Good morning, and welcome to Horizon Technology Finance's yearend 2015 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 introduction and the reading of the Safe Harbor statement. Please go ahead.

Thank you. And welcome to the Horizon Technology Finance fourth quarter 2015 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Gerry Michaud, President; and Chris Mathieu, Chief Financial Officer. Before we begin, I would like to point out that the Q4 press release is 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 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, 2015. 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. It's a beautiful morning here in New England. On today's call, we will provide details of our successful 2015 results and give you an overview of the markets that we serve. But, first, I would like to speak to several topics that are impacting the BDC sector in general, and reemphasize what is unique and compelling about the Horizon strategy and its value proposition for shareholders. Share prices for the BDC sector as a whole are trading well below historical levels and net asset values. Why are BDC share prices depressed? Several macro issues are offered as possible reasons, including concentrations in oil, gas and energy-related investments, exposure to foreign markets, the possible start of a down credit cycle in middle market lending and the potential for interest rates to rise. It's important to note that none of these macro issues have a direct impact on Horizon. Horizon has no direct investments in the oil, gas and energy markets and has no direct exposure to foreign markets. Our credit quality remained solid with a flat NAV, down less than 1% from the third quarter. And we operate in a venture lending market, whose credit cycle historically has not been correlated to middle market lending. Finally, the coupons on Horizon's portfolio are structured to increase, when interest rates rise. So rising interest rate environment is expected to be accretive. In addition to these macro issues, some shareholders, analysts and commentators have also raised BDC sector concerns, including overaggressive capital raising, deterioration in credit quality, concentration in CLOs and misalignment of incentives with shareholder interest. With respect to these issues, Horizon has had one equity raise since 2012; a follow-on offering in March 2015, that was accretive beginning in the third quarter; our…

Thanks, Rob. Good morning, everyone. During the fourth quarter, Horizon funded seven new loans totaling $18.5 million. For the year, Horizon funded 37 new loans totaling $123 million, representing a 29% increase over 2014 fundings of $95 million. As a result, our portfolio grew by more than $45 million or 22% for the year. We were able to achieve this measured growth by maintaining a strong pricing discipline as reflected in our onboarding yields of over 12% and portfolio yield of 14.2% for the fourth quarter and for the full year. We experienced liquidity events from three portfolio companies during the fourth quarter, which included receiving total proceeds of $455,000 from one warrant and one success fee. We also received prepayment and accelerated end-of-term payments from one portfolio company. The fourth quarter liquidity events brought Horizon's total number of liquidity events in 2015 to 17. As of December 31, 2015, Horizon's unfunded loan commitments, all priced at floating interest rates, were $10 million to five companies. In addition, already in the first quarter of 2016, we have been awarded four new transactions totaling $13 million and funded four transactions totaling $14 million. We also have experienced one liquidity event in the first quarter. We expect the size of our portfolio to remain flat or to grow slightly for the first quarter. We are pleased with the measured growth in our portfolio during 2015 and our consistent ability to achieve attractive pricing and maintain solid credit quality. Our ability to achieve these positive results for our shareholders was in part a result of our contrarian marketing strategy over the last eight quarters to weight our portfolio towards technology. For those of you that have been following Horizon over the last two years, you may recall we have been signaling that our…

Thanks, Gerry, and good morning, everyone. Our consolidated financial results for the three months and year ended December 31, 2015, have been presented in our earnings release we distributed after the market closed yesterday. We also filed our Form 10-K with the SEC last night. For the fourth quarter of 2015, total investment income was $8.6 million compared to $7.3 million for the fourth quarter of 2014 or an 18% increase. This change was primarily due to higher interest income on investments resulting from the higher average size of our loan portfolio as well as additional fee income. For the full year ended December 31, 2015, total investment income remained flat at $31 million compared to the prior year. Although flat, 2015's investment income included more predictable earnings from a larger portfolio, which was less reliant on the positive impacts of loan prepayments. We continued to generate attractive onboarding yields with new loans, averaging onboarding yields of 12.3% for the fourth quarter compared to 11.9% in the prior quarter. Combined with portfolio liquidity events, we achieved strong portfolio yields, generating 14.2% for the fourth quarter and for the full year. The primary changes period-to-period to 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 payments. Total net expenses were $4.5 million for the fourth quarter of 2015 as compared to $4 million for the fourth quarter of 2014. Total net expenses for the full year 2015 decreased by $3.3 million or 16% to $17 million as compared to $20 million for the full year 2014. Interest expense for the full year 2015 decreased by $3 million or 34% year-over-year to $5.8 million due…

[Operator Instructions] Our first question comes from the line of Leslie Vandegrift with Raymond James.

First of all, good quarter. Coming in, I know is hard at the end of year, but coming in right in line with loan origination, so congratulations. I wanted to ask about that actually, specifically, you guys were kind of right on in your guidance for the fourth quarter. So I was hoping to get some more color on your expectations for 2016. And then after that kind of some color on net asset value on the markdowns, because you guys were less obviously than your peers by a good bit. And obviously we felt spread widening in the space versus some credit issues at other BDCs. And so just some of that breakdown would be nice?

So as it relates to 2016, we think our portfolio is at a stable level. We've hit our overall target leverage of pretty near of 0.75x, so we think the portfolio will be generally flat to slightly up. So the earnings potential of the portfolio is pretty strong with consistent onboarding yields. We'll be looking for some normal prepayment activity, although it's hard to estimate when or how many. From an NAV perspective, I guess, your real question is asset quality, so let me just turn over to Rob to just talk about the asset quality in the portfolio.

So the NAV was down less than 1% from the third quarter, a lot of ups and downs in that, but we believe our credit quality remains very solid. Chris had mentioned the one non-accrual loan, but we were able to resolve that early in January. You never to like have that kind of outcome, but I think the negative impact of that is contained and really has no impact going forward on our NII.

Our next question comes from Ryan Lynch with KBW.

First one, over the past few quarters, you guys have had some fee waivers, and with those fee waivers the dividend has been fully covered. As we move forward, you guys have met the conditions for those fee waivers are not required anymore. So now that those fee waivers are not going to be required going forward, how confident are you around covering that dividend excluding those fee waivers? And what are your thoughts around potentially extending those fee waivers to the extent necessary that you're not covering the dividend with NOI earnings?

We implemented those fee waivers primarily as we build the portfolio back up from raising the capital. We were pretty confident that we could -- that that would be accretive long term. And now that we've reached our target leverage, we expect that the earnings from our portfolio will be strong enough to cover our dividend with NII over time. And that's really what we've been preaching for quite a while.

And then I wanted to just go back to the fair value marks and the write-down for the portfolio this quarter. So it looks like you guys had about a $2 million write-down, and I'm probably going to [ph] push this name, but -- as that draws that one non-accrual this quarter. So if you exclude that that was $2 million of a write-down this quarter. Your portfolio had unrealized depreciation of about $1.4 million, so excluding that one write-down in your non-accrual, it looks like the portfolio actually appreciated by about $600,000. So am I thinking about that math right, number one? And number two, how did the portfolio actually appreciate its fair value mark in the quarter excluding the one non-accrual given the backdrop of the credit markets in the fourth quarter?

Your math is pretty closed to being spot-on. On balance our credit quality remains very strong. We have sort of normal migration of accounts and we actually feel like the portfolio actually improved notwithstanding that one loan that we made to ZetrOZ. The other rest of the movement is sort of in the warrants, and so I think you are thinking about that correctly, Ryan.

And then just one last one. I believe, you said that you believe that your asset-backed notes are going to pay down at the end of the second quarter or by the end of second quarter. It looks like you guys have about $45 million of assets still pledged in that securitization. So is the thought process once those notes wind down and payoff to take those assets, and pledge them to the credit facility and expand the capacity on that credit facility or what are you thinking about on the liability side going forward as those asset-backed notes pay down?

Yes, exactly what you described. So we have two options. One is to, once we relieve the debt obligation on the securitization, we can move those assets to any other vehicle we choose, which would include the key bank facility. Currently, its $70 million facility and we have the ability to increase that up to $150 million by either having existing vendors provide more capital or bringing in other quality vendors into the syndicate. So that's certainly a very good option for us to bring those existing assets into that existing portfolio. The thing is those are really good assets and they're well diversified and seasoned, so facility would absorb those very well in the structure that's there. The alternative is to go out and seek where there is substantial interest in the securitization to effectively take the portfolio and put it into a securitization pool much like we did in the general structure a couple of years ago.

Our next question comes from the line of Casey Alexander with Ladenburg Thalmann.

You've answered most of my questions, but as it relates to the ZetrOZ resolution, I mean should we be -- you mentioned that there is sort of a contingent forward-looking piece to the resolution. So from a booking standpoint, should we be booking at $2.2 million realized loss and a corresponding $2.2 million unrealized recapture0, and therefore no impact on NAV or is this going to be booked differently somehow?

No, you're correct, Casey. So the $500,000 is the fair value at December and that was what the basis of the transaction was that we completed in February.

So its booking a $2.2 million realized loss, a $2.2 million unrealized gain, and no further impact on NAV?

Exactly correct.

Secondly, obviously while there was volatility in Q4, there was clearly a high-degree of volatility in the first six weeks of 2016. Was the company able to take advantage of any of that volatility and push the share repurchase program a little further down the road and maybe at even more advantageous prices than they did in Q4?

Unfortunately, no, because we're subject to the blackout policy, Casey, so we have to wait until after we clear the earnings.

Well, I mean, I would argue that the price right now is still slightly below your average price in Q4, so we should be out of that blackout period in the next 48 hours or so. Is it the company's intention to push this share repurchase program a little further down the road here in Q1?

We had $5 million program. We've executed 26% of it in the first quarter that was in place, and we'll remain focused on doing that.

We certainly appreciate the fact that unlike some others in the BDC group that you've announced the share repurchase program and you've actually executed against it, that's very favorable. Is the company holding back -- some cash has moved up to $22 million, is the company holding back some cash from investment because of the potential close out of the Horizon Funding Trust, is that kind of the capital structure strategy that we're seeing play out here?

No, the securitization actually deleverages itself as the loans pay back, so that's not the strategy. The cash that's on the books is really to fund between the cash and the available liquidity on the revolvers to fund our existing commitment level. And that --

So what you're saying is, because I thought there was trigger like $10 million where if it came down to $10 million, whether or not you had a pay off event against it, you had to go ahead and close it out, what you're saying is that during the second quarter it's going to naturally close out through repayments that you see on the Horizon?

No. The provision you're referring to, it is a 10% provision, which allows optional prepayment by the company. So with the $9 million we have the option, but not the obligation to pay off that debt. So it's an option for us, but not an obligation. There is no triggers that we see on the Horizon that would force an acceleration or a prepayment.

So you're just saying, it's going to naturally pay down by your pay-offs by some time in Q2?

Either naturally or through expansion of the revolver, that we may choose to take the assets that are on the securitization and move them over to an expanded credit facility.

And you're in active discussions with potential lenders to expand the revolver?

Yes. I think for the past -- back in August, we added a lender. And we communicated to the Street over the past couple of quarters that that's an interest to grow the facility at a reasonable rate rather than bringing on a whole bunch of lenders all at once. And so that's a natural progression for us to continue to stay in the market to talk to not just lenders, but also securitization investors. So that's always an ongoing process for us.

And just to make sure that I heard this right, what you're suggesting is flat to slight portfolio growth for the year of 2016 and similarly a similar language for Q1 of 2016?

Agreed, yes.

Our next question comes from the line of Christopher Testa with National Securities.

Just with the $18.5 million of originations in the fourth quarter, just seemed a little bit light. Were you somewhat holding back from the originations? Were the opportunities not as good in terms of structure or pricing, comparatively to what it was in the previous quarters? Can you just give us some color there?

We actually experienced somewhat a slowdown in opportunities in Q4, especially toward the end of the year. I don't know if companies were just focused on growing their business and kind of restructuring their finances, but we actually didn't see a whole lot of high quality opportunities during Q4, which was a little unusual because usually that is a pretty good quarter for us. However, I will say that literally, right out of the gate in Q1, activity picked up quite significantly and our pipeline grew rapidly. So whatever caused that was clearly temporary. And like I had mentioned earlier, we're seeing a lot of opportunity in the life science sector, either for refinance opportunities, for debt that had been put on the books in 2013 and 2014 that's now coming off interest-only, and also new opportunities in life science sector.

So with the life sciences commentary, just I guess real quickly, how much could you quantify, how much incremental yield are you being able to pick up in that market so far in 2016? And do you see that becoming, because of the better opportunities, becoming a bigger portion of your portfolio or should that be somewhat constant with what it's been?

As it relates to picking up yields, we have a pretty disciplined onboarding yield policy around here. And having understood the risk of venture lending for many, many years. We don't stray from that too much, because markets might get a little overheated, which is why we kind of pulled back a little bit from the life science market. So what we're seeing now are yields that more consistent with our strategy, and so to the extent that those opportunities present themselves, we love the life science market, we always have, and so we are now very interested in kind of just shifting the weight a little bit back towards life science. That said, we always kind of maintain a 60:40 portfolio and we work within that 60:40 technology and life science depending on what's going on in the market at any given time. And so over the last two years, we're seeing much better opportunities on the tech side. So if you look at our portfolio, it's little bit more weighted on the tech side today. But generally that pendulum only swings by about from between 60:40 one way or the other. And so we're going to look to kind of rebalance that a little bit more back toward life science, but still stay within a very diversified 60:40 ratio of life science technology.

And just with regards to leverage, I know you guys have tried to say it between 0.75x to 1x. Just what should we look at as your appetite to take on balance sheet leverage, just taking into account potential improved fair value marks to be negative, given where spreads are going? I guess how are you looking at the market environment and your portfolio and where we should expect balance sheet leverage to be at for the coming year?

So we have stated our long term strategy of being at 0.75x to 1x and that remains our strategy. And being at 0.72x today, we think that we're right in that wheelhouse, and so we may move up a tiny bit here from time to time, but we're right where we want to be generally from a leverage perspective. The particular leverage vehicle may change or increase or shift, but the overall leverage, we're right where we want to be now.

Our next question comes from the line of Jonathan Bock with Wells Fargo Securities.

One item as it relates to biotech, do you have some life sciences in the portfolio? And as we've seen kind of the biotech industry or the index rather down, 30% since December, 31, give us a sense of potential stress and/or kind of forward valuations of your biotech holdings and how that ties to your leverage? Because I understand you're in debt, but when we generally see stress in equity, it always leaves a question for investor to ask is, are there potential valuation hits to come with an index off that much?

I think that's one differentiator between us and some others in the market, is that we only have from an equity perspective $8 million of our total, $260 million portfolio in equities and substantial potion of that is actually in the warrants of private companies, well diversified, as Gerry said, not really heavy in the biotech arena. So although we do have about a dozen companies that are public, and are in some cases biotech that is not a big piece of our portfolio, so even if there was a large shift in that little niche of our portfolio would not have any material impact on NAV, and therefore not really any impact on the overall leverage of the company, but it's a good question.

Maybe, I'll rephrase it a bit. Are you seeing valuation or enterprise value compression across your life sciences to the point where your venture capitalist are now contemplated with the choice of down routes?

Well, we do see that, as overall valuations become tighter that the capital raising is more difficult. But all of that's fully reflected in the ratings and fair value and what we do with the loans, Jonathan.

And then, I guess, the need for debt then rises. But maybe your view in terms of credit quality going forward, because it's more of a companies with adequate liquidity, et cetera, in light of the tighter capital raising environment for VCs and given the legacy investments that all BDCs have in venture, right, and no one is any different, just curious if you would find it appropriate for us to model some amount of non-accruals a bit higher or if you actually expect over time this is normal, well-underwritten loans, really no expectation of near-term credit losses going forward? Just a question every one asks in light of what they see in public equity. And to your point, Chris, everybody realizes, it's not the same, I totally get it, but generally when valuations is compressed, right, it tends to effect everybody, hence the question.

Again, it's a valid question, Jon. And I think that this is not our first time to the rodeo. We've been through this kind of cycles before. But we are seeing support. These companies have long, long development horizons and timelines. And where the money comes from, whether they are public already and they have to be supported by pipes or whether the investors remain supportive, all of that's fully vetted into our analysis of our portfolio and our fair value markets. So we're certainly keenly aware of the cycles within these markets and we stay on top of these loans very aggressively.

Well, I mean, it's always better for the investors to be in debt instead of the equity. And thank you for your descriptions, I appreciate it.

There are no further questions. I would now like to turn the call back to Robert Pomeroy, Chairman and Chief Executive Officer, for closing comments. End of Q&A