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Horizon Technology Finance Corporation (NASDAQ:HRZN)

Q4 2013 Results Earnings Conference Call

March 12, 2014 09:00 AM ET

Executives

Megan Bacon - Marketing Support Manager

Rob Pomeroy - Chairman and CEO

Gerry Michaud - President

Chris Mathieu - Chief Financial Officer

Analysts

Andrew Kerai - National Securities

Troy Ward - KBW

Chris York - JMP Securities

Fin O'Shea - Raymond James

Jon Bock - Wells Fargo Securities

Jim Young - West Family Investments

David Miyazaki - Confluence Investment

Operator

Good morning and welcome to Horizon Technology Finance’s Fourth 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 the opening remarks; instructions will follow at that time.

I would now like to turn the call over Megan Bacon of Horizon Technology Finance for introductions and the reading of the Safe Harbor statement. Please go ahead.

Megan Bacon

Thank you, and welcome to the Horizon Technology Finance fourth quarter 2013 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Gerry Michaud, President; and Chris Mathieu, Chief Financial Officer.

Before we begin, I would like to point out that Q4 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 in predicting future results and conditions.

Certain factors could cause actual results to differ on 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, 2013. 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.

Rob Pomeroy

Good morning and thank you all for joining us. During the fourth quarter and full year 2013, Horizon delivered positive results by actively managing its existing portfolio and capitalizing on profitable liquidity events.

We are pleased to have achieved a strong overall yield on our loan investments which enabled our company to earn net investment income that has exceeded our dividend since implementing our current dividend policy in November 2012. We believe our dynamic venture portfolio positions Horizon well to continue to produce high current pay interest income and attractive fees, while maintaining the opportunity to realize significant warrant gains as we remain focused on providing stable dividends to shareholders.

Some highlights of our performance include net investment income was $3.4 million or $0.35 per share for the fourth quarter and $13.3 million or $1.38 per share for the full year. In the fourth quarter, we originated $19 million in new loans to 8 companies, bringing the total to 18 new companies added to our portfolio for the year. Total originations for the year were $88 million.

In the second half of 2013, we began to structure a majority of our new loans with floating rates. For the fourth quarter, 47% of new debt investments included floating rate adjustments and at year-end, 89% of our committed backlog was floating rate.

We ended 2013 with a venture loan portfolio at fair value of $221 million to 49 companies as well as warrants and equity with an aggregate fair value of $6 million in 73 portfolio companies. Of those 73 portfolio companies, 11 are public with an aggregate fair value of $2 million, providing the potential for near-term realization.

Our portfolio yield was 15.5% for the fourth quarter and 14.4% for the full year, underscoring the stability of the strong returns we achieved on our investment. This portfolio yield consists of double digit coupons, fees and end-of-term payments. Importantly, our full year portfolio yield of 14.4% compared favorably to 14.2% for the full year of 2012, and reflects the earnings stay in power of our venture loan portfolio in a year when interest rate compression had a negative impact on many BDCs.

During 2013, we also reduced our borrowing cost by completing our first investment grade term securitization for the fixed annual interest rate of 3%, and lowering the interest rate on a revolving credit facility from 4.25% to 4%.

We experience liquidity events from 4 portfolio companies in the fourth quarter and 11 portfolio companies for the full year. During the fourth quarter, one of our portfolio companies, Fiberlink Communications was acquired by IBM. In connection with this acquisition, Horizon received $400,000 success fee as well as an accelerated end-of-term payment and prepayment fees, resulting in a fully realized internal rate of return of 25.2%.

We also existed one of our medical device companies to Direct Flow Medical in the fourth quarter. Horizon received the prepayment fee and accelerated end-of-term payments resulting in an IRR on this investment of 17.8%, plus we continued to hold warrants in the company that could result in further upside. This is the case in many of our liquidity events where the loan is prepaid early, since our warrants have 7 to 10 years lives and typically survive the underlying loan providing the ability to augment total returns.

In addition, one of our warrant portfolio companies Revance Therapeutics successfully completed an IPO in January and raised approximately $110 million. At the time of their IPO, we exercised a put option within our warrant resulting in $720,000 in cash proceeds which was equal to the fair value we reported at year-end. We continue to hold additional warrants in Revance stock.

Given the significant improvement in the IPO market in the second half of 2013 and continuing into 2014, we believe the opportunity for liquidity events from our existing portfolio of 11 public company warrants has been considerably enhanced. In addition, we believe the opportunity exists for an increasing number of our private portfolio companies to complete an IPO or a positive M&A transaction in 2014 as compared to the last 2 years.

The fourth quarter of 2013 also presented some challenges for Horizon. During the quarter, we took fair value adjustments on 5 portfolio accounts, which reduced our net asset value. 4 of the 5 accounts are in the solar related cleantech sector. This sector in general has experienced challenges as a result of several issues that when combined, has led to a significant decrease in investment for solar related companies.

We stopped originating new business in solar and energy related technology companies approximately a year and a half ago. We will continue to leverage Horizon’s extensive expertise in aggressively managing our venture loan portfolio to resolve these fluid accounts in a manner that maximizes recovery over the coming quarters.

To that end, we have settled one of our non-accrual accounts in this solar related cleantech sector. As recently announced by SolarBridge Technologies, it has recapitalized its business including new equity from existing investors and 2 new investors. As a result, we received a cash payment of $2.7 million which was applied to the loan balance. In addition, we received $2.3 million in preferred stock as part of the new equity realm, providing the potential for recovery and upside on our investment.

We will record a realized loss on this loan of $1.8 million in the quarter ending March 31st. We had previously fair valued this loan in $5 million as of December 31st and do not expect this loss to have an impact on NAV in the first quarter. The $2.7 million received in cash, will be reinvested over the next few quarters.

During the fourth quarter, we successfully settled our loan investment in ACT Biotech upon the sale of substantially all of the company’s assets to a private VC-backed Biotech company. In connection with this transaction, we received a cash payment of $2.1 million that was applied to the loan balance of $3.9 million, as well as a right to receive up to $17 in contingent contractual success payments.

Although, we took a realized loss on this loan, which had been on non-accrual since Q4 2012, we believe this transaction has significant upside potential for recovery, including milestones that could be reached in the next 12 months to 24 months, resulting in additional fee income that could more than offset our realized loss. We are pleased with the positive disposition of this asset and now look forward to future upside potential.

As of December 31st, our loan portfolio had a weighted average credit rating of 3 where 3 is a standard credit on a 4 point scale with over 90% of the portfolio continuing to perform at or better than expected at the time of underwriting. Additionally, the historical performance of our investment portfolio since our inception in March 2008 remained strong with cumulative gains from the exercise of warrants offsetting realized losses.

Although we continue to benefit from rapid loan amortization schedules and early terminations that naturally delever our portfolio, Horizon ended the year with an overall debt to equity ratio above our target leverage of approximately 0.8 to 1.

Our success in delevering our portfolio during the fourth quarter was offset by the fair value adjustments I just mentioned, and our strategic decision to reinvest capital in attractively priced venture loan transactions and do a further repayment of our lower cost debt. As of December 31st, our asset coverage ratio was 211% or a GAAP debt to equity ratio of 94%. We expect to return to our target leverage over the next 6 months to 12 months by liquidating the assets from our non-accrual accounts over the coming quarters and redeploying the proceeds into earning assets. We also intend to build our portfolio by taking advantage of select high quality loan investments, while continuing to receive normal contractual loan payments and seeking opportunities to monetize our warrant portfolio.

In consideration of our performance in the fourth quarter and our outlook for the future, we declared monthly dividends totaling $0.345 per share payable during the second quarter of 2014, representing an annualized yield of 9.8% based on our NAV of $14.14 per share.

Since our IPO, we have now declared cumulative dividends of $5.27 per share. Our focus remains on producing net investment income that fully covers our dividends over the long-term. In that regard, our aggregate NII has exceeded cumulative dividend payment since the implementation of our current dividend policy in late 2012.

In addition as of December 31st, we had approximately $6.3 million or $0.66 per share in undistributed or spillover income for future payout consideration. Overall, 2013 was a positive year for Horizon in which we capitalized on the inherent earnings power of our dynamic venture loan portfolio. Management remains committed to generating attractive risk adjusted returns through a strong commitment to our venture lending strategy.

We believe Horizon’s long improvement history as a pure play in venture lending cannot be easily replicated and explains why we are considered the lender of choice among leading VC and private equity firms. As a result, we continue to see a steady stream of high quality deal flow from top tier equity sponsors. And we’ll continue to differentiate Horizon’s exclusive and long standing commitment to the venture debt market for the benefit of our shareholders.

Chris will provide details of our financial performance and portfolio, but first Gerry will provide an overview of the market.

Gerry Michaud

Thank you, Rob. And good morning, everyone. In the fourth quarter of 2013 and to-date in 2014, our advisor originated approximately $62 million in new loan investments of which we funded approximately $34 million and partnered with other lenders for the remaining $28 million. These sizable deal originations are directly related to the strength of our dedicated venture lending platform and reflect positive demand for our debt products through the end of 2013 and the onset of 2014.

In the fourth quarter, we funded 8 portfolio companies totaling $19 million. Onboarding yields for this transactions remained strong, averaging 12.6%. For the full year 2013 onboarding yields also averaged 12.6%. Of note, in addition to maintaining our attractive yields, 39% of new loans funded during the second half of 2013, including floating rate -- concluded floating rate interest -- interest rates which will allow us to benefit from potential Horizon rates. Going forward, we will maintain our focus on transactions that include floating rate adjustments.

At the end of Q4, our pipeline remained relatively strong with over $100 million of new investment opportunities being evaluated and negotiated, enabling Horizon to select the highest quality investments available. Although there’d be no assurance that transactions in our pipeline will be funded, our proved and committed backlog as of today totals $8 million with 88% priced at floating interest rates.

Turning to our core markets, as we predicted last year, we are now seeing significant activity in the technology sector related to both IPOs and M&A. Of the 24 venture backed IPOs completed in the fourth quarter 10 were technology companies. In addition, 66 of the 81 M&A transactions completed in the fourth quarter were technology related companies including our own portfolio company Fiberlink Communications.

We believe our focus on quality technology related debt transactions throughout 2013 has considerably strengthened Horizon’s position to benefit from additional upside during 2014 and beyond as the tech markets maintain strong momentum.

We expect to continue to capitalize on high quality growth oriented technology companies, particularly in the areas of enabling internet companies, cloud management, cyber security and specialized chip companies.

In our life science market, we continue to see quality opportunities within medical device and early stage drug development companies by maintaining the cautious approach toward late stage drug development companies due to increased competition and unfavorable pricing.

The IPO market of life science sector remained extremely robust in Q4 with 6 life science companies completing IPOs during the quarter, increasing the total for 2013 to 42 life science company IPOs. This amount has equaled to the combined number of life science IPOs from the prior 4 years. Currently Horizon’s portfolio includes warrants and equity in 9 publicly traded life science companies including Revance and Ambit Biotech that completed IPOs in 2013 and 2014.

We continue to see a decline in M&A activity in the life science market as a direct result of more life science companies turning to the IPO market to create additional value for shareholders. We believe big pharma companies will become more aggressive in 2014 pursuing acquisitions of life science companies including earlier stage companies to compete more effectively with the IPO market.

We remain bearish on the cleantech market, as Rob discussed earlier. Globally, cleantech investment has dropped substantially with investments in VC-backed renewable energy companies for example, totaling approximately 632 million during 2013 as compared to 1.2 billion in 2012 and 2.8 billion in 2011, reflecting the overall uncertainty for cleantech. Based on the recent trends, we do not anticipate making any investments in the cleantech sector during 2014.

In our healthcare information and services market, we continue to seek attractive opportunities in the medical information sharing and medical payment processing markets. In that regard, we increased our investment in Q4 in one of our fastest growing medical payment technology companies. In addition, another of our portfolio companies Everyday Health announced last month that it’s filed for an IPO is expected to raise up to a $115 million, which if been completed, they have a positive impact on our NAV in the future.

Turning to venture capital activity during the quarter, venture capital investment of $8.9 billion for the quarter represented the highest level of quarterly VC investment in 2013. Total VC investment of $33 billion for the full year is consistent with VC investment in 2012. With a strong IPO market for both technology and life science companies, we expect VC firms to invest with confidence during 2014 in certain market segments such as drug discovery, medical device within the life science sector as well as internet related companies, cyber management and security companies within the tech sector. In addition, we expect a significant increase in VC fund raising in 2014, as VC firms are able to clearly demonstrate to investors, higher returns from VC firms compared to other alternative asset investment strategies, based on a number of successful VC portfolio exits.

As it relates to competition, there has been a shift in the competitive landscape in the venture debt market over the past few quarters. According to Fortune finance, a multi faceted commercial finance company has shut down its venture lending platform during the fourth quarter. We were not surprised by this decision based on our own experience with large diversified financial institutions, which has consistently been at the venture debt portion of their business, eventually becomes an outlier within the context of a broad and more traditional investment strategy.

The infrastructure needed to manage our growing venture debt portfolio and specialized experience required in managing this asset class often frustrates the management teams of larger financial entities, by having devoted disproportionate amount of time and resources for a relatively small percentage of their overall portfolio.

While large financial institutions are attractive by the high yields historically generated in our business, reality is, it requires a strong and dedicated infrastructure including an expert team with deepen market access and knowledge to execute successfully in venture lending strategy over the long-term. At Horizon we’ve built a leadership role in [the venture] lending market that began of 10 years ago upon the founding of our adviser. Our roots however go back over 20 years based on the collective experience of our management team which happens to include expense of large and diversified financial terms so we know what works and what doesn’t.

In addition we’re aware of 2 private fund based venture debt lenders that have not raised new funds and are no longer active in the market than another venture debt group with a large financial organization that has pulled back in venture lending activities. The exit of these experienced venture lending entities has reduced the number of true venture lending franchises serving our marketplace. While we expect others to try to fill the void overtime Horizon is uniquely positioned to take advantage of the supply and demand imbalance during 2014. This is already evidenced by our ability to maintain attractive on boarding yields and other lending mark as our experience in interest rate compression.

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

Chris Mathieu

Thanks, Gerry, and good morning, everyone. Our consolidated financial results for the three months and year ended December 31, 2013, have been presented in our earnings release distributed after the market closed yesterday and we also filed our Form 10-K with the SEC last night.

For the 3 months ended December 31st, total investment income increased 10.5% to $8.8 million compared to $7.9 million for the fourth quarter of 2012. This increase was primarily due to the increased average size of our loan portfolio.

New loans funded in the fourth quarter had an average onboarding yield of 12.6%. Total investment income for the quarter included $7.9 million from investment income related to interest income on investments as well as approximately $850,000 of fee income associated with loan prepayments from three of our portfolio companies. And success fees of $400,000 in connection with the sale of one of our portfolio companies.

For the year ended December 31st total investment income increased 26% to $33.6 million compared to $26.7 million in the prior year period. For the fourth quarter our portfolio yield was 15.5% compared to 14.7% for the fourth quarter of 2012. The portfolio yield for the year ended December 31, 2013 and 2012 was 14.4% and 14.2% respectively. But primary changes from quarter-to-quarter to portfolio yields are driven by the timing of new loan investments and timing and extend of prepayments and related prepayment fees within the portfolio.

The company’s total expenses were $5.3 million for the fourth quarter as compared to $4.3 million for the fourth quarter of 2012. Interest expense increased year-over-year primarily due to the increased average borrowings following the issuance in June of fixed rate asset backed notes in an aggregate principal amount of $90 million. During the fourth quarter we reduced the outstanding balance of our asset backed notes by approximately $10.6 million the effective interest rate on all of our debt outstanding as of December 31st was 6.8% compared to 6.4% a year earlier.

I want to remind you that interest expense is the current pay coupon plus debt issue cost already paid in connection with securing commitments plus non-used fees on our credit facilities. Management fee expense for the fourth quarter increased year-over-year by approximately $200,000 to $1.4 million as a result of an increase in average gross assets.

We earned net investment income of $0.35 per share or $3.4 million for the three months ended December 31st as compared to $0.36 per share or $3.4 million for the fourth quarter of 2012. We began the fourth quarter with three loans on non-accrual, one of these loans accounts was ACC was resolved in December as Rob detailed earlier. There were also three new accounts all solar related clean-tech companies placed on non-accrual during the fourth quarter. As a result there were five investments on non-accrual as of December 31, with an approximate cost of $23.3 million and a fair value of approximately $13.9 million.

Excluding Solar Bridge which was resolved last month the total cost basis of these accounts was $16.5 million with a fair value of $8.9 million as of December 31st. The impact on NII from the new accounts on non-accrual in fourth quarter was 1 penny a share. For the current first quarter we expect the impact on NII to be approximately $0.05 per share on those same new accounts on non-accrual.

For the fourth quarter of 2013, the net unrealized depreciation on investments was $6.2 million which was primarily due to the unrealized depreciation under five debt investments on non-accrual status, offset by the reversal of previously recorded unrealized depreciation related to ACC.

Our net asset value as of December 31st was $14.14 per share, the decrease of $0.81 per share compared to September 30th, primarily due to the fair value adjustments. As expected we reduced the portfolio and ended the quarter with an investment portfolio of $221 million with new bookings in the quarter of $19 million in venture loans to eight portfolio companies.

This performance was offset by $12 million in regularly scheduled principal payments and $20 million in principal prepayments resulting in a lower portfolio balance to start the current first quarter. For the year ended December 31st, we had an aggregate new fundings of $88 million to 31 portfolio companies, offset by $41 million in regularly rescheduled principal payments and $46 million in principal prepayments.

We do not expect any loan prepayments before the end of the first quarter, subject to the level of actual loan prepayments combined with the impact of regularly scheduled principal payments we expect a net portfolio change for the first quarter to be up $5 million to $10 million.

Investment capacity remains consistent with Q3 as Horizon ended the fourth quarter with $39.5 million in availability including cash totaling approximately $26 million as well as $13 million in funds available under existing credit facility commitments. As of December 31st, we had no borrowings under our existing revolving credit facility and our term loan credit facility had a total of $10 million outstanding.

While we expect to continue to delever the balance sheet in Q1 by $3 million to $5 million with the natural deleveraging of the amortizing portfolio, we will enjoy the continued access to these available funds from our credit facilities. In November, we partnered with key equipment finance to renew and amend our revolving credit facility under favorable terms. With this new facility we have further reduced our future borrowing cost, secured more favorable asset eligibility and extended the remaining revolving period by more than two years.

We intend to use this facility as our primary source of leverage for both first and second lean loans beginning in second quarter and more fully in the second half of the year. We are pleased by the success we achieved throughout 2013 and significantly improving our overall borrowing capacity including our $90 million term securitization rated A2 by Moody’s.

And currently we have 65% of our total borrowings outstanding fixed at a favorable interest rate of 3%. In addition 92% of total borrowings are at fixed rates. We have moved a substantial portion of our borrowings to fixed rate match term financing and reduced our exposure to a possible rise in interest rates consisting with our focus on mitigating risk while augmenting returns via cost effective leverage.

Now I'd like to turn the call back to Rob.

Rob Pomeroy

Thank you Chris. We are pleased by our performance in 2013 and remain excited by our future prospects. Management will continue to focus on deploying capital efficiently and profitably, while maintaining an opportunistic approach to increasing our financial flexibility in support of Horizon's long-term growth objectives.

Our strong track record in generating attractive risk adjusted returns from both high yielding loans and warrant gains has enabled Horizon to build a leading industry brand and positions our company well to drive shareholder value in 2014 and beyond.

Before we open the floor for questions, I would like to note that we plan to hold our next conference call to report first quarter results during the week of May 5, 2014.

We'll be happy to take questions you may have at this time.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Andrew Kerai of National Securities. Your line is open. Please go ahead.

Andrew Kerai - National Securities

Yes, hi good morning and thank you for taking my questions.

Rob Pomeroy

Good morning.

Andrew Kerai - National Securities

I'm just looking at the clean-tech sector. Again, appreciate the commentary on Solar Bridge. Do you guys plan to exit the other two investments in the near term that are on nonaccrual within that space?

Rob Pomeroy

We're working on that right now Andrew. Yes.

Andrew Kerai - National Securities

Okay, great. Thank you. And then just another question, Chris, on the $0.05 impact from the non-accruals in Q1. So, if I'm understanding that correctly, then it's reasonable to assume that your Q1 NII is going to come in a little below the dividend payout, is that correct?

Chris Mathieu

That’s fair. Yes, yes. So basically the [nipple is] the difference, is what the impact off of the fourth quarter actuals were.

Andrew Kerai - National Securities

Right, right, fair enough. Thank you.

Operator

Thank you. Our next question comes from the line of Troy Ward of KBW. Your line is open. Please go ahead.

Troy Ward - KBW

Great. Thank you and good morning. Andrew actually just hit on a couple of my questions. But Rob can you just speak -- you talked about selling additional non-accruals here to kind of recapture some of that fair value and protect that. Can you speak to the operational performance of these companies, just considering their VC, what do you think the opportunity is to sale these at the current fair value?

Rob Pomeroy

Well we settled Solar Bridge you know that. One of the companies is in Chapter 11 and there is ongoing process with an auction soon so that that should be cleared up in the next quarter or two. The other company is actively trying to raise capital and so again we expect that they’ll either be successful in that in the next coming quarter or two.

Troy Ward - KBW

Okay. And then the one you talked about Chapter 11 and that Cereplast which is public information of course. We saw where the company was awarded a small dip loan and there will be a hearing on March 20th. Is the March 20th hearing, is that going to determine if you have control of the assets and if there will be a sale of the assets, is that what that hearing’s for?

Rob Pomeroy

In the case of Cereplast, it’s in the Chapter 11 process. There will be a series of hearings that will allow the company execute its attempt to reorganize under Chapter 11. But the other company that is also in Chapter 11 is Xtreme Power.

Troy Ward - KBW

Okay. I am sorry. I didn’t know which type of one. That’s the one you were referring to. Okay. Do you expect higher legal expenses in the coming two quarters as you deal with these companies working through that process?

Rob Pomeroy

We did have higher level of professional fees in the fourth quarter and we would expect some of that to continue as we work our way through these.

Troy Ward - KBW

Okay. And then one last one you talked about the Solar Bridge restructuring is that preferred piece that you are going to retain, will it have a yield on it?

Rob Pomeroy

No, it’s a previous preferred share, preferred equity.

Troy Ward - KBW

Okay, great. Great. Thanks guys.

Operator

Thank you. Our next question comes from line of Chris York of JMP Securities. Your line is open. Please go ahead.

Chris York - JMP Securities

Good morning guys, thanks for taking my questions. What are your thoughts on amending or changing your expense structure to potentially align your interests with shareholders?

Rob Pomeroy

Right now we are continuing with the plan that we have.

Chris York - JMP Securities

So just continue to execute on your strategy and you haven’t put much thought onto that, is that the kind of way to think about it?

Rob Pomeroy

Well one of the ways you reduce your overall cost is if you maintain your -- if you grow the size of the overall assets, but with external management the contract has the management fee and incentive fee as outlined.

Chris York - JMP Securities

Okay, that’s it from me, thanks.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Robert Dodd of Raymond James. Your line is open. Please go ahead.

Fin O'Shea - Raymond James

Hi guys, thank you this is actually Fin O'Shea in for Robert Dodd this morning. Just a couple of questions. Regarding the move to floating rate securities, you mentioned earlier on in the call. Does that indicate (inaudible) in the capital structure? And back to the solar, was there anything specific this quarter that can draw a lot of markdowns, say primary specific event in this space or do they all need financing at the end of their project lives something like that?

Rob Pomeroy

Yes. I will take that. So the switch to floating rate really is just the different interest income structure for the same products we have always [want], so rather than a fixed rate, we have gone to a floating rate.

Fin O'Shea - Raymond James

So you were able to put just change the terms of the loans?

Gerry Michaud

Yes, that is correct, this is Gerry. Yes, that is correct. Because I mentioned there is a -- there has been a fairly significant shift in the competitive landscape of our market and we actually found ourselves in Q4 in this quarter, specially on the tech side, specifically on the tech side, where there is -- we found less competition for the transactions that we have been on which gives us obviously the ability to be more aggressive and how we price those and we have been looking at moving to floating rate interest products since the middle of last year and this has allowed us to accelerate that and that’s one of the major benefits with that from the competitive landscape as it exists today.

Fin O'Shea - Raymond James

Okay.

Rob Pomeroy

With respect to your question about the solar space, I mean each company has its own facts and circumstances and capital raising issues that brought the stress to the head, but the overwriting team is that the venture equity investment in support for this sector has been difficult for about last year and half, two years.

Fin O'Shea - Raymond James

Okay. That’s very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Jon Bock of Wells Fargo Securities. Your line is open. Please go ahead.

Jon Bock - Wells Fargo Securities

Good morning and thank you for taking my questions. Maybe a bit of a bigger picture item here. As we look at the venture space and Gerry and Rob and Chris, correct me if I’m wrong, the ability to drive down and draw more overtime, it’s something that’s important to VC spots or so normally you will see an investment with perhaps a $20 million investment in which 5 is drawn and 15 will be drawn overtime. That implies that you need a significant amount of liquidity in order to fund those types of transactions at venture sponsors and if they can do appreciate that flexibility yet here at 0.9 and at vast liquidity very limited, and I’m trying to put it in a positive way, I mean we appreciate that but it is limited, can you speak to the competitive advantage that you would offer versus someone who has adequately capitalized and likely able to meet VC’s needs in a number of different ways as opposed to the liquidity constraint that you are operating under here?

Rob Pomeroy

Yes, so I’ll take that. As I have mentioned last quarter and this quarter, we have not been actively pursuing kind of the larger type late stage life science companies which typically have the great features that you talked about. So most of what we have been doing really in the second half of 2013 and even in 2014 have been technology deals which require a significantly less capital, it may still be tranche but we're talking about relatively small amounts in that $2 million to $5 million range.

So, we have been able to manage really that portfolio and that backlog relatively efficiently based on the capital we have. I think to get to your question about the competitive advantage, our competitive advantage in our marketplace is our track record with the VCs. They know us very well. We have a lot of their portfolio companies in our portfolio. And so we generally are going to get a look at just about everything.

And if there is something that is too big for us, of course as you know we also have very good partners in the marketplace that we partner with. Some of them marine markets, some of them kind of rely on us, with their origination on venture [debt side] because they don't have a platform for it.

So, we very efficiently manage that process and that hasn't been a big issue for us. Although, I will say that we watch it pretty closely.

So, that's how we would mention it.

Jon Bock - Wells Fargo Securities

Yes. Fair enough. And then maybe two more global questions, I mean people have come and asked about kind of earnings and the earnings profile. Rob are you comfortable with paying out a return to capital your dividend for a while or do you think it'd be best to perhaps reduce it closer to what you believe lower earnings power this business could be?

Rob Pomeroy

Just couple of points Jon. First of all we do have $0.66 per share of spillover income. So, even in a quarter where we would have a shortfall for the time being it would not be return of capital.

So that's important consideration, we believe that we stated that our dividend policy is to establish a dividend and can be covered by NII overtime. And we believe that one look it in the rear view mirror, we have demonstrated that capability and we are confident that we can do so going forward.

Jon Bock - Wells Fargo Securities

Okay. And then last question as it relates to track record and I find a very good tie in with Mr. York’s question as it relates to fee structure. So correct me if I am wrong guys, but in the first quarter 2011, we were looking at $17.23 book value, today $14.14. Can you explain, with that reduction in NAV, why one should take an NOI or incentive fee and/or outperformance fee if we see that amount of book value degradation, while your peers have not shown the same?

Chris Mathieu

I don’t really have a good answer for that Jonathon.

Jon Bock - Wells Fargo Securities

That’s fair. Thank you very much for taking my questions.

Operator

Thank you. Our next question comes from the line of Jim Young of West Family Investments. Your line is open. Please go ahead.

Jim Young - West Family Investments

Yes. Rob, you mentioned that you’re pleased with the 2013 results. And your stock is down over 7% and down over 10% at [1.48]. And I am trying to just reconcile those 2 and I am trying to understand, think about what changes may we expect in 2014? Are there fundamental issues with your credit underwriting process or are your loans that you’re extending not being priced appropriately for the risks that you’re actually assuming, so any clarity you can provide would be very helpful?

Rob Pomeroy

So, our outlook Jim really is includes a couple of things that I think we tried to mention in the script is that we do expect to recover from these non-accruals and as a result, get the cash back so we can redeploy profitably. We did have suffer I think disproportionately by some of investments in the solar related space, turned out to be a much more difficult space than we anticipated when we entered it. We made a corrective action to exit that market about a year and half ago and some of these problems have hit the beach reasonably although we expect to come out the other side in decent shape. We believe that our portfolio is very, highly profitable as demonstrated by our 14.4% yield on that portfolio during last year and the year before. Consistently earning that kind of top-line yield with improved cost of debt and leverage as we think over the long haul that as we demonstrated for nearly 20 years, the venture lending space is a very, very profitable place to invest.

Operator

Thank you. Our next question comes from the line of David Miyazaki of Confluence Investment. Your line open. Please go ahead.

David Miyazaki - Confluence Investment

Thank you. A question for you, when you are talking about floating rate and the shift to that duration (inaudible) your portfolio; I hear that from a lot VCs that there is a shift to floating rate but if I think about what you are doing there to try and protect Horizon’s income from rising interest rates, ultimately the risk is still out there. So now, you have shifted it to your borrower. How do they address the fact that interest rates may rise? Because in the end, you may have a floating rate coupon but if we go up in LIBOR, pick a number, a couple or 300 basis points, then they are going to be stretched in covering their own debt servicing costs. So, how do they address that interest rate risk?

Rob Pomeroy

That’s a good question. Our structures do provide some top level of ceiling on the interest rates, so that we enjoy the protection of interest rate, rising interest rates within a limit. So on the high ends, it still is -- financing makes sense for them and their plan. Remember what venture landing is all about; it’s a less diluted form of capital for these companies as they develop their technology products. And so, they are looking at the alternative of equity. And so as long as they can have -- can forecast the cost of this capital within a range, it makes sense for them.

David Miyazaki - Confluence Investment

Yes.

Rob Pomeroy

Very value added for them as opposed to taking a similar amount in equity.

David Miyazaki - Confluence Investment

Yes, I understand that and that they will incur debt costs that are higher. But ultimately if they can protect their equity cost, and they can have higher returns, so I understand what you are saying. But I just don’t always have a sense of security, when I hear that you’re shifting to anyone, is shifting to a floating rate posture, because that means that you are collecting from somebody who is not wearing that. Do they every -- I would suspect that they are not of the opinion that they ought to swap that out with some sort of an interest rate swap fixed their cost?

Rob Pomeroy

That’s the borrower’s decision. We try to look at in our asset liability mix and the cost of our debt, which is largely fixed now try to provide ourselves some contraction. Previously, we would have considered swaps to protect ourselves, now the borrower can look at swaps. The product provides some protection for us, because it has a ceiling protection for the borrower. So, within the realm of all of corporate finance, we think this is still a good move for us and for our customer.

David Miyazaki - Confluence Investment

Yes. I just -- do you ever think that maybe it’s better for you to wear that interest rate risk and swap it out on your own side and allow them to have a lower fixed rate number?

Chris Mathieu

We actually have done that for many years and the market has clearly said that we should pass that cost on to our portfolio company. The end of day will be down the road when (inaudible) rates rise. But today there is a clear message in the market that lenders should push some of that off to their (inaudible) and that’s what we’ve done. We will see how that plays out.

David Miyazaki - Confluence Investment

Okay. Second thing, I just wanted to ask about with the number of workouts that you are having to deal with; one of the primary concepts in venture lending is that you have an interest in the intellectual property of the company that is drawing and developing. And this is part of the recovery in the event that there is a bankruptcy or default. How, as you look at your situation here with the non-accruals, how valuable is that intellectual property actually turning out to be and what -- how well did you underwrite it or is it 100% what you expected, or is it something less?

Rob Pomeroy

Yes, it really is what drives the value and the potential product recovery, the fact that we are secured by the entire enterprise value is what is giving us the opportunity to liquidate these companies and get recoveries.

Gerry Michaud

I think if you look at the most recent kind of full recovery that we’ve just went through on ACT, it was in fact the intellectual property to drug candidates that we are able to position to effectively do a deal with that we think is going to be -- have significant upside. And it was really all about the IP.

David Miyazaki - Confluence Investment

And do you feel like that thesis is still intact for the solar exposure that you have right now?

Rob Pomeroy

Yes.

David Miyazaki - Confluence Investment

Okay. So generally speaking, we would expect as you work through these non-accruals that there should be pretty good recovery?

Rob Pomeroy

Correct.

David Miyazaki - Confluence Investment

Okay. I did want to follow-up on a couple of the questions I came up with, because I think that I’ve talked about this issue with you guys more on a one on one basis in the past with regard to cost structure of external versus internal. But I have to say that I thought that your comment about costs coming down as you become larger, didn’t make a lot of sense to me in an external structure, because as you become larger that’s just not going to happen.

And I think that’s something that you do -- you should consider and against the backdrop of what one of the early analysts was talking about with your fee structure versus your NAV performance. If you don’t have a response to that right now, I would encourage you take the next 90 days and come up with a good one for us next quarter, because it really is something that if you’re not thinking about it, then I think that that’s an issue. And if you are thinking about it, then we would like to hear about it.

Rob Pomeroy

Fair enough.

David Miyazaki - Confluence Investment

Alright. Thank you.

Operator

Thank you. And with no further questions in queue, I’d like to turn the conference back over to Mr. Rob Pomeroy for any closing remarks.

Rob Pomeroy

Thank you. I’d like to thank everyone again for joining us on today’s call and following the Horizon story. We look forward to sharing with you our progress in the future. This will conclude our call. Thank you.

Operator

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

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