HRZN

Horizon Technology Finance Corporation (HRZN)

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Horizon Technology Finance Corporation (HRZN)

Q2 2013 Earnings Conference Call

August 7, 2013 09:00 a.m. ET

Executives

Michael Cimini – IR

Robert D. Pomeroy Jr. – Chairman and CEO

Gerald A. Michaud – President, Director

Christopher M. Mathieu – SVP, CFO and Treasurer

Analysts

Greg Mason – KBW

Robert Dodd – Raymond James

Casey Alexander – Gilford Securities

Presentation

Operator

Good morning, and welcome to Horizon Technology Finance Second Quarter 2013 Conference Call. Today’s call is being recorded. All lines have been placed on mute. We will conduct a question-and-answer session after opening remarks, instructions will follow at that time.

I would now like to turn the call over to Michael Cimini of The IGB Group for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

Michael Cimini

Thank you, and welcome to the Horizon Technology Finance second quarter 2013 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 Q2 press release is available on the company’s website at www.horizontechnologyfinancecorp.com.

Now, I’ll read the following Safe Harbor statement. During this conference call, Horizon Technology Finance will make certain forward-looking statements including statements with regard to the future performance of the company. Words such as believes, expects, anticipates, intends, or similar expressions are used to identify forward-looking statements.

These statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are detailed in the risk factor discussion in the company’s filings with the Securities and Exchange Commission, including the company’s Form 10-K for the year ended December 31, 2012. The company undertakes no obligations 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. Rob?

Robert D. Pomeroy Jr.

Good morning, and thank you all for joining us. We are pleased to report two important accomplishments during the second quarter. First, that we earned net investment income of $0.38 per share, and earned a portfolio yield of 14.5%. Our second quarter NII more than covered our dividends of $0.345 per share paid in the second quarter, and we maintained a portfolio of quality, high yielding assets, delivering solid financial results for shareholders.

Second, we also strategically enhanced Horizon's future earnings potential. Specifically, in May we reduced the interest rate on our revolving credit facility, and in June we issued $90 million of asset-backed notes at a fixed interest rate of 3%. At June 30, we have over 90% of our borrowings locked in with a fixed interest rate.

Today I would like to speak to the Horizon venture lending strategy, the earnings power of our high-quality portfolio, and the value proposition of owning shares in Horizon. Horizon is a leading provider of secured loans to venture capital backed, development stage companies. We target four broad technology markets, including information technology, life science, healthcare information and services, and clean-tech. Venture lending is a smart way to play in the technology and venture capital market.

Our investments are secured loans with strong current pay yields, and we receive warrants on our transactions. These warrants allow us to participate in the upside when these young companies succeed. Conversely the secured nature of our loans, which are made at low loan-to-value protect us if the borrower runs into difficulties. As a result, the Horizon track record is characterized by low loan losses and warrant gains that exceed these losses over time.

The capital that Horizon provides to these technology companies is used to further clinical research, launch new products, ramp revenue, and reach the next technological or valuation milestone. Because our capital comes in the form of a loan rather than equity, the companies are able to advance with much less dilution to the existing owners and management teams.

As such, venture debt has become a standard tool in the venture capitalist tool box. But it is important to remember that the development curve for these young companies is not a straight line. Plans are made, altered and difficulties encountered. As a result, the venture capital investors want to be sure that they are working with the lender that understands the unique aspects of venture capital backed companies, and will work with them through sometimes difficult transitions.

Horizon has proven to be such a partner for over 10 years, and the Horizon management team has executed this strategy together for over 20 years through multiple business cycles. Why is this reputation important? It is important to the existing investors and management of Horizon’s portfolio companies because they can be confident that they will have a lender that will act rationally when plans change. It is important to Horizon because it provides a seat at the table for the most interesting new opportunities that are referred to us by the venture capital community, and it should be important to investors in Horizon that look to invest in a team that has the necessary market access and market knowledge to successfully execute the venture lending strategy.

How is the Horizon strategy different from most middle market BDCs? First, we focus only on our core technology markets, where we have participated for many years and understand the unique dynamics. Horizon has a team of very experienced managing directors with deep in market expertise and strong reputations in their core markets. Second, we keep our loans small relative to the enterprise value that secures our debt, and the amounts invested by the venture capitalists are low loan-to-value and the amortizing repayment structures provide a great cushion against decreases in value.

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