Ladies and gentlemen, greetings, and welcome to the Horizon Technology Finance Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today, Megan Bacon. Please go ahead.

Thank you, and welcome to Horizon Technology Finance Corporation's Third Quarter 2025 Conference Call. Representing the company today are Mike Balkin, Chief Executive Officer; Paul Seitz, Chief Investment Officer; and Dan Trolio, Chief Financial Officer. I would like to point out that the Q3 earnings press release and Form 10-Q are available on the company's website at horizontechfinance.com. Before we begin our formal remarks, I need to remind everyone that during this conference call, the company 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, 2024. 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 Mike Balkin.

Thanks, Megan, and welcome, everyone, and thank you for your interest in Horizon. Today, we will update you on our quarterly performance in the current operating environment. Paul Seitz will take us through recent business and portfolio developments as well as the current status of the venture lending market, and Dan Trolio will detail our operating performance and financial condition. We will then take questions. Well, it has been a very active several months since I assumed the CEO role in June. I spent countless hours with our team together thinking about the next chapter of Horizon and how best to expand the Horizon platform moving forward. The first part of that strategy came to fruition when we announced in August, that MRCC and HRZN will be merging in a NAV-for-NAV share exchange, subject to shareholder approval and customary closing conditions. The merger is progressing. But due to the federal government shutdown, we now expect to complete it in early 2026. Upon closing, Horizon will significantly increase their assets under management, while MRCC shareholders will have the opportunity to participate in what we expect to be a rapidly growing BDC that will be able to take advantage of greater economies of scale in the combined vehicle. Importantly, Monroe Capital, which is the parent company of Horizon Technology Finance Management, will provide additional and ongoing support to the post-merger company. As a result, you will see a much more coordinated and synergistic effort in 2026 as we expect to take significant advantage of having such a premier asset manager and expert private credit lender providing us with stalwart backing. To that end, we added several new originators in the third quarter, who are hitting the ground running. With our reinforced team combined with Monroe's support, we expect to compete to originate…

Thanks, Mike, and good morning to everyone. I'm happy to join today's call and look forward to speaking to you all in the quarters to come. It's an exciting time here at Horizon. While we continue to work closely with all of our current portfolio companies to optimize returns and create further opportunities for additional value creation, we are very enthusiastic about our future. As Mike mentioned, we believe the combined company will provide us with the size and scale needed to originate larger venture loans to growing public and private small companies. At the end of the quarter, our current portfolio stood at $603 million as the loans we originated and acquired during the quarter were offset by prepayments and amortization in our existing portfolio. In the third quarter, we funded 3 debt investments totaling $15 million. Positively, we are making strong progress on building up our pipeline with larger venture loan opportunities in our target sectors, and we are positioning ourselves well to return to growing our portfolio. Looking ahead to Q4, we expect to grow our portfolio in the quarter driven by our pipeline. Thus far in October, we have already funded a $10 million venture loan transaction and have been awarded 3 new venture loan transactions representing $50 million in total commitments, with much of that total to potentially fund in Q4. That said, we will always be disciplined in our approach to originating loans. During the third quarter, we experienced 6 loan prepayments totaling $50 million in prepaid principal and also collected over $3 million in equity and warrant proceeds. We currently expect more limited prepayment activity in Q4. Our onboarding debt investment yield of 12.2% during the third quarter remained consistent with our historic levels. We expect to continue to generate strong onboarding yields…

Thanks, Paul, and good morning, everyone, Along with the hard work being accomplished to get the merger across the finish line as well as build up our originations pipeline, we further strengthened our balance sheet during the quarter. As Mike mentioned, we successfully raised $40 million through the issuance of our 5.5% convertible notes due 2030 and used the proceeds to retire our Horizon funding trust, asset-backed notes, which had an interest rate of just over 7.5%. Additionally, we continue to utilize our ATM program to successfully and accretively sell over 1.5 million shares in the quarter, raising an additional $10 million of equity. These actions demonstrate our continued ability to opportunistically access the debt and equity markets. In addition, we continue to diligently work with all of our portfolio companies to optimize outcomes for our investments and improve our credit quality. As such, we believe we remain well positioned to grow our portfolio in the coming quarters and create additional value for our shareholders moving forward. As of September 30, we had $151 million in available liquidity, consisting of $130 million in cash and $21 million in funds available to be drawn under our existing credit facilities. We currently have no borrowings outstanding under our $150 million KeyBanc credit facility, $181 million outstanding on our $250 million New York Life credit facility and $90 million outstanding on our $200 million Nuveen credit facility, leaving us with ample capacity to grow our portfolio of debt investments. Our net equity ratio stood at 1.36:1 as of September 30. And and netting out cash on our balance sheet, our net leverage was 0.94:1, below our target leverage. Based on our cash position and our borrowing capacity on our credit facilities, our potential new investment capacity as of September 30 was $460 million.…

[Operator Instructions] The first question comes from Douglas Harter with UBS.

This is Cory Johnson on for Doug Harter. So it sounds like the VC market is heating up and there are more exits out there in the market. And early payoffs have been strong for the last 2 quarters, but I believe you mentioned that for 4Q, that those payoffs might be a little bit more limited. I guess, what do you expect that trend to be going forward maybe into 2026? And is it related to the government shutdown where we think that perhaps the 4Q payouts might be a little bit more limited?

Yes, this is Paul Seitz. I don't think that the government shutdown necessarily is going to impact any payoffs or prepayments or anything like that. I would say that it was a little bit higher this quarter, but we expect probably our payoffs and early prepayments to revert to any sort of historical standard. The exit markets are heating up, which is a good thing. But I think it's, right now, in just sort of a little bit of a wait-and-see period.

Got it. And during the quarter, the net leverage -- your net leverage came down. Curious, are you seeing -- I know you mentioned that you think your portfolio will grow next quarter, and you're starting to see more deals come across your table. But I was just sort of curious in terms of like now that you are seeing more deals, what is sort of the credit quality behind them? Are there names that you like? Or are you just more name that you seem to be -- you're looking to pass on? And then obviously, it's a little bit difficult to exactly figure out the trajectory of your -- where the leverage will go. But how long do you think it might be before you perhaps reach your target leverage again?

Yes. So as we say every quarter, our target leverage is around 1.2 to 1.3x net of cash. This quarter, it did come down a bit, where we're at 0.94:1. So as we talked where -- in our prepared remarks that the pipeline is growing in originations, we expect originations to exceed prepayments going forward. And so I think when we look at the leverage, we should be getting back to that 1.2, 1.3x over the next quarter or 2.

[Operator Instructions] Our next question comes from Paul Johnson with KBW.

Just on the portfolio yield or just the portfolio yield in general, it sounds like you're pretty confident about the onboarding yields coming in. But obviously, the income has been running higher, some onetime items just running higher with prepayments. I mean the 18.9% yield, I mean, how should we be thinking about that? Is that sustainable going forward? Or what's kind of like the longer-term sort of target, I guess, based on the same pipeline?

Yes. So I would point you to our historical portfolio yield, which we've averaged around 14.5% to 15%. That's a more normalized yield. And then I'll just point out, that is a portfolio yield after prepayments and onetime events. And as we mentioned, the onboarding yield has been about 12%, 12.5% for the past few quarters and probably most likely be around that going forward.

Got it. Okay. That's helpful. And then maybe you could just take us through the debt portfolio that you acquired during the quarter, kind of what transpired there? It looks like you were able to buy at a potentially a discount to where, I guess, had previously been marked. But anything -- any color on that would be helpful to hear.

Yes, correct. We were able to acquire a venture debt portfolio from one of our co-lenders that we had created a [ sidecar ] fund, SMA back in 2021 with a $300 million total commitment. We were able to invest that completely. And so it was in runoff. And then over the past year or so when there are fewer names remaining, we were working with that co-lender, names that, obviously, we've already invested in and negotiated a price. They were co-lender in venture debt, was their only venture debt portfolio and they were looking just to exit the market. And obviously, we're the natural buyer.

Got it. Okay. Interesting. And then maybe just it would be helpful here kind of what is -- as we get into next year and get beyond the fee waivers, like what is kind of the idea with spillover? It still looks like there's a decent amount of $0.93. But I mean, would you like to just continue to work that down potentially further before evaluating the distribution? Or is that something you'd like to kind of maintain?

Yes. So I'll just remind you, every quarter, we discussed the distribution and take into account the current income level and the future level of the Horizon platform and look at the spillover, and we'll determine the amount of distribution on a quarterly basis.

Our next question comes from Christopher Nolan with Ladenburg Thalmann.

Assuming the deal with MRCC closes, is the focus going to be on larger credits going forward? And what does that do to the yield?

That will be one of the benefits with a larger balance sheet. You can hold larger position and stay diversified as we focus on our top 1, top 5, top 10 diversification. But there will still be venture debt deals in the market that we have played in, we'll just be able to hold larger pieces of it. And so we don't expect the yields to change dramatically.

Great. Given the stock price is trading below book now, what's the plan on using the common stock ATM going forward?

Same plan as usual. We look at our originations pipeline, we look at our liquidity and our capacity and look to pull as many levers as possible to originate and grow the portfolio where we can. Obviously, we're trading below book. We won't be able to utilize the ATM.

Okay. And then given -- assuming the Monroe deal closes, you are going to have a much larger balance sheet, any consideration in terms of revisiting the base management fee? I know it is 2% for the first $250 million in assets. And then there's a breakpoint to 160 bps above $250 million. And even at 160 bps, you're sort of at the high end of the range for BDCs in general stay. Any comment on that?

Yes. So we have our normal 15-C process that we do on an annual basis, and we review all of our competitors. And when everybody calculates it different, has different hurdles and different percentages on a blended effective cost percentage; we are within the average of our peers. We look at it every year through that 15-C process, and we'll continue to do that going forward and make sure we're within market.

Great. And then any target ROE for the new assets coming on from Monroe?

We don't have any targeted new assets right now that are coming on. The Monroe platform will help us get access to larger assets and potentially some additional assets, but nothing specific today.

Yes. No, actually, I phrased it poorly. For the new capital coming in from the Monroe deal, what is the target ROE or return hurdle that you're looking for to get from that new capital?

It's basically stick to what we do, the venture debt model that has a high-yielding portfolio, and that will drive the ROE. We don't have a specific targeted ROE on that capital.

Thank you. Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Mike Balkin for the 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 soon. This will conclude our call.

Thank you. Ladies and gentlemen, the conference of Horizon Technology Finance Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.