Horizon Technology Finance Corp (HRZN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Horizon Technology Finance Corporation Second Quarter 2014 Financial Results Conference Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (operator instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Megan Bacon. You may begin.

Welcome to the Horizon Technology Finance's 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 would like to point out that the Q2 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.

Good morning and thank you all for joining us.

Before I review the financial performance for the second quarter, I would 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 1 and are effective as of July 1, 2014.

The first change is to make permanent, the 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 have made provide significant and meaningful benefits to our shareholders while maintaining the ability of the advisor to operate efficiently with its staff of professionals in the 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 have taken will enhance shareholder value over both the near-term and long-term.

Highlighting our operating performance for the second quarter, we earned 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 continued 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 in our receipt of accelerated income from prepayment fees and end of term payments. M&A activity remained 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 continued 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 recovered value from these investments. At June 30, only one account remained on non-accrual.

In consideration of our second quarter performance and future outlook, we declared monthly distributions totaling $0.345 per share, payable during the fourth quarter of 2014. This represents an annualized yield of 9.7% based on our NAV as of June 30. 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 continued to maintain undistributed or spillover income of approximately $0.42 per share as of June 30. We are 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 rent expense reduction from rightsizing our debt commitments.

I would 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 in 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 30, approximately 94% of our loan portfolio was performing at or better than expected at the time of underwriting.

In terms of liquidity, we've reduced our overall debt-to-equity ratio [to 0.79 to 1], consistent with our target leverage. We continue to benefit from rapid loan amortization schedules that naturally delever 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 redeploy the capital from liquidity events into new loans at onboarding yields consistent with our existing high-yielding loan portfolio.

Going forward, we will 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?

Thank you, Rob. Good morning, everyone.

During the second quarter, we continued to execute on our disciplined investment strategy of seeking and originating quality investments in venture capital sponsored technology and life science companies that offered strong current pay yields with additional upside potential from warrant support success fees. We also continued 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 in 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 backed technology market sectors of software, Internet-related and semiconductor companies. In the life science market, we are primarily focused on the medical device sector. Our reason for specifically targeting these sectors was our strong belief that they provide 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 and building the same potential for prepayment fees and term payment success fees and warrants like those we actually received in 2013 and the first half of 2014.

As a reminder, our onboarding yield consists 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 on 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 a 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 its $7.5 million loan and as additional yield, we also received a prepayment fee, an accelerated ETP and a cash payment of approximately $200,000 for our warrants. In addition, on July 31, Atmel Corp completed an acquisition of Newport Media, one of our semiconductor portfolio companies. The M&A transaction resulted in a 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.

By the end of the second quarter, our pipeline of new investment opportunities has grown to approximately $200 million, which includes $26 million of recently awarded transactions, $85 million in new proposals issued 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 fund 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 to grow in the third quarter by $5 million to $10 million.

Turning to our core markets, we continued to see solid demand for IPOs in the life science market in the second quarter of 2014. According 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 the fifth straight quarter of 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 valuation 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-backed companies over the last five quarters has had a number of positive effects for the VC funds, including the return of capital to be redeployed. There is now strong evidence that VCs are in fact redeploying net capital into new investments. According to the NVCA, VCs invested $13 billion in 1,100 companies in the second quarter compared to $7 billion in 1,000 companies for the same period of 2013. This $13 billion of new investment during the quarter represents a ten-year high for VC investment in a quarter. We believe based on our historical experience that as VCs redeploy their capital into new investments, many venture-backed companies 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 continued 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. However, strategic collaborations are getting done between big pharma and life science companies. We are aware of a number of recently announced large strategic collaborations, including a $65 million distribution and commercialization agreement between Sandoz, a Novartis company and Anacor Pharmaceutical, one of our portfolio companies.

As predicted over the last couple of quarters, we have seen a significant increase in technology related M&A transactions compared to our targeted markets. The NVCA reported that 79 of the 96 M&A transactions reported in the second quarter were 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 here in the third quarter. We continue to believe that we will see more M&A activity in the tech sector in 2015. Through 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.

Although we remain bearish on the cleantech 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 services sector have been slow to develop, however we are encouraged by the quality of the transactions we're seeing. As we mentioned last quarter, one of our companies Everyday Health, completed an IPO in the first quarter, and its stock price is up approximately 15% from its offering price.

As we look at the competitive landscape during Q2, we continued to see competition for companies that are moving away from VC sponsored to relying more on debt and public -- and/or public equity. We have 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 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 have originally sought]. These companies are looking to bolster liquidity, which may result in great demand for venture debt, thus leading to improved 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 relationship 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 this consistent and reliable market approach has established Horizon as a value-added financing partner to VC-backed technology and life science companies. This value-added market position has resulted in our strong onboarding yield performance and one of the highest yielding portfolios in the BDC industry.

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

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 30, 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 quarters. Total investment income for the quarter included $7.7 million from interest income on investments, as well as approximately $1 million of fee income.

For the second quarter, our portfolio yield 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 extent of loan prepayments 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 due to the acceleration of $1.1 million of unamortized debt issuance costs and $750,000 prepayment 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 key equipment finance, which currently has an interest rate of 4%.

The effective interest rate on our borrowings for the first half of 2014 was 6.9%. Following the termination of the term loan facility, we expect our effective interest rate 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 for the second quarter of 2013 of $900,000.

Base management fee expense also decreased year-over-year due in part to 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 30 is a useful financial measure because 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 reported in accordance with GAAP, instead, we believe that this information is a useful financial measure to be considered in addition to GAAP performance measures.

Net investment income was $0.19 and $0.45 per share for the three and six months ended June 30, 2014 respectively. We realized warrant 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 remains 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 appreciation on investments was $1.2 million, which was primarily due to the reversal of previously recorded unrealized depreciation on one debt investment. Our net asset value as of June 30 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 the 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 30, we had $10 million outstanding under our revolving credit facility, which has an initial commitment of $50 million and contains an accordion feature allowing for increase in the total loan commitment up to an aggregate commitment of $150 million. We also had $64.5 million outstanding under our securitization and $33 million outstanding under our publicly traded 2019 senior unsecured notes.

As of June 30, 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 intend to maintain our current debt levels as we increase the use of our revolving credit facility, while the borrowings under our securitization continue to pay down through normal amortization and pre-payments 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 3.

This concludes our opening remarks, we'll be happy to take questions that you may have at this time.

(operator instructions) Robert Dodd, Raymond James.

Hi guys, congratulations on taking care of a lot of things this quarter. On the prepayment side, if I can -- I mean, obviously 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 et cetera that there may be early prepayments this quarter? And obviously that goes to the other part, this part of the question, $2.1 million in amortization -- accelerated amortization et cetera, other fees embedded within the interest income line. How -- if you can give any color, how much of that's kind of the [curving] base number versus what was the kind of the one-time benefit in that $2.1 million?

Yes, hi, this is Gerry. So the answer to the first part of that, I mean -- I have noticed that many times prepayments are referred to as one-time events, and the reality is in a venture debt portfolio, they're really not one-time events, 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 have 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 come from voluntary prepayments. So we're 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 am not aware of any additional early terminations, but it's also, I would 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 mean -- I think that's one way to look at it.

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

Okay, got it. Thank you, I mean, point well made. I usually assume about $10 million a quarter, it's just that $26 million was somewhat larger, so I obviously had a distortive effect.

On the expense side, the professional fees, again elevated this quarter. We expected that, given [you will result in non-accruals and] -- the credit facility issue. Should we expect that to drop back down to kind of the level it was at the beginning of [F 2013] next quarter or are still expenses to come there and resolving some other matter?

It's a good question. So 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'll see for the second half of the year and certainly into the first quarter of 2015 is a trend in the other direction. What's hard right now is to give guidance specifically on what that number would be, but clearly trending into a downward trend on that line. I think it will take (technical difficulty) for us to get back to a more normalized level that you may have seen in 2013.

On the SBA, obviously you went through this process, I know there were issues in the past, have you -- you believe that as a result, have you gotten indications from the SBA that they think the matters are cleared up or is this from your counsel or whoever maybe involved giving indications that the thing is cleared up and it's worth another show or have you gotten indication that something more concrete from the SBA that they think the issue is resolved and [have encouraged] the re-application?

It is more the latter, Robert. We worked with our attorney who is very close with the principals there. No guarantees, but the resolution to the issues have allowed us to re-enter and that's really the important takeaway here.

Troy Ward, KBW.

First of all, just congratulations on the quarter and then the movements that you did in the external management agreement. I think that speaks highly of the future.

Gerry, you spoke of 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?

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

Relative to the fund raising, really there are two groups of VCs that are raising funds and one of the mega -- one is the mega funds, the really big funds that have won -- obviously demonstrated really good historical performance over a long period of time and they are raising big money and they have to win, as a result, generally speaking, they're 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 fund raising has improved dramatically are the ones in the middle, the midsized funds who haven't yet or maybe won't 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 VCs 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.

And so we're not seeing the market over-heated by any stretch right now. I know that is -- right now, there is a pretty good outlet through M&A and IPO. So the markets I think have some wind behind it, for sure, but we're 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 are changing dramatically. And so we're still seeing for -- the balance of this year and certainly probably at least the first half of 2015, a real solid market where we're going to see some really good opportunities and good demand for our product.

Great, that's good color. Sticking with the macro theme here and 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?

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. They've done that, and that has, as you've seen over the last few quarters, I think that has a very positive effect.

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

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?

Yes, I can. First of all, we are watching it closely. We are in fact seeing greater demand in the last, really kind of 90 days for public life science companies that have probably recently raised capital meaning in the last year and a half where they may not have, especially in the 2014, they may not have raised as much money as they would have like 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 to the clinical trials and what they raised in the IPO.

Now, we've seen this happen before. I don't know if you guys remember Pharmasset which was a very good deal for us. Ultimately, we had a significant warrant gain there, but that's exactly how we get into that transaction. They went out and tried to raise $70 million, I think it was in 2007, and 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 have seen more opportunities along that line very recently and what we're watching and hoping for is that that will kind of balance out the demand and supply of 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.

Ron Jewsikow, Wells Fargo Securities.

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 kind of what's going on with that business given that you do have a senior investment ahead of it that's maturing here shortly?

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

All right and then just one more question on this quarter's new investment, it looks like largest one mBlox. It doesn't look like you got any equity warrants with that, is that a function of valuation or is that just kind of deal specific with this transaction?

Yes. So what we look at relative to taking warrants versus taking success fees is with 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 are 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 would 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 and first of all, the success fee is kind of a preference to everything, so irrespective of what happens. That's something if there is an exit, if you will, in fact kind of lock-in, which is good.

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

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

(operator instructions) Casey Alexander, Gilford Securities.

Pom, 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 in a similar situation?

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

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

Casey, that's a good observation. Actually, the structure from the beginning was a static pool with no reinvestment period and that has a borrowing base feature where as the loans within the asset pool pay down, so does the liability side. And so for example, this quarter we had a number of pre-payments that actually were in that vehicle. So we had a little bit of acceleration on the debt side as well, which is how 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 are today.

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.

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 have considerably strengthened Horizon's future prospects. Permanent changes made to 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, while 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 Technology Conference Call. You may now disconnect. Good day.