horizon had $52 million in available liquidity, consisting of $39 million in cash, and 13 million in funds available to be drawn under our existing facility. As the COVID-19 volatility impacts the market, we drew down further on our credit facility to enhance our liquidity, and as of March 31st, it was 45 million outstanding under our 125 million KeyBank credit facility. As a reminder, the KeyBank facility has a LIBOR floor of 75 basis points. Our debt-to-equity ratio stood at 0.94 to 1 as of March 31st, lower than our targeted leverage of 1.2 to 1, and based on our cash position and the capacity on our key bank facility, our potential capacity was $119 million at March 31st. Our asset coverage ratio for barred amounts as of March 31st was 206%. We continue to believe we have ample capacity at the company to navigate through the current environment and selectively invest where we see opportunity. The significant enhancement of our balance sheet and capital structure over the past couple of years has enhanced our overall position. For the first quarter of 2020, Horizon earned total investment income of $10.1 million, a 22% increase compared to $8.3 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. Our debt investment portfolio grew on a net cost basis to $317 million, a 9% increase from the end of 2019. For the first quarter of 2020, we achieved onboarding yields of 11.2% compared to 12.2% achieved in the fourth quarter. Our loan portfolio yield was 13.2% for the first quarter, versus 14.4% for last year's first quarter. Turning to our expenses, the first quarter total net expenses were $5.8 million compared to $5.1 million in the first quarter of 2019. Our interest expense was up $114,000 compared to the prior year period, primarily due to an increase in average borrowing, partially offset by a 10% reduction in our effective cost of debt. Our net incentive fee expense increased $263,000 due primarily to higher pre-incentive fee net investment income, while our base management fee rose $285,000, driven by an increase in the average size of our portfolio. Net investment income for the first quarter was 26 cents per share, compared to 43 cents per share in the fourth quarter of 19, and 28 cents per share for the first quarter of 19. The company's undistributed spillover income as of March 31st was 38 cents, compared with 42 cents as of December 31st. As noted on our prior call, the first quarter is typically our lowest quarter for NII, as we usually see lower prepayment activity in the first few months of the year. And the COVID-19 pandemic in March further impacted potential prepayments as portfolio companies pivoted to shoring up liquidity. We expect repayment activity will continue to be muted in the near term. Based upon our outlook for NII, our liquidity forecast, and our spillover income levels, our board declared monthly distributions of 10 cents per share for July, August, and September 2020. We have now declared monthly distributions of 10 cents per share for 45 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 March 31st was $11.48 per share, compared to $11.83 as of December 31st, 2019, and $11.55 as of March 31st, 2019. The 35-cent reduction in NAV on a quarterly basis was primarily due to net unrealized loss on investments due to the economic environment. To summarize our portfolio activities for the first quarter, new originations totaled $51 million, which are partially offset by $9 million in principal payments and $17 million in principal prepayments. We ended the quarter with an investment portfolio of $335 million, consisting of debt investments in 36 companies with an aggregate fair value of $308 million, a portfolio of warrant, equity and other investments in 71 companies with an aggregate fair value of $10 million, in an equity investment in our JV with a fair value of $17 million. As Rob mentioned last week, we purchased Arena's full stake in our joint venture, and it is now wholly owned by Horizon. We'll be consolidating the assets of the former joint venture into our financial statements beginning in the second quarter of 2020. As we've consistently noted, 100% of our outstanding principal amount of our debt investments bear interest at floating rates with coupons that are structured to increase as interest rate rise with a LIBOR interest rate floor. As of March 31st, the average LIBOR floor on the entire portfolio is 197 basis points, and 90% of our portfolio is at their specific floors. As a reminder, this provides interest rate margin protection in a decreasing rate market. This concludes our opening remarks. We'll be happy to take questions you may have at this time.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Questions. Our first question today is coming from Tim Hayes from B. Riley FBR. Your line is now live.

Good morning, guys. Thanks for taking my questions and, you know, appreciate your comments and hope everyone at Horizon is doing well given the circumstances. My first question here, you know, and I know you touched on this a little bit, but the unrealized appreciation recognized this quarter was significant. Was it more a function of actual credit deterioration in the book that you've seen so far, or do the markdowns incorporate more adverse economic assumptions going forward? Just trying to understand if the portfolio is somewhat reflecting future loss potential, given the increased likelihood of a recession, or if that's going to be more layered on as you actually see it impact businesses over time.

Thanks, Kim. This is Rob. I think it's a combination of all of those things. But, you know, there are specific companies in our portfolio that we felt, due to the markets that they operate in, that they were significantly or potentially significantly impacted by COVID. And so those are the ones that we moved into the two-rated bucket. You know, we have as Jerry and Dan said, I mean, we're in constant contact with these companies. We're looking at the plans that they have to raise capital. And almost all of them are in the process of raising capital they needed or they have capital well into 2021. So it's, you know, we have a few historic twos that have been having issues raising capital or operationally, and those continue. But the impact of the COVID-19 pandemic and the economic downturn, heightened our interest in looking at a few of those companies and downgrading them to two.

And I know you said you have six curated companies now, but can you just give us an idea of how many companies were downgraded this quarter?

Maybe I'll ask Dan Dvoracic. Just so we're pleased to have Dan Dvoracic on our call today. Our Chief Investment Officer, Dan, has been a key member of our senior management team for a long time, and we want to give him some exposure to everybody and welcome him on board. Dan, you want to just summarize sort of how many we had, the moves, ins and outs?

Sure. Good morning, everybody. Thanks, Rob. We have six twos in the portfolio this quarter. Three of them were two-rated credits in prior quarters in Q4, Sparrow, Decision, and Ignition I. And then we moved three... new three companies that were three-rated credits in previous quarters to a two this quarter, Encore, Kinestrel, and Updater for the reasons that Rob mentioned.

Got it. Okay. And, you know, can you touch on the types of, if any, the things you've had to do to work with portfolio companies to provide some type of relief or forbearance? You know, have you seen – have you had to extend loans more than usual? Have you had to waive fees or move more interest from cash to pick or done anything else, again, to provide forbearance at this time? And how has that translated to, or I guess, did that impact your debt yield at all this quarter?

So it's a long, good question with lots of parts to it, Tim. Maybe I summarize by saying when we're in these kinds of situations and You know, fortunately, unfortunately, our management team has been through some of these crises before, including 08, 09, and even back in the tech boom and bust. We usually try to employ what we call the three-legged stool, which is to work with the companies and the three legs are how management be real about the severity of the outlook and make appropriate cuts in operating expenses and do everything they can to right-size the business for the difficulty of the current environment. The second leg is to have investors support the companies through this process by providing additional capital or having commitments to have standby capital. And then the third is to have the lenders join those other two to help the company through the problem. The tools we use primarily are principal deferral, lessening of performance covenants if that's necessary, and on occasion, making additional loans. We have not yet experienced having to transfer our interest payments to PIC, but that would be another possible tool that we would have. So right now, that's what we're doing is trying to be sure everybody is focused on raising the liquidity of the companies through 2021 into that timeframe. And we're really engaged with the investors and the management teams.

And I know this is a granular question and, you know, sorry if you don't have it in front of you, but do you have an idea of how many companies you've had to employ some of these, you know, legs of the stool here so far?

Well, I think you can be sure the ones that are in the two-bucket and some of the others, we're in constant conversation with them. But the ones in the two, we're having dialogues with. We're extending interest-only periods or those kinds of things. It's a handful right now, Tim.

Okay. Got it. And then, you know, how have conversations with sponsors been? You know, over the past couple months, have you seen them step into support portfolio companies so far? And, you know, would you say that the lack of fiscal aid for sponsored companies incentivizes the VC sponsors to be more proactive at this time?

I'm going to ask Jerry to answer that one because he's on the front line with several of our companies, so. Jerry, take your phone off mute. I am sorry. No problem.

Yeah, so, you know, it's been a pretty iterative and busy process relative to working with the investors. I think generally speaking, they're all very focused as we are. I don't think any of them don't understand the economic condition of their portfolio companies. They're very focused on them. Our conversations with them have been, I would say, extremely good for the most part, almost across the portfolio. A couple of companies, the ones we've moved to, obviously, You know, those are taking a little bit more of their time and our time, but we're working through those. You know, 10 of our portfolio companies raised money in the first quarter or got signed term sheets that they'll be closing shortly. So the funding is coming in. And, you know, to Rob's point, with that, you know, we're trying to help the companies with interest-only extensions. and things like that with the idea of getting everybody well into 2021. And I think we made great progress in a very, very short period of time. I would just mention to everybody, you know, we're in the second inning of a, I hope it's only a nine-inning game. So, you know, we've got a ways to go. But the VCs are definitely focused on their portfolio companies and, you know, what they need to do to support them making sure the management teams are focused on, to Rob's point, cutting costs and things like that, and then whatever help we can provide. I did mention in the script that unlike 2008, really, VC capital is at a much higher level right now than going into that period. So they have capital. They have plenty of capital. And it's a question of, you know, which companies are they going to support? It's not unusual in times like this that VCs start force ranking their portfolio companies. It's kind of a natural thing you do. It's like they take a step back and say, okay, you know, we're in a difficult time, you know, how are our portfolio companies doing? But what we have seen, generally speaking, is a very supportive group of investors.

Okay, that's helpful. I've asked a few here, so I'm going to hop back in the queue. But thanks again for taking my questions, and nice to meet you, Dan, over the phone.

Thank you. Our next question today is coming from Ben Zucker from Aegis Capital. Your line is now live.

Good morning, guys. Thanks for taking my questions. Can you hear me all right?

We're good, Ben.

Cool. I wanted to touch – Tim did a nice job covering kind of the landscape and the portfolio. Real quickly on share repurchases, I think you have a remaining authorization for a little over 3 million, which, you know, would come out to about like 2% of the company's outstanding shares at these current prices. I saw that you extended it. Were there any discussions around potentially increasing the size of that authorization or kind of what were those conversations like?

So we did have a discussion about it. Appreciate the question. both with the senior management and with our board. I think there's a real strong emphasis here on liquidity and conserving cash. I'd say there were a few days when the stock price was extremely low that it was a topic of conversation. But we did decide to extend it. We have had it in place, I think, two or three years anyway. And so we bought about $1.6 million worth of shares since we initiated it. And it's there if we need it and want to use it. But right now, our focus is on conserving cash on the balance sheet.

That makes sense. Definitely feels like an environment where cash is king. So I guess you'd have a similar response to if I were to ask about your ability or interest in maybe buying back some of the 2022 notes that seem to be trading at like, I don't know, 90 cents on the dollar right now. Would your comments around the share repurchase usage hold true for that as well?

Same question, same answer. Again, interactive at $16, I have to say. But that only lasted for a few days. But, yeah, you're right.

Yeah, I hear you. Do you have any idea of how many companies or what percentage of your portfolio companies applied for some kind of government aid or relief program?

We're aware of about a little less than half of them that are either in the process or have received the – payroll protection loans. We know they usually require our consent under our loan agreements, so that's how we become aware, and we've been willing to grant those consents.

Gotcha. If I heard you right in the press, I think I saw in the press release and Dan's comments that the first quarter has the typical slowdown in prepayment activity, and given the market you're expecting that trend to maybe persist for the next few months. Now, I guess that negatively impacts your NII yield, but that does give your portfolio more duration. So I'm just kind of curious what your thoughts are on this dynamic and how do you guys feel about kind of the trade-off between the outsized debt yields we've been seeing previously versus, you know, adding a little bit more duration to the portfolio?

Well, I'll take an initial stab at that and ask Dan to give you a little, Charlie will give you a little bit more color. Typically, the first quarter is lighter. We actually had a good prepayment from Bridge 2 Solutions. That was a very profitable exit for us, including a warrant game. But some of the fee impact was a little less than we thought. We'd hoped that the HealthEdge acquisition which happened in early April, was scheduled to happen in March. And so it got delayed in March because of the COVID uncertainty and ultimately closed a couple of weeks after the end of the quarter. But looking forward, we expect it to be modest only because refinancing is one of the sources for prepayments for us. And our outlook for that is unknown, so uncertain. So that's why we're being cautious about that. Dan, do you want to add? some additional color to that?

No, I think you hit it right on the head there.

Yeah. That's helpful. You bought out the arena interest, I think I saw, for just over $17 million. I mean, is that just kind of simple math? I mean, you're bringing over $17 million of assets in that transaction onto the balance sheet. That will be consolidated.

Yeah, Ben, that's basically how it works. There's a little bit more nuance based on timing. The health edge prepayment was in the JV also. So how you want to think about it going forward is that the dividend line income coming in will be gone, but on a portfolio basis on the horizon balance sheet, there will be $30 million of additional investment, net positive to horizon of a $15 million increase in portfolio. on an income basis.

Got you. And could you just remind me, was the decision to kind of collapse that or buy them out, was that just, you know, you guys had some excess liquidity, you had these interest earning assets already there, so it was just a nice kind of immediately accretive way to deploy that capital into assets you've already underwritten?

That's part of it. I think we've been signaling this for a while, that if the JV was originally, the concept of doing it was the Genesis of it was back before there was even a two to one leverage vote. So it was originally thought to be a way to increase leverage on balance or off balance sheet for Horizon. The portfolio didn't grow as fast as we'd hoped it would. As a result, we didn't meet certain requirements for minimum number of records and the New York Life credit facility we had there went into rapid amortization. We explained this last quarter. And it then just became a good opportunity for us to take control of the assets and buy them out. And now those will be on our balance sheet. And the JV had a small arena portion, if you think about it, was a small percentage of each of the loans because the loans in the JV were shared with Verizon. So now we control all of the assets and all of the loans. And at this uncertain time, we thought it was really a key thing for us to do.

Gotcha. That makes sense. And then lastly, I guess this is for Dan. I missed your comments. Did you say – and I can look at your quantitative and qualitative disclosures, and I can see that based off of where LIBOR is, you guys are kind of in a nice position with your floors. But what was that – what did you say was the weighted average floor and the percentage of debt assets that are already at that level?

The weighted average floor right now on the entire portfolio is 197 basis points. and 90% of the current portfolio are at their floors.

Very helpful. All right, guys, thanks for taking my questions. I appreciate your time this morning. Thanks, Ben. Thanks, Ben.

Thank you. As a reminder, that's star one to be placed in the question queue. Our next question today is coming from Ryan Lynch from KBW. Your line is now live.

Hey, good morning, guys, and thanks for taking my questions. I first had one regarding your guys' liquidity position today. In the press release, you guys talk about 12.8 million funds available under your existing credit facility commitments. But then I also know that you guys have capacity in your credit facility for up to $80 million of additional capacity. So can you just talk about given the balance sheet construction today and the portfolio with the cash today, do you guys anticipate that you guys will be able to access that full additional $80 million of additional capacity, or is the $12.8 million what we should kind of think about as far as leverage capacity available to yourselves on your credit facility?

Yeah, Ryan, this is Dan. The $12.8 million is a snapshot of what is available at the balance he takes on March 31st. And capacity is, you know, our opportunity to borrow on the facility. And to answer your question, as we forecast out through the year and as we fund new investments, it increases the availability with new investments that we put into the SPV. So, As it's currently constructed and where we stand today, we do have the ability to reach that $80 million capacity.

Okay. So you think as you guys put new assets into that, you guys will be able to draw down the full additional $80 million? Okay. Correct. Okay. And then regarding your unfunded commitments, about $44 million today, Can you talk about what percentage of those are based on some sort of milestone?

So I think generally the commitments, I would say the majority of them have some sort of either performance, equity event, revenue milestone, clinical milestone. uh, to draw, uh, very little of that is actually open available to draw.

Okay.

And then regarding, uh, the, the, your guys' valuation process, um, you know, you guys only had a, about a 1.6%, you know, uh, mark down, uh, in your portfolio this quarter, which was well under what, um, Several other middle market BDCs have kind of preannounced this quarter. As I look through your portfolio, it looks like there are some select investments that had some meaningful markdowns. I would assume that they're related to some underperformance or credit issues just as we head into this very, very uncertain and unprecedented environment. But it looks like the vast majority of your portfolio is basically marked at 100%, which was a little bit surprising. Was there not any sort of effective yield component as credit spreads wind out that you guys incorporated into pricing down even well-performing loans in your portfolio as of March 31st?

That's a really good question, and it was the essence of what we spent a lot of the last three or four weeks with both internally, with our outside valuation consultants, and with our board on this topic. You know, unlike some of the middle market, you know, almost 0% of our portfolio has a market or a traded loan, you know, syndicated loan. There's no direct indication for that. I think we've talked about this in the past that the – we do this on a granular basis, on a loan-by-loan basis. We look at the risk ratings and the things that we think are important, and then we do a discounted cash flow based on what we think the market rate for that risk would be. This tends to be much less volatile in the venture lending market has been over a long period of time because the – all-in yields that we're able to charge in this market, really not impacted by credit rates as much as they are by what the competition has. And it stayed pretty stable between 10% and 13% for as long as I've been doing this, which is a long, long time. And the reason for that is that there's a cost to funds that the players in this market have that protect the downside of this. You can't be profitable in the venture lending business if you're not charging a certain range. And on the high end, the alternative is for the venture capitalists to put the money in if we charge too much. So our valuation consultants understand this and agree with this. They use risk migration factors as they look at individual transactions. And there was discussion about overall risk migration factors for the current environment. But in the end, our evaluations and theirs were very solidly within the range. There was some up and down variations between our marks and theirs, but they tended to be both positive and negative. And so that supported the ultimate valuations that we have in our queue.

Okay. Did you consult with a third-party valuation firm for all of your investments this quarter?

So we have two outside valuation firms, Sterling and Lincoln. They look at 100% of our portfolio on an annual basis. And this particular quarter we had more than usual because we wanted to look at them, at all of the ones that we had issues with, hadn't been looked at in a while, or had meaningful movements. So they looked at probably close to 40% of our portfolio in this particular quarter alone. Okay, or have looked at it as recently as March for the year end.

And then one question about Ignition One, that loan was placed on non-accrual, but you guys still have that marked at 100% of cost. Can you just talk about what's going on? I'm assuming that they stopped paying interest income, but not sure if the outlook is high for a repayment or something like that. Just why was the non-accrual corresponding with a a stable and unchanged fair value market at cost.

Yeah, so this one was on accrual at 1231. It was a balance of $12 million. We received the five, the company has basically been sold the assets of the company and its operations and through an assignment for the benefit of creditors. In the first quarter, middle of first quarter, we received a $5 million pay down on that loan that we used to offset some of the interest. That's why it was on accrual in the fourth quarter. Once we had that payment, what's left in a trust is we're the only lender and there's only a senior secured lender and there's private stocks on the sale of the company. that secures our outstanding balance, several times our outstanding balance. Our balance is about $7.5 million. But because there are no operations and there's no cash flow at the company, we put the loan on non-accrual, but we're working through trying to monetize the collateral that supports our loan. It could take a couple of quarters. It certainly would be helped if the environment was a little better. But we do believe that we'll have a full recovery on it. recovery on that, Ryan. That's why we've carried it at 100% on the remaining balance because there's private stock in an operating company that has value three or four times that.

Okay. That makes sense. Those are all my questions. I appreciate the time today and hope you guys all stay healthy and safe. Thanks, Ryan.

Thank you. Our next question is from Kim Hayes from B-Riley FBR. Your line is now live.

Hey, guys, just a couple of quick follow-ups. Can you remind me what needs to happen for assets to fall out of the borrowing base? For lower middle market companies, it could be a result of leverage multiples increasing to certain levels, but given you don't really have most of your companies are EBITDA negative, just wondering if it's a function of investments moving to non-accrual or if there are any other multiple-driven factors that could result in a decline in the borrowing base.

Sure, Tim. Yeah, that is definitely something we are focused on right now. There is no overriding One Covenant or not that. We'll kick it out. There's certain buckets and concentrations based on performance. In our rating system, from a 4 to a 2, it's still eligible to be borrowed against on the line. When it becomes a one or becomes insolvent, then it starts getting kicked out of the eligibility requirements. One other item that has come into play or we're looking at closely is the loan-to-value percentage is an area that may cause an eligible loan becoming ineligible with Some of the public companies and the way the public market has been acting, there's a little pressure there, and we're watching that closely. But no overriding one theme that we're running into. Okay.

Got it. And then I just want to make sure I'm thinking about your comments on the dividend correctly. So I'm going to paraphrase and just let me know if I think about this the right or wrong way, but it sounds like you're setting the dividend at a level that you believe will be covered by NII plus the $0.38 of spillover you have right now. So it doesn't necessarily mean you're going to cover the dividend with NII over the course of the full year, but you think that given the cushion you have with the spillover, I guess you're expecting that the dividend could be, or I guess core earnings could be $0.37 lower than NII hypothetically, but you'd still be able to cover it with spillover that way, and that's why you're maintaining it at the level it's at. Am I thinking about that correctly, or if you could just provide some more context around that, it'd be helpful.

Yeah, you've got it pretty much right. I mean, I think we continue to believe that we can achieve NII that will cover the current $0.30 per share. We won't do it every quarter. You know, in the third and fourth quarter last year, we had – outsized earnings in about 40 cents. This quarter, we were below for a combination of things that were a little missed. We need prepayment activity to achieve those large NII numbers, but over time, the sort of core earnings are close to or will cover the dividend.

Okay, and does that take into account both recent earnings rate movements, and I guess your outlook for slower repayment activity and the potential for increased credit losses in the book? Or is it a combination of all three that's factored into this analysis?

I'm sure you'll have this answer on every call you have, but it's very, very hard to know exactly what's going to happen tomorrow. maybe even this afternoon. So it's very difficult to do modeling with high confidence in this environment. But we know how our business sort of works, the important levers or drivers for us to achieve that level of NII or to have a modest level of prepayments to get at or near our leverage, real leverage, meaning not too much cash on the balance sheet for liquidity purposes, but to have an invested portfolio that's levered one-to-one or better and have performing loans. So those are the drivers for us. And as we look out from today, we were comfortable maintaining our dividend distribution through September and our board concurred based on the way we look at the future.

Got it. Okay, thanks, Rob. I guess just one last one, just on target leverage. Is the range still unchanged, and do you kind of expect to be at a certain part of that range? You've kind of been on the lower end of that for a while. Do you expect that to kind of reach the higher end, given potential headwinds to asset marks, or are you going to attempt to stay at the lower end in anticipation of that?

So the function of being at the lower end of that was twofold. We were able to grow our portfolio very steadily now for eight quarters, but we were also able to raise quite a bit of capital last year on the equity side. So our ability to get towards our target of 1.2 was hurt, and we would say helped by the fact we were able to raise equity at a good value that was accretive to our shareholders. we don't actually have any expectation of raising capital, you know, in the near term. So we would expect that if we can continue to modestly grow our portfolio, as Jerry indicated, that we will move from the low end of the range towards the middle, maybe the high. We want to keep a lot of liquidity available to support our companies. That's really critical to us is to help this portfolio get through into 2021. So, That's the offset. If we are at 1 to 1 and approaching our target leverage, which is 1.2 to 1, with the spreads that we get, the yields that we charge, we can be extremely profitable.

Got it. That's helpful. All right. Well, thanks again for taking the follow-ups.

Okay. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Rob for any further or closing comments.

So thank you all for joining us this morning. We appreciate your continued interest and support and horizon. We hope you and your families continue to remain safe and healthy, and we look forward to speaking with you again soon. This will end our call.

Thank you. That does conclude today's teleconference. Let me just connect your line at this time and have a wonderful day. We thank you for your participation today.