Good morning and welcome to Horizon Technology Finance’s Third Quarter 2018 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 conference over to Megan Bacon of Horizon for introductions and a reading of the Safe Harbor statements. Please go ahead.

Thank you. And welcome to the Horizon Technology Finance Third Quarter 2018 Conference Call. Representing the Company today are, Rob Pomeroy, Chairman, Chief Executive Officer; Gerry Michaud, President; and Dan Trolio, Chief Financial Officer. Before we begin, I would like to point out that the Q3 earnings press release and Form 10-Q are available on the Company’s Web site 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, 2017. 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. Building on the positive momentum we established in the first half of 2018, we generated strong results for the third quarter, implementing our strategies established earlier in the year, we made notable progress in a number of important areas. Specifically, we grew our portfolio and committed backlog for the second consecutive quarter, highlighting the strong demand for Horizon’s ventured debt products. We posted our third consecutive quarter of net investment income growth, earning net investment income of $0.30 per share that cover our distribution for the quarter. We’ve had only one new non-accrual since the beginning of 2017, finished the quarter with no loans on non-accrual and grew our NAV by $0.06 per share. Finally, yesterday our shareholders approved the proposal to implement the increased leverage made possible by the Small Business Credit Availability Act passed earlier this year. These steps should strengthen our liquidity and growth potential, as well as ensure our interest remains strongly align with shareholders. Today, we will discuss this progress in more detail. The growth of our loan portfolio by over $23 million during the past two quarters has contributed to higher investment income. We continue to maintain one of the highest yielding floating rate loan portfolios in the BDC industry. For the third quarter, our debt portfolio yield was 14.8% and 14.4% for the past four quarters, which takes into consideration regularly scheduled interest and fee income, as well as income from liquidity events. As we have discussed on previous calls, the pace of prepayments has normalized in 2018 relative to 2017's higher levels. Prepayment will continue to present opportunities for accelerated income from liquidity events and a more stable portfolio in terms of size and earnings power. We funded seven new loans in the…

Thanks, Rob. Good morning, everyone. During the third quarter, we continued to execute on our strategy of sustained managed growth based on adding high quality venture debt loans with attractive yields to our portfolio. We added seven new floating rate transaction store portfolio, totaling $24 million. When combined with the portfolio growth we achieved in 2017 and year-to-date date in 2018, our portfolio has now grown 23% over the last seven quarters, while we have maintained a strong focus on product quality and consistently achieved strong on-boarding yields. During the quarter, our on-boarding yields of 13.3% reflected the economic benefits of our strategy to provide senior secured debt solutions to growing technology and life science companies, as well as the reality of a rising rate environment. We have two portfolio exits during the quarter, totaling $6.6 million, including the successful exit of SavingStar, which was a two rated of credit in our portfolio in Q1 of 2018. The prepayment and accelerated income from these events resulted in the loan portfolio yield for the quarter of 14.8%. While prepayment activity was lower than prior quarters, when it was combined with our growing portfolio of high yielding loans, we continued to maintain one of the highest yielding debt portfolios in the BDC industry with a more predictable income stream, all while adding new investments with higher ETPs and prepayment opportunities going forward. In addition to our funding activity during the quarter, we also closed $50 million in new loan commitments and approvals and ended the quarter with a committed backlog of $47 million compared to a backlog of $29 million at the end of Q2. At the end of the quarter, we held warrant and equity positions in 78 portfolio companies with a fair value of $12.5 million. In addition to existing…

Thanks, Gerry, and good morning, everyone. I will now briefly discuss our financial results for the third quarter of 2018. Horizon earned total investment income of $7.8 million for the third quarter of '18 as compared to $6.8 million for the third quarter of '17. The increase was due to higher interest income on investments given the larger average size of our loan portfolio. For the third quarter, we achieved on-boarding loan yields of 13.3% compared to 11.9% in the second quarter. Our loan portfolio yield was 14.8% for the third quarter of 2018 compared to 15.3% in the second quarter and 16.5% for the last year's third quarter. 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 turn payments. Turning to our expenses, total net expenses for the third quarter were $4.4 million compared to $3 million in the third quarter of '17. Interest expense increased year-over-year to $1.7 million, compared with $1.1 million in the prior year period. This change was primarily due to an increase in the average borrowing. Base management fee increase year-over-year to $1.2 million compared with $0.9 million in the prior year period. This change was primarily due to growth in the average size of our investment portfolio. In addition, we recorded $850,000 of incentive fee expense in the third quarter of 2018. As previously mentioned, in March of 2018, the Advisor irrevocably waived the receipt of incentive fees related to the amount previously deferred that it may be entitled to receive under the investment management agreement for the 2018 year. During the third quarter…

Thank you [Operator Instructions]. And our first question comes from Ryan Lynch from KBW. Your line is now open.

First question I had, you guys actually had good portfolio growth net portfolio growth in this quarter. I was just curious, can you walk -- but I guess you guys didn’t have any growth in Horizon senior loan fund. So can you maybe just walk me through what is this termination between what loans actually get placed on Horizon's balance sheet versus which loans go into the Horizon's loan fund or what loans could actually be on balance sheet and senior loan fund?

So as we mentioned the strategy in the senior loan it's similar to the strategy at Horizon. It’s early in the process with the JV and we closed it in the end of Q2. So we’re in three to four months and we’re working through the JV process with the Arena in our investor. So Horizon manages its investment portfolio as an opportunity as we normally do and then the JV is another platform. And we discussed those opportunities with arena and we side those what goes in there through that process.

So could the loans that you guys placed on the balance sheet today also be split and put some on the balance sheet as well as some within the fund. And if that’s the case with those loans, essentially it was -- so you guys put it on your balance sheet, so you guys obviously like the loans was Arena this quarter. Were they the ones you who didn’t want to actually put those loans in the fund. Just trying to understanding of why none of those loans were actually placed into the fund this quarter, when you guys made some loans last quarter?

I think about it -- Ryan this is Rob, more of a timing thing. It's our intention to split deals with the -- between on balance sheet and the joint venture. So as Dan said, we'll work through the process to make that work effectively. And so I would expect to see some of the loans that we have already funded and up in the JV and going forward for those two loans -- new loans to be placed some on the JV and some on the balance sheet.

And then regarding the fee waiver, you guys have made the decision to waive the deferred portion of the incentive fee through the remainder of 2018, that’s not an immaterial or now. So, I’m just wondering what is -- as we look to 2019. What is the thought process for potentially continuing that waiver?

We made the decision in March to do that. For 2018, we’ll take a look at the outlook in next year and make a decision at that time.

Thank you. And our next question comes from Robert Dodd from Raymond James. Your line is now open.

Congrats on covering the dividend in the quarter, a couple of questions on the spread. I mean, if I got it right, the on-boarding yields this quarter 13 to -- they were 11.9 last quarter. And if I just look at overall yields as well, 14.8 in the last four quarters have been 14.4. Obviously, base rates have gone up over that period. But if I just look versus prior quarter, I mean LIBOR was stable versus the second quarter prepay, and regular amortization fees seemed pretty stable Q2 and Q3, if anything they tick down a tiny part in Q3 on the amortization side, but the yield was up. And then to Joe’s point, the market is pretty competitive. So, can you maybe reconcile those two things for us a little bit higher on-boarding and higher average yields in a competitive market when fee income seems to be stable, I mean it sounds like spreads are going up and that’s pretty rare in a highly competitive markets. So can you reconcile those issues for us?

So I wouldn’t take one quarter as an indication. There was a particular trend going on here. It could be related to one or two transactions that we just were able to -- maybe have the insight track on relative to the transaction and the relationship we had with the borrower, the investors, which could have impacted deal. So I wouldn’t take this necessarily one quarter but we are absolutely focused on where rates are today, where they are going. And you’re absolutely right both relative to interest rate as well as other structure points in the transaction it is a very competitive market. And we are finding ways to compete relative to all those things. But again it was actually a relatively overall the $24 million I think in fundings -- third quarter is always relatively like compared to the other quarters. So, I would give it a couple of more quarters before we draw any conclusions on that.

And then on the liability structure, obviously, they have shareholder approval to go over one-to-one debt to equity. Do the covenants and obviously the key facility, which looks very like it's just a net worth covenant and a borrowing base. And then also on your baby bond, which I presume is just a 40x, covenant or does -- do either of those things need to be adjusted before you can take advantage of the shareholder approval or are you just ready to go right now?

There's nothing in either of those documents that will prohibit us to take advantage of it as they are today.

And then if I can, one more on the fee. Obviously, you've announced that you will lower the incremental fee to 1.6, if it seems right. I mean, you've done that for me now I want more. I mean, why 1.6? It's -- why not 1.5, why not 1.75? I mean, what was the process that the board went through to come up with that 1.6 on the incremental? And is it related to a desire that that's what needs -- it needs to be above an asset base in order to cover the dividend in '19 or was that a separate consideration?

I appreciate your preamble, Robert, because no good deed goes on unpunished. But the thought was that we took a hard look at our peers and where they are. There's a lot of people at 1.75, we thought we would in essence average down to 1.7 and on the margin, the 1.6 also helps with the argument about leverage that said, this was all about the managers not all -- not to managers, it's about ROE and increased NII. And so we decided on 1.6. And going forward, I think you should note that we did it on assets not on as just those loans -- were above 1:1 leverage. So, if we're able at some point to grow, both debt and equity on the margin, the fee will continue to average down.

Thank you. And our next question comes from Casey Alexander from Compass Point. Your line is now open.

Can you explain the technicalities of the vote for the increased leverage? And the only reason that I asked that is looking at the filing from last night it appears that only 45% or so of your shares outstanding actually voted for the leverage, not 50%. So, I'm just curious what the technicalities are of achieving a positive vote when less than 50% of the shareholders voted for the new proposal?

So the technicalities -- I'm not a lawyer Casey but as I understand it, there are two hurdles you have to raise to me. One is you have to have a quorum of shareholders to vote. In the case for the shareholder or for the leverage vote, that quorum was more than 50% of the stock shares held on the register date, which I think was early in September. And then of those voters, you needed to achieve for the leverage vote more than 50% voting for. So we had close to 90% of the people who voted, voted in favor of the proposal and we had about 53% of our total shares voted.

Okay, that explains it for me thank you. And believe me I appreciate how difficult it is to get retail BDC shareholders to vote for a special provision. It's not a simple task. Gerry, this is for you. I’m curious about your cautionary note about cove light and structures entering the venture debt base. And the Company has as big a backlog, as I can remember. And yet in your comment you said you’re taking a defensive market position. Could you explain to me what that means in regards to a defensive market position?

So we absolutely over the last three quarters, Casey and see those on the form, we have seen a significant increase in the request from borrowers for larger debt transactions. As I also mentioned, generally speaking, they're being accompanied by larger equity ramps, as well as either if it’s a revenue company, actually attractive revenue growth from the companies as well. So what we’re trying to do is not be enamored with the growth or the equity round that they’ve done but looking forward relative to, if we make our investment today, are they going to be able to continue to do that. And the way we go about structuring the transaction, it’s all about that. It’s all not about the fact that they may have just done $25 million equity round and they grew revenues 40% in the prior year. It’s about will they be able to continue with that trajectory and if they can’t, what does that mean to us and what do we need to do to protect ourselves in case they can’t continue on that thing. So we will continue to use things like milestones relative to trenching our deals and making, maybe a larger debt commitment. But access to that money based on them continuing to perform the way they historically have performed over the recent year, and so that’s the first thing. And then the second thing is we will look at the same thing relative to covenants. So we are still trying to put in covenants that we believe that down the road we may protect ourselves, so that’s one thing we are doing. And yes, there is pressure on that from a competitive standpoint but we are continuing to do that, we have plenty of pipeline. So, if we can’t win all…

Well, the prevalent comment I’ve heard is in the fourth year of the credit cycle. So I’m not sure in terms of evaluating companies by looking forward and what you think they were going to do over the next couple of years and whether that’s sustainable versus the loan that you’re making is anything different than what you might have already done. Let me ask you different question. You mentioned that the deal sizes -- that the equity raises and the deal sizes that are being asked are larger. Can you protect yourself a little more by clubbing out a portion of the deal or syndicating out a portion of the deal and thereby keeping your whole sizes smaller and your portfolio more diversified?

That’s something across that we’ve always done, actually it’s always been part of our strategy. And so yes, certainly that hasn’t changed relative to how we think about whole sizes in our portfolio. I mean, I think right now our committed backlog is about 70 -- committed in awarded backlog is about $75 million, that’s 10 deals that’s $7.5 million whole size that’s the place where we’re comfortable.

Thank you. And our last question comes from Christopher Testa from National Securities. Your line is now open.

Just touching a little bit on what Casey was getting at regarding the cov light and deterioration in terms of what you guys are seeing. Are there any instances where you might find it good to do a loan that might be cove light or might have some loser terms if it's with a VC that you guys have repeatedly done business and what you feel comfortable with, or is this something that’s just gets passed on immediately if the proper protections are in the place?

I think that’s a great question actually, but there is no perfect answer to it. We went through 2007 to 2010, which was a horrible time overall globally. Our portfolio in many ways came through that portably than most asset classes and in part the reason for that was in fact that we did work very closely with the VC investors in the portfolio companies. And to the extent that the company themselves were doing what they were suppose to do relative to developing their product or whatever, but the markets weren’t allowing them to raise capital, because things were so bad. We work very closely with the VC investors and that did allow us to get a lot of companies in our portfolio and their portfolio through that period. So who the investors are absolutely do matter as we’re looking at transactions. That said, I think that you can find yourself on the wrong side of that ledger if you are just facing your decision on the fact that you have good investors, because no matter how good a VC firm might be, they have a portfolio just like we do. And they rank their portfolio companies just like we do. And when things get difficult, the bottom part of that portfolio is going to be exposed, because they probably aren’t going to be putting more capital at work there. So we have to do our own very solid underwriting and structuring relative to the transaction. But it is helped by the fact of who the VCs are, what relationships we have with them, how we've worked with them in the past, not just on good results, but on difficult situations as well.

That's definitely a good explanation already. Thank you. And sticking with that theme, has a lot of the deterioration in terms come from later stage companies or is that also affected the more early stage and the mid stage companies that you guys will look at?

Well, there has been, I would say what I would call, a trickledown effect. I would say most of it is in fact later stage that's true with larger transaction sizes have come in. But there was also which is not unusual in our markets by the way where there is a trend toward a certain technology, maybe it's AI technology or whatever where the VCs are putting a lot of money to work. Sometimes the debt requests that come from pretty early stage companies that are in very specific technologies markets that are training positive, it can absolutely trickle down to earlier stage companies and we have seen some of that.

And you guys have a slight increase in the investments that were rated to on your internal system this quarter. I am assuming by the dollar amount, it was probably just one investment. Could you just give some color on what moved there and why?

This is a normal part of the way we manage our credit portfolio. And if a company needs to raise money or is materially behind plan and we feel that that is putting stress on the Company, we'll move it into the two categories, Chris. I think our history of moving those in and out including the deal that Gerry mentioned on the tax was SavingStar, it was a two-rated credit earlier this year was similar to the deal that we moved this quarter. It was able to be sold -- the company was actually sold and we were able to get a full repayment and full recoupment. So, it's a deal that we're watching and managing very aggressively. But we expect as we do for all of the twos that we will come through the other side with a full recovery.

And just switching gears and looking at the financing side of the equation. You guys don't do -- have some move on the credit facility, but obviously as you pick up more leverage, it seems that that capacity could get utilized almost in full, going forward. So I'm just curious. Are you more prone to upsize the facility? You guys have also done a securitization in the past and it seems that that market is opening back up from BDCs. Or is potentially another unsecured note in the mix? I guess, given where spreads are and what you guys are seeing in your backlog, what do you think actually makes the most sense for Horizon?

Chris, that's a great question and you're correct on all three of those options. And as you said, there's a lot of activity in the baby bond market and securitization has opened up with a couple of deals that just finished. And so we are analyzing those currently and we are in discussions with KeyBanc and our current facility. So there's -- we're analyzing those and there's good opportunity for us in all three of those, and as we get closer to that obviously. But we'll announce that when we get there, but we're still in the process of analyzing it.

And just last one for me. I might have missed this. You guys had alluded to a certain amount of prepayment related income received, I believe, in the fourth quarter thus far. What was the number on that?

$1.2 million…

And is that all prepayment fees or does that include any acceleration of [OID]?

That’s both…

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

Thank you all for joining us this morning. We appreciate your continued interest and support in Horizon, and we look forward to speaking with you again in March. This will conclude our call. Thanks.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.