Megan Bacon - Investor Relations Rob Pomeroy - Chairman and Chief Executive Officer Jerry Michaud - President Dan Trolio - Chief Financial Officer.

Paul Johnson - KBW Leslie Vandergrift - Raymond James Christopher Testa - National Securities Casey Alexander - Compass Point.

Good morning, and welcome to Horizon Technology Finance Year End 2016 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 reading of the Safe Harbor statement. Please go ahead..

Thank you and welcome to the Horizon Technology Finance fourth quarter 2016 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President, and Dan Trolio, Chief Financial Officer.

Before we begin, I would like to point out that the Q4 earnings press release and Form 10-K are available on the company's website at horizontechfinance.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, 2016.

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. In 2016, we achieved a year of solid earnings for our shareholders, with net investment income of $1.48 per share that exceeded our distributions of $1.38 per share.

During the year we experienced significant positive portfolio events, including liquidity events from loan pre-payments, M&A and warrant realizations, while we also experienced underperforming loans, which we work to resolve.

These events together with our disciplined approach to sourcing quality loans, contributed to the overall decline in the size of our portfolio in 2016.

Over the past few months we’ve taken important steps to improve marketing and underwriting resources, which coupled with our anticipation of a more favorable market for our loans, lead us to believe we can grow our portfolio and achieve a stable or increased NAV during 2017. Our first step in this process was addressing the underperforming loans.

At present we’ve resolved three out of the four loans that were on nonaccrual as of December 31. We settled the ScoreBig loan by receiving the right to the proceeds from the long-term royalty agreement with the buyer of ScoreBig’s assets, a large established ticket broker dealer.

We also settled the New Haven Pharmaceuticals’ loan by receiving the right to the proceeds of a long-term royalty agreement with the buyer of New Haven’s assets, a specialty pharmaceutical company that has similar product selling into the cardiovascular marketplace.

Both of these royalty agreements have the potential for a full recovery of our loan balances in the future and the fair value of each is in line with the September 3 value of these loans.

Xtera, another portfolio company filed for bankruptcy in the fourth quarter and a court ordered auction in January of this year failed to produce the sale price sufficient to recover any of Xtera’s obligations to us. Accordingly the loan was written down to zero during the fourth quarter. Obviously this was a very disappointing outcome.

Our portfolio company Digital Signal was on accrual as of September, but was placed on nonaccrual in the fourth quarter. The company which had been attempting to raise capital in the third quarter could not raise additional funds to operate.

Thus its Board elected to wind it down by making an assignment for the benefit of creditors, which is seeking a buyer of its assets. The ABC is in negotiation with the buyer to be sold and we anticipate the loan will be resolved during the first half of 2017.

If this transaction is completed we will have the potential for full recovery of our loan balance. The second important step we took to improve our portfolio was adding two new talented professionals to our origination in portfolio management team.

Both of these executives bring considerable life science experience to Horizon and we expect them to provide valuable knowledge and expertise as we seek to expand our investments in this sector. Jerry, will provide further details on our new team members during his comments.

With regards to market opportunities and our outlook for new business, we’re seeing gradual improvement. As we’ve stated on the last few quarter’s calls, we’ve continued to see steady demand for our venture lending products and a stream of opportunities, but have been very selective.

Many of these opportunities are for refinancing existing debt that already represents significant leverage at the borrower, which is inconsistent with our loan to value approach of providing growth capital. We’ve resisted these refinancing unless the company’s growth opportunities support additional leverage.

Encouragingly, during the fourth quarter we began to see opportunities that were not over leveraged and where we could generate appropriate returns. We’re cautiously optimistic that this trend will continue.

During 2016, our liquidity improved by a combination of portfolio turnover and an increase in our KeyBank revolving credit facility to $95 million, which we accomplished by adding a new lender to our banking group. With this increased borrowing capacity, we enter 2017 with considerable dry powder to expand our investment portfolio.

With the additions to our advisors origination team, we’re already seeing an increase in our pipeline and backlog. We expect that our portfolio will be flat to slightly down in Q1and then begin to grow during the course of the year as we return to our target leverage.

We’ve also positioned ourselves for a rising interest rate environment, 96% of our portfolio is comprised of loans with rates that float up with increases in short-term interest rates. We expect to see top-line growth in interest income as well as net interest margin from any potential increases in interest rates.

Dan Trolio, will discuss this in more detail during his remarks. Horizon also continues to maintain a diverse portfolio of warrants and equity positions in over 80 companies, many of which have fully repaid their original associated loans.

While there has been stress in the M&A and IPO markets over the past couple of years, an improvement could lead to exit that provide additional upside to Horizon’s NAV and overall profitability as our portfolio continues to mature. Finally, we declared distributions up $0.10 per share for each of April, May and June.

These distributions bring total declared distributions of $9.32 for our shareholders since going public in 2010. We maintain a spillover of $0.15 per share at December 31, 2016. Our goal remains to cover our distributions with net investment income overtime.

As we endower to rebuild our portfolio and our net asset value, we’re focused on originating quality loans that provide appropriate risk adjusted returns with strong on-boarding yields and that generate steady net invest income. At the same time, we continue to offer our shareholders potential upside through our warrant and equity portfolio.

Before turning over the call to Jerry and Dan, I want to congratulate Dan Trolio on his recent appointment as Horizon’s permanent Chief Financial Officer. Prior to being named interim CFO, Dan served as Vice President and Corporate Controller for over 10 years.

After assuming the responsibilities of interim CFO, it swiftly became clear he was the best person to lead Horizon’s finance organization. We’re are very excited, he has taken on the CFO role permanently and look forward to his further contributions to Horizon’s continued growth.

We’re equally pleased to congratulate Lynn Dombrowski, who has been promoted to Corporate Controller. It’s a tribute to our deep bench strength that we’ve professional who are ready and able to fill these important positions.

Jerry will now update you on our business development efforts and market environment and Dan will then detail our operating results and financial condition.

Jerry?.

Thanks, Rob. Good morning everyone. During the fourth quarter we continued to monitor what we believe is a downwards of credit cycle defined by over leverage loan opportunities to companies with limited growth, reduced VC investment, a sluggish IPO market and generally poor M&A activity especially for VC backed companies.

During the past three quarters, we’ve been implementing a marketing strategy more consistent with the traditional value of our loan products and aimed at the higher growth areas of our core technology and life science markets.

In doing so, we’ve been seeking to rebuild our pipeline mostly around life science and technology companies with new and innovative technologies at little or no leverage. We believe we’ve made strong progress during the fourth quarter and we’ll continue to advance our efforts in 2017.

To highlight some of the fourth quarter accomplishments, we funded two life science transactions totaling $14 million. Both of these companies which are publicly traded had no previous leverage. Further, they both are strong IP product pipelines addressing critical disease indications with unmet cures.

We maintained our disciplined pricing performance, achieving on-boarding yields of over 12%, despite overall pricing pressure across all debt markets. We achieved a portfolio yield for the quarter of 14.2%, which continues to be one of the highest yielding BDC portfolios in the industry.

We maintained a growing backlog of committed transactions, ending the quarter with four transactions totaling $21 million.

Our pipeline of new opportunities increased from 120 million at the end of Q3 to over 150 million at 12/31, again with an increased focus on low leverage opportunities that are developing innovative new products addressing unmet needs. Our pipeline has continued to build since the end of the year.

Today we have a committed backlog of more than 36 million to six companies and our pipeline of new opportunities of approximately $280 million. During the fourth quarter, we began to reweight our portfolio toward life science and healthcare technology.

It resulted in an increase from 35% at the end of the third quarter to 40% of our total portfolio at the end of the year. At the end of the fourth quarter, we held warrant and equity positions in 83 companies. In addition, we exited four loans totaling $16 million by continuing to hold warrant positions in three of the exited companies.

As Rob mentioned, our advisors strengthen this life science lending platform in Q4 by adding two seasoned investment professionals to our life science team.

Mishone Donelson has joined the advisor as Managing Director and Mishone brings a strong academic background in life science with a degree from the MIT as well as a significant lending and investment experience from previous position at Fairview Capital.

Lillian Mu, also recently joined our advisor as a Portfolio Manager on our advisors life science team. Lilly brings a strong academic background to the position with advanced degrees in the sciences.

In addition, Lilly has substantial life science operational experience from her work at big pharma companies and investment experience from her previous position at Connecticut Innovations where she sat on the Boards of several life sciences portfolio companies.

Going forward, we expect our advisor will continue to strategically add marketing and portfolio capabilities in order to further build the Horizon pipeline and pursue quality opportunities in our core markets.

As we continue to execute our focus strategy of providing quality debt products to companies with low leverage, continued investor support and strong IP product platforms, I would expect our on-boarding yields to be slightly lower in the coming quarters, compared with historical highs we’ve recently achieved.

This is consistent with rebalancing our portfolio toward life science and healthcare technology transaction and our focus on incremental quality portfolio growth during 2017. At the same time, we still expect our on-boarding yields will continue to remain among the highest in the BDC industry.

Before providing some perspective on the market environment, I’d like to note the development subsequent to year end.

During the first quarter, one of our public life science portfolio companies Argos Therapeutics, reported that the independent data monitoring committee for the company’s ADAPT phase 3 trial recommended the study be discontinued for futility based on its planned interim data analysis.

Following this development Argos repaid the outstanding principal balance of its loan to Horizon. Horizon continues to hold warrants in the company as Argos endowers to work with the FDA on a path forward for its lead product. Now, I’ll discuss the general venture capital environment.

In the fourth quarter, the number of star-up companies receiving capital continued to trend down with 11.7 billion invested as reported by PWCs monitory report. In terms of the number of deals in dollars, both fell to eight quarter lows. Overall, VCs continue to remain invested in private companies longer with fewer deals and larger equity raise.

However, 2016 was a record year for VC fund raising with nearly 42 billion raised for the year, well above the 35 billion raised in 2015 according to the National Venture Capital Association.

Contributing to this increase were large fund sizes during 2016.VC backed exit activity continued to trend down during the fourth quarter, with a lowest value since the first quarter of 2103. Turning to our core market, life science investment activity declined during the quarter coming off strong third quarter highs.

Despite this decline, the sector attracted 11% of the venture investment during the fourth quarter, including two of the ten largest VC investments. VCs invested 1.9 billion into 119 life science companies with an average deal size of approximately 16 million.

With both M&A activity and IPO activity trending down in the life science marketplace, we continue to expect more quality opportunities to provide debt to later stage life science companies during 2017, if they wait for a better IPO and M&A exit markets to materialize.

Prospects in the healthcare technology market remain attractive for us, as we continue to see increasing opportunities for companies that are focused on cost containment and productivity solutions in the healthcare space. Based on our multi-year industry outlook, we believe there will be compelling opportunities on both debt and equity side.

The one cautionary note is the uncertainty of healthcare reform and how it will impact the overall healthcare market. In the broad technology market, while U.S. based internet companies continue to receive the most funding across all sectors during Q4, investment activity for internet companies declined on a quarterly basis.

The sector accounted for 39% of the U.S. investment activity for the quarter down from 46% in the third quarter. Aside from the internet sectors, companies involved in artificial intelligence and robotics and other more revolutionary products in markets remained ahead of the general slowdown.

Overall, we’re still seeing hesitation on the part of VCs to continue to support early stage companies with technology has been passed or otherwise experience slow growth. We’ve not focused as of late on the clean tech market as venture capital investing remains scarce there. We continue to see greater emphasis on technologies for healthy living.

However our approach remains cautionary given the limited VC investment. Looking at the venture debt competitive landscape, technology banks continue to be active in the completion of life science transactions.

This has driven opportunities for multi-partner transactions in the late stage life science deals as evidenced by our recent venture debt financings with Strongbridge Biopharma and vTv Therapeutics. We expect to see further opportunities for joint transactions during 2017. With that update, I will now turn the call over to Dan..

Thanks, Jerry, and good morning everyone. I will now briefly discuss our financial results for the fourth quarter and full year 2016. Our total investment income for the fourth quarter was $7 million as compared $8.6 million for the fourth quarter of 2015.

The decrease was finally due to lower interest income and investments resulting from the smaller average size of our loan portfolio. For the year ended 2016, total investment income increased to $33 million compared to $31 million in the prior year. Our portfolio yield for the fourth quarter was 14.2%, consistent with last year's fourth quarter.

On-boarding yields in our portfolio were 12.1% and have remained stable in the 12% to 13% range since our inception. For the full year, we achieved a portfolio yield of 14.9% and on-boarding yields of 12.3%.

As mentioned in the past, the primary changes period-to-period to our portfolio yields are driven by the timing of new loan originations and the timing and extent of loan prepayments and the related fee income from those prepayments, including prepayment fees and acceleration of previously unamortized end of term payment.

Turning to our expenses, total expenses were $3.1 million for the fourth quarter, a 30% decrease as compared to the $4.5 million in Q4 of 2015. Included in these expenses is interest expense which decreased slightly on a year-over-year basis mainly due to a decrease in average borrowings.

Due to the fair value adjustments as Rob discussed earlier, the incentive fee expense for the fourth quarter was subject to the incentive fee cap and deferral mechanism under our investment management agreement. This resulted in $800,000 of reduced expense, an additional net investment income.

In addition, base management fee decreased year-over-year to $1.1 million compared to $1.2 million in the prior year period, primarily due to a decrease in the average size of our investment portfolio. Total net expenses for the full year of 2016 decreased by $1.1 million to $16 as compared to $17.1 million for the full year of 2015.

Interest expense for the full year increased slightly to $5.9 million compared to $5.8 million in the prior year period due to an increase in the average outstanding borrowings of $14.9 million or 17%, which was partially offset by a decrease in our effective cost of debt.

Base management fee expense increased by $0.3 million to $4.7 million for the full year of 2016 and professional fees in general and administrative expenses for the full year were unchanged at $2.3 million compared to 2015.

We earned net investment income of $0.33 per share for the fourth quarter as compared to $0.35 per share for the fourth quarter of 2015 and $0.38 per share for the third quarter of 2016. For the full-year, we earned net investment income of $1.48 per share as compared to $1.25 per share in the prior year period.

After paying our deemed tax distribution of $1.36 per share and taxable earnings of $1.41 per share, the company’s undistributed spillover at year end was $0.16 per share. As of December 31, NAV was $4.09 per share, a $0.35 per share decrease from the prior quarter. The decrease was primarily due to the unrealized depreciation on our debt investments.

New originations in the fourth quarter totaled $14 million, which were offset by $14 million in scheduled principal payments and $13 million in principal prepayments.

We ended 2016 with an investment portfolio of $194 million, which consisted of secured loans to 44 companies with an aggregate fair value of $186 million and a portfolio of warrant and equity positions in 83 companies with an average fair value of $89 million.

New loan originations for the full year totaled $58 million to 13 portfolio companies which were offset by $49 million in scheduled principal payments and $46 million in principal prepayments.

In terms of the balance sheet, we ended the year with approximately $42 million in available liquidity, including cash and funds available under our credit facility.

As of December 31, we had $63 million outstanding under our credit facility, which was expanded to $94 million in April of last year and contains [indiscernible] future, which allows for an increase in size above $250 million. In addition to our credit facility, we continue to have $33 million of publicly traded baby bonds, which mature in 2019.

As previously discussed, we refinanced the remaining balance of our asset backed notes during the second quarter of 2016. We remain committed to increasing debt levels and growing our leverage ratio towards our target of 0.75 to 1. At year end, our actual leverage ratio was 0.69 to 1.

Taking into consideration the current gap between our target and actual leverage ratio, we expect that we can grow our current investment portfolio by $50 million. And I would like to provide an update on our stock repurchase plan.

Since the share repurchase plan was first approved in September 2015, we have repurchased over 161,000 shares of our common stock at an average price of $11.27 on the open market at a cost of $1.8 million.

As previously announced in July, our board of directors extended the share repurchase program until the earlier of June 30, 2017 for the repurchase of $5 million of the company's common stock.

Before we go to questions, I would like briefly touch on our interest rate sensitivity, which is a topic that’s received a lot of attention lately, following the FOMC meeting in December when it alluded to a rising interest rate environment. Horizon, like all BDPs, can be affected by changes in interest rates.

Recognizing this, for the past two years we have been shifting our focus to floating rate loans in anticipation of increasing interest rates.

As of year-end, 96% of the outstanding principal amounts of debt investments were interests at floating rates with coupons that are structured to increase when interest rates rise compared with 64% as of year-end 2014.

Based on our December 31, 2016, consolidated statement of assets and liabilities, we estimate that 100 basis point increase in the LIBOR rate. We will increase annual net interest income by approximately $200,000 or $0.02 per share.

In summary, we believe Horizon is well positioned to experience increasing income, expanding net interest margin in a rising interest rate environment. Lastly, I’d like to note that we plan to hold our next conference call to report first quarter results during the week of May 1st. This concludes our opening remarks.

We will be happy to take questions you may have at this time..

Thank you. [Operator Instruction] And our first question comes from the line of Jonathan Bock from Wells Fargo Securities. Your line is open..

Hi, guys. Jamie Tropan [ph] filling in for Jonathan.

If you guys - can you provide a little bit more detail on the royalty agreements for ScoreBig and New Haven? How will those look exactly and then what are your expectations for recovery?.

Yeah, so both of these were negotiated during the fourth quarter and concluded in the early first quarter. They represent longer-term agreements that were entered into through an ABC, the –they are different, of course, because one is a service and one is a product.

The important thing on ScoreBig is that the site is back up and running and the partner, the actual acquirer of the asset is a well-established ticket broker dealer. And they are off and selling tickets again, which is good and over time we will have the potential to recover our entire balance.

We fair value that asset based on scenario analysis of future revenues and profit sharing royalties.

In terms of New Haven, same thing, the company's asset, primary asset, its approved drug has been acquired by another company and we are the beneficiary of a royalty agreement from that transaction that as the product is essentially re-launched back into the market side by side with the acquirer’s other product selling into the cardiovascular market.

We will start to earn royalty agreements. We expect both of these to take time to fully ramp up, but we felt strongly that negotiating these agreements was in our shareholders' best interest, because it gives us the potential for full recovery over time..

Great, that helps. And switching gears a little bit kind of as it relates to dividend, we saw NII was above the dividend, the new 30% dividend this quarter, but that was largely due to the lack of incentive fees.

So, kind of as incentive fees return, where do you expect NII to fall and if there is a gap between the NII and dividend, how do you expect to bridge that gap?.

So, as we've stated consistently, our goal and target is to have distributions that are covered by NII over time.

We - the strategy in order to accomplish that is to rebuild the portfolio, which essentially gets back towards our leverage, continue to have steady stream of liquidity events and we believe that we can achieve that over time, hence our decision is to continue at the current dividend level..

Sure. Thanks. That’s all questions for me..

Thanks..

Thank you. And our next question comes from the line of Paul Johnson from KBW. Your line is open..

Good morning, guys. Thanks for taking my questions. I just had a question. You guys made a couple of hires back in the fourth quarter, which is good. You're building out a greater ability of your platform and I know you already talked about that a little bit in your last quarter, but this is the second straight quarter of no incentive fees.

And I was wondering has that or do you expect that to put any pressure on executing on that on your ability to retain or hire new personnel?.

Hi. Paul. It’s Jerry. The answer is, no, we don't.

We actually have a very strong plan going forward on where our transactions are going to come from, the kind of transactions that we want, who we need on board to execute on that plan and we plan on, as you've already seen in the fourth quarter and you will probably see going forward, we are planning on adding the resources that we need to do that.

And our strategy for 2017 is pretty much set and we're actually pretty optimistic about it..

Okay. Okay, thanks. And I guess last question is just sort of a technical thing.

But can I get an update on your total headcount where it stands today?.

I think we are at 18, 18..

All right, thanks. That's all for me..

Thank you. And our next question comes from the line of Leslie Vandergrift from Raymond James. Your line is open..

Hi, good morning. Thanks for taking my question..

Good morning, Leslie..

A quick follow-up to one of the early ones on ScoreBig and New Haven coming up this quarter, some idea on in terms of the realization there in the quarter?.

In terms of realization, now these are longer term contracts. Both of them require some ramping up, hence our statement that we have the potential to recover the full balance over time and yet the fair value didn’t mark down in the 40% to 50% range of that balance and that's because of waiting the scenarios and the timeline..

Well, Leslie, we’ll continue to fair value the scenarios over the coming quarters as more information comes in. But the royalty agreements will have a significant life to them..

Okay.

So, the loans themselves are still on there than it’s just - so there was no realization on the previous ones?.

So, the loan for ScoreBig will be on the books for a period of time. It all has to do with the legal contract of our loan security and the mean we have on the assets of the ABC in the royalty agreement.

And when certain factors change, you may see may New Haven go away or ScoreBig go away over time, but as long as the loan is still outstanding, it will still be recorded as a loan..

Okay. And then on NextEra, you marked it 65% approximately to vary the cost last quarter.

I know you said the sale came in too well for the secondary lenders there, but what kind of color did you have at that time going into the process pretty much or rather large amounts to go from 64 to aero, so looking at what happened there and the difference over the quarter?.

Yeah, at the time that we submitted our third quarter, they had not yet filed bankruptcy, they were in the process of considering either rising additional capital - we had offered to restructure a loan, the possibility of bankruptcy was existent, but they hadn't filed until right after we had filed.

But the expectations from everyone including the investment bank that they had hired were that an auction would generate many strategic buyers well in excess of the combined debt. Unfortunately that did not happen and it was very disappointing through the process that played out in bankruptcy sort of in December and January.

Leading up to the auction, we were expecting still that that we had a chance for some recovery, but the auction proved to be totally unfruitful..

Okay. All right. Thank you.

And on the outlook, you said up about $50 million in the portfolio growth there for the year I believe, so growth of 25% on that side and this choppy market has had a bit more opportunities in the fourth quarter, optimistic for the first half, but how do we get that much growth in this coming year?.

Yeah. Hi, Leslie, this is Jerry Michaud. Yeah, so if you look at historically where our funding patents have been, we've been somewhere in the $25 million to $40 million range every quarter. And generally speaking we have had prepayments in the $10 million to $15 million range.

Obviously if you look at 2016, we significantly ramped that back and I've mentioned some of the reasons for that. We just - honestly the opportunities - a combination of the opportunities we're seeing, we're not high quality. They were awful leverage companies.

But even more importantly we were seeing an exit market that honestly hasn't been as bad as I have ever seen. And if you think about 2008, 2009, those were pretty bad markets. But there were still buyers around who were willing to, at the right price, pick up some of these companies. That has not been the case for the last three quarters.

It has scared the heck out of the VC community companies that generally would have been supported and a couple in our portfolio, ScoreBig being one and maybe one other one that historically would absolutely have been continued to be supported by their investors with the idea of finding a soft landing a quarter or two down the road with us helping them with some restructure of the loan.

And instead they just basically dropped the companies and that has not been historically how this market has worked.

So, as we were witnessing that early on in the year, we definitely pulled back and - but it gave us an opportunity I think in the third quarter and fourth quarter to really look at where our markets were going, where the high quality opportunities were going to be, not in 2016 but going forward 2017, 2018, 2019, and we have reorganized our group to focus on those.

We have gone out to the market and instead of looking at the opportunities that have been brought to us, we are going out to the market and looking for very specific opportunities where we believe there will be strong growth and there is two reasons for that.

One is, that is the - for a venture debt fund, that is where how you rebuild NAV that you have high quality exits. We've had them before. We know how to do that and that's what we are. That's our strategy for the next two years.

And so, to get to the bottom of your question, we were very pleased in the fourth quarter and here into the first quarter having made that kind of pivot.

I’ve seen really high quality opportunities begin to flow into our pipeline and I expect that we can get back to that kind of $30 million or so funding on a quarterly basis with fewer exits probably in the $10 million to $15 million range.

So, if we can get back there, we will rebuild the portfolio over the course of the year, get back to our leverage of 0.75 to 1 and obviously increase NII..

Okay.

And on that point about the - you talked about the 2018, 2019 outlook as well, I mean, one of the big things being talked about right now for every company is regulation changes, but specifically for you is the FDA changes that are already being put out over there, so the life sciences and pharmas, pharmaceutical investments, are you guys seeing opportunities arriving here from that?.

The answer is yes. Basically the changes, the FDA had been pretty positive. And when I talk to pharmaceutical executives and biotechnologies, they are much more optimistic about the FDA relative to getting drugs through that process very faster, so that means less cost with hopefully better outcomes.

And so, we are seeing more optimism on that side of the ledger.

But I do think because of overall - the overall health care hangover and question mark around that, which could impact drug prices, I do think there is still a hesitation at the top of that market meaning IPOs and M&A where people are still kind of waiting to see kind of how the fallout of that will be.

And so, it's kind of a - it's good if you're at development stage like science company and I think the opportunity to work with the FDA is better today than it has been really in a very long time and that's good.

You might get drugs again through the process faster and cheaper, but there is some hesitation about - ultimately once you do that, what will the price - what kind of price are they going to be able to get for that product in the United States?.

Okay. All right. Well, thank you for taking my questions..

Thank you. And our next question comes from the line of Christopher Testa from National Securities. You line is open..

Good morning, guys. Thanks for taking my questions. You had mentioned seeing a lot of deal flow, but a lot of the deals being way too leveraged.

Just curious, which particular verticals are you seeing that are the most leveraged and how that's changed quarter-to-date so far here in the first quarter?.

Yeah, very good question. Software, software companies, SaaS model companies, they were over leveraged. They became over leveraged in the last two to three years based on projected revenue that didn't materialize at least in the way that they expected.

And so, now they're coming back to the market being over leveraged with the same kind of pro forma growth that they haven't been able to achieve in the last two years. And so, I think certainly from our standpoint, those deals just aren't very interesting.

And the other part of that is that it's not just a matter of them not growing, it's a matter of their technology or their software not being at the end of the day all that innovative.

In other words, there is other products in the market that have passed them or many products competing with them, which is slowing their growth and that's where we have seen companies that have - SaaS model companies were very popular a couple of years ago and they were able to attract both equity and debt and now they are - in my view that's a very over leveraged part of our market today..

Great and just you had mentioned obviously the technology banks being very active, just curious if you're seeing other players stepping into the VC space that were typically not in the sector prior who were making loans further down the capital stack?.

Yeah, not so much going down - going downstream to the earlier stage companies. They do have technology, but it's going to take a while to obviously to - the value of those to be materialized.

I think at the top of our funnel, we are seeing buyout firms, PE firms that can't find good true buy-out opportunities, maybe reaching down into that market and bidding on companies that otherwise would still require VC funding going forward, but on the debt side, no, not too much.

There actually - the competition beyond the banks really is lower than it has been in a while outside - again outside of the banks. The banks are still pretty active, but the smaller funds that we used to compete with aren't really as active as they have been. And so, there is good opportunity for us.

For instance, the two life science transactions we funded in the fourth quarter, high quality deals, but we've got the kind of pricing that we need where two years ago we couldn't, in 2015, when that market was really hot, you were talking about single-digit interest rates on deals and extremely low and sometimes no warrant coverage and they were good - they were good companies.

They were just poor investments for us relative to the kind of return profiles. We've seen that improved dramatically. So, we're pretty optimistic about that..

That's good color. Thank you.

And last one for me, just wondering if you could just provide us with the timing of the originations closing during the quarter?.

Yeah, most of it will be at the end of the quarter..

Okay. That's all for me. Thanks for taking my questions..

Thank you. [Operator Instructions] Our next question comes from the line of Casey Alexander from Compass Point. Your line is open..

Hi, good morning and thank you for taking my questions. First of all, on the royalty agreements, you said you ran a scenario analysis. I mean how far out did the scenario analysis go, five years, 10 years? I mean there had to be a determination point for the scenario analysis..

Yeah, so both of them are in the three to five-year range. Casey..

Okay.

Secondly, do you anticipate accruing incentive fees at some point in time in 2017 and what quarter do you expect them to come back in?.

The fee and deferral, the fee cap and deferral will impact the first quarter and our outlook is that we could be back into incentive fees as early as the second quarter, but that requires the outlook - that's the outlook that we would have relative to NAV..

Okay. There is a statement in the release and something that I am just curious about, you have $37 million in cash, you have $63 million out on the credit line and there is a statement in the release that only $4.6 million in funds are available to you under the existing credit line.

Why is it there more available to you under the existing credit line?.

There is more available. However, we are targeting the same 0.75 to 1 leverage and so working within that constraint, the cash plus, probably roughly about $8 million to $10 million of availability to stay within that target..

Well, okay, so there is actually more liquidity available to you than what you're saying. I'm not sure why you would say it that way. At 0.69 going to 0.75, okay, you said you could do another $15 million worth of loans.

I mean frankly if incentive fees come back in the second quarter, given the drawdown that you've had in your total portfolio of assets, from a calculation standpoint, it's not possible for you to currently cover the dividend if you pay incentive fees.

Why aren't you waving the incentive fees permanently?.

We look at our NII and dividend and distribution quarterly. And that $4 million as of December 31, that is at a point in time and that depends on the assets that are SPE..

Yeah. Well, I don't think it's at all possible for you to cover the current dividend at this point in time if you start to repay incentive fees. Secondly, the company has lost about a third of NAV since starting as a public company. The company currently has more than 20% of their loans in credit buckets three and four.

Why should we have any confidence that we're not going to see continued NAV degradation over time?.

Casey, we've talked about this on the calls and in our individual calls. We work very hard to try to recover the - resolve these underperforming loans the best we can with our shareholders over time and we believe that there are opportunities for us to grow our portfolio. We certainly are subject to criticism based on what you've described.

The buckets you described actually we call one and two, not three and four..

Excuse me..

That's all right. But they are - we had one new loan go on non-accrual in the fourth quarter. That's a digital signal deal. We expect based on negotiations that are ongoing that we have the potential for full recovery there. We've marked out loans down at 12/31. We had really very little movement in the twos, new twos that are on our watch list.

I mean this is hard for you guys to understand, because you don't see it and it’s hard for you to buy based on our track record. All we can do here is work hard to resolve the loans favorably over time. We believe we did that.

It was not easy and hard work on New Haven and ScoreBig to get - see that recovery over time and we're encouraged by the opportunities we’re seeing. As Jerry described, it's been a very difficult M&A market, especially for the companies that are in distress.

The experience of having VC step-up to help the company find a soft landing has been very difficult these years. So what happens is that those loans end up getting trans - the companies get a discount of the debt and so that’s what we’ve experienced.

Our outlook is for improvement and I understand your hesitation, but our management team, our new Director or Managing Directors are committed to finding good quality loans going forward and getting as much out of the portfolios we can..

Can I ask then, if you have 37 million in cash and it’s not listed in restricted cash, why continue to pay the interest on the credit line, why not pay it down?.

We have paid it down. It’s a timing thing with our bank and the way that the key facility works. We have pre-payments late in the quarter and that cash is on the balance sheet at 12/31.

We’re working to make that facility from that aspect more efficient, but you’re right there’s no reason to borrow money and keep it in cash, pay 4% interest, we get that and the fact is that at 12/31 we had that much cash on the balance sheet, today we don’t..

What’s the non-used fee on the credit line?.

50 basis points..

Does it even make sense to have a credit line that extends out to 95 million at this time in time considering the fact that that would far exceed your leverage ratio, where you need to go to the far end of the credit line?.

These are the strategic decisions that we look at and make. If there was - we worked hard to expand the facility, something we always think about as we get to take care of that board, but right now we think it’s very efficient financing even given the non-used fee..

I understand, but I think it makes a great deal of sense to reduce your capacity, cut your fees and clearly take a hard look at management incentive fees based upon the track record over the last five years. I think that’s something that shareholders would appreciate. Thanks for taking my questions..

Thanks, Casey..

Thank you. There are no further questions. I'd now like to turn the call back over to Robert Pomeroy, Chairman and CEO for closing comments..

Thank you. Moving ahead, in 2017 Horizon will use our liquidity position to grow our portfolio and our net asset value by originating new loans to promising companies who’re committed on executing on the strategies I just said and to producing NII that covers our distributions.

We thank you for your interest in Horizon and we look forward to sharing our progress with you again in May. This concludes our conference call. Thank you and have a great day..