Good morning, and welcome to Horizon Technology Finance's First Quarter 2017 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 first quarter 2017 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 Q1 earnings press release and Form 10-Q 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. The first quarter marked progress on several fronts for Horizon. For the quarter, we earned net investment income of $3.4 million or $0.29 per share. The earnings resulted from a strong portfolio yield of 15.5% for the quarter and income derive from liquidity events at six portfolio companies.

Our ending net asset value increased during the quarter to $12.11 per share based on a combination of our NII, our distributions which totaled $0.30 per share for the quarter and realized and unrealized depreciation on our portfolio. Importantly we funded over $25 million in new loans during the quarter a significant increase over the fourth quarter.

The investments that we are making in the advisors platform with new senior professional's is beginning to pay-off with increased originations and a growing pipeline. We have added Managing Director's on each coast originating new opportunities in our target markets.

In addition, we are adding talent and portfolio management and accounting and finance. Asset quality continued to recover with the reduction in the number and dollar of non-accrual loans.

At March 31st, there were only two loans on non-accrual, one of which is already resolved with the long-term royalty agreement that has the potential portfolio recovery overtime. There were no new non-accruals during the quarter. We also saw a reduction in the number and dollar amount at two rated loans from the levels at December 31st.

Two of the loans were repaid in full and one loan was upgraded two a three during the quarter. There was one new loan downgraded to a rating of two. Loan prepayments can be either profitable with accelerated fee income or defensive with the opportunity to reduce exposure and reinvest the capital in the new loans.

Horizon experienced both types of prepayments during the quarter. Our challenge is to increase new loan originations to a level where we can grow our portfolio.

Our increased originations in the quarter were not enough to overcome the strong amount of prepayment liquidity events and ordinary amortization that occurred in the quarter, resulting in a reduction in our earnings portfolio.

Staying with the prepayment thing Horizon often retained its warrant position in these portfolio companies, even after the loan has been repaid. The warrants has long seven to 10 year lives which gives our shareholders a meaningful opportunity to capitalized on the future upside of the development stage companies that we finance.

We continue to hold warrants and equity positions in 76 portfolio companies. [indiscernible] our loan prepayment is a result of an acquisition of the portfolio company that includes the realization of a warrant gain in addition to the fee income earned for the loan prepayment. This is exactly what occurred with one of our portfolio companies.

Later in the quarter the company paid-off our loan and we also received warrant proceeds of a $1 million. The loan IRR was increased from it's on boarding yield of 12% to a realized loan return of 16%. The warrants had been fair-valued at year-end at $80,000 resulting in a realized gain of $1 million from the warrant proceeds.

On a combined basis, the overall return on the investment which was originated in 2015 was 21%. For the quarter our NII was $0.29 per share and our net increase and net assets per common share was $0.32. We declared monthly distributions for July, August and September 2017 totaling $0.30 per share.

We have now declared a distribution to $9.62 per share since our IPO in 2010. We are focused on maintaining this progress on all fronts over the balance of 2017. Jerry will now update you on our business development efforts and market environment and Dan will then detail our operating results of financial condition. Jerry..

Thanks Rob, good morning everyone. Our first quarter performance reflected improved investment activity as we began to reap the benefits of our enhanced investment platform. During the quarter we funded five new loans totaling $26 million and also closed three new loan commitments in the first quarter totaling $20 million.

At the same time, we maintained our disciplined pricing performance achieving on boarding yields of over 12% and we generated portfolio yields for the quarter of 15.5% up from 14.2% in the fourth quarter.

The higher portfolio yields is a result of consistently maintaining strong on boarding yields since our inception combined with strategically pricing and structuring transactions to maximize returns received from our portfolio companies as they exit our portfolio.

The combination of ETP a big payment fee we just received as company's exit out portfolio has consistently resulted in Horizon having one of the higher yielding portfolios in the BDC industry. We continue to expand our investment pipeline with over 340 million in opportunities including 120 million term sheet issued to 10 companies.

We are over 25 million in awards and commitments as of today. We are encouraged not only with the size of our pipeline, but also with the quality of the companies we are evaluating.

During the first quarter we saw a marked improvement and the quality of the transactions as a direct result of our targeted focus of finding companies with relatively low leverage, continued equity investor support and leading technology platforms in very specific technology and life science sectors.

Our increased pipeline activity is also a reflection of new hires by our advisor on Q4 as well as reorganizing our managing director team to take full advantage of the markets that we serve. At the end of the first quarter we held warrant and equity positions in 76 portfolio companies with the fair value of $8.1 million.

In addition to our increased origination activity we expanded positive liquidity events during the quarter from six portfolio companies totaling $27 million. We continue to hold warrant position and four of the exiting companies. One of these liquidity events was Argos Therapeutics, which announced their Phase III trial was discontinued.

In connection with this development, Argos prepaid the outstanding principal balance of $9 million on a venture loan plus interest in March. As Rob mentioned, this is an example of defensive prepayment, which protected Horizon’s exposure.

Horizon continues to hold warrants in Argos as the company works with the FDA on a path forward for its new product. Also included in liquidity events was the exit of one of our portfolio companies that prepaid the outstanding principal balance of the $10 million venture loan plus interest, ETP and prepayment fees.

Horizon also realized a warrant gain of $1 million; this is an example of a profitable liquidity then. Looking at our core markets in the life science area, we continue to see quality deal flow.

This market is reasonably stable as we are seeing some IPO activity and solid VC investment, there are significant competition on the debt side from all participants with banks competing on pricing while others are focusing on structure.

Despite this, we are steadily building out our pipeline in this market helped by the addition of two life science professionals added to our advisory in Q4.

The healthcare technology market remain promising despite some short-term uncertainty around national healthcare reform, while some healthcare investors are waiting for further clarity from the new administration, we are seeing some pipeline activity related to healthcare and technology companies and they are using technology to reduce the cost of patient care or clinical trials.

Our portfolio company [Indiscernible] is a great example of a technology platform that significantly improves clinical trial protocols and measurable outcomes form mental health drug development companies. In the broader technology market we are seeing the quality of opportunities improve.

There are less technology companies looking to go public given the trend of LP investment and private equity, rather than utilizing the public markets liquidity is coming from private equity firms going to buy out existing investors at high premiums and keep companies private.

Regarding the CleanTech market, we continue to take a long-term stance as venture capital investment remains limited. While we see some potential on this area given the continued emphasis on technologies that support clean healthier living we have no immediate plans there. Turning now to the general venture capital environment.

We are starting to see investment activity that is more in line with the historical norms. According to the National Venture Capital Association, venture capital investments of $16.5 billion represents a slight decline from 2016 levels, but still represents a very healthy VC investment environment.

It should be noted that VC investment and a few later stage unicorn transactions has tended to inflate VC investment activity. In Q1, VCs invested in 1,800 companies which is down approximately 25% on an annualized basis over 2016.

With fewer VCs raising larger funds it has become noticeably difficult for early stage companies representing smaller investment opportunities to attract venture capital. VC fund raising started the year-up slowly in 2017 with only $8 billion raised in the first quarter according to PitchBook.

However, taking into consideration that banner fund raising years we got in 2015 and 2016 over the last five of the last eight quarters saw more than $10 billion raised. So the slow start in the first quarter is less surprising.

With this in mind, we do view the VC fund raising market slowing as a result that VCs not focusing on investing capital raised over the last two years.

While we saw a limited VC investment in stable technology sectors such as software and internet, we are seeing some segments of the tech market those that are demonstrating revolutionary technology changes receiving significant VC interest.

Technologies sectors such as advanced computing and storage, transportation and mobility, artificial intelligence and internet of things are all attracting strong VC interest. Similarly in the life science market we are seeing significant VC investment and drug discovery and diagnostics, advanced prosthetics and genomic analytics.

In the first quarter, VC backed exit activity showed signs of a rebound after coming-off a very low exits during the 2016. that companies has received approximately $15 billion of value of in the first quarter compared to under $8 billion in the fourth quarter of 2016 according the PitchBook.

And this trend is a welcomed improvement, VC is still having to support their portfolio companies longer with the exception of a few outliers M&A valuations are still not attractive. There are really seven venture backed IPOs completed during the first quarter raising a total of $4 billion.

overall activity has continued to lag there were some notably venture backed exists including the widely known Snap IPO along with the acquisition of Appdynamics by Cisco for $3.7 billion.

The success of these transactions combined with the growing pipeline of VC backed company IPO filings and [indiscernible] recent IPO put signal additional venture backed IPOs in the near future.

Looking at the venture debt competitive landscape, we continue to see competition from technology banks and this has created some pricing pressure, but we are still seeing opportunities for attractive on boarding yields across our targeted industries.

Additionally the quality of opportunities has continued to improve; this includes more opportunities from multi partner transactions particularly in later stage life science companies. Considering the IPO market for biotech is less robust than it has been in previous periods.

We expect many biotech companies will be coming back to the market over the next 24 months to refinance 2014, 2015 debt, which will continue to further drive financing opportunities in this market. As we move through 2017 our outlook is positive as market trends are steadily improving.

We continue to focus on sourcing loans in the life science and technology markets to companies with limited leverage that we believe we will provide appropriate risk adjusted returns. Based on that, we believe Horizon is positioned to grow with investment portfolio over the next 12 months. With that update, I will now turn the call over to Dan..

Thanks, Jerry, and good morning everyone. I will now briefly discuss the results for the first quarter 2017. Our total investment income for the first quarter was $7 million as compared $9.3 million for the first quarter of 2016.

The decrease is primarily due to lower interest income and investments resulting from the smaller average size of our loan portfolio. Our portfolio yield for the first quarter was 15.5% consistent with last year first quarter. On-boarding yields in our portfolio which were 12.1% and have remained stable in 12% to 13% range since our inception.

Turning to our expenses, total expenses were $3.6 million for the first quarter, a 27% decrease as compared to $4.9 million in first quarter of 2016. Included in these expenses is interest expense which decreased slightly on a year-over-year basis mainly due to a decrease in average borrowings.

Base management fee decreased 24% year-over-year to $1 million compared to $1.3 million in prior year period. This change was primarily due to a decrease in an average size of our investment portfolio.

In addition incentive fee expense for the first quarter was subject to the incentive fee cap and deferral mechanism under our investment management agreement. This resulted in $300,000 of reduced expense and additional net investment income.

We earned net investment income of $0.29 per share for the first quarter as compared to $0.38 per share for the first quarter of 2016 and $0.33 per share for the fourth quarter of last year.

After paying distribution of $0.30 per share and earnings $0.29 per share for the quarter, the company’s undistributed spillover income as of march 31, was $0.14 per share. Our NAV as of march 31, was $12.11 per share, as compared to $12.09 in the prior quarter.

This increase is primarily due to the net realized and unrealized gains from our portfolio. New originations in the first quarter totaled $26 million, which were offset by $12 million in scheduled principal payments and $27 million in principal prepayments.

We ended the first quarter of 2017with an investment portfolio of $180 million, which consisted of secured loans to 37 companies with an average fair value of $166 million a portfolio of warrant and equity positions in 76 companies with an average fair value of $80 million.

And other investments in three companies within average fair value of $6 million. [Indiscernible] big is included in our debt investment as of march 31, we reported last quarter that this investments had been effectively settled with horizon receiving, the indirect right to the proceed of a long-term royalty agreements.

Any proceeds received from the royalty agreement where we recorded as in recovery of capital. In addition, we will continue to list for big as a debt investment until that is either paid in full or of the royalty agreement is directly assigned to us.

In terms of available liquidity, we ended the quarter with approximately $50 million which includes cash and funds available under our credit facility. As of March 31st we had $53 million outstanding under our $95 million credit facility, which has an important features that allows for an increase in size of up to $150 million.

Subsequent to quarter end, we paid down this credit line by $30 million. In addition to our credit facility, we continue to have 33 million of publicly traded baby bonds, which mature in 2019. Our intent remains to increase our debt levels with an overall target leverage ratio of 0.75 to 1, at March 31st our leverage ratio was 0.62 to 1.

Taking into consideration cash position and the current gap between our target and [indiscernible] leverage ratio. We expect that when we reach our target leverage we can been grow our current investment portfolio by $50 million. Now, I would like to provide an update on our stock repurchase plan.

On April 27th our Board extended our previously authorized share repurchase program until the early of June 30th, 2018 for the repurchase $5 million of the Company's common-stock. The thing was first approved, we have repurchased over 161,000 shares of our common stock at a total cost of $1.8 million.

And a finale note, I would like to provide an update on our interest rates sensitivity. It starts to continually garner a lot of attention since the Fed signal a likely increase in rates. As we have stated on prior calls, the anticipation of increasing interest rates Horizon has shifted its portfolio to floating rate loans for over three years.

As of March 31st, 100% of our outstanding principle amount of our debt investments or interest at floating rates of coupon are structured to increase when interest rate rise.

Based on our March 31st, 2017 consolidated statements of assets and liabilities, we have determine that 100 basis point increase in the LIBOR of rates and we would increase the annual net interest income by approximately 100,000 or $0.07 per share.

Considering this with our intentional shifts of floating rates, we believe Horizon is well positioned to benefit from a rising rate environment and experience both increasing income and expanding net interest margin.

Before we go to questions, I would like to mentioned that we plan to hold our next conference call to report our second quarter results and during the week of July 31st. This concludes our opening remarks, we will be happy to take questions you may have at this time..

[Operator Instructions] And our first question comes from Jonathan Bock of Wells Fargo Securities. Your line is open, Jonathan..

Hi guys [indiscernible] for Jonathan this morning. Thanks for taking our question and congratulations on the quarter.

I'm sorry if I missed but did you provide an update on digital signal, I think last quarter you mentioned that the company was seeking a buyer of its assets?.

We did not specifically mention it, but that process continues, it's being done through the assignment for benefit of creditors, there are active bidders and we are in the middle of the negotiations ongoing..

Okay, very well. And then for the royalty agreement ScoreBig, New Haven can you give us a sense of what say for New Haven where we can see the structure now in the value of it.

How are these structured to return? Would it be similar to your current portfolio yields?.

So the fair value that we have for them whether its ScoreBig as a loan and New Haven as a long term royalty investments are based upon scenarios and expectations of royalty income overtime. I wouldn’t expect a lot of fluctuation for them in the near-term, but as the royalties as the revenues that produced the royalties grow overtime.

We will use that scenario analysis to adjust the fair value..

Okay, very well and just one more on what is you view on spill over, I think you reported about $0.14 do you have a strategy of maintaining and building spill over or is this something used to - do you see as sort of a purse to fund a dividend gap as seen this quarter? Just your kind of high level thoughts on that and that’s all for me. Thank you..

So our goal as stated repeatedly over the last several years and quarters is set our dividend or distribution level at a point that can be covered by NII overtime. There are fluctuations in terms of prepayment income that made some quarters positive, some negative and as we have stated need to rebuild our portfolio back to our target leverage.

So our goal is to cover our dividend with NII and maintain some spill over long-term..

Thank you so much..

And our next question comes from Robert Dodd of Raymond James. Your line is open Robert..

Maybe for Dan, but to all of you. I mean Dan you mentioned the portfolio leverage going up to target et cetera, you could expand the portfolio buyback $50 million plus. Obviously overtime you get repayments call it round numbers of $100 million a year in terms of scheduled and early but obviously that takes time.

Jerry's comment was if I noticed that right you have got $120 million in outstanding term sheets right now on preliminary earlier stage pipeline of [indiscernible]. So obviously you are depending on the timing, if you close the term sheet tomorrow, you don’t have the capital.

So what is the strategy there on managing that overtime or do you simply expect a major pickup in early repayments to provide the capital to fund some of these opportunities you see?.

Hi Robert this is Jerry I'll take that question because it's more about pipeline and liquidity actually. So as you probably remember that most of the transactions that we do even once they are committed aren’t all funded upfront, there milestone that need to be met overtime.

And so we can easily project out relative to win those milestones would be relative to our overall funding pattern of those transactions. How much liquidity we need to have on hand and I would say that we are quite comfortable - first of all there is no guarantee we are going to 120 million $120 million as you well know.

We are quite comfortable of our capabilities to fund those commitments overtime. We actually still have room even beyond that. So we are in a good position to be able to fund any of the term sheets that are awarded that I have you mentioned you today..

Okay cool, one more if I can I mean last quarter - somebody asked a question about this that might be asked later, but you asked about the incentive fee and you said that you could be back into incentive fees as early as the second quarter.

Obviously there was a incentive fee paid this quarter which I haven’t projected given the color you gave on the last call and that call obviously it was March 8th right so within three weeks of we ended the quarter.

So what changed between then early March and the end of the quarter that resulted in an incentive fee being accrued from in the first quarter given the color that you gave that maybe second quarter was when we would see that..

The incentive fee is calculated based on the investment management agreement and at any point in time we regarding that calculation and determining what the incentive fee cost would be, we had been projecting throughout the year that depending on the portfolio activity what the incentive fee possibly could be and we knew that in the first quarter there is possibility for it, in each quarter that will be as we continue to go and do the calculation each quarter..

I thought we had indicated that we thought that there could be some incentive fee in the first quarter, we did have one additional prepay in the last at nearly end of the quarters that might have put those number Robert. I can’t remember what it is..

I wish that quote FY was from the transcript from last quarter. So understood, but there you go. Thank you..

[Operator Instructions] Our next question comes from Christopher Testa of National Securities. Your line is open..

Just touching on the royalty agreements again, just a couple of things, just wondering when we should expect any sort of revenue coming in from the royalty agreements can we have an idea on that.

And also just Dan with your comment on how that's going to be recognized is that is there going to do a new loan item for that or is that just going to be in the investment income as well..

Well for both royalty agreements when we receive any capital from the agreements then it will first be a return to capital, and then depending on which investment it is for a New Haven that we received additional cost basis then it will be a capital gain, because that is now a royalty agreement in other assets.

The loan agreement will be marked at every quarter based on the activity and the probability on the scenario analysis and as payments come in for the ScoreBig as we return of capital and so the cost based is of the loans are fully covered..

Got it that's helpful. Thank you. And I'm just also curious more of the high-level thing I know last quarter you guys have spoken about VC is generally not having a willingness to stand behind companies as much and that caused some of the non-accruals.

What have you seen if anything has changed from last quarter to now in terms of VCs are backing our companies?.

So really I think you know having now the benefits two quarters that we looked at this, what we are basically seeing is a shift in VC focus relative to the kind of technologies where they want to put their capital.

And so I think we have a really good sense today of those areas where companies have been established maybe four five years, but revenue growth has slowed and has limited upside, those are companies they are beginning to have troubles support continuing to support.

On the other hand some of the newer technology sectors some of which I mentioned, we are seeing very significant VC support into those areas and we expect that that support will continue over the next certainly four or five years as some of those areas there are somewhat revolutionary some are evolutionary but some are revolutionary.

I think the VCs is seeing those areas where they can get the greatest returns on their capital. So we are very cognizant of those areas where we think VC support is somewhat tappet right now and we have kind of adjusted our pipeline accordingly..

Got it and I know you guys have also mentioned that a lot of the VCs are more vary of obviously be the smaller type companies, just curious if there is any information or thoughts on your behalf on potentially during a joint ventures or some partnership with another venture lender in order to have some larger bite size and some larger borrowers to kind of avoid the trouble in the smaller companies?.

We really have no plans right now to do joint venture, we do partner with the technology banks and others occasionally on the larger life science transactions to be able to provide appropriate solution to the borrower..

Got it. Okay. And just last one for me.

Just the cash balance ended pretty high at the quarter, just as curious how we should think about that going forward with cash relative to the portfolio and balance sheet, does this seems like HBK down more driven the portfolio shrink and what not?.

The cash is always based on the timing of the principal prepayments and at the end of the first quarter Rob mentioned there was a substantial prepayment at the end of the quarter. So that will fluctuate each quarter and then also depends on the amount that we are able to deploy each quarter.

So I would go with what we have normally have been projecting over the past, for each quarter we have normal principal payments of around $10 million to $13 million a quarter and on average we have had some principal prepayments about $10 million a quarter..

We did pay out $30 million pretty quickly up to the end of the quarter..

Okay, great. That’s all for me. Thank you..

And our next question comes from Casey Alexander of Compass Point. Your line is open..

Good morning.

Do you expect a full incentive fee in the second quarter?.

Well it's too early to say because it's dependent on timing both new loan volume prepayments and the income associated with those prepayments that are really it would be inappropriate to say for sure..

Okay, secondly do you have any sense of subsequent events that had taken place in the second quarter. Is there a look at - in general are you prepayment spend to come before deployments, do you have any sense for how prepayment are looking thus far in the quarter..

We have always sort of modeled around $10 million per quarter of prepays and $10 million to $12 million in normal amortization. There is a possibility that we could be higher than that on the prepays this quarter..

Okay, thank you..

Our next question comes from Jonathan Bock of Wells Fargo. Your line is open, Jonathan..

[indiscernible] for Jonathan. Just another follow-up on the incentive fee item.

As you guys recover sort of back to the 7% hurdle is there going to be a cap of your normal 20% of pre-incentive fee NII plus any gains the normal way these hurdles work or is that backing in of the base fee going to allow for a much higher incentive fee clip going forward..

The formula allows for the cumulative incentive fee to not agree 20% further the formula. I’m not sure exactly what you are asking..

Just how in terms of the cap, how the base fee is backed to back into that if you agree?.

It's yes I do..

So would your CapEx as you said prevents a an incentive fee that would be larger than the base fee..

On a cumulative basis no, but in a single quarter possibly..

Okay, very well. And thank you so much..

And there are no further questions. I would now like to turn the call back over to Robert Pomeroy, Chairman and CEO for closing comments..

Thank you. In summary in the first quarter we achieved higher levels of loan originations, made further progress in resolving underperforming loans and increased our NAV. We also continue to realize positive liquidity events including a $1 million warrant gain.

Looking ahead, we remain optimistic about our long-terms ability to grow our portfolio and pay distribution that are covered by our net investment income, while we also provide our shareholders with that upside potential from our diverse warrant portfolio.

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