Horizon Technology Finance Corp (HRZN) 2015 Q1 法說會逐字稿

Good morning and welcome to Horizon Technology Finance's first-quarter 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 introductions and the reading of the Safe Harbor statement. Please go ahead.

Thank you and welcome to the Horizon Technology Finance first-quarter 2015 conference call. Representing the Company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; and Chris Mathieu, Chief Financial Officer.

Before we begin, I would like to point out that the Q1 press release is available on the Company's website at www.horizontechnologyfinancecorp.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 and 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, 2014.

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 of 2015 represented a good start to the year for Horizon. We maintained our portfolio of high quality venture loans while experiencing portfolio liquidity events and steady competition. With strong demand, we both originated new loans to replace the loans that were prepaid during the quarter and enlarged our pipeline in what is traditionally the slowest quarter of the year.

In March we also strengthened our liquidity by completing an equity offering, positioning us to capitalize on our growing pipeline. With our improved liquidity position, we are poised to achieve portfolio growth and remain committed to maintaining a disciplined approach to sourcing and pricing high quality loans.

We earned net investment income of $2.9 million or $0.30 per share for the first quarter, in line with our expectations. Net investment income was impacted in the quarter by a slightly higher weighted average share count from the March equity offering and a small reduction in the weighted average size of our portfolio, primarily due to the timing of loan prepayments early in the quarter and new loan closings later in the quarter.

In the first quarter, we had an increase in net assets from operations of $3.8 million or $0.39 per share, underscoring the earnings power and credit quality of our portfolio. In the past five quarters, we have earned an increase in net assets from operations of $19.3 million or $2 per share generated from a combination of NII totaling $13.6 million and $5.6 million from increases in realized and unrealized gains on investments.

For the first quarter, we originated $24 million in new loans to nine companies and generated attractive onboarding yields, despite contending with persistent competitive pressures. We achieved a portfolio yield of 15%, which compares favorably to 13.6% for the first quarter of 2014.

We experienced liquidity events from four portfolio companies in the first quarter as compared to two liquidity events in the first quarter of 2014. Liquidity events produced accelerated income and the return of capital for redeployment into new investments, while we often retain warrants in our former borrowers.

We ended the first quarter with a portfolio of venture loans to 50 companies with an aggregate fair value of $198 million, as well as a portfolio of warrants and equity investments in 82 companies. We believe our warrant portfolio has the potential to provide meaningful income to our shareholders. We currently hold several positions in companies that are already public or in registration, along with warrants and success fee agreements in private later stage companies which we believe are right for M&A exits.

With regard to credit quality, we believe that our loan portfolio is in sound condition. Our loan portfolio had a weighted average internal credit rating of 3.1 at the end of the first quarter, and 90% of our loan portfolio was performing at or better-than-expected at the time of underwriting. There remain only two loans rated one, which have an aggregate cost in fair value of $5 million.

Of note, we have a record level of four rated loans with an aggregate fair value of $50 million. A rating of 4 is indicative of a portfolio company that has performed better than expected at the time of underwriting, has increased warrant potential or is expected to have liquidity event in the near future.

Turning to liquidity, our debt to equity ratio at the end of the first quarter of 2015 was 0.49 to 1 compared to 0.63 to 1 at the beginning of the year. While our leverage ratio decreased due to the increase in capital from our equity raise and normal portfolio amortization and loan prepayments, we intend to leverage our portfolio to our targeted ratio of 0.75 to 1 in the coming quarters, which equates to a projected portfolio of approximately $290 million. We maintained $40 million of availability under our revolving credit facility and have the ability to increase that facility if necessary as our securitization debt continues to amortize.

Our increased liquidity from the recent offering, together with the availability of funds from our credit facility, provides Horizon with adequate capital to fund its existing pipeline of quality, venture loan opportunities. We believe we are poised to expand our investment portfolio in a manner that creates significant and sustainable shareholder value. We are now targeting earning NII that covers our distributions by the end of 2015.

Taking into account our first-quarter performance and future outlook, we declared monthly distributions totaling $0.345 per share payable during the third quarter of 2015. This represents an annualized yield of 9.7% based on our NAV as of March 31. Since our IPO, we have now declared cumulative distributions of $60 million or $7.00 per share.

To help maintain a steady stream of cash distributions to our shareholders, we have undistributed or spillover income of $0.31 per share as of March 31.

As an update to our SBIC application, our formal application was accepted by the SBA late in the fourth quarter of 2014. We are in discussions with the SBA regarding our application, but as we have cautioned, that process is thorough, and there is no guarantee when or if we will receive a license.

I would like to briefly discuss the type of financing Horizon provides its borrowers and the security position it receives in connection therewith. Since Horizon was formed more than 10 years ago, the team has funded more than $1.1 billion in loans to more than 190 companies. These loans almost entirely consisted of senior term loans, which are loans secured either by a first lien or a first lien position behind a bank revolver. Our investment strategy has long been and continues to be to focus on the senior term loan position in the capital stack of our borrowers.

Horizon does not currently focus on the second lien term loan market, which are loans secured by a second lien behind the bank's revolver and an additional term loan provided by the bank.

Horizon also does not hold or actively seek subordinated loans, which are typically secured or unsecured loans that are behind not only a revolving loan, but an additional term loan provided by a non-bank lender.

As of March 31, 2015, 98% of our venture loan portfolio consists of senior term loans with 45% of the portfolio consisting of senior term loans secured by the first lien position behind the bank revolver.

In a moment, Chris will detail the financial results for the first quarter, including details of our recent offering, which will provide more color on these events. But first, Jerry will provide an overview of our strong pipeline and the venture lending market.

Jerry?

Thank you, Rob, and good morning, everyone. Against a backdrop of what is a seasonally slower quarter for venture capital investing and venture lending, Horizon experienced continued demand for a senior term loan product. This resulted in Horizon achieving solid origination levels as it funded $24 million to nine companies in the first quarter of 2015 compared to $15 million to three companies in the first quarter of 2014.

Horizon continued to obtain attractive onboarding yields of 11.8%, which when combined with four portfolio liquidity events in the quarter resulted in a portfolio yield of 15%.

Importantly, our committed, approved and awarded backlog during the quarter grew to approximately $50 million at March 31, 2015. In addition, we have been awarded four new transactions totaling $30 million in April.

Meanwhile, our pipeline of new opportunities continues to grow and exceeds $160 million at March 31, 2015. We believe all of these data points signal to a very active market for our venture debt products for 2015.

At the end of the first quarter, we held warranted equity positions in 82 portfolio companies. In the first quarter of 2015, one of our life science portfolio companies, Inotek Pharmaceuticals, completed its initial public offering. In addition, one of our portfolio companies, eASIC Corporation, filed for an IPO, and another portfolio company filed for an IPO under the JOBS Act.

With the Inotek IPO, Horizon now has 12 publicly traded portfolio companies. Of those, 10 are drug development companies which have the potential for significant increases in market value if and when they meet clinical and regulatory milestones.

With respect to M&A transactions in the first quarter, one of our portfolio companies was acquired. In addition, we have a number of other tech companies that are performing at or above expectation that are becoming attractive M&A or IPO candidates. We believe our historical focus on the tech market may result in positive NAV and NII upside for our shareholders in 2015.

Turning to the activity in our core markets in the first quarter, while the dollar amount of VC investment in the biotech market of $1.7 billion was down 14% from Q4, the number of companies receiving VC investment increased slightly. Considering that the first quarter of the year historically sees a lower level of VC investing as venture capitalists plan investment activity for the remainder of the year, we believe the level of investment activity in the biotech market in 2015 will continue to be favorable.

With the growing level of equity investment in 2014 and the anticipated strong level in 2015, we anticipate solid demand for venture debt over the balance of 2015 as biotech companies seek to augment their equity capital with venture debt.

We also believe 2015 will be a significant year for clinical and regulatory milestone events for Horizon's 10 publicly -- excuse me, public biotech companies. Clinical and regulatory milestones are major drivers of market valuation upside. Therefore, we anticipate being active in 2015 in both making new debt investments and realizing value from our biotech warrant and equity investments.

The number of IPOs for life science companies continue to pull back from their historical highs seen in the first half of 2014. According to the National Venture Capital Association, or NVCA, there were 13 VC-backed life science IPOs in the first quarter. While the number of life science IPOs has declined over the last two quarters, it is important to remember that the market has been experiencing record high levels of IPO activity in the life science space over the last six quarters.

I would also note that according to NASDAQ, the number of life science companies to continue to file for IPOs is still very active, which suggests there is still an opportunity during 2015 for a number of high quality life science companies to go public.

Accordingly, we anticipate that 2015 will still reflect an active market for life science IPOs.

As we review the technology market for 2015, we clearly see an opportunity for quality exits on the Horizon portfolio. Over the last two years, Horizon has strategically invested more capital in the technology market and now has a number of late-stage technology firms poised for an exit.

Of the $13.4 billion of venture capital invested in the first quarter of this year, the tech sector received the most investment of $5.6 billion invested in 434 software companies, according to the NVCA.

In the healthcare, information and service industry, our venture debt pipeline of quality opportunities continues to grow due to the significant venture capital investment in the second sector over the last two years, which is a result of healthcare information services being viewed as critical to reducing healthcare costs and improving patient care.

Our pipeline growth experience is mirrored by the growth in venture capital investment in healthcare information and services, which surged 141% over Q4 according to the National Venture Capital Association.

Horizon experienced a positive exit in Q1 from one of its healthcare service companies, Radisphere, which resulted in a meaningful contribution to NII in the quarter.

Finally, we continue to monitor the clean-tech market for quality opportunities and increasing venture capital support. We expect to continue to take a cautionary approach to this market during 2015.

Turning to the overall competitive landscape, as we've highlighted over the past few quarters, we believe competition primarily from tech banks reaching growth loans typically provided by venture lenders resulted in some lenders obtaining lower pricing that in our view did not provide adequate risk-adjusted returns.

Looking ahead, we expect these trends will begin to abate during the second half of 2015 with tech banks' focus turning inward towards portfolio management.

This focus combined with the distractions associated with the recently announced bank consolidation will result in tech banks returning to the historical practice of offering formula-based revolving lines of credit. As such, they will rely on venture lenders like Horizon Technology Finance with whom tech banks have long-term relationships to provide senior term loans.

We believe the shift and focus of the tech banks when combined with the recently announced planned sale of GE Capital, which has some life science investments and the potential sale of another PE backed life science lender, mainly to pricing improvement, widening spreads and softening competition in the second half of 2015 and beyond.

Overall, our outlook for 2015 is positive as we enter the year with a strong balance sheet from which to grow our portfolio. We look for potential exit opportunities in our maturing portfolio and see a favorable competitor environment that rewards experienced, reliable, long-term venture lenders like Horizon.

With that update, I will now turn the call over to Chris.

Thanks, Jerry, and good morning, everyone. Our consolidated financial results for the three months ended March 31, 2015 have been presented in our earnings release and our Form 10-Q both distributed after the market closed yesterday.

For the three months ended March 31, total investment income was $7.3 million compared to $7.5 million for the first quarter of 2014. This change was primarily due to lower interest income on investments resulting from the decrease in average investments, partially offset by greater acceleration of income related to transaction fees and end of term payments from loan prepayments.

Total investment income for the quarter included $6.6 million from interest income on investments, as well as approximately $700,000 of fee income. New loans funded in the first quarter had an average onboarding yield of 11.8%.

Our loan origination efforts continue to include a focus on floating interest rate investments. As of March 31, 74% of the outstanding principal amount of our loan portfolio for interest debt floating rates and further substantially all of our older fixed rate loans are match funded in our securitization, which has a fixed 3% annual borrowing rate.

As a result of this deliberate shift, we now believe we are now largely protected from a rising rate environment in the broader markets. We continue to see strong demand for our floating rate product as shown by the fact that we reported as of March 31, 2015 unfunded loan approvals and commitments totaling $37 million with 100% priced at floating interest rates.

For the first quarter, our portfolio yield was 15% compared to 13.6% for the first quarter of 2014 and 15.3% for the full year of 2014.

The primary changes quarter to quarter to portfolio yields are driven by the timing of newer loan originations and the timing and extent of loan prepayments and related fee income from those prepayments, including prepayment fees and acceleration of previously unamortized transaction fees.

The Company's net expenses were $4.3 million for the first quarter as compared to $5 million for the first quarter of 2014. Interest expense decreased by $500,000 or 23% year over year to $1.6 million, primarily due to a decrease in our average debts outstanding.

Our objective marginal borrowing cost has improved due to the termination of our term loan facility in the second quarter of 2014 and our securing of a lower interest rate under our revolving credit facility in 2013. Recall back in late 2013, we secured a two-year extension with a new maturity date into 2018 on our key facility, which included lowering the interest rate and rightsizing the commitment.

Base management fee expense decreased by $200,000 or 14% to $1 million for the first quarter of 2015 compared to a year ago period. Base management fee expense declined primarily due to a decrease in the average gross assets of the Company by about 12%. Professional fees decreased to $400,000 for the first quarter of 2015, which we believe is a more normalized level. We earned net investment income of $0.30 per share for the three months ended March 31 as compared to $0.26 per share for the first quarter of 2014.

We elected to carry forward the taxable income in excess of current distributions of $3.6 million or $0.31 per share as of March 31. This is commonly referred to as our spillover income. Our NAV as of March 31 was $14.19 per share.

We experienced a small net portfolio decline during the first quarter and ended the quarter with an investment portfolio of $204 million. New originations in the quarter of $24 million in loans to nine portfolio companies were offset by $8 million in scheduled principal payments and $18 million in principal prepayments.

Subject to the level of actual loan originations and prepayments, combined with the impact of expected scheduled principal payments of approximately $6 million, we expect the net portfolio for the second quarter to increase in the range of $10 million to $20 million.

In terms of liquidity, Horizon ended the first quarter with over $70 million in available liquidity, including cash and funds available under our credit facility, an increase of over $26 million from the end of the fourth quarter.

In March, Horizon increased its liquidity and approved its overall capitalization by issuing 2 million shares of common stock at a public offering price of $13.95 per share. This offering generated total net proceeds to Horizon of $26.7 million.

In connection with the offering, the advisor agreed to waive the base management fee related to the proceeds of the offering for up to one year or until NII covered the quarterly distributions for two consecutive quarters.

I'd like to take a moment to outline Horizon's view on the benefit it believes will accrue to it shareholders over time from Horizon's recent equity offering. We believe the nature of our business and the yields it can provide given our market access and market knowledge may be offering the right strategy for Horizon shareholders.

The strategic benefits of an offering done at the right price and right time include greater capital allocation and flexibility and ability to fund attractive pipeline opportunities which are accretive to all shareholders. Horizon's recent equity offering is an example of an offering which we believe can be accretive to shareholders.

Horizon sold 2 million shares, which increased its capital base 21% from $9.6 million to $11.6 million shares outstanding as of March 31. In analyzing whether to complete the transaction, Horizon and its board carefully modeled and considered the impact on NAV and NII. Horizon's average portfolio yield since its IPO in 2010 was approximately 14.7%. Horizon's marginal cost of leverage committed today is 4%, and its target leverage is 0.75 to 1.

We believe that considering these factors, the new capital deployed to a steady-state portfolio can generate a favorable return on equity on the new capital, which would then contribute to an overall improved return on equity to all shareholders.

As of March 31, we has $10 million outstanding under our revolving credit facility, which has a current commitment of $50 million and contains an accordion feature allowing for an increase up to an aggregate commitment of $150 million.

We also had $31 million outstanding under our investment grade securitization and $33 million outstanding on our publicly traded bonds.

We continue to see demand for all of these loan products in the market, and we'll add to our current commitment levels when warranted. We intend to increase our current debt levels and grow our leverage ratio towards our target of 0.75 to 1 as we use the proceeds from our recent offering and our revolving credit facility as a source of capital to grow our investment portfolio.

Before we open the floor to questions, I'd like to note that we plan to hold our next conference call to report second-quarter results during the week of August 3.

This concludes our opening remarks. We'll be happy to take questions you may have at this time.

(Operator Instructions) Ryan Lynch, KBW.

Just the first one. With the recent equity raise, we calculate about $70 million of liquidity. What should we be thinking in terms of the pace of the capital deployment, and can you specifically give us any color on how originations and repayments are looking quarter to date?

This is Jerry. I can take the second part of that question. As I noted, our committed and awarded pipeline has grown I think just about twofold actually since the end of the fourth quarter to about $50 million, and we had a very strong April. We were awarded another $30 million in business.

So we have a very strong pipeline -- excuse me, strong committed backlog and awarded backlog going into the second quarter, which bodes probably pretty well. I think Chris noted that we expect the portfolio to increase somewhere between $10 million and $20 million based on prepayments. Prepayments are obviously a little bit more difficult to calculate over the course of the whole quarter. We are aware of a couple of events and are watching for others.

We certainly will have some growth in the portfolio in the second quarter, and beyond that, that will again a strong pipeline of opportunities that we are looking at today. So I think as I kind of look at that, I think our pipeline is in really good shape looking for the second half of the year.

Obviously, we need to -- we still have a lot of work to do to get those transactions awarded in the shop and get them underwritten and funded. But still I think we're in very good shape, and I'm pretty optimistic about how fundings look for the balance of the year.

Okay. And then Semprius, that's one of your nonaccrual investments. That's now marked at 100% of your cost in par. That's up from 93% last quarter. Should we read anything into that and expect that to be come back to accruing status anytime soon?

Yes, so we continue to rate that as a one rated credit. Note that they've been making regular payments since it went on nonaccrual over a year ago, and we use our scenario analysis, and that's the value. The Company continues to be in some level of stress, but we're making progress. That's all we can say.

Okay and then just kind of a higher level question. There's been some consolidation recently into VC lending space. Are you starting to see any of the effects of that -- of that consolidation in your market, and ultimately do you expect that this consolidation will improve market conditions, or do you expect that these entities that have consolidated will just kind of continue to compete in the market at the same level but just with a different parent company?

This is Jerry. We have seen -- we've already seen some significant improvement actually pricing on the life science side on a comparative basis to a year ago where life science transactions interest rates were being priced in the single digits. We've seen a significant really improvement in that in the fourth quarter here in the first quarter, and that's been a very favorable sign for us.

But I think really where we're going to start seeing the impact will probably be in the second half of the year. The tech banks have undertaken a significant increase in their term loan portfolios, which are very different to manage than the typical bank revolver, and I think as they begin to understand what it takes to manage that type of a portfolio, it is going to certainly slow down their activity. I think when you combine that with the distractions and disruption of them of at least three of the major tech banks being acquired, which none of those are complete as far as I know, we'll see how that plays out in the second half. But certainly we expect it to have some sort of significant impact.

Okay. Thanks. That's all for me.

Casey Alexander, Gilford Securities.

You gave a target of a $290 million portfolio size, and that was by when? When did you hope to have that up to that level?

Later in the year, Casey. That's a portfolio that's at our target leverage.

So that's by the end of this year you hope to be there?

Yes.

Okay. And you also expressed some net investment income targets? Can you review that for me, please?

What we said was that we are now targeting that we will be able to cover our distribution by NII by the end of the year.

By the end of the year again. And you are waiving the fee on cash for how long?

The waiver of fee on cash is permanent. We also agreed to waive management fee on the equity proceeds for up to four quarters.

So Casey, even after we deploy the capital into earning assets, we will continue to waive management fee that we would have otherwise earned on that capital for up to a year or shorter if we cover the dividend for two consecutive quarters prior to that.

Okay. Next, interest expense was a little higher than your debt balances would have suggested. Where there some type of offering costs that got accelerated into interest expense this quarter?

That's a good question. So interest expense is a little bit higher partially due to the offering and that we had higher nonuse fees in the first quarter than originally expected since we did not lever off the balance sheet. So it's essentially nonuse fees that caused that.

All right. Great. That's all I have. Thanks for taking my questions.

You're welcome.

(Operator Instructions) Chris York, JMP Securities.

Thanks for taking my questions. I just have one this morning. Congrats on the new raise. We applaud you on waiving the fees and attempting to drive value, additional value to shareholders there with that equity raise.

So taking kind of a longer-term view and thinking about asset growth as our context, what do you guys think is maybe the ideal size for your total portfolio maybe over the longer term?

We're pretty focused on deploying the capital that we've raised, and we are working our way back into the leverage, Chris. So I think if we can get to the target portfolio that I mentioned, we'd be very pleased with that, and I think it would be very profitable and a good result to our shareholders to create real value for the shareholders.

Yes, so I get the $290 million by year-end, but maybe taking a longer-term view and thinking about 2017/2018, I mean what kind of size do you target and maybe you don't have a long-term target on that that Horizon could grow to?

We're pretty focused on the execution of this part of our strategic plan, and we'll see where that takes us, Chris.

Great. Okay. And then lastly, just a clarification. So that's $290 million I believe you said you're trying to get leverage up to your target level of 0.75. Is that a GAAP leverage ratio, or is that inclusive or exclusive of SBICs and the SBA debentures?

For conservativeness, we basically just said let's take our 0.75 on the equity we have today and lever that up to 0.75. (multiple speakers) So that would be the timing and the extent that we deploy the license leverage.

Okay. And then one last clarification. So the interest expense, what was the nonuse fees? I bet I could pull that up in the queue as well?

What was it related to? It relates to the KeyBanc facility. There were certain minimum levels of usage on the facility. So during the term of the credit facility, there were -- there's a base nonuse fee, and then to the extent that we didn't hit certain overall minimum usage, there was another supplemental nonuse, and that kicked in in the first quarter given that we did not deploy the additional leverage for two reasons. One is the we used the equity capital for fundings at the end of the first quarter.

Yes, got that. I guess how much was that nonuse fee?

I do not have that we right now.

Okay.

Otherwise, I would assume that I think Casey has a similar question. I think otherwise the rest of the interest expense would have been in line but for that.

Okay. That's it for me. Thanks, guys.

Robert Dodd, Raymond James.

Just actually following up on a couple of questions. On Semprius I know in some way that is -- versus December, the costs came down in round numbers $400,000. So has there been an additional restructuring at that asset that allowed you to get more comfortable on the fair value cost ratio? Has something distinct changed with that asset over the last couple of months?

The principal difference is that they've actually been making principal payments, Robert.

Just another follow-up for Jerry. One of your comments about the competitive environment in life sciences has already improved. Is it possible -- and I realize this is our question, right -- to tease out the if whether that is the broader tech bank's changing competitive approach when you are kind of indicating that might happen in the back half of the year, or is that early indications that a change from GE given life sciences the one area that they are actually a player in your space?

Actually, Rob. It's a good question. But the fact of the matter is that GE has historically been in and out of our markets in such a fashion that the venture capital community really doesn't depend on them for venture debt much. They are very price competitive when they are in the market, but they are oftentimes out of the market. And when they are out of the market, it not only means that they are not doing new deals, it means that they are probably putting pressure on some of their portfolio companies that might not be operating as they would like.

So they are not a big participant in the market and have never had a kind of real foothold in our marketplace. So I don't really see that impacting the competitive landscape. But the size of the transactions on life science side are generally bigger, and that does when the tech banks start to pull back, that does impact them first because they are the first ones to recognize that they can't or don't want to be getting too deep into large life science term loans. And so that is certainly part of it.

But I think a bigger part of it is probably some of the more traditional venture lenders in the life sciences space are also going through some transition. In one case, one of them is we believe on the market to be acquired. They are a PE backed company, and they were a lower rate provider in the marketplace.

So, we are starting to see some of that, and we actually took advantage of that opportunity in the fourth quarter and in the first quarter this year to rebalance our portfolio a little bit and increase our life science portfolio. I think at the end of the first quarter of last year, if you look at our portfolio, it is about 65% technology and only about 15% life science, and today it is more like 58% technology and 25% life science.

So we made an intentional change in the weighting of our portfolio there when we saw the opportunity to get in at what we thought was very good pricing for high-quality deals.

Got it. Thank you. One more follow-up, if I can, for Chris. Just to clarify on the waiver, since you already waived the base management fee on cash and obviously the proceeds to the offering basically set on the balance sheet as cash right now, there isn't -- there won't be the incremental waiver on the proceeds from the capital raise won't kick in essentially until that cash balance is reduced and then will phase in as you utilize the cash that you raised in the offering. Because, otherwise, we are double counting the waiver in a sense. Is that correct?

That is correct. Right. So in the second quarter, we estimate 10 -- an increase in the portfolio of $10 million to $20 million. That number whatever that turns out to be would attract the waiver.

Got it. Thank you.

You're welcome.

Jonathan Bock, Wells Fargo Securities.

Thank you for taking my questions, and I appreciate your discussion on the strategy of lending behind the bank revolver while still maintaining the first lien. So much appreciated.

One small clerical point. So when you waive fees on the equity capital, will you also waive fees on the leverage that will come as you lever that equity capital to drive NOI?

The waiver is limited to the equity capital raise.

Okay. All right. So the next question, Jerry, so talking about the potential for $290 million net growth target effectively looking at a pretty sizable deployment pace in order to get earnings back up in line with the dividend and considering the fact then the last two years the net portfolio has effectively declined and in light of the good things that are happening as it relates to prepayments, walk us through how such an aggressive net number is possible. Because while we like to see the net prepayments, the fees that result from net prepayments, it also probably puts in the mind of a conservative investor that net portfolio growth might not be as achievable because you're getting more capital coming back to you.

Yes, a combination of factors here.

First of all, I think one thing that's important to point out that we generally have been talking about literally every quarter is we have been originating at a much higher level historically than what we have actually been putting on the balance sheet of Horizon strictly because of liquidity issues.

So it's not like we have to significantly ramp up on our marketing activity compared to where we have historically been. We generally only end up being able to put a certain portion of what we originate every quarter on the public balance sheets and then the rest of it we partner out with strategic partners we have.

Some of that growth we will be able now to put on our own balance sheet for the benefits of our own shareholders, and that's probably the most important part of what nobody on the public side sees. We certainly get the advantage to that.

The second thing is, as I mentioned earlier, we think that certainly in the second half that we are going to see an abatement from the tech banks specifically pulling back, as well as some other things going on in the market relative to competitors that will pull that back as well.

And that has two really big impacts. One is obviously it gives us a bigger opportunity to find new transactions at attractive pricing. The other thing it does, though, there are less competitors in the market when companies come back to the market to refinance or add additional capital.

And so that again gives us an opportunity that over the last year or year and a half years, I would say really, there's been so much competition pushing into our market that it has made it difficult for us to get a piece of that.

So I think when you combine all of that, there's going to be less prepayment probably in the second half because there are going to be less providers of debt who are willing to do prepayment.

So we probably won't see prepayments as much other than from M&A activity, which we hope will be actually quite favorable this year.

So I think when you combine all of that, Jonathan, we actually see 2019 as being a really good opportunistic year for growth in our portfolio, which has been difficult to do obviously because of liquidity, but also from I think a higher level of competition over the last certainly six quarters than we are going to see over the next four quarters.

That's very helpful, Jerry. Thank you. And then Rob, more of a strategic question that gets to touch his equity investors' hearts, and it relates to below book issuance. And so in general, a number of the future benefits of issuing equity at a discount to book value have been made by a number of BDC management teams in the past and even recently.

And while those future benefits are dependent on markets, etc., the immediate impact is that investors experience NAV dilution. So can you walk us through -- you mentioned repayments came in earlier than expected, and you mentioned portfolio fundings were later than expected. You had $40 million of available liquidity post your last call. Why not wait for the markets to be more favorable and raise at a premium to book value given the value of permanent capital in the BDC structure is such that management teams can be permanently patient. It just helps us understand why given the fact that so many below book raises have created more questions than answers. And so your discussion would be very helpful to us.

Good and fair question, Jonathan. You know, we look at our pipeline opportunities. We looked at what we felt was a need for more flexibility and financial flexibility for our balance sheet as it relates to some of the things that Jerry mentioned.

And we've -- based on -- so where we were and relatively minimal dilution that was presented as a result of the offering compared with our firm belief in the accretive nature to NII of the offering, we felt that the opportunity was there, and we took advantage of it. Because we believe in our heart of hearts that this is the right thing to do for our shareholders.

I appreciate that. Thank you so much.

Christopher Nolan MLV & Co.

Two questions. First, given the consolidation happening in the tech bank sector, are you anticipating ramping up hiring of talent for teams, and should that imply a higher operating expense base going forward?

Yes, this is Jerry. It is a good question because of, as I've been mentioning around here lately, I've been getting a lot of LinkedIn requests from people who work with (inaudible) just anecdotally. But no, we are going to -- we have a pretty good strategic plan for this year.

If you look at the team we have together now, a very experienced group of people that have been around a long time, been through good markets, bad markets, and honestly I think we are able to achieve probably I think a greater efficiency in both our origination and underwriting based on the strength of our team and the experience of our teams. So I don't see us going out and looking for hiring any major teams.

Obviously, we obviously are going to be -- we will look when needed for opportunities to hire people, and we think that there's a place where it can provide us with a significant opportunity to either increase opportunities, origination or higher-quality underwriting talent. But there's no strategic plan to go out and hire teams of people from any of these organizations.

Great. My follow-up question. Given the comments made earlier in terms of the accretive nature of the equity raise, should we take away from that that management's internal projections imply a possible increase in NAV per share or an increase in the dividend as a result of this going forward?

I think what we've tried to signal is that NAV could increase over time from the realized workings that we have in our portfolio over time and that NII by the end of the year is our goal to cover the current dividend. We've not put out on the table an increase in the dividend I think is more appropriate to make sure we have a period of time of not just covering it but covering it with cushion for the market to absorb.

Okay. And final question. With the realized gains you just referenced, that would be from existing investments so they are not tied to the capital raise directly, correct?

That would be fair.

Correct.

Okay. Thank you for taking my questions.

I'm showing no further questions or comments. So with that, I would like to turn the conference back over to Mr. Rob Pomeroy.

Thank you and we appreciate all of your questions and your continued interest in the Horizon story. During the first quarter, we took advantage of our liquidity position by originating high quality venture loans with attractive onboarding yields. We also completed an equity offering that further enhances our liquidity and positions Horizon to take advantage of its strong pipeline and achieve quality portfolio growth.

Going forward, as we continue to pursue growth opportunities, ensuring the strength and soundness of our portfolio's credit quality remains a top priority for us.

We will also focus on providing shareholders with the stable distribution and added upside from our growing and maturing equity and warrant portfolio. We look forward to sharing the progress of our Company with you.

So this will conclude our call. Thank you.

This concludes Horizon Technology Finance Corporation's conference call. Thank you and have a great day.