Welcome to the Hercules Technology Growth Capital first quarter 2013 earnings conference call. (Operator Instructions) I would now like to introduce your host for today's presentation, Ms. Linda Wells. Ma'am, you may begin.

Thank you, operator, and good afternoon, everyone. On the call today are Manuel Henriquez, Hercules Co-Founder, Chairman and CEO; and Jessica Baron, Vice President of Finance and Chief Financial Officer. Hercules first quarter 2013 financial results were released just after today's market close. They can be accessed from the company's website at www.htgc.com. We've arranged a replay of the call at Hercules' web page or by using the telephone number and passcode provided in today's earnings release. I would also like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and in the confirmation and final audit results. In addition, the statements contained in this release that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements including, without limitation, the risks and uncertainties, including the uncertainties surrounding the current market turbulence, and other factors we identified from time-to-time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate and as a result, the forward-looking statements based on those assumptions also can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit sec.gov or visit the website www.htgc.com. I would now like to turn the call over to Manuel Henriquez, Hercules Co-founder, Chairman and CEO. Manuel?

Thank you, Linda, and good afternoon everybody and thank you for joining us on the call today. I'm here today to discuss our first quarter results, discussing many corporate activities that have taken place, and to also share with you some perspective of the 2013 outlook that we have. In first quarter we delivered very strong quarterly performance and outstanding execution, as we continued our controlled growth strategy and purposely not assuming a market shift strategy. I'll elaborate on that statement further in our call. Our preference is to remain steadfast and disciplined and in order to taking a credit, underwriting environment, and maintaining a strong credit outlook and strategy, as we look to convert our additional liquidity of over $200 million to earning assets over the course of 2013 in a very controlled fashion to lead to higher earnings and eventual dividend growth for the benefit of our shareholders. Our performance in Q1 2013 compared to Q1 2012 was very strong and marked with many of our key metrics and variables up 20% to 30% at year-over-year basis. Our activity in general today, I will cover a brief summary of our operating performance and results for Q1. I'll discuss the current market conditions, including venture capital activities, our outlook for Q2 and outlook for the remainder of 2013, and then turn the call over to Jessica Baron, our CFO. Let me first start by discussing our Q1 performance at a summary level. For Q1 we delivered record high total investment income of $31 million, representing a 38% increase year-over-year. We also achieved year-over-year growth of 30% net investment income of $15 million or $0.27 per share in Q1. We also increased DNOI by 33% to $60.2 million or $0.30 a share. Because of this strong performance, our board of…

Thanks, Manuel, and thanks everyone for listening today. I'd like to remind everyone that we filed our 10-Q, as well as our earnings press release after the market close today. I'll briefly now discus our financial results for the quarter ended March 31, of '13. Turning to our operating results, we delivered a record total investment income or revenues of $31 million, an increase of 38% when compare to the first quarter of 2012. This year-over-year growth was driven by higher average outstanding balances of yielding assets. As Manuel mentioned, the GAAP effective yields on our debt investments during the first quarter was 14.3%, excluding the income acceleration impact from early payouts and one-time events, the effective yields for the quarter was 13.8%, up by about approximately 20 basis points relative to the previous quarter. On a quarter-by-quarter basis, borrowing any notable trends upwards or downwards in yields having a spring of 20 to 30 basis points in yields is reasonable and is expected. Interest expense and loan fees were approximately $8.7 million during the first quarter of '13, as compared to $5 million during the first quarter of 2012. The increase is primarily related to interest and fee expenses related to the $170 million of baby bonds issued in April and September and the $129.3 million of asset-backed notes issued in December, partially offset by a decrease in interest and fees related to our refinancing of approximately $50 million and SBA debentures as transpired over the course of the last year. Our weighted average cost of debt comprised of interest and fees was approximately 5.9% for the first quarter of 2013 versus 6.8% during the first quarter of '12. The lower weighted average cost of that is primarily attributable to once again, as of refinancing of $50 million of…

(Operator Instructions) Our first question or comment comes from the line of Greg Mason.

Manuel, you've talked about the market being pretty sloppy. Are you seeing changes in terms, for example interest-only periods or milestones, covenant changes? What are you seeing embedded in the new debt market?

Well, certainly we're seeing a bit of frostiness and it's not silliness going on at early stage deals in tech deals and just to give people some solidify comment, firstly, the early-stage exposure is probably less than 1% to 2% over our portfolio and we remain on the sidelines now for probably 24 months in that area. But the level of silliness going on in early-stage deals and technology deals is to the point of being out of control. We're seeing elongated interest-only periods. We're seeing loosened at the terms, all of which we've decided not to participate, not to play purposely in that area. And we should have waited out, but it's just getting to the point of being silly.

What about in the middle stage and later stages. Are you seeing on economical terms or interest-only periods?

No, we're not seeing that much. Just to remind some of the listeners here, the venture industry could be divide on two very similar barbells. You have early stage deals, which are basically backing a venture capitalist and I guess the cash balance or cash deposit. And on the other side of barbell, you have more of lower market kind of ABL lending activities. The center part of that market that center chasm is where we operate in. It's a very, very pictorial situation to be in, but you have to have a team of underwriters and not just business development people, but a team of underwriters who actually understand technology trends or life sciences trends in order to underwrite that credit risk. And as has always been the case for many, many years, as new entrance way into that segment of the market, they'll eventually lose a couple hundred million dollars pretty easily, and then eventually pull it back. And so that segment of the market is not yet that profit yet, because very few people are willing to necessarily go into that area.

And then one more and I'll hop back in the queue. It looks like that the one credit issue you had in the quarter UPA's holdings, can you talk about that? And what's the prospect there for any type of recovery or potential future deterioration?

I think as a future deterioration, look we can't talk something that they assume like that they're on their own. And the good news is that a big loan and still exposure to less than $10 million. It's been written down to a level that we feel very comfortable from recoverability point of view. The company is an interexchange (inaudible) carrier. Sorry, I'll make it easy. It's a telecommunications company. And they were going to telecommunication sector and retariffing is one of the issues that caused the margins to change in that company. So it's going through a reassessment of business model related to retariffing and interexchange related cost as enhance our calls to one carrier to another carrier.

Our next question comes from the line of Kyle Joseph from Stephens.

You had a $0.03 2012 dividend spillover income, if I recall, since you out earned or since you earned, you have roughly out earned dividend in this quarter, do you still have all of that or was that a portion of this quarter, this dividend?

No, I think that we still have that and it rather reflected on per cent stages. I think that when you look at the capital rates that we just completed that $0.03 on a weighted basis, the new 8 million shares that we just issued, it's just becoming about $0.022 spillover, if you will. So we still have that. And we've showed and we keep that in our back pocket, until we see how the year progress. So if the year progresses the way we think it will, it is high and likely that could have additional spillover for the benefit of our shareholders or board can opt to further increase the dividend in Q2 and Q3 and beyond. And actually that reserve is still there.

And then so going back to competition and we saw 20 bps of yield expansion this quarter, and I know Jessica mentioned 20 bps here or there may happen in the quarter. Do you see competition change it all and has your kind of forecasted yield changed at all. Do you expect kind of yield compression going forward, stability, what are your thoughts there?

So I'm not aware that many companies will talk about the same breadth of seeing increased competition, while at the same time seeing yields going up. I think it's a testimony to our continued focus on our credit quality, disciplined underwriting and a steadfast disciplined approach to underwritings. So we're less concerned about just reasoning to originate. And this is why you saw our yields actually go up during the quarter. I think that what we're saying is and I'll repeat it again, that for us to see yields go up or down 20 to 30 basis points is not untypical. And we made that that same forecast in Q4 to Q1 that we thought we'll see a 20% swing in our yield by 20 basis points. I will say it again in Q2 that yield could go up by 20 basis points or down by 20 basis points in the quarter as well. Right now, by remaining disciplined what we're doing, I don't think that will fully come to roost that we'll see that 20 basis point swing in dividend yields, but it's something that could happen. But at this point we're being conservative.

And then a few modeling questions, it look like despite it was a very active quarter, but fee income came down q-on-q, is this quarter a good run rate to you as going forward?

I think that's a fair estimate as a percentage of our total assets outstanding. There wasn't any atypical events during quarter.

Kyle, I'll make this quarter from a forecasting point of view, as Jessica just said, more stable. It's probably one of the cleanest quarters that we've had in terms of minimizing early payoff. So it's a more pure reflector of our fee income on a sustained basis. But as I'm sure you're aware of, early payoffs will cause that number to spike either way. And it will spike depending on the maturity of the credit. If the credits are older on our books, then the impact on fee spiking is a lot less; if they're newer credits, they payoff early, you'll see a higher percent of fee income.

And then for the asset-backed facility, can we kind of expect that to amortize on a straight line basis or is that all going to just depend on the maturity that the loans backing out facility.

Yeah, that is true. I mean, I think your best guess and best effort is to model a straight line amortization, but bear in mind if there happens to be a pay-off of one of the assets in that collateral pool, it will result in a dollar-for-dollar reduction as a securitization balance or at least as per the advance rate of 65%. But I think it's prudent to model it as a straight line amortization.

One more and I'll get out of your hair. I know you guys got your investment grade rating today. Have you thought about having institutional debt market? So we saw one BDC do it recently. Have you guys looked at going down that path, not that you need that but?

Couple of a factors there. We got a Kroll before we run. We were very honored and happy to see Kroll who did an incredible amount of work of understanding the BBC model in particular and more importantly understanding the venture debt model, who took the time and effort to do that. We're not unnecessarily contemplating immediately going on and doing a deal. We just got this credit rating today. It was a surprise to us. We're happy by it. And I think we've kind of digested and look at our capital planning. But certainly leveraging the balance sheet further is one of our goals and one that we'll continue to pursue.

Our next question or comment comes from the line of Robert Dodd from Raymond James.

First one, real simple one. Just want to get a click because I think I read it down, on the origination expectations for the quarter, did you say 30% to 50% net or is it 30% to 50% in the net off 20% to 45% in repayments?

Yeah, so you did not read it wrong and let me take this opportunity to remind people why we're saying that. It's for those who've been with us for a while. Hercules had historically amortization rate between $20 million, $25 million of normal amortization that was taking place. And the last half of 2012, that number increased up to about $25 million to $30 million of amortization that was taking place in the portfolio. Now other is portfolio is larger and if portfolio is maturing, you will now see that number on normal amortization be in the $30 million to $35 million range. So just waking up in the morning, we have to originate $35 million dollars to stay even with the normal amortization taking place. On top of that, it is often the case that some times we get heads up that we may have early pay-offs. When you have early pay-offs, for example, say $35 billion, that means you have $70 million of net portfolio that's being paid off, they have to replace. So the net $30 million to $50 million increase already absorbs that $35 million of increased amortization that's higher. If we were to see a $20 million to $40 million pay-off that will take place that $30 million to $50 million number will in fact go down, but we expect that if it occurs and again, it's a big if. If it occurs, it will most likely be at the end of June time period, if it does at all.

Coming back to the fee question, obviously, I mean there is the fee line and then obviously there is embedded accelerated amortization point. Looking at the distinction between the 14/3 and the 13/8, am I right, coming around, there is about a million dollars ballpark of accelerated fees in the interest income line that won't occur unless you get the early repayments obviously.

It's pretty easy to model taking like the way that you should have purchased by looking at the effective yields with and without acceleration. And the method is how you can back into what the decline was quarter over quarter in early pay-offs, that's correct. Bur bear in mind, as Manuel, mentioned earlier that it's all a matter of where the deal maybe in its life span with respect to the magnitude of the acceleration. I mean it is a factor there as when we originate the investment, we will from time to time have a discussion about taking a trade off between fees and interest yield, so that all factors into the magnitude of the acceleration. Like I said, it's really more a function of this specific investment that are paying us off, that's really function of the volume of pay-offs, which occur quarter-to-quarter, that's why we kind of broke the record about the difficulty in predicting what the acceleration impacts maybe.

And also, Robert, to you question because we may have some idea of which credit may paying us off, sometimes we simply have a anonymous comment where it's $20 million to $30 million that may occur unexpectedly. If the credit is now only 24 months of maturity or outstanding with us, that the acceleration will be de minimus as compared to a company that may be on book fully six months and pay us off earlier.

Two other questions. Sequestration, looks like it's been normal event for you, frankly, especially since you've got more companies filing IPOs, more ways with the jumps at as well confidentially. I mean has there been any impact at all and do you expect any feature or is it just brought over and it's just not going to affect you.

Well, I hate to say this, it's like a Congress Act or something, but honestly, it's been somewhat a big yawn.

Last question, pricing environment, kind of following up. I mean, either one of your big bank competitors in this space is too old so talking up just the other day that net interest margin expectations. So I mean, you didn't sound too confident that you'd expect the expansion to maintain this year, but I mean, so the thing we're hearing some other guys in the space. I mean, just trying to ask about the quarter a little bit more on kind of really how confident you are that you're going to be seeing expanding March, at a signing interest March?

Let me be very clear this comment, because if the extrapolation was that I'm somehow concerned of people that surely in the wrong message I will broadcast. I am very confident in the market that we're seeing. We're seeing unprecedented demand for capital, unprecedented. And with that it is our underwriting streams has to become tighter because as you're getting more deal volume through just because you have low hanging fruit, does not mean you should execute or fill that order or pick that fruit. So what we're doing is we're being a much more judicial when we're seeing an increasing demand of capital that we maintain that ratio kind of skinning the upper cream of all the opportunities we're seeing out there. With that discipline, you will see us continue to have that $500 million to $700 million growth and growths commitment, which will be up from 2012. If you look at the chart that we have in our earnings release today, you'll see here on Page 8 of our earnings release, that on a year-to-date basis with the science terms already, we're at $423 million of commitments. If I am guiding to a $500 million to $700 million and I still have approximately, you can call it six to seven months of rest of the year, that's a pretty bogie, that's a pretty easy bogie for us to hit at the $500 million or $700 million down level. So I am not worried about hitting the growth numbers, I do worry about the credit quality, I do worry about the mix, which will absolutely skew my effective yields that we're on it. If I wanted to really capture market share, I could lower our yields by 150 basis points and actually originate a lot more transactions. I don't think that's prudent and I think that continuing disciplined in underwriting is the right strategy. And if I lose a $100 million of deals in a quarter, so be it.

Our next question or comment comes from the line of Aaron Deer from Sandler O' Neill.

Manuel, just kind of following-up on your general comments with respect to that lending market, I guess it sounds like there still a lot of opportunities out there that you maybe just pulling back some from maybe you've mentioned a private tech companies. Given that are there other lending verticals where you're seeing increased opportunities and where you're pushing a little harder into?

We are and for competitive reasons, I am not sure I want to initially show that right now because we're seeing some new voice spaces that are available out there that others are not capitalizing it right now. And I intend to go where all suddenly crowds are going. I go to the other direction. And I think the crowds are off slightly to early-stage tech and we've been running away from early-stage tech for quite sometime now and we'll continue to do weighted out in that category. But I will tell you that this is why my confidence level in our $500 million to $700 million origination number, I am not wavering on that whatsoever. So you'll see a cycle of the different sectors, but I am not at all concerned about origination activities, I just want to make sure that we don't overspend or make sure we don't just be sillier or sloppy at the last finish simply to get assets of the books. But we are seeing some good new voice spaces to go after.

And then, just kind of if you have the number handy, but do you by chance have the weighted spot grade of your debt at March 31?

The aggregate?

Yes.

I want to say it's on weighted base, I think we're at 520 or 475 on overall, but we'll get that for you, we don't have it right here available just, but I think last when we looked it, its some more in the mid-fives. I think we're in the mid-fives on a weighted base, with securitization and everything else.

Our next question or comment comes from the line of Chris York from JMP Securities.

My question is on the portfolio and the market environments have been asked. So I will turn to my second question, which includes two components. First, how many employees did you end the quarter with? You already referenced in your prepared remarks that you increase headcount. And then secondly given that originations should remain healthy throughout the remainder over the year, do you need to add an investment officer or two or can you utilize your credit investment officers more?

We ended the quarter in approximately equity equivalent about 60. We are in fact actively, which gives you reinforcement of my optimism. We are actively looking to add headcount. We actually have the total of approximately three to five over vivacious all origination teams, which tells you the deal volume that we're seeing and opportunities that we're seeing in the marketplace. So we're actively doing that. However, we hire like we invest. We take our time. We're very disciplined. We're very methodical about it. And we want to make sure we make the right hires, because a wrong hire could translate into $20 million of credit losses, and I am not losing money, so we will take a very controlled approach to hiring. So we are actively looking to hire more people.

And then, I think previously you stated if you brought on an investment officer, it would take them arguably maybe six to nine months to get up to speed with Hercules platform. Is that somewhat reasonable of an expectation for new originations out of this investment officer?

That is absolutely correct. We tend to invest in our people that we will allocate a learning curve of a minimum of six months and generally nine months to have that individual become a productive individual, and understand our underwriting methodologies. Again, we don't simply hire somebody and expect them to get out of the box and be originating exits right away. We rather have them be knowledgeable, and how we underwrite and be controlled that how we underwrite. And that will remain the case. So, yes, we're very methodical and very modulated on expectations on a hire for at least six to nine months.

And then lastly, so the potential investment option that you might add, are they in a specific sector? And then are you looking for them to potentially bring on new relationships that you guys don't have, is there an area there that you might want it for?

The good and bad news is that this whole company is made of a population of individuals from the venture capital industry and the commercial banking industry, private equity and operational background. We don't really love pure commercial bankers and we don't initially purely love pure venture capitalist. You really want to have the background experience at both of those fields. And you want to have a strong technology with life science or other technology background. So it takes a while to find that skill set in that individual that we're looking for and the personality trace that we're looking for.

Our next question or comment is a follow-up from Mr. Greg Mason from KBW.

I have one follow-up on the two exits post quarter. Althea I believe is marked around $4.2 million fair value at quarter end. Is there any kind of material difference between that fair value and what you exited? And number two, Omthera, I actually couldn't find that in your portfolio, is that under a different name in your portfolio?

Althea is marked to the acquisition price. So that should represent the realized gain we'll see in Q2, once the proceed come in. And with Omthera that investment closed for us, we signed our commitment with them at the end of the quarter. It just so happened so that the warrant agreement was executed at the beginning of April, and that's why you do not see that in our schedule of investments.

So would it be the pricing of your warrants, would it be reasonably close to that $8 IPO price?

I don't know the specifics of the pricing of the warrant.

I think we gave this as public within the SEC filings. But I hope you don't take this wrong way, with the 117 portfolio company, 91 one, non-positioned. My ability to have the specificity on each warrant is no longer there.

I'm showing no additional questions and comments in the queue at this time. I'll turn the conference back over to you.

Thank you, Operator. I thank everyone for your continued support and interest in Hercules Technology Growth Capital. I want to remind our investors and investor community that we'll be presenting at three conferences in the coming weeks here. We have the JMP Conference on May 13; we have the Wells Fargo Conference in New York City, on May 16; and we have the Stephens Spring Conference in New York City, on June 4. We will be meeting with investors throughout those conferences as well as participating in non-deal roadshows and we'll circle cities around the country. If you have an interest and because you're meeting with us, I would encourage you to reach out and contact our shareholder relations or Investor Relations Department. And I'll just say thank you everybody for your continued support and believe in the Hercules team, and what we've been doing here at Hercules. Thank you very much and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.