Horizon Technology Finance Corporation

portfolio companies employing the three-legged stool approach. That approach involves, first, engagement with our portfolio company management teams to ensure they are maintaining a realistic and achievable outlook, including, where appropriate, by right-sizing their staffs and expenses to preserve liquidity. We are encouraged by the responsible way our borrowers have faced this reality. Second, seeking to ensure investors are willing and able to support portfolio companies with additional new capital now and in the future. I would note that with our portfolio companies raising over $500 million in new capital in 2020, the response from investors has been overwhelmingly positive. And third, aiding companies when they are at their most challenged through various means, including deferrals, easing covenants, or making additional loans. We have done our part to support these companies in concert with management and investors. As a result of these combined efforts, over 90 percent of our portfolio companies have adequate cash resources to execute their business plans. Over 80 percent of the portfolio has cash into mid-2021, and over 50 percent have runway into late 2021 and beyond. Over 70 percent of our portfolio companies have raised capital during 2020, again showing the continued support of the investors. Entering the fourth quarter, our committed backlog and overall pipeline continue to remain active. We continue to see strong demand for venture debt within our target industries as companies simultaneously explore various paths for additional liquidity and funding. we will continue to selectively pursue new investment opportunities. With respect to distributions, we maintained our monthly distribution level at 10 cents per share through March of 2021. It is our Board's policy to make distributions in amounts that can be covered by NII over time. The distribution level reflects our outlook for the remainder of 2020 and the beginning of 2021, and our spillover income as September 30th. We have now covered our distributions with NII for the past three years. Last week, we marked our 10th anniversary as a public company. We're very proud of our team's performance and the portfolio we've collectively constructed over the years, as well as the success we have shared with our shareholders. We will remain measured and proactive with respect to our portfolio as we look to opportunistically fund new investments to further expand and diversify our portfolio and ultimately generate additional long-term value for our shareholders. With that, I will turn the call over to Barry.

Thanks, Rob. Good morning. We continue to hope you are all healthy and safe as we all traverse both the health and economic impact of the pandemic. We did begin to see some improvement in economic conditions in the third quarter, but overall, the uncertainty caused by COVID continued to be a factor. As a result, we maintained a cautious approach to our venture lending strategy, including elevating our underwriting of new investments to include a COVID-19 impact analysis. However, with knowledge-based understanding of market risk comes opportunity. Thus, we continue to selectively invest where we see significant strength. On our last call, we noted that we were beginning to see positive developments in certain technology sectors that are benefiting from the impact of COVID-19, and that trend continued into the third quarter. Utilizing our strong brand, we originated quality investments to two tech-oriented companies that provide software platforms. Both companies have strong management teams, committed investors, ample liquidity, and have demonstrated growth even through the current uncertain economic cycle. In the quarter, we made a total of $16 million in investments to the two new technology companies I just mentioned, as well as two existing life science portfolio companies. The onboarding yield for such investments was 11.9 percent. As Rob mentioned, we had strong prepayment activity in the quarter, which reflects the overall strength of our portfolio borrowers to raise additional equity or complete M&A transactions. During the quarter, we experienced four loan prepayments totaling $43 million, which significantly contributed to our NII and continued to validate our predictive pricing strategy, notwithstanding the challenging economic environment. The prepayment and accelerated income from these events helped drive a debt portfolio yield for the quarter of 15.1 percent. Our debt portfolio yield remains at the top of the BDC industry and, once again, helped us deliver income in excess of our distributions, further increasing our undistributed spillover income to 45 cents per share. During the quarter, we also received proceeds of $1.8 million from warrants in New Signature, which experienced an M&A transaction, and in OnTrack, a public company where we exercised strategically sold part of our warrant holdings. As we've noted, structuring investments with warrants and equity rights is a key aspect of our venture debt strategy and an additional value generator. Near to date in 2020, we've generated $7.9 million in proceeds from warrants, a clear indicator of our successful strategy of including warrants in the structure of our investments, as well as further proof that warrants continue to be an important value generating aspect our overall business strategy. As of September 30th, we held warrant and equity positions in 68 portfolio companies with a fair value of $13 million. In the third quarter, we closed $36 million in new loan commitments and approvals and ended the quarter with a committed and approved backlog of $96 million compared to $101 million at the end of the second quarter. Moving ahead, and as previously mentioned, We have approximately 96 million in our committed backlog, of which 60 million is committed to current life science portfolio companies as they meet key milestone value drivers in their development. In addition, we have added 77 million in new awarded and approved transactions to our backlog in October. Our pipeline of new opportunities as of today is 372 million, Thus, we believe we are well positioned to generate growth in the portfolio in the fourth quarter. Turning to our portfolio management activities, we continue to proactively manage our venture debt portfolio in a very challenging economic environment. Some of our debt portfolio companies have demonstrated solid growth and value enhancement, while some have been challenged. So, I want to take time to discuss some of the notable specific portfolio activity that took place during the quarter. In addition to the four positive portfolio exits mentioned earlier, three credits were downgraded, one of which, Encore Demertology, was materially impacted by COVID and was thus placed on non-accrual. Another, NanoSeal, was downgraded after a failed effort to complete an M&A transaction. While Encore and NanoSeal downgrades impacted NAV in the quarter, We also ended the quarter with a record level of credits with our highest credit rating of four. Turning now to the venture capital environment. According to PitchBook, approximately $38 billion was invested in VC-backed companies in the third quarter, which was relatively on par with the prior year quarter despite COVID, and the number of deals remained fairly steady with an increase in the number of late-stage companies funded. In terms of VC fundraising, $14 billion was raised in the third quarter, and a total of $57 billion raised to date in 2020 already surpasses 2019's total of $55 billion. The number of funds closed continues to be well below last year's pace, meaning that mostly large funds are able to raise funds in the current environment. In terms of VC-backed exit activity, the IPO window opened up considerably in the third quarter, with 37 venture-backed IPOs contributing to a total exit value of $104 billion, the second highest total on record. With the IPO window still open, we are seeing other firms looking at IPOs as another path to generate additional liquidity. Turning now to our core markets, we remain focused on the technology, life science, and healthcare technology markets, where we continue to selectively seek investment opportunities During the quarter, we provided funding to two new portfolio companies, a $10 million venture loan to Topia, a developer of global talent mobility software, and a $5 million venture loan to Brightcore, a developer of cloud-native software for property and casualty insurance. We also funded an additional $1 million to two of our existing portfolio companies. We entered the last quarter of 2020 with a strong balance sheet characterized by ample liquidity and lower leverage and a strong pipeline of new investment opportunities. We believe this positions us well to navigate through the current environment while selectively growing our portfolio and delivering additional long-term shareholder value. With that, I will now turn the call over to Dan.

Dan Bauschardt Thanks, Jerry, and good morning, everyone. I will provide a quick review of our third quarter 2020 results before opening up for questions. As mentioned on our last call, we successfully strengthened our balance sheet during the year, which provides us increased liquidity and lending capacity. In part, these efforts led to a strong liquidity position at the end of the quarter. On balance sheet as of September 30th, Horizon had $104 million in available liquidity, consisting of $57 million in cash and $47 million in funds available to be drawn under our existing credit facilities. As of September 30th, there was $15 million outstanding under our $125 million KeyBank credit facility and $13 million outstanding on our $100 million New York Life credit facility, leaving us with ample capacity to grow the portfolio. Additionally, during the third quarter, we issued 1.1 million shares under our ATM program, receiving $13 million in net proceeds. Our debt-to-equity ratio stood at .81 to 1 as of September 30th. which was lower than our targeted leverage of 1.2 to 1. Based on our cash position and our borrowing capacity on our revolving credit facilities, our potential capacity is $254 million at September 30th. For the third quarter, Horizon earned total investment income of $12.3 million, an 8% increase compared to $11.4 million in the prior year period. This increase was primarily due to a 21% increase in interest income on investments, given the larger average size of our loan portfolio. Our debt investment portfolio on a net cost basis stood at $319 million as of September 30, a 10% reduction from June 30, 2020. For the third quarter of 2020, we achieved onboarding yields of 11.9% compared to 11.1% achieved in the second quarter. Our loan portfolio yield was 15.1% for the third quarter versus 17.7% for last year's third quarter. Turning to our expenses, for the third quarter, total net expenses were $6.5 million compared to $5.6 million in the third quarter of 2019. Our interest expense was up $561,000 compared to the prior year period, primarily due to an increase in the average borrowings, partially offset by a reduction in our effective cost of debt. Our base management fee rose $222,000, driven by an increase in the average size of our portfolio. Net investment income for the third quarter was $0.34 per share, compared to $0.40 per share in the second quarter of 2020, and $0.42 per share for the third quarter of 2019. As Rob mentioned, we have now covered our distributions with NAI for the past three years. The company's undistributed spillover income as of September 30th was 45 cents, an increase from 42 cents as of June 30th. To summarize our portfolio activities for the third quarter, new originations totaled $16 million, which were offset by $6 million in principal payments and $43 million in principal prepayments. We ended the quarter with an investment portfolio of $312 million. The portfolio consisted of 10 investments in 34 companies with an aggregate fair value of just under $299 million, and a portfolio of warrant, equity, and other investments in 69 companies with an aggregate fair value of $13 million. Based upon our outlook for NII, our liquidity forecast, and our spillover income levels, our Board declared monthly distributions of $0.10 per share for January, February, and March 2021. We have now declared monthly distributions of 10 cents per share for 51 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 30th was $11.17 per share, compared to $11.64 as of June 30, 2020, and $11.67 as of September 30, 2019. The 47-cent reduction in NAV on a quarterly basis was primarily due to our distributions and the net unrealized loss on investments exceeding our net investment income and net realized gains. As we've consistently noted, 100 percent of the outstanding principal amount of our debt investment bear interest at floating rates with coupons that are structured to increase as interest rates rise with interest rate floors. As of September 30th, 100% of our portfolio is at their specific floors. This concludes our opening remarks. We'll be happy to take questions you may have at this time.