UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
   
  OR
   
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                TO

 

COMMISSION FILE NUMBER: 814-00802

 

 

 

HORIZON TECHNOLOGY FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   27-2114934
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
312 Farmington Avenue    
Farmington, CT   06032
(Address of principal executive offices)   (Zip Code)

 

(860) 676-8654
(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
       
Non-accelerated filer ¨  (Do not check if a smaller reporting company) Smaller reporting company ¨
       
Emerging growth company ¨    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act   ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of October 31, 2017 was 11,517,984. 

 

 

 

 

 

 

HORIZON TECHNOLOGY FINANCE CORPORATION

 

FORM 10-Q

TABLE OF CONTENTS

 

    Page
  PART I  
Item 1. Consolidated Financial Statements 3
     
  Consolidated Statements of Assets and Liabilities as of September 30, 2017 and December 31, 2016 (unaudited) 3
  Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (unaudited) 4
  Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2017 and 2016 (unaudited) 5
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited) 6
  Consolidated Schedules of Investments as of September 30, 2017 and December 31, 2016 (unaudited) 7
  Notes to the Consolidated Financial Statements (unaudited) 18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38
Item 3. Quantitative and Qualitative Disclosures About Market Risk 52
Item 4. Controls and Procedures 53
     
  PART II  
Item 1. Legal Proceedings 54
Item 1A. Risk Factors 54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
Item 3. Defaults Upon Senior Securities 54
Item 4. Mine Safety Disclosures 54
Item 5. Other Information 54
Item 6. Exhibits 54
  Signatures 55
EX-31.1    
EX-31.2    
EX-32.1    
EX-32.2    

 

 2 

 

 

PART I: FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Assets and Liabilities (Unaudited)

(Dollars in thousands, except share and per share data)

 

   September 30,
2017
   December 31,
2016
 
         
Assets          
Non-affiliate investments at fair value (cost of $184,124 and $211,627, respectively) (Note 4)  $173,211   $194,003 
Affiliate investments at fair value (cost of $3,767)(Note 5)   3,493     
Total investments at fair value (cost of $187,891 and $211,627, respectively)   176,704    194,003 
Cash   22,326    37,135 
Interest receivable   4,366    6,036 
Other assets   1,413    2,078 
Total assets   204,809   $239,252 
           
Liabilities          
Borrowings (Note 7)  $64,101   $95,597 
Distributions payable   3,455    3,453 
Base management fee payable (Note 3)   304    337 
Incentive fee payable (Note 3)   258     
Other accrued expenses   695    673 
Total liabilities   68,813    100,060 
           
Commitments and Contingencies (Note 8)          
           
Net assets          
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of September 30, 2017 and December 31, 2016        
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 11,684,244 and 11,671,966 shares issued and 11,516,779 and 11,510,424 shares outstanding as of September 30, 2017 and December 31, 2016, respectively   12    12 
Paid-in capital in excess of par   179,626    179,551 
Distributions in excess of net investment income   (846)   (397)
Net unrealized depreciation on investments   (11,187)   (19,463)
Net realized loss on investments   (31,609)   (20,511)
Total net assets   135,996    139,192 
Total liabilities and net assets  $204,809   $239,252 
Net asset value per common share  $11.81   $12.09 

 

See Notes to Consolidated Financial Statements

 

 3 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except share and per share data)

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
Investment income                    
Interest income on investments                    
Interest income on non-affiliate investments  $6,164   $6,819   $17,861   $24,610 
Interest income on affiliate investments   81        81     
Total interest income on investments   6,245    6,819    17,942    24,610 
Fee income                    
Prepayment fee income on non-affiliate investments   399    355    1,187    618 
Fee income on non-affiliate investments   130    434    485    769 
Total investment income   6,774    7,608    19,614    25,997 
Expenses                    
Interest expense   1,140    1,420    3,540    4,466 
Base management fee (Note 3)   921    1,135    2,783    3,666 
Performance based incentive fee (Note 3)   258        1,094    2,126 
Administrative fee (Note 3)   194    197    575    753 
Professional fees   275    315    1,105    1,159 
General and administrative   189    218    600    681 
Total expenses   2,977    3,285    9,697    12,851 
Net investment income before excise tax   3,797    4,323    9,917    13,146 
Credit for excise tax       (52)       (138)
Net investment income   3,797    4,375    9,917    13,284 
                     
Net realized and unrealized loss on investments                    
Net realized (loss) gain on non-affiliate investments   (429)   5    (11,098)   (2,857)
Net realized (loss) gain on investments   (429)   5    (11,098)   (2,857)
Net unrealized (depreciation) appreciation on non-affiliate investments   (640)   (10,023)   8,295    (14,752)
Net unrealized depreciation on affiliate investments   (19)       (19)    
Net unrealized (depreciation) appreciation on investments   (659)   (10,023)   8,276    (14,752)
Net realized and unrealized loss on investments   (1,088)   (10,018)   (2,822)   (17,609)
                     
Net increase (decrease) in net assets resulting from operations  $2,709   $(5,643)  $7,095   $(4,325)
Net investment income per common share  $0.33   $0.38   $0.86   $1.15 
Net increase (decrease) in net assets per common share  $0.24   $(0.49)  $0.62   $(0.37)
Distributions declared per share  $0.30   $0.345   $0.90   $1.035 
Weighted average shares outstanding   11,518,552    11,549,508    11,516,246    11,543,995 

 

See Notes to Consolidated Financial Statements

 

 4 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Changes in Net Assets (Unaudited)

(Dollars in thousands, except share data)

 

   Common Stock   Paid-In
Capital in
Excess of
   Distributions
in Excess of
Net
Investment
   Net Unrealized
Depreciation
on
   Net Realized
Loss on
   Total Net 
   Shares   Amount   Par   Income   Investments   Investments   Assets 
Balance at December 31, 2015   11,535,212   $12   $179,707   $(2,006)  $(5,227)  $(12,735)  $159,751 
Net decrease in net assets resulting from operations, net of excise tax               13,284    (14,752)   (2,857)   (4,325)
Issuance of common stock under dividend reinvestment plan   18,048        211                211 
Repurchases of common stock   (1,319)       (16)               (16)
Distributions declared               (11,952)           (11,952)
Balance at September 30, 2016   11,551,941   $12   $179,902   $(674)  $(19,979)  $(15,592)  $143,669 
                                    
Balance at December 31, 2016   11,510,424   $12   $179,551   $(397)  $(19,463)  $(20,511)  $139,192 
Net increase in net assets resulting from operations, net of excise tax               9,917    8,276    (11,098)   7,095 
Issuance of common stock under dividend reinvestment plan   12,278        134                134 
Repurchases of common stock   (5,923)       (59)               (59)
Distributions declared               (10,366)           (10,366)
Balance at September 30, 2017   11,516,779   $12   $179,626   $(846)  $(11,187)  $(31,609)  $135,996 

 

See Notes to Consolidated Financial Statements

 

 5 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

   For the Nine Months Ended 
   September 30, 
   2017   2016 
Cash flows from operating activities:          
Net increase (decrease) in net assets resulting from operations  $7,095   $(4,325)
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities:          
Amortization of debt issuance costs   383    434 
Net realized loss on investments   11,098    2,857 
Net unrealized (appreciation) depreciation on investments   (8,276)   14,752 
Purchase of investments   (66,311)   (45,223)
Principal payments received on investments   80,062    69,266 
Proceeds from sale of investments   1,572    939 
Changes in assets and liabilities:          
Net decrease in investments in money market funds       285 
Net decrease in restricted investments in money market funds       1,091 
Decrease (increase) in interest receivable   253    (1,749)
Decrease in end-of-term payments   1,008    200 
Decrease in unearned income   (437)   (476)
Decrease in other assets   423    143 
Increase (decrease) in other accrued expenses   22    (220)
Decrease in base management fee payable   (33)   (22)
Increase (decrease) in incentive fee payable   258    (1,028)
Net cash provided by operating activities   27,117    36,924 
Cash flows from financing activities:          
Proceeds from issuance of 2022 Notes   32,500     
Repayment of Asset-Backed Notes       (14,546)
Advances on credit facility   34,000    10,000 
Repayment of credit facility   (97,000)   (15,000)
Distributions paid   (10,230)   (11,736)
Repurchase of common stock   (59)   (16)
Debt issuance costs   (1,137)   (221)
Net cash used in financing activities   (41,926)   (31,519)
Net (decrease) increase in cash   (14,809)   5,405 
Cash:          
Beginning of period   37,135    20,765 
End of period  $22,326   $26,170 
Supplemental disclosure of cash flow information:          
Cash paid for interest  $3,242   $4,051 
Supplemental non-cash investing and financing activities:          
Warrant investments received and recorded as unearned income  $1,482   $446 
Distributions payable  $3,455   $3,985 
End-of-term payments receivable  $3,657   $4,859 

 

See Notes to Consolidated Financial Statements

 

 6 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

September 30, 2017

(Dollars in thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(9)(10)  Amount   Investments (6)   Value 
Non-Affiliate Investments — 127.3% (8)                 
Non-Affiliate Debt Investments — 116.1% (8)                 
Non-Affiliate Debt Investments — Life Science — 23.4% (8)               
Palatin Technologies, Inc. (2)(5)  Biotechnology  Term Loan (9.73% cash (Libor + 8.50%; Floor  $2,500   $2,475   $2,475 
      9.00%), 5.00% ETP, Due 1/1/19)               
      Term Loan (9.73% cash (Libor + 8.50%; Floor   3,667    3,635    3,635 
      9.00%), 5.00% ETP, Due 8/1/19)               
Sample6, Inc. (2)  Biotechnology  Term Loan (10.23% cash (Libor + 9.00%; Floor   551    548    548 
      9.50%; Ceiling 11.00%), 4.50% ETP, Due 8/1/18)               
      Term Loan (10.23% cash (Libor + 9.00%; Floor   335    332    332 
      9.50%; Ceiling 11.00%), 4.50% ETP, Due 8/1/18)               
      Term Loan (10.23% cash (Libor + 9.00%; Floor   1,181    1,172    1,172 
      9.50%; Ceiling 11.00%), 4.50% ETP, Due 8/1/18)               
vTv Therapeutics Inc. (2)(5)  Biotechnology  Term Loan (11.23% cash (Libor + 10.00%; Floor   6,250    6,191    6,191 
      10.50%), 6.00% ETP, Due 5/1/20)               
      Term Loan (11.23% cash (Libor + 10.00%; Floor   3,750    3,696    3,696 
      10.50%), 6.00% ETP, Due 10/1/20)               
Titan Pharmaceuticals, Inc. (2)(5)  Drug Delivery  Term Loan (9.63% cash (Libor + 8.40%; Floor   3,500    3,394    3,394 
      9.50%), 5.00% ETP, Due 6/1/21)               
      Term Loan (9.63% cash (Libor + 8.40%; Floor   3,500    3,425    3,425 
      9.50%), 5.00% ETP, Due 6/1/21)               
Lantos Technologies, Inc. (2)  Medical Device  Term Loan (11.73% cash (Libor + 10.50%; Floor   2,479    2,465    2,183 
      11.50%), 8.91% ETP, Due 5/1/19)               
Mederi Therapeutics, Inc. (2)  Medical Device  Term Loan (12.87% cash (Libor + 11.82%; Floor   173    171    171 
      12.00%), 6.00% ETP, Due 12/1/17)               
      Term Loan (12.87% cash (Libor + 11.82%; Floor   173    171    171 
      12.00%), 6.00% ETP, Due 12/1/17)               
NinePoint Medical, Inc. (2)  Medical Device  Term Loan (9.98% cash (Libor + 8.75%; Floor   3,000    2,975    2,975 
      9.25%), 4.50% ETP, Due 3/1/19)               
      Term Loan (9.98% cash (Libor + 8.75%; Floor   1,500    1,484    1,484 
      9.25%), 4.50% ETP, Due 3/1/19)               
Total Non-Affiliate Debt Investments — Life Science        32,134    31,852 
Non-Affiliate Debt Investments — Technology — 82.0% (8)               
PebblePost, Inc. (2)  Communications  Term Loan (10.49% cash (Libor + 9.26%; Floor   4,000    3,869    3,869 
      10.25%), 4.00% ETP, Due 7/1/21)               
      Term Loan (10.49% cash (Libor + 9.26%; Floor   4,000    3,928    3,928 
      10.25%), 4.00% ETP, Due 7/1/21)               
Gwynnie Bee, Inc. (2)  Consumer-related Technologies  Term Loan (11.74% cash (Libor + 10.50%; Floor   67    66    66 
      11.00%; Ceiling 12.50%), 2.00% ETP, Due 11/1/17)               
      Term Loan (11.74% cash (Libor + 10.50%; Floor   133    130    130 
      11.00%; Ceiling 12.50%), 2.00% ETP, Due 2/1/18)               
      Term Loan (11.74% cash (Libor + 10.50%; Floor   200    197    197 
      11.00%; Ceiling 12.50%), 2.00% ETP, Due 4/1/18)               
Le Tote, Inc. (2)  Consumer-related Technologies  Term Loan (10.88% cash (Libor + 9.65%; Floor   4,000    3,955    3,955 
      10.15%), 5.00% ETP, Due 3/1/20)               
      Term Loan (10.88% cash (Libor + 9.65%; Floor   3,000    2,966    2,966 
      10.15%), 5.00% ETP, Due 3/1/20)               
Rhapsody International, Inc. (2)  Consumer-related Technologies  Term Loan (11.73% cash (Libor + 10.50%; Floor   6,000    5,881    5,881 
      11.00%), 3.00% ETP, Due 10/1/19)               
SavingStar, Inc. (2)  Consumer-related Technologies  Term Loan (11.63% cash (Libor + 10.40%; Floor   2,267    2,237    2,237 
      10.90%), 4.25% ETP, Due 6/1/20)               
      Term Loan (11.63% cash (Libor + 10.40%; Floor   1,978    1,911    1,911 
      10.90%), 3.80% ETP, Due 11/1/20)               
IgnitionOne, Inc. (2)  Internet and Media  Term Loan (11.46% cash (Libor + 10.23%; Floor   3,000    2,822    2,822 
      10.23%), 2.00% ETP, Due 4/1/22)               
      Term Loan (11.46% cash (Libor + 10.23%; Floor   3,000    2,822    2,822 
      10.23%), 2.00% ETP, Due 4/1/22)               
      Term Loan (11.46% cash (Libor + 10.23%; Floor   3,000    2,822    2,822 
      10.23%), 2.00% ETP, Due 4/1/22)               
      Term Loan (11.46% cash (Libor + 10.23%; Floor   3,000    2,822    2,822 
      10.23%), 2.00% ETP, Due 4/1/22)               
Jump Ramp Games, Inc. (2)  Internet and Media  Term Loan (10.96% cash (Libor + 9.73%),   4,000    3,937    3,937 
      3.00% ETP, Due 4/1/21)               
Kixeye, Inc. (2)  Internet and Media  Term Loan (10.83% cash (Libor + 9.60%; Floor   3,000    2,896    2,896 
      10.75%), 2.00% ETP, Due 9/1/21)               
      Term Loan (10.83% cash (Libor + 9.60%; Floor   3,000    2,941    2,941 
      10.75%), 2.00% ETP, Due 9/1/21)               

 

See Notes to Consolidated Financial Statements

 

 7 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

September 30, 2017

(Dollars in thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(9)(10)  Amount   Investments (6)   Value 
MediaBrix, Inc. (2)  Internet and Media  Term Loan (12.23% cash (Libor + 11.00%; Floor   4,000    3,974    3,974 
      11.50%), 3.00% ETP, Due 1/1/20)               
Rocket Lawyer Incorporated (2)  Internet and Media  Term Loan (10.63% cash (Libor + 9.40%; Floor   4,000    3,899    3,899 
      10.50%), 3.00% ETP, Due 7/1/21)               
      Term Loan (10.63% cash (Libor + 9.40%; Floor   4,000    3,928    3,928 
      10.50%), 3.00% ETP, Due 7/1/21)               
Zinio Holdings, LLC (2)  Internet and Media  Term Loan (12.48% cash (Libor + 11.25%; Floor   4,000    3,975    3,975 
      11.75%), 5.00% ETP, Due 2/1/20)               
The NanoSteel Company, Inc. (2)  Materials  Term Loan (10.73% cash (Libor + 9.50%; Floor   4,792    4,708    4,708 
      10.00%), 7.20% ETP, Due 1/1/20)               
      Term Loan (10.73% cash (Libor + 9.50%; Floor   2,396    2,354    2,354 
      10.00%), 6.45% ETP, Due 1/1/20)               
      Term Loan (10.73% cash (Libor + 9.50%; Floor   2,500    2,452    2,452 
      10.00%), 5.85% ETP, Due 3/1/20)               
Powerhouse Dynamics, Inc. (2)  Power Management  Term Loan (11.93% cash (Libor + 10.70%; Floor   1,500    1,480    1,480 
      11.20%), 3.00% ETP, Due 3/1/19)               
Luxtera, Inc.  Semiconductors  Term Loan (11.00% cash (Prime + 6.75%),   2,000    1,891    1,891 
      Due 3/28/20)               
      Term Loan (11.00% cash (Prime + 6.75%),   1,500    1,437    1,437 
      Due 3/28/20)               
Bridge2 Solutions, Inc. (2)  Software  Term Loan (12.23% cash (Libor + 11.00%; Floor   2,933    2,916    2,916 
      11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19)               
      Term Loan 12.23% cash (Libor + 11.00%; Floor   933    931    931 
      11.50%; Ceiling 14.50%), 2.00% ETP, Due 1/1/20)               
Digital Signal Corporation (11)(13)  Software  Term Loan (11.48% cash (Libor + 10.25%; Floor   1,285    1,252    965 
      10.43%), 5.00% ETP, Due 7/1/19)               
      Term Loan (11.48% cash (Libor + 10.25%; Floor   1,285    1,252    965 
      10.43%), 5.00% ETP, Due 7/1/19)               
      Term Loan (10.00% cash, Due 12/31/17)   350    350    270 
Education Elements, Inc. (2)  Software  Term Loan (11.23% cash (Libor + 10.00%; Floor   1,000    986    986 
      10.50%), 4.00% ETP, Due 1/1/19)               
      Term Loan (11.23% cash (Libor + 10.00%; Floor   1,100    1,085    1,085 
      10.50%), 4.00% ETP, Due 8/1/19)               
Netuitive, Inc.  Software  Term Loan (13.48% cash (Libor + 12.25%; Floor   214    230    230 
      12.50%), 3.33% ETP, Due 9/1/18)               
ScoreBig, Inc. (2)(11)(12)  Software  Term Loan (11.08% cash (Libor + 10.00%; Floor   3,403    3,332    945 
      10.50%), 4.00% ETP, Due 4/1/19)               
      Term Loan (11.23% cash (Libor + 10.00%; Floor   3,403    3,360    953 
      10.50%), 4.00% ETP, Due 4/1/19)               
      Term Loan (11.23% cash (Libor + 10.00%; Floor   2,000    1,950    553 
      10.50%), 4.00% ETP, Due 3/1/20)               
      Term Loan (11.23% cash (Libor + 10.00%; Floor   203    203    58 
      10.50%), 4.00% ETP, Due 10/31/16)               
      Term Loan (11.23% cash (Libor + 10.00%; Floor   324    324    91 
      10.50%), 4.00% ETP, Due 11/11/19)               
ShopKeep.com, Inc. (2)  Software  Term Loan (11.18% cash (Libor + 9.95%; Floor   6,000    5,915    5,915 
      10.45%), 3.00% ETP, Due 4/1/20)               
      Term Loan (11.18% cash (Libor + 9.95%; Floor   4,000    3,934    3,934 
      10.45%), 3.00% ETP, Due 9/1/20)               
SIGNiX, Inc.  Software  Term Loan (12.23% cash (Libor + 11.00%; Floor   2,200    2,094    1,899 
      11.50%), 3.5% ETP, Due 4/1/19)               
SilkRoad Technology, Inc. (2)  Software  Term Loan (11.58% cash (Libor + 10.35%; Floor   7,000    6,894    6,894 
      10.85%; Ceiling 12.85%), 5.00% ETP, Due 6/1/20)               
Weblinc Corporation (2)  Software  Term Loan (11.48% cash (Libor + 10.25%; Floor   3,000    2,909    2,909 
      11.25%), 3.00% ETP, Due 3/1/21)               
xTech Holdings, Inc. (2)  Software  Term Loan (11.73% cash (Libor + 10.50%; Floor   1,056    1,042    1,042 
      11.00%), 3.00% ETP, Due 4/1/19)               
      Term Loan (11.73% cash (Libor + 10.50%; Floor   1,667    1,644    1,644 
      11.00%), 3.00% ETP, Due 3/1/20)               
Total Non-Affiliate Debt Investments — Technology         118,903    111,485 

 

See Notes to Consolidated Financial Statements

 

 8 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

September 30, 2017

(Dollars in thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(9)(10)  Amount   Investments (6)   Value 
Non-Affiliate Debt Investments — Cleantech — 4.4% (8)               
Lehigh Technologies, Inc. (2)  Waste Recycling  Term Loan (10.95% cash (Libor + 9.72%), 1.67% ETP,   3,000    2,993    2,993 
      Due 8/1/19)               
      Term Loan (10.95% cash (Libor + 9.72%), 1.67% ETP,   3,000    2,993    2,993 
      Due 8/1/19)               
Total Non-Affiliate Debt Investments — Cleantech        5,986    5,986 
Non-Affiliate Debt Investments — Healthcare information and services — 6.3% (8)            
Interleukin Genetics, Inc. (2)(5)(11)  Diagnostics  Term Loan (11.73% cash (Libor + 10.50%;   3,649    3,539    1,135 
      Floor 11.00%), 6.50% ETP, Due 10/1/18)               
      Term Loan (8.00% PIK , Due 1/1/22) (15)   514    514    165 
Watermark Medical, Inc. (2)  Other Healthcare  Term Loan (10.73% cash (Libor + 9.50%; Floor 10.00%;   1,021    1,019    1,019 
      Ceiling 11.00%); 4.00% ETP, Due 4/1/18)               
      Term Loan (10.73% cash (Libor + 9.50%; Floor 10.00%;   1,021    1,019    1,019 
      Ceiling 11.00%); 4.00% ETP, Due 4/1/18)               
      Term Loan (10.73% cash (Libor + 9.50%; Floor 10.00%;   486    486    486 
      Ceiling 11.00%); 4.00% ETP, Due 4/1/18)               
HealthEdge Software, Inc. (2)  Software  Term Loan (9.48% cash (Libor + 8.25%;   5,000    4,777    4,777 
      Floor 9.25%), 3.00% ETP, Due 7/1/22)               
Total Non-Affiliate Debt Investments — Healthcare information and services        11,354    8,601 
Total Non- Affiliate Debt Investments          168,377    157,624 
                      
Non-Affiliate Warrant Investments — 5.9% (8)               
Non-Affiliate Warrants — Life Science — 1.2% (8)               
ACT Biotech Corporation   Biotechnology  1,521,820 Preferred Stock Warrants        83     
Alpine Immune Sciences, Inc. (5)   Biotechnology  4,634 Common Stock Warrants        122     
Argos Therapeutics, Inc. (2)(5)  Biotechnology  73,112 Common Stock Warrants        33     
Celsion Corporation (5)  Biotechnology  408 Common Stock Warrants        15     
Inotek Pharmaceuticals Corporation (5)  Biotechnology  28,204 Common Stock Warrants        17     
Ocera Therapeutics, Inc. (2)(5)  Biotechnology  6,491 Common Stock Warrants        6     
Palatin Technologies, Inc. (2)(5)  Biotechnology  608,058 Common Stock Warrants        50    22 
Revance Therapeutics, Inc. (5)   Biotechnology  34,113 Common Stock Warrants        68    457 
Sample6, Inc. (2)  Biotechnology  661,956 Preferred Stock Warrants        53    25 
Strongbridge U.S. Inc. (5)  Biotechnology  160,714 Common Stock Warrants        72    742 
Sunesis Pharmaceuticals, Inc. (5)  Biotechnology  2,050 Common Stock Warrants        5     
vTv Therapeutics Inc. (2)(5)  Biotechnology  93,896 Common Stock Warrants        44    77 
Titan Pharmaceuticals, Inc. (2)(5)  Drug Delivery  280,612 Common Stock Warrants        88    88 
AccuVein Inc. (2)  Medical Device  75,769 Preferred Stock Warrants        24    27 
EnteroMedics, Inc. (5)   Medical Device  134 Common Stock Warrants        347     
IntegenX, Inc. (2)  Medical Device  170,646 Preferred Stock Warrants        35    32 
Lantos Technologies, Inc. (2)  Medical Device  2,763,646 Preferred Stock Warrants        38    12 
Mederi Therapeutics, Inc. (2)  Medical Device  248,736 Preferred Stock Warrants        26    40 
Mitralign, Inc. (2)  Medical Device  641,909 Preferred Stock Warrants        52    35 
NinePoint Medical, Inc. (2)  Medical Device  566,037 Preferred Stock Warrants        33    40 
OraMetrix, Inc. (2)   Medical Device  812,348 Preferred Stock Warrants        78     
Tryton Medical, Inc. (2)  Medical Device  122,362 Preferred Stock Warrants        15    13 
ViOptix, Inc.    Medical Device  375,763 Preferred Stock Warrants        13     
Total Non-Affiliate Warrants — Life Science          1,317    1,610 
Non-Affiliate Warrants — Technology — 4.2% (8)               
Ekahau, Inc. (2)  Communications  978,261 Preferred Stock Warrants        33    24 
PebblePost, Inc. (2)  Communications  598,580 Preferred Stock Warrants        92    93 
Additech, Inc. (2)  Consumer-related Technologies  150,000 Preferred Stock Warrants        33    32 
Gwynnie Bee, Inc. (2)  Consumer-related Technologies  268,591 Preferred Stock Warrants        68    819 
Le Tote, Inc. (2)  Consumer-related Technologies  202,974 Preferred Stock Warrants        63    360 
Rhapsody International Inc. (2)  Consumer-related Technologies  852,273 Common Stock Warrants        164     
SavingStar, Inc. (2)  Consumer-related Technologies  850,439 Preferred Stock Warrants        104    104 
XIOtech, Inc.    Data Storage  96 Preferred Stock Warrants        22     
IgnitionOne, Inc. (2)  Internet and Media  262,910 Preferred Stock Warrants        672    668 
Jump Ramp Games, Inc. (2)  Internet and Media  159,766 Preferred Stock Warrants        32    32 
Kixeye, Inc. (2)  Internet and Media  530,751 Preferred Stock Warrants        74    74 
Rocket Lawyer Incorporated (2)  Internet and Media  235,549 Preferred Stock Warrants        83    84 
The NanoSteel Company, Inc. (2)  Materials  379,360 Preferred Stock Warrants        187    443 
IntelePeer, Inc.    Networking  141,549 Common Stock Warrants        39     
Nanocomp Technologies, Inc. (2)  Networking  1,414,921 Preferred Stock Warrants        67    24 
Powerhouse Dynamics, Inc. (2)  Power Management  290,698 Preferred Stock Warrants        28    26 

 

See Notes to Consolidated Financial Statements

 

 9 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

September 30, 2017

(Dollars in thousands) 

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(9)(10)  Amount   Investments (6)   Value 
Avalanche Technology, Inc. (2)  Semiconductors  202,602 Preferred Stock Warrants        101    40 
eASIC Corporation (2)  Semiconductors  40,445 Preferred Stock Warrants        25    28 
Kaminario, Inc.  Semiconductors  1,087,203 Preferred Stock Warrants        59    45 
Luxtera, Inc.(2)  Semiconductors  3,546,553 Preferred Stock Warrants        213    358 
Soraa, Inc. (2)  Semiconductors  203,616 Preferred Stock Warrants        80    434 
Bolt Solutions Inc. (2)  Software  202,892 Preferred Stock Warrants        113    118 
Bridge2 Solutions, Inc. (2)   Software  75,458 Common Stock Warrants        18    342 
Clarabridge, Inc.    Software  53,486 Preferred Stock Warrants        14    82 
Digital Signal Corporation  Software  125,116 Common Stock Warrants        32     
Education Elements, Inc. (2)  Software  238,121 Preferred Stock Warrants        28    28 
Lotame Solutions, Inc. (2)  Software  288,115 Preferred Stock Warrants        22    278 
Netuitive, Inc.    Software  41,569 Common Stock Warrants        48     
Riv Data Corp. (2)  Software  321,428 Preferred Stock Warrants        12    37 
ShopKeep.com, Inc. (2)  Software  165,779 Preferred Stock Warrants        98    119 
SIGNiX, Inc.  Software  114,767 Preferred Stock Warrants        210    42 
Skyword, Inc.  Software  301,056 Preferred Stock Warrants        48    57 
SpringCM, Inc. (2)  Software  2,385,686 Preferred Stock Warrants        55    132 
Sys-Tech Solutions, Inc.  Software  375,000 Preferred Stock Warrants        242    464 
Visage Mobile, Inc.  Software  1,692,047 Preferred Stock Warrants        19     
Weblinc Corporation (2)  Software  195,122 Preferred Stock Warrants        42    42 
xTech Holdings, Inc. (2)  Software  158,730 Preferred Stock Warrants        43    302 
Total Non-Affiliate Warrants — Technology          3,283    5,731 
Non-Affiliate Warrants — Cleantech — 0.1% (8)               
Renmatix, Inc.  Alternative Energy  53,022 Preferred Stock Warrants        68     
Rypos, Inc. (2)  Energy Efficiency  5,627 Preferred Stock Warrants        44    48 
Tigo Energy, Inc. (2)   Energy Efficiency  804,604 Preferred Stock Warrants        100    116 
Total Non-Affiliate Warrants — Cleantech              212    164 
Non-Affiliate Warrants — Healthcare information and services — 0.4% (8)               
Interleukin Genetics, Inc. (2)(5)  Diagnostics  12,452,290 Common Stock Warrants        168     
LifePrint Group, Inc. (2)  Diagnostics  49,000 Preferred Stock Warrants        29    2 
ProterixBio, Inc. (2)   Diagnostics  3,156 Common Stock Warrants        54     
Singulex, Inc.    Other Healthcare  294,231 Preferred Stock Warrants        44    51 
Verity Solutions Group, Inc.    Other Healthcare  300,360 Preferred Stock Warrants        100    43 
Watermark Medical, Inc. (2)  Other Healthcare  27,373 Preferred Stock Warrants        74    60 
HealthEdge Software, Inc. (2)  Software  63,291 Preferred Stock Warrants        26    27 
Medsphere Systems Corporation (2)  Software  7,097,792 Preferred Stock Warrants        60    206 
Recondo Technology, Inc. (2)    Software  556,796 Preferred Stock Warrants        95    207 
Total Non-Affiliate Warrants — Healthcare information and services        650    596 
Total Non-Affiliate Warrants           5,462    8,101 
                      
Non-Affiliate Other Investments — 4.3% (8)                  
Espero  Pharmaceuticals, Inc. (14)  Biotechnology  Royalty Agreement        5,300    5,300 
ZetrOZ, Inc.  Medical Device  Royalty Agreement        328    500 
Vette Technology, LLC   Data Storage  Royalty Agreement Due 4/18/2019        4,254    100 
Total Non-Affiliate Other Investments           9,882    5,900 
                      
Non-Affiliate Equity — 1.0% (8)                  
Insmed Incorporated (5)   Biotechnology  33,208 Common Stock        238    1,036 
Revance Therapeutics, Inc.(5)  Biotechnology  5,125 Common Stock        73    141 
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology  13,082 Common Stock        83    26 
SnagAJob.com, Inc.    Consumer-related Technologies  82,974 Common Stock        9    83 
Total Non-Affiliate Equity              403    1,286 
Total Non-Affiliate Portfolio Investment Assets       $184,124   $173,211 
                      
Affiliate Investments — 2.6% (8)                  
Affiliate Debt Investments — Technology — 2.5% (8)               
Decisyon, Inc.  Software  Term Loan (13.538% cash (Libor + 12.308%; Floor  $1,523   $1,522   $1,450 
      12.50%), 8.00% ETP, Due 12/1/19)               
      Term Loan (13.538% cash (Libor + 12.308%; Floor   833    764    728 
      12.50%), 8.00% ETP, Due 12/1/19)               
      Term Loan (12.02% PIK , Due 4/15/19) (15)   250    250    238 
      Term Loan (12.03% PIK , Due 4/15/19) (15)   250    250    238 

 

See Notes to Consolidated Financial Statements

 

 10 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

September 30, 2017

(Dollars in thousands) 

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(9)(10)  Amount   Investments (6)   Value 
      Term Loan (12.24% PIK , Due 4/15/19) (15)   750    750    714 
Total Affiliate Debt Investments — Technology        3,536    3,368 
                      
Affiliate Warrants — Technology — 0.0% (8)               
Decisyon, Inc.  Software  82,967 Common Stock Warrants        46     
Total Affiliate Warrants — Technology          46     
                      
Affiliate Equity — Technology — 0.1% (8)               
Decisyon, Inc.  Software  45,365,936 Common Stock        185    125 
Total Affiliate Equity              185    125 
Total Affiliate Portfolio Investment Assets       $3,767   $3,493 
                      
Total Portfolio Investment Assets — 129.9%(8)       $187,891   $176,704 

 

 

 

(1) All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States.
   
(2) Has been pledged as collateral under the Key Facility.
   
(3) All non-affiliate investments are investments in which the Company owns less than 5% ownership of the voting securities of the portfolio company.  All affiliate investments are investments in which the Company owns 5% or more of the voting securities of the portfolio company.  
   
(4) All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include end-of-term payments (“ETPs”) and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt investments are at fixed rates for the term of the debt investment, unless otherwise indicated. All debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of September 30, 2017 is provided.
   
(5) Portfolio company is a public company.
   
(6) For debt investments, represents principal balance less unearned income.
   
(7) Warrants, Equity and Other Investments are non-income producing.
   
(8) Value as a percent of net assets.
   
(9) The Company did not have any non-qualifying assets under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”), as of September 30, 2017. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
   
(10)

ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee the Company may pay its Advisor will be based on income that the Company has not yet received in cash. 

   
(11) Debt investment is on non-accrual status at September 30, 2017.
   
(12)

ScoreBig, Inc., a Delaware corporation (“ScoreBig”), made an assignment for the benefit of its creditors whereby ScoreBig assigned all of its assets to SB (assignment for the benefit of creditors), LLC, a California limited liability company (“SBABC”), established under California law to effectuate the Assignment for the Benefit of Creditors of ScoreBig. SBABC subsequently entered into a License Agreement with a third party (“Licensee”), whereby SBABC granted a license of certain of SBABC’s intellectual property and general intangibles to Licensee in exchange for certain royalty payments on the future net profits, if any, of Licensee. SBABC, in consideration for the Company’s consent to the License Agreement, agreed to pay all payments due under the License Agreement, if any, to the Company until the payment in full in cash of the Company’s debt investments in ScoreBig. 

   
(13)

Digital Signal Corporation, a Delaware corporation (“DSC”), made an assignment for the benefit of its creditors whereby DSC assigned all of its assets to DSC (assignment for the benefit of creditors), LLC, a Delaware limited liability company, established under Delaware law to effectuate the Assignment for the Benefit of Creditors of DSC. 

   
(14) Royalty Agreement received in partial satisfaction of obligations of New Haven Pharmaceuticals, Inc. (“NHP”) to the Company in connection with the sale of substantially all of the assets of NHP to Espero Pharmaceuticals, Inc.
   
(15) Debt investment has a payment-in-kind (“PIK”) feature.

 

See Notes to Consolidated Financial Statements

 

 11 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2016

(Dollars in thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(9)(10)  Amount   Investments (6)   Value 
Debt Investments — 133.8% (8)                 
Debt Investments — Life Science — 38.5% (8)               
Argos Therapeutics, Inc. (2)(5)  Biotechnology  Term Loan (9.38% cash (Libor + 8.75%; Floor 9.25%;  $4,375   $4,339   $4,339 
      Ceiling 10.75%), 5.00% ETP, Due 10/1/18)               
      Term Loan (9.38% cash (Libor + 8.75%; Floor 9.25%;   5,000    4,969    4,969 
      Ceiling 10.75%), 5.00% ETP, Due 3/1/19)               
New Haven Pharmaceuticals, Inc. (11)  Biotechnology  Term Loan (11.63% cash (Libor + 11.00%; Floor   1,282    1,274    651 
      11.50%), 11.42% ETP, Due 3/1/19)               
      Term Loan (11.63% cash (Libor + 11.00%; Floor   427    424    217 
      11.50%), 11.42% ETP, Due 3/1/19)               
      Term Loan (10.63% cash (Libor + 10.00%; Floor   1,973    1,960    1,002 
      10.50%), 6.10% ETP, Due 3/1/19)               
      Term Loan (10.13% cash (Libor + 9.50%; Floor   6,185    6,118    3,127 
      10.00%), 4.00% ETP, Due 4/1/19)               
      Term Loan (10.13% cash (Libor + 9.50%; Floor   593    593    303 
      10.00%), Due 1/31/17)               
Palatin Technologies, Inc. (2)(5)  Biotechnology  Term Loan (9.13% cash (Libor + 8.50%; Floor   4,000    3,960    3,960 
      9.00%), 5.00% ETP, Due 1/1/19)               
      Term Loan (9.13% cash (Libor + 8.50%; Floor   5,000    4,955    4,955 
      9.00%), 5.00% ETP, Due 8/1/19)               
Sample6, Inc. (2)  Biotechnology  Term Loan (9.63% cash (Libor + 9.00%; Floor   972    969    969 
      9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)               
      Term Loan (9.63% cash (Libor + 9.00%; Floor   591    588    588 
      9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)               
      Term Loan (9.63% cash (Libor + 9.00%; Floor   2,083    2,073    2,073 
      9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)               
Strongbridge U.S. Inc. (5)  Biotechnology  Term Loan (8.84% cash (Libor + 8.22%; Floor   7,500    7,353    7,353 
      8.75%), 8.00% ETP, Due 12/1/20)               
vTv Therapeutics Inc. (2)(5)  Biotechnology  Term Loan (10.63% cash (Libor + 10.00%; Floor   6,250    6,106    6,106 
      10.50%), 6.00% ETP, Due 5/1/20)               
Lantos Technologies, Inc. (2)  Medical Device  Term Loan (11.50% cash (Libor + 10.50%; Floor   2,479    2,455    2,320 
      11.50%), 5.00% ETP, Due 2/1/18)               
Mederi Therapeutics, Inc. (2)  Medical Device  Term Loan (12.27% cash (Libor + 11.82%; Floor   1,352    1,344    1,344 
      12.00%), 4.00% ETP, Due 7/1/17)               
      Term Loan (12.27% cash (Libor + 11.82%; Floor   1,352    1,344    1,344 
      12.00%), 4.00% ETP, Due 7/1/17)               
NinePoint Medical, Inc. (2)  Medical Device  Term Loan (9.38% cash (Libor + 8.75%; Floor   4,500    4,461    4,461 
      9.25%), 4.50% ETP, Due 3/1/19)               
      Term Loan (9.38% cash (Libor + 8.75%; Floor   2,250    2,225    2,225 
      9.25%), 4.50% ETP, Due 3/1/19)               
Tryton Medical, Inc. (2)  Medical Device  Term Loan (10.66% cash (Prime + 7.16%), 2.50% ETP,   1,313    1,309    1,309 
      Due 3/1/17)               
Total Debt Investments — Life Science           58,819    53,615 
Debt Investments — Technology — 75.4% (8)               
Ekahau, Inc. (2)  Communications  Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)   57    57    57 
      Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)   19    19    19 
Gwynnie Bee, Inc. (2)  Consumer-related Technologies  Term Loan (11.13% cash (Libor + 10.50%; Floor   667    657    657 
      11.00%; Ceiling 12.50%), 2.00% ETP, Due 11/1/17)               
      Term Loan (11.13% cash (Libor + 10.50%; Floor   433    424    424 
      11.00%; Ceiling 12.50%), 2.00% ETP, Due 2/1/18)               
      Term Loan (11.13% cash (Libor + 10.50%; Floor   500    492    492 
      11.00%; Ceiling 12.50%), 2.00% ETP, Due 4/1/18)               
Le Tote, Inc. (2)  Consumer-related Technologies  Term Loan (10.28% cash (Libor + 9.65%; Floor   4,000    3,942    3,942 
      10.15%), 5.00% ETP, Due 3/1/20)               
      Term Loan (10.28% cash (Libor + 9.65%; Floor   3,000    2,955    2,955 
      10.15%), 5.00% ETP, Due 3/1/20)               
Rhapsody International, Inc. (2)  Consumer-related Technologies  Term Loan (11.13% cash (Libor + 10.50%; Floor   7,500    7,336    7,336 
      11.00%), 3.00% ETP, Due 10/1/19)               
SavingStar, Inc. (2)  Consumer-related Technologies  Term Loan (11.03% cash (Libor + 10.40%; Floor   2,900    2,860    2,860 
      10.90%), 3.00% ETP, Due 6/1/19)               
      Term Loan (11.03% cash (Libor + 10.40%; Floor   2,000    1,965    1,965 
      10.90%), 3.00% ETP, Due 3/1/20)               

 

See Notes to Consolidated Financial Statements

 

 12 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2016

(Dollars in thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(9)(10)  Amount   Investments (6)   Value 
MediaBrix, Inc. (2)  Internet and Media  Term Loan (11.63% cash (Libor + 11.00%; Floor   4,000    3,966    3,966 
      11.50%), 3.00% ETP, Due 1/1/20)               
Zinio Holdings, LLC (2)  Internet and Media  Term Loan (11.88% cash (Libor + 11.25%; Floor   4,000    3,967    3,967 
      11.75%), 4.00% ETP, Due 2/1/20)               
The NanoSteel Company, Inc. (2)  Materials  Term Loan (10.13% cash (Libor + 9.50%; Floor   5,000    4,940    4,940 
      10.00%), 5.00% ETP, Due 7/1/19)               
      Term Loan (10.13% cash (Libor + 9.50%; Floor   2,500    2,470    2,470 
      10.00%), 5.00% ETP, Due 7/1/19)               
      Term Loan (10.13% cash (Libor + 9.50%; Floor   2,500    2,464    2,464 
      10.00%), 5.00% ETP, Due 1/1/20)               
Nanocomp Technologies, Inc. (2)  Networking  Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)   369    367    367 
      Term Loan (11.63% cash (Libor + 11.00%; Floor   3,000    2,939    2,939 
      11.50%), 3.00% ETP, Due 4/1/20)               
Powerhouse Dynamics, Inc. (2)  Power Management  Term Loan (11.33% cash (Libor + 10.70%; Floor   2,250    2,220    2,220 
      11.20%), 3.00% ETP, Due 3/1/19)               
Avalanche Technology, Inc. (2)  Semiconductors  Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;   417    416    416 
      Ceiling 11.75%), 2.40% ETP, Due 4/1/17)               
      Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;   1,335    1,331    1,331 
      Ceiling 11.75%), 2.40% ETP, Due 10/1/18)               
      Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;   1,548    1,517    1,517 
      Ceiling 11.75%), 2.00% ETP, Due 2/1/19)               
Luxtera, Inc. (2)  Semiconductors  Term Loan (10.38% cash (Libor + 9.75%; Floor 10.25%;   614    607    607 
      Ceiling 12.25%), 13.00% ETP, Due 7/1/17)               
      Term Loan (10.38% cash (Libor + 9.75%; Floor 10.25%;   343    341    341 
      Ceiling 12.25%), 13.00% ETP, Due 7/1/17)               
      Term Loan (9.13% cash (Libor + 8.50%; Floor 9.00%),   667    663    663 
      4.50% ETP, Due 12/1/18)               
      Term Loan (9.13% cash (Libor + 8.50%; Floor 9.00%),   667    663    663 
      4.50% ETP, Due 12/1/18)               
      Term Loan (9.63% cash (Libor + 9.00%; Floor 9.50%),   2,000    1,990    1,990 
      4.50% ETP, Due 11/1/19)               
Xtera Communications, Inc. (5)(11)   Semiconductors  Term Loan (12.50% cash, 22.92% ETP, Due 11/1/16)   3,056    3,047     
      Term Loan (12.50% cash, 22.92% ETP, Due 11/1/16)   936    933     
Bridge2 Solutions, Inc.  Software  Term Loan (11.63% cash (Libor + 11.00%; Floor   4,000    3,976    3,976 
      11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19)               
      Term Loan (11.63% cash (Libor + 11.00%; Floor   1,000    996    996 
      11.50%; Ceiling 14.50%), 2.00% ETP, Due 1/1/20)               
ControlScan, Inc. (2)  Software  Term Loan (10.88% cash (Libor + 10.25%),   4,500    4,413    4,413 
      3.00% ETP, Due 7/1/20)               
Decisyon, Inc.  Software  Term Loan (12.94% cash (Libor + 12.308%; Floor   1,523    1,521    1,519 
      12.50%), 6.50% ETP, Due 6/1/18)               
      Term Loan (12.94% cash (Libor + 12.308%; Floor   833    715    713 
      12.50%), 6.50% ETP, Due 6/1/18)               
Digital Signal Corporation (11)(13)  Software  Term Loan (10.88% cash (Libor + 10.25%; Floor   1,280    1,246    928 
      10.43%), 5.00% ETP, Due 7/1/19)               
      Term Loan (10.88% cash (Libor + 10.25%; Floor   1,280    1,246    928 
      10.43%), 5.00% ETP, Due 7/1/19)               
      Term Loan (10.00% cash, Due 6/30/17)   194    194    144 
Education Elements, Inc. (2)  Software  Term Loan (10.63% cash (Libor + 10.00%; Floor   1,600    1,578    1,578 
      10.50%), 4.00% ETP, Due 1/1/19)               
      Term Loan (10.63% cash (Libor + 10.00%; Floor   1,500    1,479    1,479 
      10.50%), 4.00% ETP, Due 8/1/19)               
Netuitive, Inc.  Software  Term Loan (12.88% cash (Libor + 12.25%; Floor   461    460    460 
      12.50%), 3.33% ETP, Due 9/1/17)               
ScoreBig, Inc. (2)(11)(12)  Software  Term Loan (10.63% cash (Libor + 10.00%; Floor   3,403    3,332    1,526 
      10.50%), 4.00% ETP, Due 4/1/19)               
      Term Loan (10.63% cash (Libor + 10.00%; Floor   3,403    3,360    1,539 
      10.50%), 4.00% ETP, Due 4/1/19)               
      Term Loan (10.63% cash (Libor + 10.00%; Floor   2,000    1,950    894 
      10.50%), 4.00% ETP, Due 3/1/20)               

 

See Notes to Consolidated Financial Statements

 

 13 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2016

(Dollars in thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(9)(10)  Amount   Investments (6)   Value 
      Term Loan (10.63% cash (Libor + 10.00%; Floor   203    203    93 
      10.50%), 4.00% ETP, Due 10/31/16)               
      Term Loan (10.63% cash (Libor + 10.00%; Floor   324    324    148 
      10.50%), 4.00% ETP, Due 11/11/19)               
ShopKeep.com, Inc. (2)  Software  Term Loan (10.47% cash (Libor + 9.95%; Floor   6,000    5,811    5,811 
      10.45%), 3.00% ETP, Due 4/1/20)               
SIGNiX, Inc.  Software  Term Loan (11.63% cash (Libor + 11.00%; Floor   2,250    2,124    2,012 
      11.50%), Due 10/1/18)               
SilkRoad Technology, Inc. (2)  Software  Term Loan (10.98% cash (Libor + 10.35%; Floor   7,500    7,455    7,455 
      10.85%; Ceiling 12.85%), 3.00% ETP, Due 6/1/19)               
Skyword, Inc.  Software  Term Loan (11.58% cash (Libor + 10.95%; Floor   4,000    3,944    3,870 
      11.45%), 3.00% ETP, Due 8/1/19)               
Social Intelligence Corp. (2)  Software  Term Loan (11.13% cash (Libor + 10.50%; Floor   323    316    315 
      11.00%; Ceiling 13.00%), 3.50% ETP, Due 12/1/17)               
Sys-Tech Solutions, Inc. (2)  Software  Term Loan (11.78% cash (Libor + 11.15%; Floor   3,000    2,983    2,983 
      11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)               
      Term Loan (11.78% cash (Libor + 11.15%; Floor   2,833    2,814    2,814 
      11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)               
VBrick Systems, Inc. (2)  Software  Term Loan (11.63% cash (Libor + 11.00%; Floor   700    696    696 
      11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)               
Vidsys, Inc. (2)  Software  Term Loan (13.00% cash, 12.58% ETP, Due 12/1/17)   2,610    2,610    2,610 
xTech Holdings, Inc. (2)  Software  Term Loan (11.13% cash (Libor + 10.50%; Floor   1,500    1,479    1,479 
      11.00%), 3.00% ETP, Due 4/1/19)               
      Term Loan (11.13% cash (Libor + 10.50%; Floor   2,000    1,970    1,970 
      11.00%), 3.00% ETP, Due 3/1/20)               
Total Debt Investments — Technology            114,743    104,917 
Debt Investments — Cleantech — 5.7% (8)               
Rypos, Inc. (2)  Energy Efficiency  Term Loan (11.93% cash (Libor + 11.55%;   1,260    1,252    1,252 
      Floor 11.80%), 4.25% ETP, Due 6/1/17)               
      Term Loan (11.93% cash (Libor + 11.55%;   697    690    690 
      Floor 11.80%), 4.25% ETP, Due 1/1/18)               
Lehigh Technologies, Inc. (2)  Waste Recycling  Term Loan (10.35% cash (Libor + 9.72%), 6.75% ETP,   3,000    2,982    2,982 
      Due 8/1/19)               
      Term Loan (10.35% cash (Libor + 9.72%), 6.75% ETP,   3,000    2,982    2,982 
      Due 8/1/19)               
Total Debt Investments — Cleantech          7,906    7,906 
Debt Investments — Healthcare information and services — 14.2% (8)               
Interleukin Genetics, Inc. (2)(5)  Diagnostics  Term Loan (11.13% cash (Libor + 10.50%;   4,225    4,081    4,081 
      Floor 11.00%), 6.50% ETP, Due 10/1/18)               
Watermark Medical, Inc. (2)  Other Healthcare  Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%;   2,333    2,330    2,330 
      Ceiling 11.00%); 4.00% ETP, Due 4/1/18)               
      Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%;   2,333    2,330    2,330 
      Ceiling 11.00%); 4.00% ETP, Due 4/1/18)               
      Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%;   1,111    1,110    1,110 
      Ceiling 11.00%); 4.00% ETP, Due 4/1/18)               
MedAvante, Inc. (2)  Software  Term Loan (9.88% cash (Libor + 9.25%; Floor   3,000    2,972    2,972 
      9.75%), 4.00% ETP, Due 1/1/19)               
      Term Loan (9.88% cash (Libor + 9.25%; Floor   3,000    2,972    2,972 
      9.75%), 4.00% ETP, Due 1/1/19)               
      Term Loan (9.88% cash (Libor + 9.25%; Floor   4,000    3,953    3,953 
      9.75%), 4.00% ETP, Due 7/1/19)               
Total Debt Investments — Healthcare information and services        19,748    19,748 
Total Debt Investments              201,216    186,186 

 

See Notes to Consolidated Financial Statements

 

 14 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2016

(Dollars in thousands)

 

         Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(9)(10)  Investments (6)   Value 
Warrant Investments — 4.6% (8)            
Warrants — Life Science — 0.5% (8)             
ACT Biotech Corporation   Biotechnology  1,521,820 Preferred Stock Warrants   83     
Argos Therapeutics, Inc. (2)(5)  Biotechnology  33,112 Common Stock Warrants   33    2 
Celsion Corporation (5)  Biotechnology  5,708 Common Stock Warrants   15     
Inotek Pharmaceuticals Corporation (5)  Biotechnology  28,204 Common Stock Warrants   17    21 
New Haven Pharmaceuticals, Inc.  Biotechnology  103,982 Preferred Stock Warrants   88     
Nivalis Therapeutics, Inc. (5)   Biotechnology  18,534 Common Stock Warrants   122     
Ocera Therapeutics, Inc. (2)(5)  Biotechnology  6,491 Common Stock Warrants   6     
Palatin Technologies, Inc. (2)(5)  Biotechnology  608,058 Common Stock Warrants   51    4 
Revance Therapeutics, Inc. (5)   Biotechnology  34,377 Common Stock Warrants   68    241 
Sample6, Inc. (2)  Biotechnology  494,988 Preferred Stock Warrants   45    16 
Strongbridge U.S. Inc. (5)  Biotechnology  160,714 Common Stock Warrants   72    72 
vTv Therapeutics Inc. (2)(5)  Biotechnology  76,290 Common Stock Warrants   23    23 
Sunesis Pharmaceuticals, Inc. (5)  Biotechnology  2,050 Common Stock Warrants   5     
AccuVein Inc. (2)  Medical Device  75,769 Preferred Stock Warrants   24    27 
EnteroMedics, Inc. (5)   Medical Device  134 Common Stock Warrants   347     
IntegenX, Inc. (2)  Medical Device  170,646 Preferred Stock Warrants   35    31 
Lantos Technologies, Inc. (2)  Medical Device  66,665,256 Preferred Stock Warrants   38    41 
Mederi Therapeutics, Inc. (2)  Medical Device  248,736 Preferred Stock Warrants   26    39 
Mitralign, Inc. (2)  Medical Device  641,909 Preferred Stock Warrants   52    44 
NinePoint Medical, Inc. (2)  Medical Device  566,038 Preferred Stock Warrants   33    39 
OraMetrix, Inc. (2)   Medical Device  812,348 Preferred Stock Warrants   78     
Tryton Medical, Inc. (2)  Medical Device  122,362 Preferred Stock Warrants   15    12 
ViOptix, Inc.    Medical Device  375,763 Preferred Stock Warrants   13     
Total Warrants — Life Science        1,289    612 
Warrants — Technology — 3.3% (8)             
Ekahau, Inc. (2)  Communications  978,261 Preferred Stock Warrants   32    23 
Additech, Inc. (2)  Consumer-related Technologies  150,000 Preferred Stock Warrants   33    31 
Gwynnie Bee, Inc. (2)  Consumer-related Technologies  268,591 Preferred Stock Warrants   68    698 
If(we), Inc.    Consumer-related Technologies  190,868 Preferred Stock Warrants   27    47 
Le Tote, Inc. (2)  Consumer-related Technologies  202,974 Preferred Stock Warrants   63    411 
Rhapsody International Inc. (2)  Consumer-related Technologies  852,273 Common Stock Warrants   164    150 
SavingStar, Inc. (2)  Consumer-related Technologies  98,860 Preferred Stock Warrants   60    70 
XIOtech, Inc.    Data Storage  2,217,979 Preferred Stock Warrants   22     
The NanoSteel Company, Inc. (2)  Materials  299,211 Preferred Stock Warrants   92    348 
IntelePeer, Inc.    Networking  141,549 Common Stock Warrants   39    31 
Nanocomp Technologies, Inc. (2)  Networking  707,387 Preferred Stock Warrants   67    72 
Aquion Energy, Inc.  Power Management  115,051 Preferred Stock Warrants   7    72 
Powerhouse Dynamics, Inc. (2)  Power Management  290,698 Preferred Stock Warrants   28    26 
Avalanche Technology, Inc. (2)  Semiconductors  202,602 Preferred Stock Warrants   101    40 
eASIC Corporation (2)  Semiconductors  40,445 Preferred Stock Warrants   25    28 
InVisage Technologies, Inc. (2)  Semiconductors  395,009 Preferred Stock Warrants   48    45 
Kaminario, Inc.  Semiconductors  1,087,203 Preferred Stock Warrants   59    45 
Luxtera, Inc.(2)  Semiconductors  2,508,671 Preferred Stock Warrants   49    193 
Soraa, Inc. (2)  Semiconductors  203,616 Preferred Stock Warrants   80    432 
Xtera Communications, Inc. (5)   Semiconductors  37,831 Common Stock Warrants   206     
Bolt Solutions Inc. (2)  Software  202,892 Preferred Stock Warrants   113    135 
Bridge2 Solutions, Inc.   Software  75,458 Common Stock Warrants   18    341 
Clarabridge, Inc.    Software  53,486 Preferred Stock Warrants   14    81 
ControlScan, Inc. (2)  Software  2,295,918 Preferred Stock Warrants   19    30 
Decisyon, Inc.  Software  82,967 Common Stock Warrants   46     
Digital Signal Corporation  Software  125,116 Common Stock Warrants   32     
Education Elements, Inc. (2)  Software  238,122 Preferred Stock Warrants   28    28 
Lotame Solutions, Inc. (2)  Software  288,115 Preferred Stock Warrants   22    276 
Netuitive, Inc.    Software  41,569 Common Stock Warrants   48     
Riv Data Corp. (2)  Software  237,361 Preferred Stock Warrants   12    12 
ScoreBig, Inc. (2)  Software  879,014 Preferred Stock Warrants   88     
ShopKeep.com, Inc. (2)  Software  165,779 Preferred Stock Warrants   98    118 
SIGNiX, Inc.  Software  89,767 Preferred Stock Warrants   168    167 

 

See Notes to Consolidated Financial Statements

 

 15 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2016

(Dollars in thousands)

 

         Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(9)(10)  Investments (6)   Value 
Skyword, Inc.  Software  301,056 Preferred Stock Warrants   48    56 
SpringCM, Inc. (2)  Software  2,385,686 Preferred Stock Warrants   55    131 
Sys-Tech Solutions, Inc.  Software  375,000 Preferred Stock Warrants   242    389 
Vidsys, Inc.  Software  85,399 Preferred Stock Warrants   23    12 
Visage Mobile, Inc.  Software  1,692,047 Preferred Stock Warrants   19     
xTech Holdings, Inc. (2)  Software  158,730 Preferred Stock Warrants   43    52 
Total Warrants — Technology      2,406    4,590 
Warrants — Cleantech — 0.1% (8)             
Renmatix, Inc.  Alternative Energy  53,022 Preferred Stock Warrants   68     
Semprius, Inc.  Alternative Energy  519,981 Preferred Stock Warrants   25     
Rypos, Inc. (2)  Energy Efficiency  5,627 Preferred Stock Warrants   44    25 
Tigo Energy, Inc. (2)   Energy Efficiency  804,604 Preferred Stock Warrants   100    115 
Lehigh Technologies, Inc. (2)  Waste Recycling  272,727 Preferred Stock Warrants   33    39 
Total Warrants — Cleantech         270    179 
Warrants — Healthcare information and services — 0.7% (8)          
Accumetrics, Inc.  Diagnostics  100,928 Preferred Stock Warrants   107    180 
Candescent Health, Inc. (2)    Diagnostics  519,991 Preferred Stock Warrants   378     
Interleukin Genetics, Inc. (2)(5)  Diagnostics  7,662,100 Common Stock Warrants   168    142 
LifePrint Group, Inc. (2)  Diagnostics  49,000 Preferred Stock Warrants   29    2 
ProterixBio, Inc. (2)   Diagnostics  3,156 Common Stock Warrants   54     
Singulex, Inc.    Other Healthcare  294,231 Preferred Stock Warrants   44    51 
Verity Solutions Group, Inc.    Other Healthcare  300,360 Preferred Stock Warrants   100    42 
Watermark Medical, Inc. (2)  Other Healthcare  27,373 Preferred Stock Warrants   74    76 
MedAvante, Inc. (2)  Software  114,285 Preferred Stock Warrants   66    79 
Medsphere Systems Corporation (2)  Software  7,097,791 Preferred Stock Warrants   60    205 
Recondo Technology, Inc. (2)    Software  556,796 Preferred Stock Warrants   95    204 
Total Warrants — Healthcare information and services   1,175    981 
Total Warrants         5,140    6,362 
                 
Other Investments — 0.4% (8)            
ZetrOZ, Inc.  Medical Device  Royalty Agreement   365    500 
Vette Technology, LLC   Data Storage  Royalty Agreement Due 4/18/2019   4,318    100 
Total Other Investments         4,683    600 
Equity — 0.6% (8)                
Insmed Incorporated (5)   Biotechnology  33,208 Common Stock   238    439 
Revance Therapeutics, Inc.(5)  Biotechnology  4,861 Common Stock   73    101 
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology  13,082 Common Stock   83    47 
SnagAJob.com, Inc.    Consumer-related Technologies  82,974 Common Stock   9    83 
Decisyon, Inc.  Software  4,200,934 Common Stock   185    185 
Total Equity         588    855 
Total Portfolio Investment Assets — 139.4% (8)     $211,627   $194,003 

 

 

 

(1) All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States.
   
(2) Has been pledged as collateral under the Key Facility.
   
(3) All investments are investments in which the Company owns less than 5% of the voting securities of the portfolio company.
   
(4) All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETPs and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt investments are at fixed rates for the term of the debt investment, unless otherwise indicated. All debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2016 is provided.
   
(5) Portfolio company is a public company.
   
(6) For debt investments, represents principal balance less unearned income.
   
(7) Warrants, Equity and Other Investments are non-income producing.
   
(8) Value as a percent of net assets.

 

See Notes to Consolidated Financial Statements

 

 16 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2016

(Dollars in thousands)

 

(9) The Company did not have any non-qualifying assets under Section 55(a) of the 1940 Act as of December 31, 2016. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
   
(10)

ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee the Company may pay its Advisor will be based on income that the Company has not yet received in cash. 

   
(11) Debt investment is on non-accrual status at December 31, 2016.
   
(12)

ScoreBig made an assignment for the benefit of its creditors whereby ScoreBig assigned all of its assets to SBABC, established under California law to effectuate the Assignment for the Benefit of Creditors of ScoreBig. SBABC subsequently entered into a License Agreement with a Licensee, whereby SBABC granted a license of certain of SBABC’s intellectual property and general intangibles to Licensee in exchange for certain royalty payments on the future net profits, if any, of Licensee. SBABC, in consideration for the Company’s consent to the License Agreement, agreed to pay all payments due under the License Agreement, if any, to the Company until the payment in full in cash of the Company’s debt investments in ScoreBig. 

   
(13)

DSC made an assignment for the benefit of its creditors whereby DSC assigned all of its assets to DSC (assignment for the benefit of creditors), LLC, a Delaware limited liability company, established under Delaware law to effectuate the Assignment for the Benefit of Creditors of DSC. 

 

See Notes to Consolidated Financial Statements

 

 17 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Note 1.  Organization

 

Horizon Technology Finance Corporation (the “Company”) was organized as a Delaware corporation on March 16, 2010 and is an externally managed, non-diversified, closed-end investment company. The Company has elected to be regulated as a business development company (“BDC”) under the 1940 Act. In addition, for tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, the Company generally is not subject to corporate-level federal income tax on the portion of its taxable income (including net capital gains) the Company distributes to its stockholders. The Company primarily makes secured debt investments to development-stage companies in the technology, life science, healthcare information and services and cleantech industries. All of the Company’s debt investments consist of loans secured by all of, or a portion of, the applicable debtor company’s tangible and intangible assets.

 

On October 28, 2010, the Company completed an initial public offering (“IPO”), and its common stock trades on the NASDAQ Global Select Market under the symbol “HRZN”. The Company was formed to continue and expand the business of Compass Horizon Funding Company LLC, a Delaware limited liability company, which commenced operations in March 2008 and became the Company’s wholly owned subsidiary upon the completion of the Company’s IPO.

 

Horizon Credit II LLC (“Credit II”) was formed as a Delaware limited liability company on June 28, 2011, with the Company as its sole equity member. Credit II is a special purpose bankruptcy-remote entity and is a separate legal entity from the Company. Any assets conveyed to Credit II are not available to creditors of the Company or any other entity other than Credit II’s lenders.

 

The Company formed Horizon Funding 2013-1 LLC (“2013-1 LLC”) as a Delaware limited liability company on June 7, 2013 and Horizon Funding Trust 2013-1 (“2013-1 Trust” and, together with the 2013-1 LLC, the “2013-1 Entities”) as a Delaware trust on June 18, 2013. The 2013-1 Entities were special purpose bankruptcy remote entities and were separate legal entities from the Company. The Company formed the 2013-1 Entities for purposes of securitizing $189.3 million of secured loans (the “2013-1 Securitization”) and issuing fixed-rate asset-backed notes in an aggregate principal amount of $90 million (the “Asset-Backed Notes”). The 2013-1 Entities were dissolved as of September 30, 2016.

 

The Company has also established an additional wholly owned subsidiary, which is structured as a Delaware limited liability company, to hold the assets of a portfolio company acquired in connection with foreclosure or bankruptcy, which is a separate legal entity from the Company.

 

The Company’s investment strategy is to maximize the investment portfolio’s return by generating current income from the debt investments the Company makes and capital appreciation from the warrants the Company receives when making such debt investments. The Company has entered into an investment management agreement, (the “Investment Management Agreement”) with Horizon Technology Finance Management LLC (the “Advisor”) under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.

 

Note 2.  Basis of presentation and significant accounting policies

 

The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X (“Regulation S-X”) under the Securities Act of 1933, as amended (the “Securities Act”). In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2016.

 

 18 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Principles of consolidation

 

As required under GAAP and Regulation S-X, the Company will generally consolidate its investment in a company that is an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly-owned subsidiaries in its consolidated financial statements.

 

Use of estimates

 

In preparing the consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the balance sheet and income and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the valuation of investments.

 

Fair value

 

The Company records all of its investments at fair value in accordance with relevant GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. The Company has categorized its investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as more fully described in Note 6. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

 

The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3.

 

See Note 6 for additional information regarding fair value.

 

Segments

 

The Company has determined that it has a single reporting segment and operating unit structure. The Company lends to and invests in portfolio companies in various technology, life science, healthcare information and services and cleantech industries. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these debt investments and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment.

 

Investments

 

Investments are recorded at fair value. The Company’s board of directors (the “Board”) determines the fair value of the Company’s portfolio investments. The Company has the intent to hold its debt investments for the foreseeable future or until maturity or payoff.

 

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. As of September 30, 2017, there were three debt investments on non-accrual status with a cost of $16.1 million and a fair value of $6.1 million. As of December 31, 2016, there were four investments on non-accrual status with a cost of $26.2 million and a fair value of $11.5 million. For the three and nine months ended September 30, 2017, the Company recognized $0.1 million in interest income from debt investments on non-accrual status. For the three and nine months ended September 30, 2016, the Company did not recognize any interest income from debt investments on non-accrual status.

 

 19 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The Company receives a variety of fees from borrowers in the ordinary course of conducting its business, including advisory fees, commitment fees, amendment fees, non-utilization fees, success fees and prepayment fees. In a limited number of cases, the Company may also receive a non-refundable deposit earned upon the termination of a transaction. Debt investment origination fees, net of certain direct origination costs, are deferred and, along with unearned income, are amortized as a level-yield adjustment over the respective term of the debt investment. All other income is recognized when earned. Fees for counterparty debt investment commitments with multiple debt investments are allocated to each debt investment based upon each debt investment’s relative fair value. When a debt investment is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the debt investment is returned to accrual status.

 

Certain debt investment agreements also require the borrower to make an ETP, that is accrued into interest receivable and taken into income over the life of the debt investment to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay the ETP when due. The percentage of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the three months ended September 30, 2017 and 2016 was 4.8% and 7.1%, respectively. The percentage of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the nine months ended September 30, 2017 and 2016 was 6.6% and 12.1%, respectively.

 

In connection with substantially all lending arrangements, the Company receives warrants to purchase shares of stock from the borrower. The warrants are recorded as assets at estimated fair value on the grant date using the Black-Scholes valuation model. The warrants are considered loan fees and are recorded as unearned income on the grant date. The unearned income is recognized as interest income over the contractual life of the related debt investment in accordance with the Company’s income recognition policy. Subsequent to debt investment origination, the fair value of the warrants is determined using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized appreciation or depreciation on investments. Gains and losses from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains and losses on investments.

 

Realized gains or losses on the sale of investments, or upon the determination that an investment balance, or portion thereof, is not recoverable, are calculated using the specific identification method. The Company measures realized gains or losses by calculating the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment. Net change in unrealized appreciation or depreciation reflects the change in the fair values of the Company’s portfolio investments during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

 

Debt issuance costs

 

Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities. The unamortized balance of debt issuance costs as of September 30, 2017 and December 31, 2016 was $2.3 million and $1.6 million, respectively. These amounts are amortized and included in interest expense in the consolidated statements of operations over the life of the borrowings. The accumulated amortization balances as of September 30, 2017 and December 31, 2016 were $4.8 million and $4.4 million, respectively. The amortization expense for the three months ended September 30, 2017 and 2016 was and $0.1 million. The amortization expense for the nine months ended September 30, 2017 and 2016 was $0.4 million.

 

 20 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Income taxes

 

As a BDC, the Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC and to avoid the imposition of corporate-level income tax on the portion of its taxable income distributed to stockholders, among other things, the Company is required to meet certain source of income and asset diversification requirements and to timely distribute dividends out of assets legally available for distribution to its stockholders of an amount generally at least equal to 90% of its investment company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid, for each tax year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which generally relieves the Company from corporate-level U.S. federal income taxes. Accordingly, no provision for federal income tax has been recorded in the financial statements. Differences between taxable income and net increase in net assets resulting from operations either can be temporary, meaning they will reverse in the future, or permanent. In accordance with Topic 946, Financial ServicesInvestment Companies, of the Financial Accounting Standards Board’s, Accounting Standards Codification, as amended (“ASC”), permanent tax differences, such as non-deductible excise taxes paid, are reclassified from distributions in excess of net investment income and net realized loss on investments to paid-in-capital at the end of each fiscal year. These permanent book-to-tax differences are reclassified on the consolidated statements of changes in net assets to reflect their tax character but have no impact on total net assets. For the year ended December 31, 2016, the Company reclassified $0.1 million to paid-in capital from distributions in excess of net investment income, which related to excise taxes refunded in 2016.

 

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and incur a 4% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the nine months ended September 30, 2017 and 2016, there was no U.S. federal excise tax accrual recorded.

 

The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes, as modified by ASC Topic 946. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no material uncertain tax positions at September 30, 2017 and December 31, 2016. The Company’s income tax returns for the 2016, 2015 and 2014 tax years remain subject to examination by U.S. federal and state tax authorities.

 

Distributions

 

Distributions to common stockholders are recorded on the declaration date. The amount to be paid out as distributions is determined by the Board. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such net realized gains for investment.

 

The Company has adopted a dividend reinvestment plan that provides for reinvestment of cash distributions on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board declares a cash distribution, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution. The Company may use newly issued shares to implement the plan or the Company may purchase shares in the open market to fulfill its obligations under the plan.

 

Stock Repurchase Program

 

On April 27, 2017, the Board extended a previously authorized stock repurchase program which allows the Company to repurchase up to $5.0 million of its common stock at prices below the Company’s net asset value per share as reported in its most recent consolidated financial statements. Under the repurchase program, the Company may, but is not obligated to, repurchase shares of its outstanding common stock in the open market or in privately negotiated transactions from time to time. Any repurchases by the Company will comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and any applicable requirements of the 1940 Act. Unless extended by the Board, the repurchase program will terminate on the earlier of June 30, 2018 or the repurchase of $5.0 million of the Company’s common stock. During the three and nine months ended September 30, 2017, the Company repurchased 5,923 shares of its common stock at an average price of $9.97 on the open market at a total cost of $0.1 million. During the three and nine months ended September 30, 2016, the Company repurchased 1,319 shares of its common stock at an average price of $11.54 on the open market at a total cost of $0.02 million. From the inception of the stock repurchase program through September 30, 2017, the Company repurchased 167,465 shares of its common stock at an average price of $11.22 on the open market at a total cost of $1.9 million.

 

 21 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Transfers of financial assets

 

Assets related to transactions that do not meet the requirements under ASC Topic 860, Transfers and Servicing for sale treatment under GAAP are reflected in the Company’s consolidated statements of assets and liabilities as investments. Those assets are owned by special purpose entities that are consolidated in the Company’s financial statements. The creditors of the special purpose entities have received security interests in such assets and such assets are not intended to be available to the creditors of the Company (or any other affiliate of the Company).

 

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company — put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.

 

Note 3.  Related party transactions

 

Investment Management Agreement

 

The Investment Management Agreement was reapproved by the Board on July 28, 2017. Under the terms of the Investment Management Agreement, the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.

 

The Advisor’s services under the Investment Management Agreement are not exclusive to the Company, and the Advisor is free to furnish similar services to other entities so long as its services to the Company are not impaired. The Advisor is a registered investment adviser with the U.S. Securities and Exchange Commission. The Advisor receives fees for providing services to the Company under the Investment Management Agreement, consisting of two components, a base management fee and an incentive fee.

 

The base management fee under the Investment Management Agreement is calculated at an annual rate of 2.00% of (i) the Company’s gross assets, less (ii) assets consisting of cash and cash equivalents, and is payable monthly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage.

 

The base management fee payable at September 30, 2017 and December 31, 2016 was $0.3 million. The base management fee expense was $0.9 million and $1.1 million, respectively, for the three months ended September 30, 2017 and 2016. The base management fee expense was $2.8 million and $3.7 million, respectively, for the nine months ended September 30, 2017 and 2016.

 

 22 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The incentive fee has two parts, as follows:

 

The first part, which is subject to the Incentive Fee Cap and Deferral Mechanism, as defined below, is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar quarter, minus expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income the Company has not yet received in cash. The incentive fee with respect to the Pre-Incentive Fee Net Investment Income is 20.00% of the amount, if any, by which the Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter exceeds a hurdle rate of 1.75% (which is 7.00% annualized) of the Company’s net assets at the end of the immediately preceding calendar quarter, subject to a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, the Advisor receives no incentive fee until the Pre-Incentive Fee Net Investment Income equals the hurdle rate of 1.75%, but then receives, as a “catch-up,” 100.00% of the Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.1875% quarterly (which is 8.75% annualized). The effect of this “catch-up” provision is that, if Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter, the Advisor will receive 20.00% of the Pre-Incentive Fee Net Investment Income as if the hurdle rate did not apply.

 

Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company incurs a loss. For example, if the Company receives Pre-Incentive Fee Net Investment Income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee up to the Incentive Fee Cap, defined below, even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the 2.00% base management fee. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.

 

Commencing with the calendar quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee cap and deferral mechanism which is determined based upon a look-back period of up to three years and is expensed when incurred. For this purpose, the look-back period for the incentive fee based on Pre-Incentive Fee Net Investment Income (the “Incentive Fee Look-back Period”) commenced on July 1, 2014 and increases by one quarter in length at the end of each calendar quarter until June 30, 2017, after which time, the Incentive Fee Look-back Period will include the relevant calendar quarter and the 11 preceding full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income is subject to a cap (the “Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such deferred incentive fees (collectively, the “Incentive Fee Cap and Deferral Mechanism”). The Incentive Fee Cap is equal to (a) 20.00% of Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to the Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or a negative value in any calendar quarter, the Company will not pay an incentive fee on Pre-Incentive Fee Net Investment Income to the Advisor in that quarter. To the extent that the payment of incentive fees on Pre-Incentive Fee Net Investment Income is limited by the Incentive Fee Cap, the payment of such fees will be deferred and paid in subsequent calendar quarters up to three years after their date of deferment, subject to certain limitations, which are set forth in the Investment Management Agreement. The Company only pays incentive fees on Pre-Incentive Fee Net Investment Income to the extent allowed by the Incentive Fee Cap and Deferral Mechanism. “Cumulative Pre-Incentive Fee Net Return” during any Incentive Fee Look-back Period means the sum of (a) Pre-Incentive Fee Net Investment Income and the base management fee for each calendar quarter during the Incentive Fee Look-back Period and (b) the sum of cumulative realized capital gains and losses, cumulative unrealized capital appreciation and cumulative unrealized capital depreciation during the applicable Incentive Fee Look-back Period.

 

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or, upon termination of the Investment Management Agreement, as of the termination date), and equals 20.00% of the Company’s realized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis through the end of such year, less all previous amounts paid in respect of the capital gain incentive fee. However, in accordance with GAAP, the Company is required to include the aggregate unrealized capital appreciation on investments in the calculation and accrue a capital gain incentive fee on a quarterly basis, as if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Investment Management Agreement.

 

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Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The performance based incentive fee expense was $0.3 million for the three months ended September 30, 2017. There was no performance based incentive fee expense for the three months ended September 30, 2016. The incentive fee on Pre-Incentive Fee Net Investment Income was subject to the Incentive Fee Cap and Deferral Mechanism for the three months ended September 30, 2017 and 2016, which resulted in $0.6 million and $0.9 million, respectively, of reduced expense and additional net investment income. The performance based incentive fee expense was $1.1 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively. The incentive fee on Pre-Incentive Fee Net Investment Income was subject to the Incentive Fee Cap and Deferral Mechanism for the nine months ended September 30, 2017 and 2016, which resulted in $1.3 million and $0.9 million, respectively, of reduced expense and additional net investment income. The performance based incentive fee payable as of September 30, 2017 was $0.3 million. The entire incentive fee payable as of September 30, 2017 was composed of the incentive fee based on Pre-Incentive Fee Net Investment Income. There was no performance based incentive fee payable as of December 31, 2016.

 

Administration Agreement

 

The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s Chief Financial Officer and Chief Compliance Officer and their respective staffs. The administrative fee expense was $0.2 million for the three months ended September 30, 2017 and 2016. The administrative fee expense was $0.6 million and $0.8 million, respectively, for the nine months ended September 30, 2017 and 2016.

 

Note 4.  Investments

 

The following table shows the Company’s investments as of September 30, 2017 and December 31, 2016:

 

   September 30, 2017   December 31, 2016 
   Cost   Fair Value   Cost   Fair Value 
       (In thousands)     
             
Investments                    
Debt  $171,913   $161,292   $201,216   $186,186 
Warrants   5,508    8,101    5,140    6,362 
Other   9,882    5,900    4,683    600 
Equity   588    1,411    588    855 
Total investments  $187,891   $176,704   $211,627   $194,003 

 

 24 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The following table shows the Company’s investments by industry sector as of September 30, 2017 and December 31, 2016:

 

   September 30, 2017   December 31, 2016 
   Cost   Fair Value   Cost   Fair Value 
       (In thousands)     
Life Science                    
Biotechnology  $24,311   $25,875   $46,703   $41,578 
Drug Delivery   6,907    6,907         
Medical Device   8,255    7,683    14,164    13,736 
Technology                    
Communications   7,922    7,914    108    99 
Consumer-Related   17,784    18,741    21,055    22,121 
Data Storage   4,276    100    4,340    100 
Internet and Media   37,699    37,696    7,933    7,933 
Materials   9,701    9,957    9,966    10,222 
Networking   106    24    3,412    3,409 
Power Management   1,508    1,506    2,255    2,318 
Semiconductors   3,806    4,233    12,076    8,311 
Software   47,414    40,721    60,516    55,362 
Cleantech                    
Alternative Energy   68        93     
Energy Efficiency   144    164    2,086    2,082 
Waste Recycling   5,986    5,986    5,997    6,003 
Healthcare Information and Services                    
Diagnostics   4,304    1,302    4,817    4,405 
Other   2,742    2,678    5,988    5,939 
Software   4,958    5,217    10,118    10,385 
Total investments  $187,891   $176,704   $211,627   $194,003 

 

Note 5.  Transactions with affiliated companies

 

An affiliated company is generally a portfolio company in which the Company owns 5% or more of its voting securities. Transactions related to investments in affiliated companies for the three months ended September 30, 2017 were as follows:

 

Three months ended September 30, 2017
 

Portfolio
Company

 

Fair value at
June 30,
2017

   Purchases   Sales   Transfers
in/(out) at
fair value
  

Discount
accretion

  

Net
unrealized
gain/(loss)

   Fair value at
September 30,
2017
   Net realized
gain/(loss)
   Interest
income
 
   (In thousands) 
Decisyon, Inc. (1)  $   $750   $   $2,754   $8   $(19)  $3,493   $   $81 
Total Affiliates  $   $750   $   $2,754   $8   $(19)  $3,493   $   $81 

 

 

(1)During the three months ended September 30, 2017, the Company's ownership in the portfolio company increased to five percent of the portfolio company's voting securities.

 

 25 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Transactions related to investments in affiliated companies for the nine months ended September 30, 2017 were as follows:

 

Nine months ended September 30, 2017

Portfolio
Company

  Fair value at
December 31,
2016
   Purchases   Sales   Transfers
in/(out) at
fair value
  

Discount
accretion

  

Net
unrealized
gain/(loss)

   Fair value at
September 30,
2017
   Net realized
gain/(loss)
   Interest
income
 
   (In thousands) 
Decisyon, Inc. (1)  $   $750   $   $2,754   $8   $(19)  $3,493   $   $81 
Total Affiliates  $   $750   $   $2,754   $8   $(19)  $3,493   $   $81 

 

 

(1)During the nine months ended September 30, 2017, the Company's ownership in the portfolio company increased to five percent of the portfolio company's voting securities.

 

There were no transactions related to investments in affiliated companies for the three and nine months ended September 30, 2016.

 

Note 6.  Fair value

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.

 

Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment.

 

The Company’s fair value measurements are classified into a fair value hierarchy in accordance with ASC Topic 820, Fair Value Measurement, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three categories within the hierarchy are as follows:

 

Level 1Quoted prices in active markets for identical assets and liabilities.

 

Level 2Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, and model-based valuation techniques for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

Investments are valued at fair value as determined in good faith by the Board, based on input of management, the audit committee and independent valuation firms which are engaged at the direction of the Board to assist in the valuation of each portfolio investment lacking a readily available market quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied valuation process. This valuation process is conducted at the end of each fiscal quarter, with at least 25% (based on fair value) of the Company’s valuation of portfolio companies lacking readily available market quotations subject to review by an independent valuation firm.

 

 26 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Because there is not a readily available market value for most of the investments in its portfolio, the Company values substantially all of its portfolio investments at fair value as determined in good faith by the Board, as described herein. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company's investments may fluctuate from period to period. Additionally, the fair value of the Company's investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment in a forced or liquidation sale, the Company could realize significantly less than the value at which the Company has recorded such portfolio investment.

 

Cash and interest receivable:  The carrying amount is a reasonable estimate of fair value. These financial instruments are not recorded at fair value on a recurring basis and are categorized as Level 1 within the fair value hierarchy described above.

 

Money market funds:  The carrying amounts are valued at their net asset value as of the close of business on the day of valuation. These financial instruments are recorded at fair value on a recurring basis and are categorized as Level 2 within the fair value hierarchy described above as these funds can be redeemed daily.

 

Debt investments:  The fair value of debt investments is estimated by discounting the expected future cash flows using the period end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the same remaining maturities. At September 30, 2017 and December 31, 2016, the hypothetical market yields used ranged from 10% to 25% and 11% to 25%, respectively. Significant increases (decreases) in this unobservable input would result in a significantly lower (higher) fair value measurement. These assets are recorded at fair value on a recurring basis and are categorized as Level 3 within the fair value hierarchy described above.

 

Under certain circumstances, the Company may use an alternative technique to value debt investments that better reflects its fair value such as the use of multiple probability weighted cash flow models when the expected future cash flows contain elements of variability. 

 

Warrant investments:  The Company values its warrants using the Black-Scholes valuation model incorporating the following material assumptions:

 

Underlying asset value of the issuer is estimated based on information available, including any information regarding the most recent rounds of borrower funding. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement.

 

Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on indices of publicly traded companies similar in nature to the underlying company issuing the warrant. A total of seven such indices are used. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement.

 

The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant.

 

Other adjustments, including a marketability discount on private company warrants, are estimated based on management’s judgment about the general industry environment.

 

Historical portfolio experience on cancellations and exercises of the Company’s warrants are utilized as the basis for determining the estimated time to exit of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or IPOs, and cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life assumption to be shorter than the contractual term of the warrants. Significant increases (decreases) in this unobservable input would result in significantly higher (lower) fair value measurement.

 

 27 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Under certain circumstances the Company may use an alternative technique to value warrants that better reflects the warrants’ fair value, such as an expected settlement of a warrant in the near term or a model that incorporates a put feature associated with the warrant. The fair value may be determined based on the expected proceeds to be received from such settlement or based on the net present value of the expected proceeds from the put option. 

 

The fair value of the Company’s warrants held in publicly traded companies is determined based on inputs that are readily available in public markets or can be derived from information available in public markets. Therefore, the Company has categorized these warrants as Level 2 within the fair value hierarchy described above. The fair value of the Company’s warrants held in private companies is determined using both observable and unobservable inputs and represents management’s best estimate of what market participants would use in pricing the warrants at the measurement date. Therefore, the Company has categorized these warrants as Level 3 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.

 

Equity investments: The fair value of an equity investment in a privately held company is initially the face value of the amount invested. The Company adjusts the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing. The Company may make adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in a portfolio company’s financial or operational performance. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement. The Company has categorized these equity investments as Level 3 within the fair value hierarchy described above. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. Therefore, the Company has categorized these equity investments as Level 1 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.

 

Other investments: Other investments are valued based on the facts and circumstances of the underlying contractual agreement. The Company currently values these contractual agreements using a multiple probability weighted cash flow model as the contractual future cash flows contain elements of variability. Significant changes in the estimated cash flows and probability weightings would result in a significantly higher or lower fair value measurement. The Company has categorized these other investments as Level 3 within the fair value hierarchy described above. These other investments are recorded at fair value on a recurring basis.

 

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of September 30, 2017 and December 31, 2016. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining its fair value measurements.

 

The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements as of September 30, 2017:

 

September 30, 2017
   Fair   Valuation Techniques/  Unobservable      Weighted 
Investment Type  Value   Methodologies  Input  Range   Average 
(Dollars in thousands, except per share data)
Debt investments  $155,192   Discounted Expected Future Cash Flows  Hypothetical Market Yield   10% – 25%    13% 
                      
    6,100   Liquidation Scenario  Probability Weighting   5% – 75%    38% 
                      
Warrant investments   6,412   Black-Scholes   Price Per Share
   

$0.00 – $63.98

    

$3.98

 
        Valuation Model  Average Industry Volatility   21%   21% 
           Marketability Discount   20%   20% 
           Estimated Time to Exit   1 to 5 years    3 years 
                      
    302   Expected Settlement  Price Per Share  $1.90    $1.90 
                      
Other investments   5,900   Multiple Probability   Discount Rate    

18% – 25%

    

19%

 
        Weighted Cash Flow Model  Probability Weighting   25% – 100%    40% 
                      
Equity investments   208   Last Equity Financing  Price Per Share   $0.00 – $1.00    $0.40 
Total Level 3 investments  $174,114                 

 

 28 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements as of December 31, 2016:

 

December 31, 2016
   Fair   Valuation Techniques/  Unobservable      Weighted 
Investment Type  Value   Methodologies  Input  Range   Average 
(Dollars in thousands, except per share data)
Debt investments  $174,686   Discounted Expected Future Cash Flows  Hypothetical Market Yield   11% – 25%    13% 
                      
    11,500   Liquidation Scenario  Probability Weighting   25% – 100%    40% 
                      
Warrant investments   5,677   Black-Scholes   Price Per Share
   

$0.00 – $63.98

    

$4.02

 
        Valuation Model  Average Industry Volatility Volati