Horizon Technology Finance Corp (HRZN) 2014 Q3 法說會逐字稿

Good morning, and welcome to Horizon Technology Finance's Third Quarter 2014 Conference Call. Today's call is being recorded. All lines have been placed on mute. We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time.

I would now like to turn the call over to Megan Bacon of Horizon for introductions and the reading of the Safe Harbor statement. Please go ahead.

Thank you, and welcome to the Horizon Technology Finance third quarter 2014 conference call. Representing the Company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; and Chris Mathieu, Chief Financial Officer.

Before we begin, I would like to point out that the Q3 press release is available on the Company's website at www.horizontechnologyfinancecorp.com. Now I will read the following Safe Harbor statement. 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, 2013. 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 and thank you all for joining us. Our solid performance in the third quarter reflected our continued success generating strong yields, improving credit quality and realizing profitable liquidity events. Our performance was characterized by prepayments that produced good portfolio of income and yield, but resulted in a reduction in our portfolio at the end of the quarter. The inflows from amortization and prepayments have enhanced our liquidity position.

Turning to our operating performance for the quarter. We earned net investment income of $3.2 million or $0.33 per share. We had an increase in net assets from operations of $4.8 million or $0.50 per share. Our yields in the quarter remained strong, as we achieved a dollar-weighted average portfolio yield of 15.8%, consisting of double-digit coupons, fees and end-of-term payments. We funded $22.8 million in new loans during the third quarter, of which 91% were priced at floating interest rates. We experienced five liquidity events, including receiving $1.3 million in proceeds from exercising our warrants and selling shares in Anacor Pharmaceuticals, a public portfolio company, which repaid our loan in 2013. These warrants were harvested from our balance sheet, a quality of that that demonstrates our ability to monetize our warrant portfolio and receive upside for shareholders.

In September, Horizon sold the remaining assets of HPO Assets LLC, a wholly-owned subsidiary of Horizon, which helps support NAV growth. We ended the third quarter with a portfolio of venture loans to 49 companies with an aggregate fair value of $196 million, as well as a portfolio of warrants and equity investments in 79 companies with an aggregate fair value of $8.7 million.

In consideration of our third quarter performance and future outlook, we declared monthly distributions totaling $0.345 per share, payable during the first quarter of 2015. This represents an annualized yield of 9.6% based on our NAV as of September 30. Since our IPO, we have now declared cumulative distributions of $6.305 per share.

In maintaining our commitment to provide shareholders with a steady stream of cash distributions, we continue to maintain undistributed or spillover income of approximately $0.41 per share as of September 30. Our strategy remains to pay monthly distributions that are covered by our net investment income over time. As a result of a lower portfolio to start the fourth quarter, our target for covering our distributions by NII through a combination of incremental growth in the portfolio and the continuation of favorable yields will likely be pushed out into 2015.

I'd now like to turn our attention to credit quality. During the third quarter of 2014, we further improved our asset quality by leveraging our expertise, managing venture loan portfolios. As of September 30, our loan portfolio had a weighted average internal credit rating of 3.1 and 90% -- 93% of our loan portfolio was performing at or better than expected at the time of underwriting.

At the end of the quarter, there was one investment remaining on non-accrual with a cost of $2.6 million and a fair value of $2.3 million. This compares to five investments on non-accrual as of December 31, 2013 with an aggregate cost of $23 million and an aggregate fair value of $14 million.

In terms of liquidity, our debt to equity ratio has declined from 0.79 to 1 in the second quarter to 0.64 to 1 in the third quarter. During the quarter, Horizon experienced positive liquidity events from loan prepayments, the sale of warrants and the natural deleveraging of our portfolio from loan amortization, leading to reduced long-term debt and enhanced liquidity. We are now focused on growing our portfolio.

While we maintained our pricing discipline, our credit quality improved as I noted earlier. However, given the pricing pressures in the market today, we anticipate onboarding yields from new investments to decrease modestly. We have yield flexibility, which should continue to enable Horizon to achieve industry leading yields and further differentiate itself from other BDCs.

I would also like to give you an update on another important event in the quarter. We entered the SBIC license process by submitting our management assessment questionnaire to the U.S. Small Business Administration in July. Since taking this first step in the approval process, we received the green light letter from the SBA on October 30, inviting Horizon to continue our application process to obtain a license. Monday night, we filed our application for an SBIC license with the SBA. In connection with the granting of the license the SBA typically requires that the applicant have the necessary minimum regulatory capital to meet the initial capital requirements of the SBIC.

With our significantly improved liquidity and reduced overall leverage, we are in a great position to satisfy this requirement. We have the capacity and willingness to drop the equity into our SBIC subsidiary immediately upon licensing without the need of raising additional equity in the public markets. We currently expect to fund the initial regulatory capital from existing liquidity.

I want to remind everyone that there is no guarantee that we will be granted a license or how long the process will take to receive one.

We believe that our performance in the third quarter was solid and builds a foundation for future growth. We faced some competitive challenges, but we use our enhanced liquidity position to selectively compete for the best opportunities. The credit quality of our portfolio is sound and we have harvested gains from our growing warrant portfolio. Going forward, we will remain focused on operating effectively in the current market environment and originating high quality deals with strong returns.

In a moment, Chris will detail the financial results for the third quarter, which will provide more color on these events. But first, Jerry will provide an overview of the market. Jerry?

Thank you, Rob. Good morning, everyone. We continue to see strong and consistent venture capital investment activity across our markets during the third quarter. VCs are raising and investing significant amounts of capital and it continues to be a greater number of exits in the form of IPOs and M&As. We also continue to experience consistent demand for our venture debt products in the quarter, as our advisor originated a total of $44 million in loan investments to nine companies, of which Horizon funded $23 million and partnered the remaining $21 million with other lenders.

Based on our continued success of executing on our investment strategy of originating quality investments to venture capital sponsored technology and life science companies that offer attractive yields with additional upside potential from warrants and success fees, we generated both healthy portfolio yields and on-boarding yields during the quarter. Portfolio yields were 15.8% for the third quarter and 15.3% for the nine months ended September 30.

On-boarding yields averaged 12.2% for the quarter. As a reminder, our on-boarding yields consist of contractual interest rate, commitment fees and ETPs, but does not include additional potential for increased yield from warrant gains, prepayment fees, success fees or accelerating income from ETPs upon loan prepayments. As an example of additional yields we received from our portfolio in the third quarter, in connection with the acquisition of Newport Media by Atmel, Newport prepaid the balance of its $7 million loan and we recorded approximately $800,000 in income, including a success fee.

In addition, another one of our technology portfolio companies, Construction Software, completed a merger and sale of its business on October and prepaid the $7.7 million outstanding balance of its loan, which will result in approximately $360,000 in income for the fourth quarter. At the end of the third quarter, we held warrant and equity positions in 79 portfolio companies and had success fee provisions in seven portfolio companies.

At the end of the third quarter, our pipeline of new investment opportunities is approximately $170 million. While historically we have been able to convert our pipeline into high-yielding quality assets, it can be no assurance that we will fund any investment opportunities in our pipeline. Our awarded, approved and committed backlog as of September 30 totaled $32.2 million to nine companies, compared to $11.5 million to five companies as of June 30. In addition, we added $8 million in new awards in October.

Although our total investment portfolio declined in the third quarter, we are well positioned to take advantage of market opportunities as they arise. As a result of the prepayments on investments in the last quarter, combined with the availability of funds from our credit facility, we have increased liquidity going into the fourth quarter and the early part of 2015 with the goal of putting that liquidity to work to grow our portfolio.

Turning to our core markets. We continue to see solid demand for IPOs in the life science market. According to the National Venture Capital Association or the NVCA, 18 late-stage life science companies completed IPOs in the third quarter freezing over $1.2 billion representing over three quarters of the total number of IPOs during the quarter.

The total number of life science deals for the third quarter is slightly higher than Q2 2014, and represents a six straight quarter of double-digit growth in life science IPOs. In the third quarter, we added Argos Therapeutics to our portfolio, a publicly traded clinical stage life science company that completed an IPO in February of this year. And we exited Anacor Therapeutics as we exercised our warrants resulting in proceeds of $1.3 million. Valuations for our life science companies have come down fairly significantly from the beginning of the year generally due to broader economic issues and we believe the recent volatility in the stock market may impact the market for IPOs for the fourth quarter of 2014.

Despite these challenges, the market for life science IPOs remains robust as quality late stage life science companies with positive clinical trial results in the area of oncology, cardiovascular and immune disease should be able to continue to access the public markets. We are aware that one of our life science portfolio companies has filed for an IPO under the JOBS Act in the third quarter.

Turning to the technology markets, we continue to see strong M&A activity in the sector. The NVCA reported that 91 of the 119 M&A transactions reporting during the third quarter were technology related transactions, an increase from 79 tech deals in the second quarter.

While evaluations in the tech market are selectively increasing to levels which we believe may not be sustainable, software, cloud services companies that are getting solid multiples on the value of their long-term contracts and revenues and fabulous specialty semiconductor companies still appear to be enjoying great demand for their products and attracting M&A opportunities at rational valuations. As a result, we continue to believe that 2015 may be a strong year for M&A activity in the tech sector and that our portfolio is well positioned to drive higher returns.

We remain bearish on the cleantech market as this industry has had only a modest increase in investment levels by VCs. Meanwhile, the market for healthcare information and services continues to be challenging given the uncertain and ongoing national health care debate.

So we're now seeing demand for debt or equity in this sector. We will continue to monitor these industry sectors for opportunities that meet our pricing and underwriting criteria in Q4 and into the first half of 2015.

In terms of overall venture capital activity, we believe the market for VC investments remain strong. According to the NVCA, VCs invested $9.9 billion in just over 1,000 companies in the third quarter compared to $13.5 million in more than 1,100 companies in the second quarter of 2014. Despite the sequential decline, total venture investing in 2014 of more than $33 billion has already eclipsed all of 2013, which totaled $30 billion.

Turning to the overall competitive market landscape. While our pipeline remains robust and deal activity is constant, the industry is experiencing increased competition from a growing number of tech banks that are stretching beyond their usual ABL lending platform into fewer venture lending. We believe this increased competition is causing downward pressure on yields, rising LTVs and transactions that may not provide adequate risk-adjusted returns.

Our healthy liquidity position, combined with our flexibility as one of the highest-yielding portfolios in the BDC industry and our unwillingness to compromise on credit quality, allows us to both effectively compete and maintain a high-quality venture debt portfolio. We believe that our disciplined investment strategy will support our future portfolio growth with an attractive yield to our shareholders.

In summary, we believe the VC market remains strong, as evidenced by the solid levels of deal activity in the tech and life science markets. We have the relationships, knowledge and experience to successfully execute our strategy of sourcing investment opportunities in the form of secured loans to high-quality technology and life science companies with solid on-boarding yields, incremental NII income from early exits, and income from harvesting our growing warrant portfolio, which our shareholders will continue to benefit from in the form of an attractive and stable dividend.

With that update, I would like now to turn the call over to Chris.

Thanks, Jerry, and good morning everyone. Our consolidated financial results for the third quarter of 2014 have been presented in our earnings release distributed after the market closed yesterday. We also filed our Form 10-Q with the SEC last night. For the three months ended September 30, total investment income was $7.7 million compared to $8.7 million for the third quarter of 2013. This year-over-year decrease was primarily due to lower interest income on investments, resulting from the decreased average size of the loan portfolio, partially offset by higher fee income.

New loans funded in the third quarter had an average on-boarding yield of 12.2%. Total investment income for the quarter included $6.8 million from interest income on investments, as well as approximately $1 million of fee income. We continue to shift our portfolio's interest rates towards floating rate structures. As of September 30, 42% of the outstanding principal amount of our loan portfolio bore interest at floating rates. Substantially, all of our fixed rate loans are match-funded in our securitization, which has a fixed borrowing cost. So there is no risk of spread compression on this portion of our portfolio.

For the third quarter, our portfolio yield was 15.8% compared to 14.6% in the third quarter of 2013. The primary changes quarter-to-quarter to portfolio yields are driven by the timing of new loan fundings and timing and extent of loan prepayments and related fee income within the portfolio. The Company's total expenses were $4.5 million for the third quarter as compared to $5.1 million for the third quarter of 2013.

Interest expense decreased 32% year-over-year primarily due to a decrease in our average debt outstanding and a decrease in the effective interest rate on our borrowings. We recorded expense savings from the elimination of debt issuance costs and non-used fees associated with the term loan facility we paid off in Q2, combined with lower costs under our borrowing -- under our revolving credit facility with Key Equipment Finance, which has a current interest rate of 4%.

Another effect of the term loan facility termination is that we cleaned up the balance sheet by eliminating higher cost debt and the off balance sheet commitments and now have a improved cost of debt. We've right sized our debt commitments and are paying lower coupon rates for our borrowings and paying less non-used fees compared to the year ago period. The effective interest rate on our borrowings for the first nine months of 2014 was 6.8%. For the first six months ended June 30 and the three months ended September 30, the effective rate were 6.9% and 6.2% respectively.

We expect our effective interest rate on borrowings for the fourth quarter to be approximately 6%. Horizon recorded a performance-based incentive fee expense of $800,000 for the third quarter of 2014 compared to $900,000 for the third quarter of 2013. The decrease was due to lower pre-incentive fee net investment income. Base management fee expense also decreased year-over-year by 18% primarily due to a decrease in average total assets. Professional fees for the third quarter increased year-over-year, primarily due to increased legal fees and other costs associated with certain non-accrual investments and other assets.

However, I'd like to point out that each of the non-accrual investments and other assets that were generating these professional fees have now been resolved. So we anticipate professional fees to return to normal levels of $300,000 to $500,000 per quarter beginning in fourth quarter. Net invest income was $0.33 per share for the three months ended September 30. During the quarter ended September 30, we realized net gains totaling $2.3 million, primarily due to the sale of warrants and other assets acquired through bankruptcy of a portfolio company earlier this year. We believe the opportunity to benefit from additional liquidity events including warrant gains remained strong due to the continued strength in both IPO and M&A activity within our target markets.

Our net asset value or NAV as of September 30 was $14.38 per share, an increase of $0.15 per share compared to Q2, primarily due to the net realized gains I just discussed.

New loans funded in the quarter totaled $22.8 million. This performance was offset by $10 million in normal principal payments and $27 million in loan prepayments, resulting in a portfolio of $196 million at the end of the quarter. Subject to the level of actual loan originations and prepayments, combined with the impact of expected regular principal payments of $10 million, we expect the net portfolio change for the fourth quarter to be in the range of a $5 million decrease to an increase of $10 million.

In terms of liquidity, Horizon ended the third quarter with $44 million in available liquidity, including cash totaling $16 million, as well as $28 million in funds available under our revolving credit facility. As of September 30, we had $10 million outstanding under our credit facility, which has an initial commitment of $50 million and contains an accordion feature allowing for an increase in the total loan commitment up to an aggregate commitment of $150 million. We also had $45 million outstanding under our asset-backed investment grade securitization and $33 million outstanding of our publicly traded senior unsecured notes.

89% of the Company's total borrowings outstanding were at a fixed interest rate with 51% of the total borrowings fixed at an interest rate of 3%. We intend to increase our current debt levels and grow our leverage ratio as we use our credit facility to grow our investment portfolio. This planned growth is expected to be partially offset by the continued pay-down of borrowings under our securitization through normal amortization and prepayments within our active loan portfolio.

Before we open the floor to questions, I'd like to note that we plan to hold our next conference call to report fourth quarter and year-end results during the week of March 9. This concludes our opening remarks. We'll be happy to take questions you may have at this time.

(Operator Instructions) Troy Ward, KBW.

Great, thank you, and good morning gentlemen.

Good morning.

Rob, on the SBIC, I know you don't have a lot of clarity and you don't want to provide too much guidance on that, I understand that. But given the fact that you did go pretty far down the process and to no fault of your own, you had to take a step back and now you've re-entered that process. Do you think -- do you expect that the time between the green light and the actual receipt of the license now that you've already turned in your app will be lower because you're involved in the process couple of years ago?

I would say, Troy, that, we had good interaction when we worked with them before and we would expect that going forward, but that we're not going to get any special favorable treatment, but we will work hard to be as responsive from our end as we can. But, we can't really give any other guidance on the timeline.

Okay. And then when you talked about, having the capital available to fund it, already on your balance sheet, how much equity capital do you anticipate needing to fund that, what size of facility do you anticipate starting with.

We are not going to give direct guidance on that Troy. We're going to -- we will use -- we won't put the full amount down but [we'll lease] into it over time.

Okay. And then in the press release one of the things you talked about was you are not chasing pricing and structures in the current environment, poor risk-adjusted returns. The pricing is obvious and you talked about some tech banks getting little bit more active in your more traditional space, what about the structures, what are you seeing on the structures that you think aren't quite as favorable as they were historically.

Hi, Tory, it's Jerry. So, on the structural side, I think the things that we -- certain indicators we look at, not relative to one transaction but kind of we look for trends and if we see trends of loan to values starting to increase, which in this marketplace, you certainly can see happening, because there the exits have been very favorable relative to the number of IPOs and M&A activity. So, there is a rationale that says, yeah, we can go a little bit higher up in the loan to value because exits are happening and they are happening at valuations that are still well protecting the debt. But, of course we've seen where those markets can turn and actually they can turn fairly quickly sometimes.

And so, one of the things I think that's really important for us, for our own portfolio, for our own investors is to continue to be very -- to maintain a very disciplined process relative to underwriting. And so, I am willing to lose a transaction where I believe that even, well, it may look okay and you may be able to rationalize the deal in today's market.

If I -- we see LTVs getting too high that becomes quite concerning to us. As it relates to pricing, I mean I think there we actually have a little bit of an advantage because we've been so disciplined in the marketplace. Really since we've gone public our yields have been consistently well over 12% onboarding yields.

And so I think we have a little wind at our back there relative to our liquidity position and the way our portfolio is positioned in price today, especially with our cost of capital starting to come down and lower professional fees. So, I think we've positioned ourselves well, but we have been very cautious on the underwriting side, which is what you're referring to there and that's the right place for, I think, a cautionary note. But in terms of pricing, in terms of demand, those were all good. In terms of [underlining] support from VCs, there's plenty of capital in the market. So that's all good. We will face a little bit of a headwind relative to, when we do find quality opportunities, competitive pricing.

Okay. And then one final one from me. On the portfolio, I know you haven't focused on the clean tech sector in the more recent times because you just haven't been impressed with some of the opportunities there. But looking at the portfolio, it looks like 8% or 9% of the portfolio is in clean tech and obviously with -- definitely recently in the last 48 hours all that's going on with the energy markets, how do you view changes in the energy market versus your current clean tech portfolio and what that could mean for credit quality there.

Yeah. No, good question. I think in terms of the quality of our portfolio, we only -- it's a relatively small part of our portfolio now. We're very comfortable with what we have in there. We've only had two transactions all year that are prepaid relative to being refinanced out versus an M&A activity or an exit. And both of those transactions were clean tech deals and so we were perfectly willing to have those exit our portfolio, so we could redeploy that capital in what we think are the stronger industry sectors that we have.

As it relates to going forward, I mean, I think it would not be a long stretch to say that clean tech will be more challenged by, first of all, lower oil prices because you're always competing on price for energy. So I think going forward, that's certainly one concern and obviously things like opening up the pipeline or doing things like that could also have an impact on how investors, VCs particularly, are looking at the clean tech market relative to investments. So we will be watching that very carefully. The good news is we've already repositioned our portfolio. So it's not a concern relative to what's in our portfolio today.

Great. Thanks, guys.

Greg Nelson, Wells Fargo Securities.

Hey, guys, good morning, and thanks so much for taking my questions.

Good morning.

Good morning.

You mentioned during the commentary that you expect NOI to cover the dividend being pushed out into 2015 and I'm just trying to get a sense of what needs to happen to get you there and what the real catalysts are, the past couple of quarters you've seen a higher amount of fee income from the portfolio churn. And then on the portfolio growth side, you mentioned higher competition at lower rates from banks than other venture lenders, is it continued portfolio churn, is it fees, is it portfolio growth, or is it the SBIC?

Really, it's -- Greg, it's in the near term with the -- all of the above, that you mentioned. It's working our way back a little bit more into the leverage with -- by growing the portfolio maintaining certain healthy level and standard level of prepayments during the quarter, very much part of the venture lending model, especially for Horizon. But by growing the portfolio just a little bit and will get us back to where we need to be. We're close, we're just -- we need to be, we need to have the portfolio grow modestly and we can achieve those results.

Okay and then kind of connected to that, you said you have the liquidity on balance sheet to fund the SBIC if needed. Does that mean that you could hold back portfolio growth until having certainty around the SBIC license thus limiting NOI growth?

No, we believe that we have the capacity to do both. And as I said, they have grown the portfolio modestly, we have a outlook of where -- we've already given you a guidance on the outlook for the fourth quarter. First quarter is typically one of the lower production quarter, so we have capacity to do both going forward.

Okay and then just connected to the SBIC license, just wanted to get a sense of your willingness or appetite in the future to issue equity below NAV even if it was connected to the SBIC?

We don't need to do that. We've said that assertively. We have the liquidity and the capacity under our balance sheet to fund this going forward. And so that's our plan, Greg.

All right. Thanks so much for taking my questions.

Yes.

(Operator Instructions) Robert Dodd, Raymond James.

Hi, guys. Thanks for taking the question. Just kind of focusing on the balance sheet from the other side, on the securitization, obviously it's paid down pretty substantially. Now, it's about half its starting balance, obviously you're working on the SBA as well which would be another form of capital and you don't really need the full securitization at this point, perhaps. But is there any thought into, putting another one of those on the books and I remember when the first one went on, you also moved back, there is some discussion, maybe version two might have a reinvestment period which wasn't present in the first one.

So, any color on discussions you've had about that on either, changes to the form if you do another, in terms of reinvestment or any other color?

Good question, Robert. We actually have and we're always looking at the other options in the debt market. And right now we see that really it's the combination of the securitization coming down and then redeploying leverage using our revolving facility. The key equipment finance facility really has the perfect match of our business with the leverage that we need. So I would expect that we would have, as we have more leverage needs we would add to that facility, currently it's a $50 million commitment. And we certainly have interest from additional lenders that could hold on to that commitment. So that's something we will look at it in 2015 as the securitization comes down.

We had signaled it when we had first done that securitization that it had a weighted average life of about a year-and-a-half and we're well into that now. So we're really not surprised that the securitization is where it is. And as we have prepayments on the asset side, it will continue to reduce that debt side as well. As I'd mentioned, it's a match term, fixed rate financing [we got]. So it is as we expect and certainly, to the extent we have the SBIC in 2015 that would become a very important part of our overall leverage strategy.

All right. Got it. And then just kind of on the competitive environment, rather than where they are now, could you give us sort of a 60,000-foot or 30,000-foot maybe where the [stock stood] view of where that -- where it looks to be versus historical cycles, because obviously you've been through VC cycles, economic cycle, et cetera before. And I mean is this move of the tech banks kind of getting a bit more aggressive, relatively speaking, in straight VC debt, is that typical of any particular point in prior cycles?

Great question actually. Relative to the tech banks, a lot of that is being driven not just by the tech bank, the historical tech banks that we have competed with and actually partnered with in the past, but actually the entrance of a new bank that has been -- come into the market very aggressively and put a lot of pressure on what had been the normal competition on the tech bank side. And that is really what has kind of led to a significant amount of volatility relative to the banks having to kind of reposition themselves and maybe stretch further than what they have historically been comfortable with.

We've been competing against kind of the same tech banks. Some of them have gotten stronger relative to capitalization, but the entrance of the new -- of really just one new tech bank, it happens to have a pretty big balance sheet, is kind of changed the environment. And honestly, I have to kind of wait and see. I don't see this as being a long-term issue relative to the market because banks are very heavily regulated and at some point in time they will have to address their more aggressive approach relative to regulatory issues. So, I'm not as concerned about that. Relative to the rest of the market, we've seen a lot of BDCs come in over the last few years and kind of replace what had been traditionally venture debt funds.

And I think that that's had really kind of a not much of effect because the funds that were in the market were extremely well known. These were companies that had a lot of value-added relative to how the VCs thought about them as they think about us. And so that has been offset by bigger check books that have come into the market, but don't have those relationships and don't -- and the VC don't have as much comfort level with them. So, that hasn't changed things relative to how we see the competition outside of the banks.

And I think we still have a very strong foothold as it relates to that. We're still very much considered a value added lender. And I think the evidence in that is our portfolio yield, even with significant pressure on yields overall in middle-market lending and even in the venture debt space, we have been able to hold pretty strong yield positions within our portfolio.

So, I feel good about where we are, we have more liquidity than what we've had in the past, I think this allows our mentioned directors to take off the gloves a little bit relative to the next two quarters and being more aggressive.

The liquidity -- better liquidity position also allows us to be to look at how we have used partnering in the past, we use it for two things, one is to manage concentration levels, which we will continue to do, but it gives us more flexibility relative to liquidity to be able to find more of the transactions that we originate every quarter.

And so I think with all those things working for us, the next two quarter outlooks for us certainly puts us in a good position. It's going to be a question of how much more competitive do we have to be on yields and do credit structures start getting to a place where we're not comfortable. So, we'll have to see how that goes.

Okay, thank you.

Casey Alexander, Gilford Securities.

Hi, good morning. Coming down from [60,000] or 30,000 feet to about [five]. What is -- I know that your weighted average yield is very variable because of the prepayments, what's the cash yield on the portfolio right now?

The onboarding yield is just about 12.5%

12.5%. Okay. And you mentioned that you expect the professional fees to moderate starting this quarter.

In the fourth quarter, it will be lower. Yes.

Okay. And what verticals is the competition -- I mean you have four verticals that you've approached. What verticals is the competition the highest and in what of your lending verticals are you seeing more interesting opportunities?

Yes. So life science has been a very competitive market now for over a year and I pretty much said that on every call -- investor call we have had, that continues to be true. We did see last quarter a little bit improvement in yields, we added Argos Therapeutics, which is a late-stage life science company, to our portfolio. Overall, that was a $25 million commitment. So we are seeing a little bit improvement there, which is good because we like that sector a lot and look forward to hopefully finding more opportunities there. So that's where we're going to be focused in one area.

I think on the tech sector, that's where we've seen for the first time in quite a long time yield pressure. The tech sector is more ABL driven because they actually have revenues and they're in growth modes. So they're doing -- the banks traditionally do the ABL deals there and so they have access to those customers earlier. And now they are trying to kind of push that envelope a little bit out into the venture -- kind of pure venture lending space. And so that's where we will see probably more competition.

What we like about that sector is we still very much like the software side, specialty semiconductor side. There are lots of opportunities relative to consumer Internet plays. Those are the ones that get the biggest splash in the market. Historically, though we have some history on Internet and the underlying value of some of these companies and this goes back to my LTV comment, are questionable if they don't -- aren't able to execute on their strategy and generally that strategy initially is raising an awful lot of equity. And so right now, the equity markets are good, so people feel good about it. But if that dries up, then -- you're taking about --

I mean, is your point there that their intellectual property is basically based upon an idea and nothing much more?

Yes, yes. I mean that's -- yes, that's a little bit simplifying it, but the underlying value of the enterprise value can be stressed significantly when liquidity or I should say capital raising becomes more of a problem for. But from a [lender's] perspective, we watch that carefully.

But now that you have the green light from the SBA, I mean, and you have this sort of -- you have some liquidity, you need to make sure that you have liquidity for the approval of the SBA. Other SBA -- other BDCs that were in the SBA process have taken the approach of actually putting some capital in the SBA subsidiary to do some pre-license approval, but approved the deals within the SBA structure. Are you considering doing any of those?

Casey, this is Chris. So, currently, we are not expecting to do that. We're hoping that the cadence of the approval process would be such that we would not do that. There have been folks that have been in that processes that have actually abused the SBA's ability to do that. And so we're trying to go the other way and keep the process clean, let them do their work through the licensing and not distract them with pre-licensing deals, which does create a delay in their process.

Okay. Thank you, we would never suggest that you guys be abusive?

Good.

All right. Thanks for your time this morning. Appreciate you taking my question.

Thank you.

Yes, we appreciate your questions and your continued interest in the Horizon story. We look to build on our solid performance from the third quarter as we grow our portfolio and execute on our investment strategy, and we look forward to sharing our progress with you in the future.

And this -- so this will conclude the Horizon Technology Finance conference call. Thank you and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a great day.