Horizon Technology Finance Corp (HRZN) 2014 Q1 法說會逐字稿

Good morning, and welcome to the 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 to Megan Bacon of Horizon for introductions and a reading of the Safe Harbor statement. Please go ahead.

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; Jerry Michaud, President; and Chris Mathieu, Chief Financial Officer.

Before we begin, I would like to point out that the Q1 press release is available on the Company's website at www.horizontechnologyfinancecorp.com. Now I will read the following Safe Harbor statement.

During this conference call, Horizon Technology Finance will make certain forward-looking statements, including statements with regard to the future performance of the Company. Words such as believes, expects, anticipates, intends, or similar expressions, are used to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties and predicting future results and conditions.

Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements. And some of these factors are detailed in the Risk Factor discussion in the Company's filings with the Securities and Exchange Commission, including the Company's Form 10-K for the year ended December 31, 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.

Good morning. And thank you all for joining us. During the first quarter, Horizon continued to build its venture debt portfolio, adding 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 a 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 continued to reduce our exposure to the Cleantech sector by settling two of our nonaccrual 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. In 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 loan to SolarBridge Technologies, which was on nonaccrual 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 all 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 $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 is no longer classified as a venture 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 an internal credit rating of 1, with an aggregate cost of $5.2 million and an aggregate fair value of $3.5 million. This compares to five investments with an internal credit rating of 1 as of December 31, 2013, with an aggregate cost of $23.2 million and 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 3 rating to a 4 rating, our highest credit quality; and the downgrade of one account from a 3 rating to a 2 rating. The category of 2-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 nonaccrual status. We will continue to focus on resolving the remaining investments. In terms of liquidity, our success in resolving nonaccrual accounts has resulted in total cash proceeds of 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 delevering 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 mention the number of warrant positions that we hold in our portfolio 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 warrants along with our loan investments all along this development timeline that typically have exercise periods ranging from 5 to 10 years from the date of grant. At the time that we underwrite our investments, we target potential milestones and future valuations, at 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 publicly 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 Jerry, I would like to respond to feedback that we received on our earnings call in March. Creating shareholder value is important to us and fundamental to what we do every day. 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 would better align the interests 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 agreement that a stronger alignment can be achieved, and it is our common goal to do so in the coming months.

As a 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 a corresponding reduction in the incentive fee.

We appreciate the feedback we have received regarding this matter and will 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 its long-term importance, that a full vetting of options is the right path at this time.

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

Thank you, Rob. Good morning, everyone. During the first quarter of 2014, we experienced positive demand for our venture debt products, especially from early mid-stage venture capital-backed technology and life science companies. Our advisor originated a total of approximately $30 million in new loan investments to 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 consists of the interest rate, commitment fees, and ETPs, but does not include additional potential returns in the form of warrants, repayment fees, success fees, or acceleration of income from ETPs applied for repayment.

Our favorable overall portfolio yield is one of the highest in the BD sector, and our warrant positions in 75 portfolio -- 74 portfolio companies should 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. Although there can be no assurance that we will fund any investments in our pipeline, our awarded approved-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 over $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-day yields, which are too low for the risk. And 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 providing the returns we require, we concentrated on earlier to mid-stage life science companies, where we could get attractive current-day yields and warrants at favorable valuation entry points. That said, the strong market for late-stage life science IPOs has created certain positive effects for venture debt overall, including VCs demonstrating healthy returns to their LPs, and a 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 fundraising 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-day yields to drive NII, and to build a growing warrant portfolio over time, which will create long-term value for investors, notwithstanding cyclical swings in the broader stock market. Attempting to time a venture lending strategy to the next uptick 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 -- to be very active in M&A in 2014 for a couple of reasons. First, although Big Pharma prefers to let private investors fund drug development costs in order to reduce clinical and development risk, a robust public market creates a competitive environment, which requires Big Pharma companies to act sooner, take on additional development risk, or face higher acquisition costs.

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 to 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 that three major US drug manufacturers -- Squibb, Pfizer, and Merck -- all posted lower revenues in 2012 and 2013, and are projecting lower revenues in 2014, as is Bristol Meyer.

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 spree 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 to 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&A's 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&A's in the Technology sector during the first quarter. As you know, we put particular emphasis on investing in early to mid-stage technology companies during the course of 2013. We did so because we saw a strong 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 the larger BDCs and diversified financial venture lenders focusing on 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 the IPO activity remains strong during the year. As an example of the strength of the M&A market and its positive impact on Horizon, while not yet publicly announced, two of Horizon's portfolio companies in the tech sector have signed term sheets to be acquired. Although 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 commendation of fees related to prepayments, ETP acceleration, and success fees.

We remain bearish on the cleantech market, although we are beginning to see a rebound in solar-related investing as a result of increasing solar product demand. We think there is a more positive outlook for cleantech 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 seek 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 loan 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 well-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, well-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 companies, 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 of the venture capital market across the board in a decade. According to Dow Jones venture source, VCs 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 investment since 2001. The information technology sector garnered the largest share of the VC investment during the quarter, taking 32% of the capital invested.

VC fundraising also had a very successful quarter in raising over $9.5 billion, which literally doubled the amount of fundraising from Q4 2013. Our view is that the LP market is beginning to look at VC funds and VC investment as a favorable place to be 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, when new investment and lending opportunities for early and mid-stage VC-backed companies in the life science and technology sectors began. 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 that took place in 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, who 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.

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

Thanks, Jerry. And good morning, everyone. Our consolidated financial results for the first quarter of 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 resulting 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 of 2013. There were no loan prepayment fees in either period.

The Company's total expenses were $5 million for the first quarter of 2014 as compared to $4.6 million for the first quarter 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 nonuse fees on our credit facilities. Management fee expense for the first quarter was flat year-over-year as a result of the waiver 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 nonaccrual investments. We expect these expenses to return to more historical levels upon resolving our remaining nonaccrual 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 remains 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 [depreciation] 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 a 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 principle payments, resulting in a slightly higher portfolio balance to start the current 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 are also aware of two potential liquidity events in the range of $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 the impact of regularly scheduled principle payments of $13 million, we expect the net portfolio change for the second quarter may be 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 in resolving nonaccrual 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 delever the balance sheet in Q2 from normal loan amortization and expected loan prepayments, we remain 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 a debt-to-equity ratio of 0.9 to 1. We expect to achieve our stated target leverage of 0.8 to 1 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 1 at the end of the second quarter.

Currently, we have 64% of our borrowings fixed at a 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 matched-term financing.

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

(Operator Instructions) Troy Ward, KBW.

Can you just go back and repeat what you said about the deferred income from Xtreme Power? What was the impact on this quarter? And what was the expected benefit in the second quarter?

Sure. Good question. So, the impact on the first quarter was a total of $520,000. And it was spread between recovery of interest income on the portion that was on nonaccrual during the fourth quarter, as well as some late fees that were also brought in as part of the recovery. So, totaling $520,000.

So they came through two different lines, though, partially?

Correct. Right. About $200,000 came through other income and the rest came through topline interest income. Regarding the impact on Q2, the $500,000 will be largely in interest income through the acceleration of the final payment, which only gets booked when the transaction actually was closed, which was the second quarter; and then a small amount in other income.

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

We believe that the fair value that is listed at March 31st is recoverable, Troy.

Okay, great. And then -- that's all. I just want to make one comment about -- you talked about you used the phrase intensified discussions at the Board level with trying to better align management and shareholders. And just -- I applaud you for taking that step, and hopefully, that we can come to a decision where we can see some changes to the structure to better align with shareholders. And I also applaud you for waiving the fee on cash. And that's all my questions.

Thank you.

Casey Alexander, Gilford Securities.

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

The actual cost basis? I think it was in --

Yes, it's in the (multiple speakers) --

No, not the cost base; the carrying value at the end of the quarter in the portfolio of those that are on nonaccrual.

Yes. $5.2 million at cost and $3.5 million at fair value. All of our 1-rated credits are on nonaccrual. Those are the only ones that are on nonaccrual.

All right. Got it now. 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? How do we schedule how the rate that the Company is paying that down?

It's a good question. So it is a set 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 formula with. So, in the case of a loan amortization that is set at the beginning, we know that, and it's set and fixed; but the variability is when a loan prepays, that will accelerate both the asset and debt side of the equation.

Okay. So, are some of the companies that have informed you that they are going to prepay located within the trust? And therefore, we are going to see an accelerated paydown on the trust in the coming quarter or third quarter, if that's when those deals happen to prepay?

Yes, that's a good observation. So all of those are in the -- other than the loans on nonaccrual, all the other optional prepays that we spoke about are in the trust. And they will result in accelerated borrowing paydown, which was one of the main catalysts for us getting to our 0.76 target debt-to-equity by the end of the third quarter.

Okay. All right, good. That's very helpful. Thank you. Lastly, a lot of BDC -- I wouldn't say not direct competitors, because there aren't very many direct competitors in the venture lending space -- but a 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 a more rapid amortization schedule that maybe doesn't make it as attractive to take advantage of that, have you increased the floating rate assets in the portfolio? And if so, what percentage of the portfolio is in floating rate assets at this time?

This is Jerry, 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, all of that business is floating rate business. And we expect to continue to do that. It's not something that we have problems selling in the marketplace. It does protect us relative to, as you know, 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, is floating rate business.

Oh -- and is there a current percentage of the portfolio as of the end of the quarter that is in floating rate as opposed to fixed rate? The last time I asked this, I think was a couple of quarters ago and it was 94% fixed and 6% floating.

Yes. So we don't have that number handy. But if you want to see the individual assets that actually have floating rate, you can look at the schedule of investments. I just don't have that handy. But Jerry's point of substantially everything since the securitization has actually been floating rate.

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

Robert Dodd, Raymond James.

Several of the questions have already been answered, but one, following up on Casey's, typically floating is typically tied with first lien versus fixed with second. So, is this an indicator in terms of the pipeline, et cetera, that you are rotating more towards floating -- Is that an indication that you're also shifting more and more towards first lien versus second lien?

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 lien in principle but there's clearly risk with that. And it's getting to the point that it may become economic to just pay that off, given the target is really not to lever up with that kind of facility at this point. So what's your view on that?

So, this is Jerry. I'll take the first part of that question. No, we have not changed relative to first and second lien transactions as a result of floating rate. We pretty easily transitioned in our market to a floating rate product without having to concern ourselves with changing other aspects of how we either underwrite a deal or with the structure of that deal.

So, everything that you will see going into our portfolio as floating rate will otherwise be consistent with what we have done in the past. You'll see some senior secured deals for sure, and you'll see some second lien deals as well.

And so, in terms of -- Robert, in terms of the fortress facility, you know it does provide a modest amount of leverage. We recognize it has a higher cost associated with it. And we will be looking at the economics of perhaps prepaying that loan in the third quarter when it -- the prepayment penalty improves on its third anniversary.

Okay. Thanks, guys.

Andrew Kerai, National Securities.

Thank you for taking my questions. Just wondered if I could touch on the final legal fees. As a sort of relative to Q1 is your expectation that the fees kind of remain at the same level in Q2 before normalizing the second half of the year? Or are you just kind of try to put a pin on that number during the second quarter?

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

Okay, great. Thank you. And then just to talk about as well, certainly appreciate the color on you revisiting your advisor agreement. Is sort of the range of alternatives you are considering -- I know you obviously can't say anything in stone at this point -- mean there's internally managed something you're thinking about? Or is it simply a fee waiver? Or how should we kind of think about that going forward?

I'm not going to -- so, thank you Andrew; appreciate it -- I'm not going to talk about -- discuss the details today. But I want to assure you that we are committed to the process.

Great. No, that's certainly good to hear. And in terms of the management waiver, management fee waiver on cash, that's something we can sort of expect here kind of in 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?

The same answer is that we are not really going to talk about the details going forward. All right? So (multiple speakers).

Okay. Sure. And then I just wanted to touch on one of your remaining two loans on nonaccrual. If you look at the Semprius loan, I mean, it looks like it's marked pretty close to par. Is your expectation kind of full recovery on that? Or what is your outlook for that at this point?

Well, Semprius is a private company and they are in the process of raising company, so we respect their confidentiality in doing that. And we think it's appropriately valued based on the scenarios that we used for them going forward.

Great. Thank you. I certainly appreciate the color.

Chris York, JMP Securities.

Thanks for taking my questions. A large venture lender made some comments that included expansion into lending products and penetration of lending to early and expansion stage companies. Could you provide us with an update on your thoughts on competition? And then maybe more specifically, what are your views on the effect of your business from the expansion of lending by this venture lender?

First of all, I'm not sure specifically what you are 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 that sponsor them. You know, our expectation is that those relationships in the marketplace, which have stood the test of time from all kinds of lenders -- you know, I remember when GE came into our market a long time ago, everyone said, oh, God, we're dead; you know, they're going to take over the market; low cost of capital.

You know the VC -- you have to remember one thing about our structures. We are a very small part of the overall component of these companies we finance. It's important finance to the VCs, but the relationship with the lender that actually provides it is more important. Because they don't want lenders coming into these portfolio companies that are in development stage, which have enormous amount of value creation ahead of them, and providing problems that are inconsistent with their ability to grow.

And so, over time, over the last 20 years -- I mean, that is one thing that has been fairly consistent in our marketplace. If you look at the tech banks that have supported the VC-backed companies and, in fact, supported the VCs and even some of their partners, those relationships are critically important. They are embedded in what we do every day. And we think we are in probably the best position of any competitor in the marketplace today relative to our relationship with the very markets that we serve in those.

So, we think we are in a great position. And we think that the opportunity for our investors going forward to create value, as we did last year, with consistently high yields and adding additional warrants for companies at very good valuations, we are very excited about that process moving forward.

Okay. Thanks for that color, Jerry. Last one from me is, while we had expected professional fees to be up this quarter, it still came in higher-than-expected. Your prepared remarks said that professional fees will normalize in the second half of 2014. What should be our expectations for Q2? Maybe a similar level to Q1?

Oh, sure. Fair question. We actually said on the last call -- I think we actually said what the amount was going to be -- $800,000. So I think we're repeating that to say that in Q2, we'll be in the range of $800,000 for Q2. And then after that, after the Q2 effort of working on the nonaccruals, we'll have a more normalized level in the $300,000 to $400,000 range. So, look for a higher level continuing in Q2, consistent with Q1.

Got it. Thanks, Chris. That's it for me.

You're welcome.

Ron Jewsikow, Wells Fargo.

Good morning and thank you for taking my questions, and appreciate the color on potentially enhancing -- or further enhancing alignment with your shareholders. Sorry if I missed this on Q2 exits that you forecasted, but could you provide any color on the potential end-of-term payments that might get pulled forward? And how long have these loans been on your book, just for modeling purposes? So that we can look at any potential amortization that's going to get pulled forward.

So I think what we are comfortable disclosing today, given that they have not announced their transactions, is that there is one transaction -- or two transactions range from $7 million to $15 million in the aggregate. They were not originated this year. So, they have some seasoning to them. And both transactions have final payments. But not comfortable giving the magnitude at this point.

Okay. All right. And that's all I had. Thanks for taking my question.

Okay. Thank you.

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

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 higher-yielding portfolio, the maintenance of our dividend, for upside from our maturing warrant portfolio, and further recovery from our underperforming assets. We will keep you informed on our progress as we look to enhance shareholder value over the coming months.

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