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Horizon Technology Finance Corporation (NASDAQ:HRZN)

Q1 2014 Earnings Conference Call

May 7, 2014 9:00 AM ET

Executives

Megan Bacon – Marketing Support Manager

Robert D. Pomeroy Jr. – Chairman and Chief Executive Officer

Gerald A. Michaud – President

Christopher M. Mathieu – Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Troy L. Ward – Keefe, Bruyette, & Woods, Inc.

Casey J. Alexander – Gilford Securities Inc.

Robert J. Dodd – Raymond James & Associates, Inc.

Andrew P. Kerai – National Securities Corporation

Chris J. York – JMP Securities LLC

Ron J. Jewsikow – Wells Fargo Securities LLC

Operator

Good morning and welcome to Horizon Technology Finance First Quarter 2014 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 Began – I’m sorry Bacon of Horizon for introductions and the reading of the Safe Harbor statement. Please go ahead.

Megan Bacon

Thank you, and welcome to the Horizon Technology Finance first quarter 2014 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 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 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, 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.

Robert D. Pomeroy Jr.

Good morning and thank you all for joining us. During the first quarter, Horizon continued to build its venture debt portfolio having high-quality, high yielding VC-backed loan transactions and increasing the number of warrant positions held to 74. Our NAV increased from $14.14 at the end of 2013, to $14.32 at the end of Q1, as a result of our successfully exiting one of our one rated portfolio companies and the increase in the value of our warrant portfolio. In addition, two of our portfolio companies completed IPOs during the quarter.

Further highlighting our performance for the first quarter, we had an increase in net assets from operations of $5.1 million or $0.53 per share. We achieved the dollar-weighted average portfolio yield of 13.6% during the first quarter. Net investment income was $2.5 million or $0.26 per share. We ended the quarter with a venture loan portfolio at fair value of $218 million, as well as warrants and equity investments with an aggregate fair value of $10.2 million, both representing an increase as compared to the end of the fourth quarter.

And finally, we continue to reduce our exposure to the cleantech sector by selling two of our non-accrual accounts, which I will discuss in more detail later on the call.

in consideration of our first quarter performance and our outlook for the second quarter and beyond, we declared monthly dividends totaling $0.345 per share, payable during the third quarter of 2014. This represents an annualized yield of 9.6% based on our NAV as of March 31. since our IPO, we have now declared cumulative dividends of $5.615 per share.

Our dividend strategy remains to pay monthly dividends that are covered by our net investment income over time. maintaining our commitment to provide shareholders with a steady stream of attractive dividends, we continue to benefit from our remaining undistributed or spillover income of approximately $5.8 million or $0.58 per share as of March 31.

I would now like to turn our attention to credit quality. Overall our asset quality improved during the first quarter. as of March 31, our loan portfolio had a weighted average internal credit rating of 3.1, 90% of our current portfolio is performing at or better than expected at the time of underwriting, which is consistent with our past experience. As previously announced, during the first quarter, we settled our outstanding loans of Solar Bridge technologies, which was on non-accrual status as of December 31.

In addition, we announced last month, the successful exit of our investment in Xtreme Power. The sale of assets to a strategic buyer provided for the full recovery of our investment, including our principal, interest, and fees, resulting in a realized internal rate of return on the transaction of 17.9%. with this favorable asset, we improved Horizon’s NAV by $1.3 million or a $0.13 per share for the first quarter.

The sale allowed us to reverse previously deferred income from the fourth quarter into the first quarter and will enhance the second quarter investment income due to the acceleration of fees, totaling approximately $500,000. During the first quarter, we also acquired substantially all of the assets of PixelOptics in connection with the bankruptcy of this company. and as a result, our investment in no longer classified as eventual loan within our portfolio. we have begun liquidating the assets, which should be completed over the coming quarters.

As of March 31, there were two investments with internal credit rating one, with an aggregate cost of $5.2 million and an aggregate fair value $3.5 million. This compares to five investments with an internal credit rating of one, as of December 31, 2013, with an aggregate cost of $23.2 million in an aggregate fair value of $13.9 million.

The normal migration of account credit ratings during the quarter included the upgrade of two accounts from a three-rating to a four-rating, our highest credit quality and the downgrade of one account from a three-rating to a two-rating. the category of two rated credits at March 31, 2014, included the one account we successfully exited in early April.

In summary, we made considerable progress during the first quarter in dealing with our loans on non-accrual status. we will continue to focus on resolving the remaining investments. in terms of liquidity, our success in resolving non-accrual accounts has resulted in total cash proceeds were approximately $13.7 million, which we intend to reinvest over the second and third quarters of 2014. we also paid down our long-term debt by approximately $3 million in the first quarter, while naturally delivering our portfolio from loan amortization.

Our goal remains to return to our target leverage of approximately 0.8 to 1.

Turning to another important aspect of the Horizon venture lending model, we regularly mentioned the number of warrant positions that we hold in our portfolio of companies and the potential for future upside. We invest in technology companies that range from early stage development through the expansion stage, and into the later stage of development. We obtain the warrants along with our loan investments, all along this development timeline.

We typically have exercise periods ranging from five years to 10 years from the date of grant. At the time that we underwrite our investments, we target potential milestones in future valuations, in which we believe it is wise to exercise the warrant and harvest the upside. When a company is acquired the decision to exercise the warrant and enjoy the benefit of the upside is easy. When a company completes an IPO, the timing and valuation may not yet have reached our target valuation. As a result, we often hold warrants in publically traded companies.

Today, 12 of our warrant positions are in public companies with an aggregate fair value of $3.6 million, which has the potential to enhance our ability to realize significant gains in the near-term. We will look to opportunistically monetize some of our warrants and equity investments in the coming quarters. In addition, we believe the potential 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 previous two years.

Before I turn the call over to Gerry, I would like to respond to feedback that we received on our earnings call in March. Creating shareholder value is important to us and fundamentals of what we do everyday. Horizon has recently intensified discussions at the board level, regarding our company’s investment management agreement.

The purpose of these discussions is to explore various options that were better aligned the interest between our external advisor and shareholders. While at this time, we have not concluded these discussions. The Board of Horizon and the advisor are in an agreement that a stronger alignment can be achieved that is our common goal to do so in the coming months.

As the small first step, our advisor has agreed to waive the management fee on cash beginning in the first quarter of 2014. This voluntary waiver led to a reduction in the base management fee of approximately $100,000 for the first quarter and the corresponding reduction in the incentive fee. We appreciate the feedback we have received regarding this matter and we’ll continue to value your input, as we remain dedicated to working closely with our Board to come to a positive resolution. We continue to believe that given is long-term importance to pull that enough option is the right count at this time.

I will now turn the call over to Gerry to provide an overview of the market.

Gerald A. Michaud

Thank you, Rob. Good morning, everyone. During the first quarter of 2014, we experience positive demand for our venture debt products, especially from early in mid stage venture capital-backed technology and life science companies. Our advisor originated a total of approximately $30 million of new loan investments three portfolio companies in the quarter of which Horizon funded approximately $15 million and partnered the remaining $15 million with other lenders

Onboarding yields for these transactions remain strong averaging 12.5%. As a reminder, onboarding yield consistent with the interest rate, commitment fees, ETPs, but does not include additional potential returns in the form of warrants, prepayment fees, success fees are acceleration of income from ETPs upon prepayment.

Our favorable overall portfolio yield is one of the highest BG sector and warrant positions at 74 portfolio companies to be major contributors to our results throughout 2014 and beyond.

At the end of Q1, we were evaluating and negotiating a pipeline of more than $140 million of new investment opportunities. this pipeline will enable Horizon to select those investments, which we believe are of the highest quality. Also, there can be no assurance that we will fund any investments in our pipeline now awarded, proved and committed backlog as of today totals $27.5 million of loans all priced with floating interest rates.

Turning to our core markets, we continue to see significant and strong IPO activity in the life science market in the first quarter of 2014 with 24 late-stage life science companies completing IPOs and raising more than $1.5 billion according to the National Venture Capital Association.

As we have previously mentioned, we believe that from a venture debt perspective, the late-stage life science market has been overheated, resulting in current pay yields, which were too low for the risk, in addition light warrant coverage combined with unrealistic valuations for late-stage life science companies made the likelihood of reasonable returns from warrants and equity remote, because we do not see investments in late-stage life science market provide new returns were required. We concentrated on early-to-mid stage life science companies where we could get attractive current pay yields and warrants at favorable valuation entry points.

That said, a strong market for late-stage life science IPOs has created certain positive effects for venture debt overall, including VCs demonstrating healthy returns to the LLPs and return of capital to VCs, which they can then redeploy into early-stage life science companies. These positive developments should lead to a significant improvement in VC fund raising opportunities, which is a positive for the venture debt market, which I will discuss in further detail later. As many of you know, our market for life science IPOs in Q1 continued to be strong, the beginning of the second quarter has shown a significant pullback in life science IPOs and a correction in valuations of public life science companies.

From our 25 years of experience in venture lending, we know that the only sustainable lending model for venture lending is to consistently obtain high current pay yields to drive NII, we could build a growing warrant portfolio over time, which will create long-term value for investors notwithstanding cyclical swings in a broader stock market, attempting to time a venture lending strategy for the next up tick in the IPO market is not a sustainable venture lending model.

As we mentioned in our Q4 life science market overview, we expect big pharma to be a very active M&A in 2014 for a couple for reasons. First, although big pharma is the first to let private investors come to our development cost in order to reduce clinical and development risk, a robust public market creates a competitive environment, which requires big pharma companies to act sooner, they’ve got an additional development risk, or they hire acquisition cost.

The second reason, and perhaps more important, big pharma companies are becoming more acquisitive is due to their need to add new drug products to their drug portfolios, replace blockbuster drugs that no longer have or soon will not have patent protection. This issue was highlighted in a recent article in USA today, which reported the three major U.S. drug manufactures, Squibb, Pfizer, and Merck, all posted lower revenues in 2012 and 2013 and are projecting lower revenues in 2014 as is Bristol-Myers.

Already in 2014, major big pharma M&A transactions have been announced, three major M&A transactions have been announced, including Pfizer’s bid to acquire AstraZeneca. We believe that these transactions are just the beginning of a buying spring by big pharma to use their healthy balance sheets to build their product pipeline. As a result, we expect public and private VC-backed life science companies with appropriate valuations and attractive product platforms, be very strong candidates for M&A during 2014 and into 2015.

Turning to the technology sector, as we also mentioned in previous calls, we expect to see more M&A activity in the tech sector this year. As evidence of this trend, there were 79 reported technology-related M&A transactions in Q1, an increase from 66 transactions in the fourth quarter.

In addition, technology-related M&As in the first quarter posted a 35% increase and disclosed value, as compared to the fourth quarter. Software and internet specific deals accounted for the majority of the M&As in the technology sector during the first quarter.

As you know, we put particular emphasis on investing in fairly in early-to-mid stage technology companies during the course of 2013. We did so because we saw a stronger opportunity to obtain attractive current pay yields and high warrant coverage at favorable valuation points from high-quality VC-backed technology companies.

We saw a decrease in competition in the venture debt market for early-to-mid stage technology companies with the exit of a number of venture debt players and with a larger VCs and diversified financial venture lenders focusing on less – excuse me, later stage technology companies where VC sponsors were being replaced by other types of sponsors such as PE firms or family offices.

We expect our concentrated investment in the early-to-mid stage tech sector will bode well for our investors at M&A activity and even IPO activity remain strong during the year. As an example of the strength of the M&A market and as positive impact on Horizon, were not yet publically announced two of Horizon’s portfolio companies in the tech sector has signed term sheets to be acquired. Also, there is no guarantee these transactions will close. if closed, we expect these exits to be realized in the second or third quarter of 2014 and result in a combination of fees related to prepayments, ETP acceleration and success fees.

We remain bearish on the cleantech market; also we are beginning to see a rebound in solar-related investing as a result of increasing solar product demand. We think there is more positive outlook for clean-tech in 2014, which may positively impact our existing cleantech portfolio. However, we do not anticipate making investments in this sector in 2014.

In our healthcare information and services market, we continue to evaluate a number of possible investments as more emerging companies seem to capitalize on the significant opportunity to reduce the cost of healthcare delivery and improve patient care. We believe this market is poised for future growth. As we have noted, one of our healthcare portfolio companies Everyday Health, completed an IPO in the first quarter.

As an example of the benefits of building a large and growing warrant portfolio over time, the two Horizon portfolio companies that went public in the first quarter Revance and Everyday Health were long transactions consummated in 2008 and 2009 respectively, with their warrants becoming accretive to our NAV in 2014.

Our focus on the technology sector, as well as early-stage life science companies and medical device companies during 2013 and 2014 has allowed Horizon to continue to build a portfolio of high current pay investments, while adding a significant number of low priced warrant positions to our portfolio. This focus and execution should drive long-term value creation for our investors.

For the balance of the year, we will continue to pursue quality, low priced VC-backed investment opportunities in the early-to-mid stage life science and technology markets. We expect to find many opportunities in the markets as VCs are again, investing in these critically important markets with confidence.

In pursuing a well-defined investment strategy to fund early-to-mid stage venture capital life science and technology company, Horizon has solidified its position as a leading provider of venture debt to the venture capital community. As a result, I expect demand for our venture debt product to be robust for the balance of the year. When you combine those attributes of performance and outlook with the lower cost of capital we have in place going into 2014, we believe our existing and new investors have an exciting opportunity to benefit from Horizon’s venture debt platform during 2014 and beyond.

Turning to venture capital activity during the quarter, the first quarter of 2014 represented one of the best quarters for the venture capital market across the board in a decade. According to Dow Jones VentureSource, VC has funded over $10.7 billion to VC-backed technology and life science companies in the first quarter of 2014. This represents the highest level of VC investments since 2001.

The information technology sector guided the largest share with the VC investment during the quarter, taking 32% of the capital invested. VC fundraising also had a very successful quarter and raising over $9.5 billion which literally doubled the amount of fundraising from Q4 of 2013.

Our view is at the LP market is beginning to look at VC funds and VC investment as a favorable place of the investing capital again. We believe these factors, combined with the 36 venture backed companies completing IPOs during the first quarter, indicate a strong and growing market in 2014 and 2015, with new investment and lending opportunities for early in mid-stage VC backed companies in the life science and technology sectors again. Again we believe we have positioned Horizon well to take advantage of these favorable markets.

Finally, as we look back at the shakeout in the venture lending competitive landscape which took place 2013, there are two important factors which impacted Horizon’s position in the venture lending market. First, the exit of a number of venture lenders we identified in our Q4 call, resulted in lesser competition for early-to-mid stage venture loans which we were able to capitalize on, as reflected in our overall portfolio yield performance. We also used the dislocation of competitors to strengthen our position with the VC community during 2013.

Second factor which impacted Horizon’s position in the venture lending market, was the entrance of other BDC players in the market, who choose to target late-stage companies. This created a significant downward pressure on pricing loans late-stage companies similar to what occurred in the middle-market lending.

We believe Horizon is well positioned as a long-term, and experienced and reliable lending partner to VC-backed technology and life science companies and we expect to take advantage of our market position for the benefit of our shareholders.

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

Christopher M. Mathieu

Thanks Jerry and good morning everyone.

Our consolidated financial results for the first quarter 2014 have been presented in our earnings release distributed after the market closed yesterday, and we also filed our Form 10-Q with the SEC last night. For the three months ended March 31, total investment income increased 2.3% to $7.5 million, compared to $7.4 million for the first quarter of 2013. This year-over-year increase was primarily due to higher fee income, partially offset by lower interest income on investments resulted from a decreased average size of the loan portfolio.

New loans funded in the first quarter had an average onboarding yield of 12.5%, total investment income for the quarter included $7.2 million from interest income on investments, as well as approximately $350,000 of fee income from five portfolio companies. For the first quarter, our portfolio yield was 13.6%, compared to 12.8% for the first quarter 2013. There were no loan prepayment fees in either periods. The company’s total expenses were $5 million for the first quarter 2014 as compared to $4.6 million for the first of 2013.

Interest expense increased year-over-year primarily due to the increase in average borrowings following the issuance in June of 2013 of our asset-backed notes. During the first quarter we reduced the outstanding balance of our asset-backed notes by approximately $3 million. The effective interest rate for all debt outstanding as of March 31 was reduced to 6.8% as compared to 7.2% a year earlier. Interest expense is the current pay coupon plus debt issue costs already paid in connection with securing commitments plus non-used fees on our credit facilities.

Management fee expense for the first quarter was flat year-over-year as a result of waver of the management fee on cash. Professional fees for the first quarter increased year-over-year due to higher legal fees and other costs associated with our non-accrual investments. We expect these expenses to return to more historical levels upon resolving our remaining non-accrual accounts in the second half of the year.

We earned net investment income of $0.26 per share or $2.5 million for the three months ended March 31, 2014, as compared to $0.29 per share or $2.8 million for the first quarter of 2013. We realized warrant gains in the first quarter totaling $500,000, we believe the opportunity to benefit from significant liquidity events including warrant gains from our existing investment portfolio remain strong due to the positive momentum in both the IPO and M&A activity within our target markets.

For the first quarter of 2014, the net unrealized appreciation on investments was $8.5 million, which was primarily due to the reversal of previously recorded unrealized depreciation of $7.5 million. Our NAV as of March 31 was $14.32 per share, an increase of $0.18, compared to December 31 2013, primarily due to the combined fair value adjustments on our loan portfolio, as well as our warrant and equity investments.

We ended the quarter with the venture loan portfolio of $228 million, with new bookings in the quarter of $18 million. This performance was offset by $12 million in regularly scheduled principal payments, resulting in a slightly higher portfolio balance to start to correct second quarter. Subsequent to March 31 we received cash proceeds from the loan prepayments from one of our portfolio companies in the principal amount of $7.5 million, in connection with this prepayment we expect to record accelerated fee income and prepayment fees totaling $290,000 in the second quarter.

We’re also aware of two potential liquidity events in the range $7 million to $15 million in aggregate loan principal. As two related technology portfolio companies have notified us that they intend to prepay their loans by the end of the quarter, as a result of pending acquisitions. Although we expect both to occur in the second quarter one or both may not happen or may slip into the third quarter. If both loans prepay, as expected, we would record accelerated fee income success fees and prepayment fees in the quarter.

Subject to the level of actual loan prepayments combined with impact of regularly scheduled principal payments of $13 million, we expect the net portfolio change for the second quarter maybe down by approximately $10 million to $20 million. In terms of investment capacity, Horizon ended the first quarter with $34 million in available liquidity, including cash totaling approximately $16 million, as well as $18 million in funds available under existing credit facility commitments.

Based on our continued progress and resolving non-accrual accounts, we have further enhanced our liquidity to date in the current second quarter by receiving net cash proceeds totaling approximately $11 million. As of March 31 we had no borrowings outstanding under our revolving credit facility, $76 million outstanding under our asset-backed notes, $33 million outstanding under our 2019 Senior Notes and $10 million outstanding under our term loan credit facility. While we expect to continue to deliver the balance sheet in Q2 from normal loan amortization and expected loan prepayments, we remained focused on augmenting returns by using our revolver as cost effective leverage toward the end of the second quarter.

As of March 31, our asset coverage ratio was 215% or debt-to-equity ratio of 0.9 to one. We expect to achieve our stated target leverage of 0.8 to one by the end of the second quarter, as a result of the expected loan prepayments I just outlined. With these prepayments we expect to report a leverage ratio of approximately 0.76 to one at the end of the second quarter. Currently, we have 64% of our borrowings fixed at our favorable interest rate of 3%. In addition, with 92% of total borrowings at fixed rates, we have reduced our exposure to a possible rise in interest rates, while positioning a substantial portion of our borrowings to fixed rate match term financing.

Before we open the floor to questions, I would like to note that we plan on holding our next conference call to report second quarter results during the week of August 4. This concludes our openings remarks and we’ll be happy to take questions from you at this time.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Troy Ward of KBW. Your line is open.

Troy L. Ward – Keefe, Bruyette, & Woods, Inc.

Thank you and good morning guys. Can you just go back and repeat what you said about the deferred income from extreme power, what was the impact on this quarter and what was the expected benefit in the second quarter?

Christopher M. Mathieu

Sure good question. So, the impact on the first quarter was total of $520,000 and it was spread between recovery of interest income on the portion that was are non-accrual during the fourth quarter, as well as some late fees that were also brought in as part of the recovery. The total $520,000.

Troy L. Ward – Keefe, Bruyette, & Woods, Inc.

So, they can through two different so partially.

Christopher M. Mathieu

Correct, right about $200,000 came through other income and the rest came through top-line interest income. [With lot] (ph) regarding the impact on Q2, the $500,000 will be largely in interest income through the acceleration of the final payment, which only I guess booked when the transaction actually was closed, which was the second quarter and then a small amount in other income.

Troy L. Ward – Keefe, Bruyette, & Woods, Inc.

Okay. And then, you said you took control of the fixed assets, do you think the liquidation is the March 31 fair value indicate, where will you think that final liquidation will be?

Gerald A. Michaud

We believe that the fair value that is listed in March 31 is recoverable price.

Troy L. Ward – Keefe, Bruyette, & Woods, Inc.

Okay, great. And then, that’s all. I just want to make one comment about, you kind of talked about, you used the phrase intensified discussions at the board level with – trying to better [alignment] (ph) shareholders and just, I applaud you for taking that step and hopefully that there we can come to a decision where, you can see some changes to the structure to better [alignment] (ph) shareholders and also applied you for waving the fee on cash. And that’s all my question.

Gerald A. Michaud

Thank you.

Operator

Thank you. And the next question from Casey Alexander of Gilford Securities. Your line is open.

Casey J. Alexander – Gilford Securities Inc.

Can you tell me the actual balance as carried in the portfolio of loans on non-accrual at the end of the quarter?

Christopher M. Mathieu

(Indiscernible) cost basis. I think it was in.

Gerald A. Michaud

Yes. It is in the…

Casey Alexander – Gilford Securities

Not the cost base, the carrying value at the end of the quarter and the portfolio of those that are non-accrual.

Gerald A. Michaud

Yes. $5.2 million at cost and $3.5 million at fair value, all our (indiscernible) are non-accrual.

Casey Alexander – Gilford Securities

Okay, good. Alright, got it. As it relates to the Horizon Funding Trust, what is the – is there a set amortization schedule for that or is it amortizing based upon loans that are in the portfolio covering it as they come due and how do we schedule, how the rate the company is paying that down.

Gerald A. Michaud

That’s a good question. So, it is a static pool that as the loans pay us, we pay down the debt side. There is an advance rate in the borrowing base that we stay in formulae with. So in the case of loan amortization that is set at the beginning, we know that and it is set and fixed, but the variability is when a loan prepays that will accelerate both the asset and debt side of the equation.

Casey Alexander – Gilford Securities

Okay. So, are some of the companies that have been informed you that they are going to prepay located within the trust and therefore we are going to see an accelerated pay down on the trust in the coming quarter or third quarter as if excellent those deal happen to prepay.

Gerald A. Michaud

Yes. That’s a good observation, that is – so all of those are in the other than the loans I am non-accrual, all the other optional prepaid that we spoke about our in the trust and they will result in accelerated borrowing pay down, which was one of the main catalyst for us getting to our 0.76 target debt to equity by the end of the day.

Casey Alexander – Gilford Securities

Okay. Alright, good. That’s very helpful. Thank you. Lastly, a lot of BDC directly, not direct competitors because you are many direct competitors in the eventual lending space and lot of BDCs have been making a sincere effort to increase the amount of floating rate assets that they have on their portfolio. While understanding that, your guys deals have more rapid amortization schedule that maybe justn’t as attractive to take advantage of that. Have you increased the floating rate assets in the portfolio and if so, what percentage of the portfolios in floating rate asset at this time.

Gerry Michaud

This is Gerry, Casey. The answer to the first part of that question is we have in fact, as I look at everything in our pipeline now and awarded, proved and committed and follow that business is floating rate business and we expect to continue to do that. It’s not something that we have problem selling in the marketplace. It does protect us relative to as potential fluctuations in interest rates. So, our portfolio is fairly quickly moving, especially with the other part of our portfolio securitized already being match funded, all of the new business we are putting on in fact practice is the floating rate business.

Casey Alexander – Gilford Securities

Okay. Is there a current percentage in the portfolio as of the end of the quarter, did is in floating rate as suppose to fixed rate, the last time I asking I think it was a couple of quarter ago and it was 94% fixed and can 6% floating.

Gerald A. Michaud

Yes. So, we don’t have that number handy. If you if you see the individual asset that actually have floating rate you can look at the schedule of investments I just on have that handy. But, Gerry is point out substantially everything since the securitization as actually than floating rate.

Casey Alexander – Gilford Securities

All right, great. thank you very much for taking my questions.

Operator

Thank you. And the next question is from Robert Dodd of Raymond James. Your line is open.

Robert J. Dodd – Raymond James & Associates, Inc.

Hi, guys. Several of the questions have already been answered. but one, following-up on Casey, typically floating actively tied with first lean versus fixed with second. so is this an indicator in terms of the pipeline you set for that you’re rotating more towards floating. Is that an indication that you’re also shifting more and more towards, first lean versus second lean. And then, if that’s the case, or kind of following up to that, what’s your view on the Fortress Facility right now, since it is one of the more expensive pieces of capital that you have. it did grant you more access to second lean and principal, but there are truly risk with that. And it’s getting a point that may become economic to just pay that off, given the target is really not to level out with that kind of facility at this point. So what’s your view on that?

Gerald A. Michaud

This is Gerry. I’ll take the first part of that question. No, we have not changed relative to our first and second lean transactions, as it really held to floating rate. we’re pretty easily transitioned in our market to a floating rate product, without having to concern ourselves with changing other aspects of either underrated deal, or the structure of that deal. So everything that you will see going to our portfolio is floating rate will otherwise be consistent with what we have done in the past, you’ll see some senior security deals for sure and you’ll see some second lean deals as well.

Robert D. Pomeroy Jr.

So in terms of Robert, in terms of the Fortress Facility, it does provide a modest amount of leverage we recognized, it has the higher cost associated with it. And we will be looking at the economics of perhaps prepaying that loan in the third quarter, when the prepayment penalty improves on its third anniversary.

Robert J. Dodd – Raymond James & Associates, Inc.

Okay. Thanks guys.

Operator

Thank you. The next question is from Andrew Kerai of National Securities. Your line is open.

Andrew P. Kerai – National Securities Corporation

Good morning, thank you for taking my questions. Just wondered if I could touch on the final legal fees, it was sort of relative to Q1, is there expectation that the fees can remain at the same level in Q2 before normalizing the second half of the year, or just kind of try to put a pin on that number during the second quarter.

Robert D. Pomeroy Jr.

That’s a fair question. The legal fees will likely be at more the level of Q1, the $800,000 level, and then after that in the second half be a more normalized to the $300,00, $400,000 level for the second half of the year.

Andrew P. Kerai – National Securities Corporation

Okay, great. thank you and then just to talk about as well certainly appreciate the color on you revisiting your advisor agreement. Sort of the range of alternatives you are considering, I know you obviously can’t say anything at this point, I mean is it internally managed something you’re thinking about, or is it simply a fee labor, or how should we kind of think about that going forward?

Robert D. Pomeroy Jr.

I’m not going to thank you for that or appreciate that, I’m not going to talk about discuss the details today, but I want to assure you that we are committed to the process.

Andrew P. Kerai – National Securities Corporation

Great, that’s certainly good to hear and in terms of the management waiver – management team waiver on cash, that’s some of that we can sort of expect here kind of the interim before you guys make a formal announcement or is that something that you guys just kind of did for Q1 are not going to be looking at in the second quarter?

Robert D. Pomeroy Jr.

The same answer is that we’re not going to really talk about the details going forward. All right.

Andrew P. Kerai – National Securities Corporation

Okay. Sure. And then I just wanted touch on what are the remaining two loans on non-accrual, if you look at the Semprius loan, I mean it looks like it’s marked pretty close apart, is your expectation kind of full recovery on that or what is your outlook for that at this point?

Robert D. Pomeroy Jr.

Semprius is a private company and they’re in the process of raising company. so we respect their confidentiality in doing that. and we think that’s appropriately value based on the scenarios that we used for them going forward.

Andrew P. Kerai – National Securities Corporation

Great. Thank you. I certainly appreciate the color.

Operator

Thank you. The next question is from Chris York of JMP Securities. Your line is open.

Chris J. York – JMP Securities LLC

Good morning. Thanks for taking my questions. A large venture lender making comments that included expansion into lending products, in penetration of lending to early expansion stage companies. Could you provide us with an update on (indiscernible) competition and then maybe more specifically what are your views on the effect of your business from the expansion of lending that is much longer?

Gerald A. Michaud

First of all, I’m not sure specifically what you’re referring to, but I can tell you, as I mentioned in the competitive side of our comment, we spent last year really solidifying our position as a really good partner for venture capital backed companies and the VC firms response them. our expectation is that those relationships in the marketplace, which have stood the test of time from all kinds of lenders, I remember when GE came into our market long time ago, everyone said oh god we’re dead, they’re going take over the market low cost of capital.

The VC – you have to know one thing about our structures, we have a very small part of the overall gap component of these companies we finance. It’s important finance to the VCs, but the relationship with the lender that actually provide it is more important, because they are warrant lenders coming into these portfolio companies that are in development stage, which have an enormous amount of value creation ahead of them and providing problems that are inconsistent with durability to grow. and so over time over the last 20 years, I mean that is one thing has been fairly consistent in our marketplace, if you look at the tech banks that have supported the VC-backed companies and then to back supported the VCs and into some of their partners.

Those relationships are correctly important, they’re embedded in what we do everyday and we think we are in probably the best position of any competitor in the marketplace today, relative to our relationship with the varying markets that we serve. and so we think we’re in a great position and we think that the opportunity for our investors going forward create value as we did last year with consistently high yields and adding additional warrants for companies have very good valuations. we’re very excited about that process moving forward.

Chris J. York – JMP Securities LLC

Okay. Thanks a lot, Gerry. Last one from me is what we have expected professional fees to be up this quarter still came higher than expected. Their prepared remarks for that professional fees loan normalized in the second half of 2014. what should be our expectations for Q2, maybe a similar like Q1?

Gerald A. Michaud

Sure, a fair question. we actually said on the last call, I think we actually said what the amount is going to be 80,000, so I think we’re repeating that say that in Q2 will be in the range of 800,000 for Q2 and then after that after the Q2 effort of working on the non-accruals will have a more normalized level in the $300,000 to $400,000 range, so look for a higher level continuing in Q2, they are consistent with Q1.

Chris J. York – JMP Securities LLC

Got it. Thanks, Chris. That’s it from me.

Christopher M. Mathieu

You’re welcome.

Operator

Thank you. And the next question is from Ron Jewsikow of Wells Fargo. Your line is open.

Ron J. Jewsikow – Wells Fargo Securities LLC

Good morning and thank for taking my questions. I appreciate the color on potentially enhancing or further enhancing alignment with your shareholders. Sorry if I missed this on Q2 access that you forecasted, but did you provide any color on potential end of term payments that might get pulled forward? And how long of these launched on your book from modeling purposes, we can look any potential amortization is being put forward?

Christopher M. Mathieu

So I think we were comfortable disclosing today given that they have not acknowledged their transactions is that there’s one transaction or two transactions ranged from $7 million to $15 million in the aggregate and they were not originated this year, so they have some seasoning to that.

Ron J. Jewsikow – Wells Fargo Securities LLC

Okay.

Christopher M. Mathieu

And both transactions have final payments, but not comfortable given the (indiscernible) at this point.

Ron J. Jewsikow – Wells Fargo Securities LLC

All right, and that’s all I had. Thanks for taking my question.

Christopher M. Mathieu

Okay. Thank you.

Operator

Thank you, there are no further questions at this time. I turn the call back over for closing remarks.

Robert D. Pomeroy Jr.

Well, thank you we appreciate your questions and your interest in the Horizon story. We are encouraged by our start to 2014, we believe that the balance of 2014 holds promise for continued positive earnings from our high-yielding portfolio, to maintenance of our dividend, for upside from our maturing warrant portfolio and further recovery from our underperforming assets. We will keep you inform on our progresses we look to enhance shareholder value over the coming months.

Operator

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

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