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Edited Transcript of HRZN earnings conference call or presentation 3-May-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Horizon Technology Finance Corp Earnings Call

Farmington Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Horizon Technology Finance Corp earnings conference call or presentation Wednesday, May 3, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel R. Trolio

Horizon Technology Finance Corporation - SVP and CFO, and Corporate Controller

* Gerald A. Michaud

Horizon Technology Finance Corporation - President and Interested Director

* Megan Bacon

Horizon Technology Finance Corporation - Marketing Support Manager

* Robert D. Pomeroy

Horizon Technology Finance Corporation - Chairman and CEO

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Conference Call Participants

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* Casey Jay Alexander

Compass Point Research & Trading, LLC, Research Division - Analyst

* Christopher Robert Testa

National Securities Corporation, Research Division - Equity Research Analyst

* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Horizon Technology Finance's First Quarter 2017 Conference Call. Today's call is being recorded. (Operator Instructions)

I would now like to turn the call over to Megan Bacon, Horizon, for introductions and the reading of the safe harbor statement. Please go ahead.

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Megan Bacon, Horizon Technology Finance Corporation - Marketing Support Manager [2]

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Thank you, and welcome to the Horizon Technology Finance First Quarter 2017 Conference Call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; and Dan Trolio, Chief Financial Officer.

Before we begin, I would like to point out that the Q1 earnings press release and Form 10-Q are available on the company's website at horizontechfinance.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, 2016.

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.

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [3]

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Good morning, and thank you all for joining us. The first quarter marked progress on several fronts for Horizon. For the quarter, we earned net investment income of $3.4 million or $0.29 per share. The earnings resulted from a strong portfolio yield of 15.5% for the quarter, and income derived from liquidity events at 6 portfolio companies. Our ending net asset value increased during the quarter to $12.11 per share, based on a combination of our NII, our distributions, which totaled $0.30 per share for the quarter, and realized and unrealized depreciation on our portfolio.

Importantly, we funded over $25 million in new loans during the quarter, a significant increase over the fourth quarter. The investment that we are making in the adviser’s platform, with new senior professionals, is beginning to pay off with increased originations and a growing pipeline. We have added managing directors on each coast, originating new opportunities in our target markets. In addition, we are adding talent and portfolio management and accounting to finance.

Asset quality continued to recover, with a reduction in the number and dollar amount of nonaccrual loans. At March 31, there were only 2 loans on nonaccrual, one of which is already resolved with a long-term royalty agreement, but has the potential for full recovery over time.

There were no new nonaccruals during the quarter. We also saw a reduction in the number and dollar amount of 2-rated loans from the levels at December 31. 2 other loans were repaid in full, and the 1 loan was upgraded to a 3 during the quarter. There was 1 new loan downgraded to a rating of 2. Loan prepayments can be either profitable with accelerated fee income or defensive, with the opportunity to reduce exposure and reinvest the capital into new loans.

Horizon experienced both types of prepayments during the quarter. Our challenge is to increase new loans -- increase new loan originations to a level where we can grow our portfolio. Our increased originations in the quarter were not enough to overcome the strong amount of prepayment liquidity events and ordinary amortization that occurred in the quarter, resulting in a reduction in our earning portfolio.

Staying with the prepayment theme, Horizon often retains its warrant position in these portfolio companies, even after the loan has been repaid. The warrants have long 7- to 10-year lives, which gives our shareholders a meaningful opportunity to capitalize on a future upside of the development stage companies that we finance. We continue to hold warrant and equity positions in 76 portfolio companies.

Occasionally, a loan prepayment is a result of an acquisition of the portfolio company that includes a realization of a warrant gain in addition to the fee income earned for the loan prepayment. This is exactly what occurred with one of our portfolio companies. Late in the quarter, the company paid off our loan and we also received warrant proceeds of $1 million. The loan IRR was increased from its on-boarding yield of 12%, to a realized loan return of 16%. The warrants had been fair valued at year-end at $80,000, resulting in a realized gain of $1 million on the warrant proceeds.

On a combined basis, the overall return on the investment, which was originated in 2015, was 21%. For the quarter, our NII was $0.29 per share and our net increase in net assets per common share was $0.32. We declared monthly distributions for July, August and September 2017, totaling $0.30 per share. We have now declared distributions of $9.62 per share since our IPO in 2010. We are focused on maintaining this progress on all fronts over the balance of 2017.

Jerry will now update you on our business development efforts and market environment, and Dan will then detail our operating results and financial condition.

Jerry?

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Gerald A. Michaud, Horizon Technology Finance Corporation - President and Interested Director [4]

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Thanks, Rob. Good morning, everyone. Our first quarter performance reflected improved investment activity, as we began to reap the benefits of our enhanced investment platform. During the quarter, we funded 5 new loans, totaling $26 million. We also closed 3 new loan commitments in the first quarter, totaling $20 million.

At the same time, we maintained our disciplined pricing performance, achieving on-boarding yields of over 12%, and we generated a portfolio yield for the quarter of 15.5%, up from 14.2% in the fourth quarter.

The higher portfolio yield is a result of consistently maintaining strong on-boarding yields since our inception, combined with strategically pricing and structuring transactions to maximize returns received from our portfolio companies as they exit our portfolio. A combination of ETPs and prepayments fees we received as companies exit our portfolio, has consistently resulted in Horizon having one of the higher-yielding portfolios in the BDC industry. We continue to expand our investment pipeline with over $340 million in opportunities, including $120 million term sheets issued to 10 companies. We have over $25 million in awards and commitments as of today. We are encouraged not only with the size of our pipeline, but also with the quality of the companies we are evaluating. During the first quarter, we saw a marked improvement in the quality of the transactions as a direct result of our targeted focus of binding companies with relatively low leverage, continued equity investor support and leading technology platforms in very specific technology and life science sectors.

Our increased pipeline activity is also a reflection of new hires by our adviser in Q4 as well as reorganizing our Managing Director team to take full advantage of the markets that we serve. At the end of the first quarter, we hold warrant and equity positions in 76 portfolio companies, with a fair value of $8.1 million. In addition to our increased origination activity, we experienced positive liquidity events during the quarter from 6 portfolio companies totaling $27 million. We continue to hold warrant positions in 4 of the exited companies.

One of these liquidity events was Argos Therapeutics, which announced that their Phase III trial was discontinued. In connection with this development, Argos prepaid the outstanding principal balance of $9 million on our venture loan plus interest in March.

As Rob mentioned, this is an example of a defensive prepayment, which protected Horizon's exposure. Horizon continues to hold warrants in Argos as the company works with the FDA on a path forward for its new product. Also included in the liquidity events was the exit of one of our portfolio companies that prepaid the outstanding principal balance of $10 million venture loan plus interest, ETP and prepayment fees. Horizon also realized a warrant gain of $1 million. This is an example of a profitable liquidity event.

Looking at our core markets in the life science area, we continue to see quality deal flow. This market is reasonably stable, as we're seeing some IPO activity and solid VC investment. There is significant competition on the debt side from all participants, with banks competing on pricing, while others are focusing on structure. Despite this, we are steadily building our pipeline in this market, helped by the addition of 2 life science professionals added to our adviser Horizon in Q4.

The healthcare technology market remains promising, despite some short-term uncertainty around National Health Care Reform. While some healthcare investors are waiting for further clarity from the new administration, we are seeing some pipeline activity related to healthcare technology companies and they're using technology to reduce the cost of patient care or clinical trials. Our portfolio company, MedAvante is a great example of a technology platform that significantly improves clinical trial protocols and measurable outcomes for mental health drug development companies. In a broader technology market, we're seeing the quality of opportunities improve. There were less technology companies looking to go public given the trend of LP investment in private equity. Rather than utilizing the public markets, liquidity is coming from private equity firms going to buy out existing investors at high premiums and keep companies private. Regarding the cleantech market, we continue to take a long-term stance as venture capital investment remains limited.

While we see some potential on this area given the continued emphasis on technologies that support clean, healthier living, we have no immediate plans here.

Turning now to the general venture capital environment. We're starting to see investment activity that is more in line with the historical norms. According to the National Venture Capital Association, venture capital investment of $16.5 billion represents a slight decline from 2016 levels, but still represents a very healthy VC investment environment. It should be noted that VC investment in a few later stage unicorn transactions has tended to inflate VC investment activity. In Q1, VCs invested in 1,800 companies, which is down approximately 25% on an annualized basis over 2016.

With fewer VCs raising larger funds, it has become a noticeably difficult for early-stage companies representing smaller investment opportunities to attract venture capital.

VC fundraising started the year off slowly in 2017 with only $8 billion raised in the first quarter according to PitchBook. However, taking into consideration the ban on fund raising years we had in 2015 and 2016, over the last 5 -- excuse me, 5 of the last 8 quarters saw more than $10 billion raised. So the slow start in the first quarter is less surprising. With this in mind, we do view the VC fundraising market slowing as a result of VCs now focusing on investing capital raised over the last 2 years.

While we saw a limited VC investment in stable technology sectors, such as software and Internet, we are seeing some segments of the tech market, those that are demonstrating revolutionary technology changes, receiving significant VC interest. Technology sectors such as advanced computing and storage, transportation and mobility, artificial intelligence and Internet of Things are all attracting strong VC interest. Similarly in the life science market, we are seeing significant VC investment in drug discovery and diagnostics, advanced prosthetics and genomic analytics. In the first quarter, VC backed exit activity showed signs of a rebound after coming off a very low exit during 2016. VC -- that companies received approximately $15 billion of value in the first quarter compared to under $8 billion in the fourth quarter of 2016, according to PitchBook. While this trend is a welcomed improvement, VCs are still having to support their portfolio of companies longer. With the exception of a few outliers, M&A valuations are still not attractive.

There were only 7 venture-backed IPOs completed during the first quarter, raising a total of $4 billion. While overall exit activity has continued to lag, there were some notably venture-backed exits, including the widely-known Snap IPO along with the acquisition of AppDynamics by Cisco for $3.7 billion. The success of these transactions, combined with a growing pipeline of VC-backed company IPO filings and Cloudera's recent IPO, could signal additional venture-backed IPOs in the near future.

Looking at the venture debt competitive landscape, we continue to see competition from the technology banks. This has created some pricing pressure, but we are still seeing opportunities where attractive on-boarding yields across our targeted industries. Additionally, the quality of opportunities has continued to improve. This includes more opportunities for multi-partner transactions, particularly in later stage life science companies. Considering the IPO market for biotech is less robust than it has been in previous periods, we expect many biotech companies will be coming back to the market over the next 24 months to refinance 2014, 2015 debt, which will continue to further drive financing opportunities in this market.

As we move through 2017, our outlook is positive, as market trends are steadily improving. We continue to focus on sourcing loans in the life science and technology markets, good companies with limited leverage, that we believe will provide appropriate risk-adjusted returns. Based on that, we believe Horizon is positioned to grow with investment portfolio over the next 12 months.

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

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Daniel R. Trolio, Horizon Technology Finance Corporation - SVP and CFO, and Corporate Controller [5]

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Thanks, Jerry, and good morning, everyone. I will now briefly discuss results for the first quarter of 2017.

Our total investment income for the first quarter were $7 million as compared to $9.3 million for the first quarter of 2016. The decrease was primarily due to lower interest income on investments resulting from the smaller average size of our loan portfolio. Our portfolio yield for the first quarter was 15.5%, consistent with last year's first quarter.

On-boarding yields in our portfolio were 12.1%, and it remained stable in the 12% to 13% range since our inception.

Turning to our expenses. Total expenses were $3.6 million for the first quarter, a 27% decrease as compared to $4.9 million in the first quarter of 2016. Included in these expenses is interest expense, which decreased slightly on a year-over-year basis mainly due to a decrease in average borrowings. Base management fees decreased 24% year-over-year to $1 million compared to $1.3 million in the prior year period. This change was primarily due to a decrease in an average size of our investment portfolio. In addition, incentive fee expense for the first quarter was subject to the incentive fee cap and deferral mechanism under our Investment Management Agreement. This resulted in $300,000 of reduced expense and additional net investment income. The year net investment income of $0.29 per share for the first quarter as compared to $0.38 per share for the first quarter of 2016, a $0.33 per share for the fourth quarter of last year. After paying distributions of $0.30 per share and earning $0.29 per share for the quarter, the company's undistributed spillover income as of March 31, was $0.14 per share. Our NAV as of March 31, was $12.11 per share as compared to $12.09 in the prior quarter.

The increase is primarily due to the net realized and unrealized gains from our portfolio. The originations in the first quarter totaled $26 million, which were offset by $12 million in scheduled principal payments and $27 million in principal prepayments. We ended the first quarter of 2017 with an investment portfolio of $180 million, which consisted of secured loan to 37 companies, with an average share value of $166 million, a portfolio warrant and equity position within 76 companies, with an average fair value of over $8 million and other investments in 3 companies with an average fair value of $6 million.

Please note that ScoreBig is included in our debt investment as of March 31. We reported last quarter that this investment has been effectively settled with Horizon receiving the indirect right to the proceeds of a long-term royalty agreement. Any proceeds received from the royalty agreement will be recorded as a recovery of capital. In addition, we'll continue to list ScoreBig as a debt investment until it has either paid in full or the royalty agreement is directly assigned to us.

In terms of available liquidity, we ended the quarter with approximately $50 million, which includes cash and the funds available under our credit facility. As of March 31, we had $53 million outstanding under our $95 million credit facility, which has an accordion feature and allows for an increase in size of up to $150 million. Subsequent to quarter end, we paid down this credit line by $30 million.

In addition to our credit facility, we continue to have $33 million in publicly-traded daily bonds, which mature in 2019. Our intention remains to increase our debt levels, with an overall target leverage ratio of 0.75:1. And March 31, our leverage ratio was 0.62:1. Taking into consideration our cash position, the current gap between our target and actual leverage ratio, we expect that when we reach our target leverage, we can grow our current investment portfolio by $50 million.

Now I'll like to provide an update on our stock repurchase plan. On April 27, our board extended our previously authorized share repurchase program until the earlier of June 30, 2018, for the repurchase of $5 million of the company's common stock. Since the plan was first approved, we've repurchased over 161,000 shares of our common stock at a total cost of $1.8 million.

On a final note, I would like to provide an update on our interest rate sensitivity.

This subject continues to garner a lot of attention since the Fed signaled a likely increase in rates. As we stated on prior calls, in anticipation of increasing interest rates, Horizon has shifted its portfolio to closing rate loans for over 2 years.

As of March 31, 100% of our outstanding principal amount of our debt investment before interest, our floating rates of coupon are restructured to increase when interest rates rise. Based on our March 31, 2017, consolidated statements of assets and liabilities, we have determined that for a 100-basis point increase in the LIBOR rate, it'll increase annual net interest income by approximately $800,000 or $0.07 per share.

Considering this, with our intentional shift to floating rates, we believe Horizon is well-positioned to benefit from a rising rate environment and experience both increasing income and expanding net interest margin.

Before we go to questions, I would like to mention that we plan to hold our next conference call to report second quarter results during the week of July 31.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Jonathan Bock, Wells Fargo Securities.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [2]

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Fin O'Shea for Jonathan this morning. I'm sorry if I missed it, but did you provide an update on Digital Signal? I think, last quarter, you mentioned that the company was seeking to buy over its assets?

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [3]

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We did not specifically mention it, but that process continues Fin. We -- it's being done through assignment for benefit of creditors. There are active bidders and we are in the middle of the negotiations ongoing.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [4]

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Okay, very well. And then for the royalty agreements, ScoreBig, New Haven. Can you give us a sense of what -- or [safe into Haven], where we can see the structure now in the value of it? How are these structured to return? Will it be similar to your current portfolio yields?

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [5]

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So the fair value that we have for them, whether it's ScoreBig as a loan and New Haven as a long-term royalty investment are based upon scenarios and the expectations of royalty income over time. I wouldn't expect a lot of fluctuation for them in the near term, but as the royalties -- so revenues, do produce the royalties grow over time, we will use that scenario analysis to adjust the fair value.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [6]

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Okay. Very well, understood. Just one more on what's your view on spillover? I think you reported about $0.14. Do you have a strategy of maintaining and building spillover? Or is this something used to -- you see as sort of a purse to fund a dividend gap as seen in this quarter? Just to share kind of high-level thoughts on that, and that's all from me.

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [7]

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Yes. So our goal, as I stated repeatedly over the last several years and quarters is to have set our dividend or distribution level at a point that can be covered by NII over time. There are fluctuations in terms of prepayment income, that makes some quarters positive, some negative. And we -- as we've stated, need to rebuild our portfolio back to our target leverage. So we -- our goal is to cover our dividend with NII and maintain some spillover long term.

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Operator [8]

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And our next question comes from Robert Dodd of Raymond James.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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Maybe for Dan, but for all of you. I mean, Danny, you mentioned that the portfolio leverage going up to target, et cetera, would -- you could expand the portfolio by about $50 million. Obviously, every time you get repayments, call it in round numbers $100 million a year in terms of scheduled and early, but obviously that takes time. Jerry's comment was -- if I worked then -- look at this time right. You got a $120 million in outstanding term sheet right now, and a preliminary earlier stage pipeline of $340 million. So obviously depending on the timing, if you close all the term sheets tomorrow, you'll have the capital. So what's the strategy there on managing that over time? Or do you simply expect a major pickup in early repayments to provide the capital to fund some of these opportunities?

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Gerald A. Michaud, Horizon Technology Finance Corporation - President and Interested Director [10]

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Rob, this is Jerry. I'll take that question because it's more about pipeline than liquidity actually. So as you probably remember that most of the transactions that we do, even ones they're committed, aren't all funded up front. There are milestones that need to be met over time. And so we can easily project out, relative to when those milestones would be hit and relative to our overall. But you can lap those transactions, you know. How much liquidity we need to have on hand. And I would say that we are quite comfortable -- first of all, there's no guarantee we're going to win $120 million or $140 million, as you will know. And we are quite comfortable of our capabilities to fund those commitments over time. We actually still have room even beyond that. So we're in a good position to be able to fund any other term sheets that are awarded without so much of an issue today.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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Okay, cool. One more, if I can. I mean, last quarter, you were asked -- probably [stealing], somebody asked a question about this, or it might be asked later, but you were asked about the incentive fee and you said that you could be back into incentive fees as early as the second quarter. Obviously, there was an incentive fee paid this quarter, which I haven't projected, given the color you gave on the last call, and that call, obviously, was March 8. That's within 3 weeks of the end of the quarter. So what changed between then, late March -- early March and at the end of the quarter that resulted in an incentive fee being accrued in the first quarter given the color that you gave, that maybe second quarter is when we would see that.

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Daniel R. Trolio, Horizon Technology Finance Corporation - SVP and CFO, and Corporate Controller [12]

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Well the -- as you know, the incentive fee is calculated based on the investment management agreement, and at any point of time, we're going through that calculation and determining what the incentive fee could possibly be. We had been projecting throughout the year that, depending on the portfolio activity, what the incentive fee possibly could be, and we knew that in the first quarter there was possibility for it and each quarter there will be, as we continue to go and do the calculation each quarter.

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [13]

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And I thought we had indicated that we thought that there could be some incentive fee in the first quarter. We did have one additional prepay in the last -- at nearly end of the quarter that might have put us over Rob. I can't (inaudible).

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [14]

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I was -- that quote, FYI, was from the transcript from last quarter. So yes. So yes, understood, but very good.

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Operator [15]

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(Operator Instructions) Our next question comes from Christopher Testa of National Securities.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [16]

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Just touching on the royalty agreements, again. Just a couple of things. Just wondering when we should expect any sort of revenue coming in from the royalty agreements? Do you have an idea on that? And also just, Dan with your comments on how that's going to be recognized, is that -- is there going to be a new line item for that? Or is that just going to be in the investment income as well?

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Daniel R. Trolio, Horizon Technology Finance Corporation - SVP and CFO, and Corporate Controller [17]

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Well, for both royalty agreements, when we receive any capital from the agreement, then it'll first be a return of capital and then, depending on which investment it is, for New Haven if we receive additional, above the cost basis, then it'll be a capital gain because that is now a royalty agreement and other assets. And for ScoreBig, the loan agreement will be marked -- we market every quarter based on the activity and the probability on a scenario analysis. And as payments come in for the ScoreBig, there'll be return of capital and so the cost basis of the loans is fully covered.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [18]

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Got it. That's helpful. And I'm just also curious -- more of a high-level thing. I know, last quarter, you guys have spoken about VCs generally not having a willingness to stand behind companies as much, and that caused of some of the nonaccruals. What have you seen, if anything has changed from last quarter to now in terms of VCs backing our companies?

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Gerald A. Michaud, Horizon Technology Finance Corporation - President and Interested Director [19]

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Yes, this is Jerry. So really I think you know, having now the benefit of kind of 2 quarters, having looked at this, what we're basically seeing is a shift in VC focus relative to the kinds of technologies where they want to put their capital. And so, I think, we have a really good sense today of those areas where companies have been established, maybe 4, 5 years, but revenue growth has slowed and they see limited upside. Those are companies that they are beginning to have trouble support -- continuing to support. On the other hand, in some of the newer technology sectors, some of which I mentioned, we're seeing very significant VC support into those, those areas. And we expected that, that support will continue over the next, certainly, 4 or 5 years as those -- some of those areas that are somewhat revolutionary -- some are evolutionary, but some are revolutionary. I think the VCs are seeing those areas as where they can get the greatest returns on their capital. So we are very cognizant of those areas where we think VC support is somewhat tepid right now, and we have kind of adjusted our pipeline accordingly.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [20]

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Got it. And I know you guys have also mentioned that a lot of the VCs are more wary of obviously, the smaller type companies. Just curious if there was any inclination or thoughts on your behalf on potentially doing a joint venture or some partnership with another venture lender in order to have some larger bite size and some larger borrowers to kind of avoid the trouble of these smaller companies?

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [21]

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So we -- that's good. We really have no intends -- no plans right now to do joint ventures. We do partner with the technology banks and others, occasionally, on the larger life science transactions to be able to provide an appropriate solution to the borrower.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [22]

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Got it, okay. And just last one from me. Just -- the cash balance ended pretty high up the quarter. Just curious how we should think about that going forward where cash relative to the portfolio and balance sheet? If this seems like a big -- we paid down more dividend, the portfolio shrank and what not.

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Daniel R. Trolio, Horizon Technology Finance Corporation - SVP and CFO, and Corporate Controller [23]

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Well, the cash is always based on the timing of the principal prepayments, and at the end of the first quarter, as Rob mentioned, there was a substantial prepayment at the end of the quarter. So that will fluctuate each quarter. So it depends -- and then also depends on the amount that we are able to deploy each quarter. So our goal is what we normally have been projecting over the past for each quarter, we have a principal -- normal principal payments of around $10 million to $30 million a quarter, and on average, we've had some principal prepayments, about $10 million a quarter.

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [24]

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As Dan said, we did pay down $30 million pretty quickly after the end of the quarter.

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Operator [25]

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And our next question comes from Casey Alexander of Compass Point.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Analyst [26]

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Do you expect a full incentive fee in the second quarter?

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [27]

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Well, it's too early to say because it's dependent on timing of both new loan volume, prepayments and the income associated with those prepayments. It'd be really -- it would be inappropriate to say for sure.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Analyst [28]

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Okay. Secondly, do you have any sense of subsequent events that have taken place in the second quarter? Is there a look at -- and generally, prepayments tend to come before deployments? Do you have any sense for how prepayments are looking thus far in the quarter?

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [29]

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Well, we have always sort of modeled around $10 million per quarter, prepays, and $10 million to $12 million of normal amortization. There's a possibility that we could be higher than that on the prepays this quarter.

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Operator [30]

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Our next question comes from Jonathan Bock of Wells Fargo.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [31]

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Fin O'Shea again for Jonathan. Just another follow-up on the incentive fee item. As you guys recover sort of back to the 7% hurdle, is there going to be a cap of your normal 20% of pre-incentive fee NII plus any gains -- the normal way these hurdles work? Or is that backing in of the base fee, going to allow for a much higher incentive fee clip going forward?

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [32]

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The formula allows for the cumulative incentive fee to not exceed 20%, for the formula. I'm not sure exactly what you're asking for.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [33]

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Just how the -- in terms of cap, how the base fee is back into that, if you agree?

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [34]

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It's -- yes, I do.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [35]

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So would your cap, as you said, prevent, say, an incentive fee that would be larger than the base fee?

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [36]

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On a cumulative basis, no. But in a single quarter, possibly.

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Operator [37]

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And there are no further questions. I would now like to turn the call back over to Robert Pomeroy, Chairman and CEO, for closing comments.

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Robert D. Pomeroy, Horizon Technology Finance Corporation - Chairman and CEO [38]

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Thank you. In summary, in the first quarter, we achieve higher levels of loan originations, made further progress in resolving underperforming loans and increased our NAV. We're also -- we continue to realize positive liquidity events, including $1 million warrant gain. Looking ahead, we remain optimistic about our long-term ability to grow our portfolio and pay distributions that are covered by our net investment income, while we also provide our shareholders with added upside potential from our diverse warrant portfolio.

We thank you for your interest in Horizon, and look forward to sharing our progress with you again in August. This concludes our conference call. Thank you, and have a great day.