Horizon Technology Finance's (HRZN) CEO Rob Pomeroy on Q2 2014 Results - Earnings Call Transcript

| About: Horizon Technology (HRZN)

Horizon Technology Finance Corporation (NASDAQ:HRZN)

Q2 2014 Earnings Conference Call

August 6, 2014 9:00 a.m. ET


Megan Bacon - Marketing Support Manager

Rob Pomeroy - Chairman & CEO

Gerry Michaud - President

Chris Mathieu - CFO


Robert Dodd - Raymond James

Troy Ward - KBW

Ron Jewsikow - Wells Fargo

Casey Alexander - Gilford


Good day, ladies and gentlemen, and welcome to the Horizon Technology Finance Corporations Second Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a remainder, this conference call is being recorded.

I'll now to like to turn the conference over to Megan Bacon, you may begin.

Megan Bacon

Welcome to the Horizon Technology Finance second 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'd like to point out that the Q2 press release is available on the company’s Web site 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 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'd like to turn the call over to Rob Pomeroy.

Rob Pomeroy

Good morning and thank you all for joining us. Before I review the financial performance for the second quarter, I'd like to first speak to two important strategic initiatives that we undertook in the first half of 2014.

The first is the consideration of changes to the investment management agreement between Horizon and our advisor. Horizon explored various options that could better align the interest between our external advisor and shareholders. While there is very little precedent for externally-managed BDCs that have amended their investment management agreement, we did consider the fee arrangements and structures of all externally-managed BDCs as we work to amend our agreement.

Yesterday, we announced changes to the agreement that were approved by our Board of Directors on August 1st and are effective as of July 1, 2014. The first change is to make permanent removal of management fees on cash and cash equivalents. Previously the advisor at times has waived such fees as it did for the second quarter. Now, the reduced fees are permanent.

In addition, the agreement has been revised to include an incentive fee cap and deferral mechanism to better align the incentive fees paid to the advisor with the returns earned by the shareholders. We believe that the changes we've made provide significant and meaningful benefits to our shareholders, while maintaining the ability of the advisor to operate efficiently with its staff of professionals and specialty niche of venture lending.

The second initiative we undertook was to enter the SBIC license application process. Previously we had been unable to consider this process due to matters related to the ownership of our advisor. This was recently resolved without any financial impact on the public company.

As a result, in July, we submitted our management assessment questionnaire to the small business administration; the first step in the approval process for an SBIC license. This is a long process, and there is no guarantee of ultimately obtaining a license, but we have started the journey. We believe the actions we've action will enhance shareholders value over both the near-term and long-term.

Highlighting our operating performance for the second quarter, we're in net investment income of 1.8 million or $0.19 per share for the second quarter. NII was impacted by our strategic decision to prepay our term loan facility with Fortress, in order to significantly reduce future interest expense and better align Horizon's total borrowing commitments with our current equity base, excluding the impact from one-time charges related to the prepayment and termination of the term loan facility. Our core NII was 2.9 million or $0.30 per share for the second quarter.

We had an increase in net assets from operations of 2.4 million or $0.25 per share. We achieved a dollar weighted average portfolio yield of 16.4% consisting of double-digit coupons, fees, and end of term payments. We continue to experience positive momentum in the marketplace, and increased deal originations quarter-over-quarter with $26 million funded in the second quarter.

We harvested two warrant gains in the quarter. One of the gains came from exercising our warrant and selling shares in Enphase Energy, a public portfolio company, which repaid our loan in 2012.

The other warrant gain resulted from the acquisition of Kontera Technologies, which also prepaid its loan in connection with the acquisition, resulting our receipt of accelerated income from prepayment fees and end of term payments.

M&A activity remain strong within our target markets. We ended the second quarter with a portfolio of venture loans to 49 companies with an aggregate fair value of 209 million, as well as a portfolio of warrants and equity investments in 79 companies with an aggregate fair value of 10 million.

Our warrant and equity portfolio in these 79 companies includes warrant and equity investments in 11 publicly traded companies with an aggregate fair value for these investments of 3.6 million, providing the potential for additional near-term gains.

We continue to improve the overall quality of our venture loan portfolio by settling two loans in the quarter that were on non-accrual. And in the process, we covered value from these investments. At June 30th, only one account remained on non-accrual.

In consideration of our second quarter performance and future outlook, we declared monthly distributions totaling 34.5 cents per share payable during the fourth quarter of 2014. This represents an annualized yield of 9.7% based on our NAV as of June 30th. Since our IPO, we have now declared cumulative distributions of $5.96 per share.

Our strategy remains to pay monthly distributions that are covered by our net investment income over time. In maintaining our commitment to provide shareholders with a steady stream of cash distributions, we continue to maintain undistributed or spillover income of approximately $%0.42 per share as of June 30th.

We're targeting NII that covers our distributions by the end of the year through a combination of incremental growth in the portfolio, continuation of high yields on the portfolio, lower expenses from the impact of the revised investment management agreement, and the interest expense reduction from rightsizing our debt commitments.

I'd now like to turn our attention to credit quality. By leveraging our extensive expertise managing venture loan portfolios, we have improved considerably our asset quality during the first half of 2014. Our success on liquidating assets from non-accrual loans resulted in the receipt of net cash proceeds in the second quarter of approximately $12 million, which will be redeployed into earning assets.

At June 30th, approximately 94% of our loan portfolio was performing at or better than expected at the time of underwriting.

In terms of liquidity, we reduced our overall debt to equity ratio to 0.79 to one, consistent with our target leverage. We continue to benefit from rapid loan amortization schedules that naturally de-lever our portfolio.

In addition, our loan prepayments have both accelerated the reduction in long-term debt and enhanced our liquidity providing the opportunity to reinvest the proceeds over the coming quarters into quality assets with comparable yields.

Unlike middle market BDCs that have been experiencing yield compression, Horizon has consistently been able to re-deploy the capital from liquidity events into new loans at onboarding yields consistent with our existing high yielding loan portfolio.

Going forward, we'll maintain our focus on generating attractive risk adjusted returns by deploying capital efficiently and profitably into high yielding loan investments and seeking additional opportunities to monetize our warrant and equity positions.

So, there was a lot going on in the second quarter. We revised our investment management agreement and entered the SBIC licensing process. The term loan facility was terminated. We made significant recoveries on non-accrual loans. Originations were strong, and we experienced positive liquidity events. We believe that these accomplishments will enhance shareholder value in both the near and long-term.

In a moment, Chris will detail the financial results for the second quarter, which will provide more color on these events, but first, Gerry will provide an overview of the market. Gerry?

Gerry Michaud

Thank you, Rob. Good morning, everyone. During the second quarter, we continue to execute on our discipline investment strategy, seeking in originating quality investments in venture capital sponsor technology and life science companies that 1018^^^ offered strong current pay yields with additional upside potential from warrants or success fees.

We also continue to experience consistent demand for our venture debt products in the quarter as the advisor originated a total of $46 million in loan investments to seven companies of which Horizon funded 26 million, and we partnered the remaining 20 million with other lenders.

As we have previously mentioned over the past 18 months, we have focused our origination efforts in the venture capital back technology market sectors of software, Internet-related and semiconductor companies.

In the life science market, we're primarily focused on the medical device sector. Our reason for specifically targeting these sectors was our strong belief that they provided the best opportunity for quality higher yields and long-term upside through warrants at attractive valuations and success fees related to near-term M&A activity.

In the second quarter, we began to bear the fruits of our efforts as our portfolio yield for the quarter surged to 16.4% increasing our portfolio yield for the first half of the year to 15%.

In addition, our average onboarding yield of 12.6% for the quarter demonstrates our continued success in adding new transactions to our portfolio that lock-in strong yields in building the same potential of prepayment fees and term payments, success fees and warrants like those we actually received in 2013 and the first half of 2014.

As a remainder our onboarding yield consist of the contractual interest rate, commitment fees and ETPs, but does not include additional potential for increased yield from warrant gains, prepayment fees, success fees or accelerated income from ETPs upon loan prepayments.

Also of note, the new transactions added to the portfolio in the second quarter were floating rate transactions, providing a built-in hedge in our portfolio against the rise in interest rates.

At the end of the second quarter, we held warrant and equity positions in 79 portfolio companies, and had success fee provisions in an additional eight portfolio companies. As an example of additional yield we received from our portfolio in the second quarter in connection with the acquisition of Kontera Technologies by SingTel. Kontera prepaid the balance of $7.5 million loan. And as additional yield, we also received a prepayment fee and accelerated ETP and a cash payment of approximately $200,000 for our warrants.

In addition, on July 31st, Atmel Corp completed an acquisition of Newport Media, one of our semiconductor portfolio companies. The M&A transaction resulted in venture loan prepayment of $7 million and approximately $800,000 in fee income, including a success fee which will be recorded in the third quarter.

At the end of the second quarter, our pipeline of new investment opportunities had grown to approximately $200 million, which includes 26 million of recently awarded transactions, 85 million in new proposal dispute and 90 million in the evaluation of new opportunities, while historically we’ve been able to convert our pipeline into high yielding quality assets, there can be no assurance that we will find any investment opportunities in our pipeline.

Based on our growing pipeline and improved liquidity from early terminations in the second quarter, we expect our portfolio will grow in the third quarter by $5 million to $10 million.

Turning to our core markets, we continue to see solid demand for IPOs in the life science market in the second quarter of 2014. Going to the National Venture Capital Association or the NVCA, 16 late-stage life science companies completed IPOs in the second quarter raising over $1.2 billion. While down from Q1 2014, the second quarter represents that this straight have a double-digit number of life science companies completing IPOs.

The strong number of life science IPOs, however, was driven by a significant decrease in evaluation and offering size, which we believe may result in an uptick in demand for venture debt by post IPO life science companies as they require additional capital in order to advance their products through clinical trials.

As I mentioned in my Q1 remarks, the successful completion of IPOs by venture back companies over the last five quarters has had a number of positive effects of the VC funds including the return of capital to be redeployed. It was now a strong evidence that VCs are in fact redeploying that capital into new investments. According to NVCA, VC has invested $13 billion in 1,100 companies in the second quarter compared 7 billion in 1,000 companies for the same period of 2013. This $13 billion of new investment during the quarter represents a 10 year high for VC investment in a quarter.

We believe based on our historical experience that is VC has redeployed their capital into new investments. Many venture back companies will look to leverage their equity with venture debt to extend their runway and reduce their overall cost of capital.

The strong demand for life science IPOs during the quarter continue to provide stiff competition for big pharma companies interested in acquiring companies to build up their own product portfolios. And as a result with the exception of a few large big pharma transactions, M&A activity in life science market was down. Although the strategic collaborations are getting down between big pharma and life science companies, we are aware of a number of recently announced large strategic collaborations including $65 million distribution in commercialization agreement between Sandoz, a Novartis company and Anacor Pharmaceuticals, one of our portfolio companies.

As predicted, over the last couple of quarters we’ve seen a significant increase in technology related M&A transactions compared to our targeted markets. The NVCA reported 79 of the 96 M&A transactions reported in the second quarter for technology related transactions. As we reported earlier, two of Horizon’s technology related portfolio companies announced M&A transactions with one closing in the second quarter and the other closed early year in the third quarter.

We continue to believe that we will see more M&A activity in the tech sector into 2015. Due to our strong focus in building up our tech portfolio over the last six quarters, we believe our portfolio is well positioned to drive higher returns. Also, we remain bearish on the clean tech market we are seeing a steady increase in investment levels in this sector and improving demand for alternative energy-related products.

In the second quarter, Aquion, an energy-related portfolio company prepaid the outstanding balance on its venture loan plus an accelerated ETP and a prepayment fee. We continue to hold the warrant in Aquion.

Our pipeline of opportunities in the healthcare information and service sector have been slow to develop, however, we are encouraged by the quality of the transactions we are seeing. As we mentioned last quarter, one of our companies, Everyday Health completed an IPO in the first quarter, and stock prices up approximately 15% from its offering price.

As we look at the competitive landscape during Q2, we continue to see competition for companies that are moving away from VC sponsored to relying more on debt and/or public equity. We had not seen an increase in competition for VC sponsored technology in medical device companies. Significant competition for late-stage life science transactions resulted in continued pressure on current pay yields and lower for warrant coverage.

However, as I mentioned in my market update comments, we are beginning to see greater demand for public life science companies that did not raise as much capital in their IPOs as they had originally sought. These companies are looking to boaster liquidity which may result in greater demand from venture debt thus leading to improve pricing. Accordingly, we may look to become more active in new public companies in the life science market in the second half of 2014.

We continue to strengthen our relation with the VC community through our steadfast focus on funding their portfolio companies along their entire development and growth stages and through their liquidity events. We believe it’s consistent; a reliable market approach has established Horizon as a value-added financing partner to VC back technology and life science companies as value-added market position as resulted in our strong onboarding yield performance and one of the highest yielding portfolios in the BDC industry.

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

Chris Mathieu

Thanks, Gerry, and good morning everyone. Our consolidated financial results for the second quarter have been presented in our earnings release distributed after the market closed yesterday. We also filed our form 10-Q with the SEC last night as well as an 8-K with a copy of our revised investment management agreement.

For the three months ended June 30th, total investment income was 8.7 million compared to 8.8 million for the second quarter of 2013. This modest year-over-year decrease was primarily due to lower interest income on investments resulting from the decreased average size of the loan portfolio, partially offset by higher fee income. New loans funded in the second quarter had an average onboarding yield of 12.6% consistent with recent quarter. Total investment income for the quarter included 7.7 million from interest income on investment as well as approximately $1 million of fee income.

For the second quarter our portfolio yields was 16.4% compared to 14.5% for the second quarter of 2013. The primary change from quarter-to-quarter to portfolio yields are driven by the timing of new loan fundings and timing and extent of loan group payments and related fee income within the portfolio. The company’s total expenses were 6.8 million for the second quarter as compared to 5.1 million for the second quarter of 2013.

Interest expense increased year-over-year primarily die to the acceleration of $1.1 million unamortized debt issuance costs and $750,000 prepaymen6t charge both related to the termination of our term loan facility. We do not expect any ongoing obligations or expenses associated with the termination of prepayment of this facility.

Beginning in the third quarter, our quarterly interest expense is expected to be reduced by approximately $300,000 or $0.03 per share. These anticipated cost savings are a result of the elimination of debt issue costs and non-usage fees associated with the term loan facility combined with lower borrowing costs under our revolving credit facility with the equipment finance which currently has an interest rate of 4%.

Effective interest rate on our borrowings for the first half 2014 was 6.9%. Following the termination of the term loan facility, we expect our effective interest on borrowings for the second half of 2014 to be approximately 6.2%. Primarily as a result of these one-time charges which totaled $1.9 million, Horizon did not incur a performance-based incentive fee for the second quarter. This compares to an incentive fee at second quarter of 2013 of $900,000. Base management fee expense also decreased year-over-year due in part the advisor’s waiver of its management fee on cash in the quarter.

Professional fees for the second quarter increased year-over-year primarily due to increased legal fees and other professional costs associated with certain non-accrual investments and other assets.

Core NII was $0.30 and $0.56 per share for the three and six months ended June 30, 2014 respectively. The company believes that core NII for the three and six months ended June 30th is a useful financial measure because of certain items related to the termination and prepayment of Horizon’s term loan facility impacted comparability of reported NII. The information is not intended as an alternative to results for the quarter in accordance with GAAP. Instead we believe that this information is used for financial measure to be considered in addition to GAAP performance measures. Net investment income was $0.19 and $045 per share with the three and six months ended June 30, 2014 respectively.

We realized more gains in the second quarter totaling $600,000. We believe the opportunity to benefit from additional liquidity events including warrant gains from our existing investment portfolio remain strong due to the continued strength in both the IPO and M&A activity within our target markets.

For the second quarter the net unrealized depreciation on investments was $1.2 million which was primarily due to the reversal of previously recorded unrealized depreciation of one debt investment.

Our net asset value as of June 30th was $14.23 per share, a decrease of $0.09 per share compared to Q1 2014 primarily due to the impact of the one-time charges associated with the termination of our term loan facility partially offset by unrealized depreciation on investments.

New loans funded in the quarter totaled $26 million. This performance was offset by $10 million in regularly scheduled principal payments and $26 million in loan prepayments resulting in a portfolio of 219 million at the end of the quarter. Subject to the level of actual loan prepayments combined with the impact of regularly scheduled principal payments of $12 million, we expect a net portfolio growth for the third quarter to be approximately $5 million to $10 million.

In terms of investment capacity, Horizon ended the second quarter with $46 million in available liquidity including cash totaling $16 million as well as 30 million in funds available under existing revolving credit facility commitments.

As of June 30th, we had $10 million outstanding under our revolving credit facility which has an initial commitment of $50 million that contains an accordion feature allowing for increase in the total loan commitment up to an aggregate commitment of $150 million. We also had $65.50 million outstanding under our securitization and 33 million outstanding our publicly traded 2019 senior unsecured notes.

As of June 30th, 91% of the company’s total borrowings were at fixed interest rates with 60% of the total borrowings fixed at an interest rate of 3%. We intent to maintain our current debt levels as we increase the use of our revolving credit facility for the borrowings under our securitization continue to pay down through normal amortization and prepayments within our active loan portfolio.

Before I open the floor to questions, I’d like to note that we plan to hold our next conference call to report third quarter results during the week of November 3rd.

This concludes our openings remarks. We’ll be happy to take questions that you may have at this time.



Thank you. (Operator Instructions) We have a question from Robert Dodd of Raymond James. Your line is open.

Robert Dodd – Raymond James

Hi, guys. Congratulations on, I think, a lot of things this quarter. On the prepayment side, I can -- I mean there has been one since the end of the quarter. I may have missed it, if you had mentioned another one. Any additional color on are you getting indications from any other portfolio companies etcetera that maybe early prepayments this quarter?

And obviously that goes to the other part. These are the questions, 2.1 million in amortization, accelerated amortization etcetera, the fees embedded within the interest income line; if you can give any -- how much of that's the curve-in base number versus what was the one-time benefit in that 2.1?

Gerry Michaud

Yes. Hi, this is Gerry. So the answer to the first part of that, I mean I’ve noticed it that many times prepayments are referred to as one-time events, and the reality is in the venture debt portfolio there are really no one-time events. It’s just not as predictable.

If you look at 2012, we had about $42 million of early terminations. In 2013 we had about $46 million of early terminations, which is about 20%-25% of our portfolio. This year we had so far 33 million, also I would note that 11 million of that came from forced liquidation of portfolio companies, so about 22 million so far in the first half of the year had come from voluntary prepayments. So, we are again consistently running on that basis at about 20% to 25% turnover.

I can tell you relative to the third quarter as I sit here today I'm not aware of any additional early terminations, but it’s also -- I'd note that it’s pretty early in the quarter, so events can happen pretty quick relative to M&A activity especially. And even now with IPOs not being known until maybe the last month of the process, those can come upon us pretty quickly, but I am not aware of that. So I think that’s one way to look at it.

The other thing I'd note that relative to the prepayment types of fees that we build into the transactions we are doing today, they are very consistent with what we have been doing over the last few years relative to the percentage of prepayment fees in that time, the final payments we are getting. So when there is an acceleration the fees we get from that should be consistent with what we have gotten in the past.

Robert Dodd – Raymond James

Okay, got it. Thank you. I usually assume about 10 million a quarter, it’s just the 26 was somewhat larger. So obviously I just thought of it. On the expense side, the professional fees, again, alleviated this quarter we expected that given you were always hoping non-accrual loans and the credit facility issue. Should we expect that to drop back down to the level it was at the beginning of ’13 next quarter or there are still expenses to come there and resolving some other matter?

Gerry Michaud

That's a good question. I think what we had over the past couple of quarters was a trend up in that professional expense largely attributable to the non-accrual loans. I think what you will see for the second half of the year and certainly into the first quarter of ’15 as a trend in the other direction. What’s hard right now is to give guidance specifically on what that number will be, but clearly trending into a downward trend on that line. I think it will take it on them for us to get back to a more normalized level that you may have seen in 2013.

Robert Dodd – Raymond James

Okay, perfect. And just one more if I can and I’ll hop back in the queue. On the SBA, obviously you went through this process and there were issues in the past. You believe there is a result? Have you got an indication from the SBA that they think the matter is cleared up from your council or whoever, maybe both, giving indications that the thing is cleared up and it’s worth another show? Or have you got an indication that something will compete from the SBA that they think the issue is resolved and have encouraged the reapplication.

Rob Pomeroy

Yes, it is more of the latter part, Robert. We worked with our attorney who is very close with the principles there. No guarantees, but that the resolution to the issues have allowed us to [re-enter] (ph) and that’s really the important takeaway there.

Robert Dodd – Raymond James

Yes, got it. I appreciate it. Thanks, guys.


Thank you. The next question is from Troy Ward of KBW. Your line is open.

Troy Ward – KBW

Great. Thank you. First of all, just congratulations on the quarter and on the movement that you did in the external mg agreement, I think that's speaks highly of the future. Gerry, you spoke some of the trends from the National Venture Capital Association and one of the things that struck me was in the second quarter the number of VC funds that raised capital hit a seven year high. How do you think about the capital formation at the VC funds and how that potentially impacts your business going forward? Do you view that as a positive or -- I know typically it’s not a positive for the IRR if you look back at the correlation between VC fundraising and VC IRRs, but how do you view that from your side on the venture debt?

Gerry Michaud

Yes. One thing, great things about venture debt is we're a preference over everything that they do. We generally maintain our yields even, and I know what you mean is where that market can heat up if it’s overcapitalized and they start making investments. First of all, I don’t believe that that is the case by any stretch yet.

Relative to the fundraising, really there were two groups of VCs that are raising funds. One of it was mega funds. They are really big funds that have one obviously demonstrated really good historical performance over a long period of time. And they are raising big money and they have to -- as a result generally speaking, they are making very large investments in order to put that capital to work.

The other group is really what I call the emerging VCs. And these are partners that have come out of some of these big funds who can -- who have good attribution relative to transactions that they did at their other VC company where limited partners are getting behind them because of what they believe is their personal success rate. The ones that have had trouble, significant trouble raising capital and still are even though fundraising has improved dramatically, and once in the middle of mid sized funds who haven’t yet or may be won’t able to be able to demonstrate really strong returns.

So we continue to focus on those kind of VCs that we feel have a lot of energy, understand the value of venture debt relative to their portfolio companies. I mean one of the things that came out of the great fall in 2000 was VC began to recognize that they couldn’t be the only source of funding for their portfolio companies, diversification of funding and having partners like Horizon became a very important strategy, overall strategy.

So we are not seeing the market overheated by any stretch right now. I know that is, right now, it is a pretty good outlet through M&A and IPO. So the markets I think had some win behind it for sure. But we are still pretty confident that 2014 and 2015 are going to be quality years for both VCs relative to investment because the technology markets are changing and life science markets changing dramatically. And so, we are still seeing for the balance of this year and certainly probably at least the first half of 2015 a real solid market where we are going to see some really good opportunities and good demand for our product.

Troy Ward – KBW

Great. That’s good color. Sticking with the macro theme here, something I haven’t heard discussed very often is with all the changes in bank regulation that is going on, and obviously that impacts a lot on the leverage finance side of our BDC markets, but within the VC world, is there any changes in bank regulation that you see having an impact on your markets or your -- the way you do business in the future?

Gerry Michaud

I mean I think the only thing that we have seen obviously is the JOBS Act, which favorably impacted technology and life science companies relative to their ability to be able to file to go public without letting the whole world know, especially their competitors and potential acquirers if they've done that. And that has -- as we've seen over the last few quarters I think that has a very positive effect.

I'm not aware of any other banking regulations other than the ones that you guys are actually -- a couple of things that you're tracking relative to -- our congress might be up to which again could have a favorable impact on that. I'm not aware of anything. I haven't heard of anything in the marketplace relative to that that's impacting VC in investment decision.

Troy Ward – KBW

Okay. And then one final one, I think I heard in your commentary that you're going to become more active in new public companies within the life sciences' realm here going forward. Can you give us a little more color on that? And what are you seeing from that perspective to make you excited about that?

Gerry Michaud

Yes, I can. First of all, we're watching it closely. We're in fact seeing greater demand in the last really 90 days for public life science companies that have probably recently raised capital, meaning in the last year and a half. They may not have especially in 2014, it may not have raised as much as they would have liked to based on valuations in order to get public. And so, there is still a gap between what they need to raise in order to bring their products with the clinical trials, and what they raised in the IPO.

We've seen this happened before. I don’t know if you guys remember Pharmasset, which was a very good deal for us. Ultimately we got a significant warrant gain there. But that's exactly how we get into that transaction. They went out try to raise $70 million, I think it was in 2007, and they only raised 45 million and yet they had three products in clinical trials and they really needed the 70 million in order to keep advancing those. And so, we provided $30 million of debt.

We've seen more opportunities along that line very recently. And what we're watching and hoping for is that, that will balance out the demand and supply credit available to these companies and increase pricing to some degree. So, we can find those opportunities more attractive. I'm not quite there yet, but I'm liking what I'm seeing. So we'll see how it goes here in the second half of the year.

Troy Ward – KBW

Great. Thanks, guys.


Thank you. The next question is from Ron Jewsikow of Wells Fargo Securities. Your line is open.

Ron Jewsikow – Wells Fargo

Yes, good morning and thanks for taking my questions. I guess just first, I think we're pleased, I'm sure your shareholders are about the amendment of the external manager agreement, but just a few asset-specific questions I guess. First, N30 Pharma, we saw the preferred equity pieces markdown to zero, I believe, and could you walk us through what's going on with that business given that you do have a senior investment ahead of it that's maturing here shortly?

Gerry Michaud

Yes. So, N30, these are private companies, so we try not to disclose too much about them. But they're a company that has been a customer for us for several years, worked on aspects, drugs for asthma and cystic fibrosis. At times it has been showing great promise, and other times had struggle a little bit to raise money. It looks now like the -- our analysis of the value of our warrant has been reduced to zero, but we still believe that the loan is secured.

Ron Jewsikow – Wells Fargo

All right. And then just one more question on this quarter's new investment, it looks like largest [one M blocks] (ph), it doesn’t look like you got any equity warrants with that. Is that a function of valuation or is that just deal specific with this transaction?

Gerry Michaud

Yes. So what we look at relative to taking warrants versus taking success fees is what the value -- if we otherwise like an investment opportunity, first of all, but we look at the valuation of the company at the time we're making our loan, and we look at the window of opportunity for additional increased value over the period, which we believe will lead to an exit.

And in some cases, and this will be an example of one, we believe the time available for them to continue to build value over the valuation at the time we made the loan was very short. And so, in that transaction we decided to take a success fee, instead of a warrant, which we believe was the right direction to go in. First of all, success fee is a preference to everything. So, irrespective of what happens, that's something if there is an exit we'll in fact lock in, which is good.

And by the way, that's exactly what we did with Newport Media. We funded Newport Media at the end of 2012, like the opportunity a lot, thought the valuation was pretty high. We thought it, given their revenues there would be an exit within 18 to 24-month period. So we took a success fee instead of a warrant and actually that turned out to be spot on based on the exit that they just has.

Ron Jewsikow – Wells Fargo

Makes total sense. Thanks for taking my question, guys.


Thank you. (Operator Instructions) The next question is from Casey Alexander of Gilford Securities. Your line is open.

Casey Alexander – Gilford

Hi, good morning.

Gerry Michaud

Good morning.

Rob Pomeroy

Good morning, Casey.

Casey Alexander – Gilford

Your discussion of potentially doing some public life science companies, does that potentially include add-ons to some of the public life science companies that are already in your portfolio that are at a similar situation?

Rob Pomeroy

We haven't -- I don’t believe we had any request for that, but clearly there is a couple in our portfolio that we think are doing quite well. It could be rising stars, but that has not been requested.

Casey Alexander – Gilford

Okay. Secondly, the Horizon Funding Trust is amortizing fairly quickly. Was there no re-investment period for the Horizon Funding Trust or -- and is it been mandated to amortize some of these deals that paid off or is it just been you felt that was the correct opportunity?

Rob Pomeroy

Casey, that’s a good observation. Actually the structure from the beginning was a static pool with no reinvestment period, and it has a borrowing-based feature where as the loans within the asset pool pay down, so does the liability side. So, for example, this quarter we had a number of prepayments that actually were in that vehicle. So we had a little bit of acceleration on the debt side as well, which is why you saw the leverage come down this quarter.

So it is coming down about as expected. We had originally signaled that the weighted average life was about a year and a half when we first did the deal just about a year ago. And so, we're pretty much on track with that given where we're today.

Casey Alexander – Gilford

All right. Okay, great. Thanks for taking my questions.


Thank you. There are no further questions in queue at this time. I'll turn the call back over to Rob Pomeroy for closing remarks.

Rob Pomeroy

Well, we appreciate your questions as always, and your interest in the Horizon story. We believe the steps we have taken during the second quarter and first half of the year has considerably strengthened Horizon's future prospects. Permanent changes made with the Horizon's investment management agreement combined with the improvement in the cost and efficiency of our debt capital will have a meaningful impact on future results.

In addition, we plan to continue to execute our investment strategy by capitalizing on select high quality venture debt opportunities for preserving the ability to benefit from additional upside via warrants. And we look forward to keeping you apprised of our progress. Thank you.


This concludes Horizon's Technology conference call. You may now disconnect. Good day.

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