Horizon Technology Finance Corporation
Horizon Technology Finance Corp (Form: 10-Q, Received: 05/06/2014 16:38:41)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014
     
    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)

 

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

 

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 þ No o .

 

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 o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller Reporting Company o
        (Do not check if a smaller reporting company)    

 

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

 

As of May 6, 2014, the Registrant had 9,619,334 shares of common stock, $0.001 par value, outstanding.  

 

 

  2
 

 

PART I: FINANCIAL INFORMATION 

 

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 March 31, 2014 and December 31, 2013 (unaudited) 3
  Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 (unaudited) 4
  Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2014 and 2013 (unaudited) 5
  Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 (unaudited) 6
  Consolidated Schedules of Investments as of March 31, 2014 and December 31, 2013 (unaudited) 7
  Notes to the Consolidated Financial Statements (unaudited) 15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 3. Quantitative And Qualitative Disclosures About Market Risk 44
Item 4. Controls and Procedures 45
     
PART II
Item 1. Legal Proceedings 45
Item 1A. Risk Factors 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
Item 3. Defaults Upon Senior Securities 45
Item 4. Mine Safety Disclosures 45
Item 5. Other Information 45
Item 6. Exhibits 45
  Signatures 46
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)

(In thousands, except share data)

 

    March 31,
2014
    December 31,
2013
 
Assets                
Non-affiliate investments at fair value (cost of $233,056 and $234,310, respectively) (Note 4)   $ 228,560     $ 221,284  
Cash     13,993       25,341  
Investment in money market funds     2,101       1,188  
Restricted investments in money market funds     5,730       5,951  
Interest receivable     5,389       4,240  
Other assets     6,369       5,733  
Total assets   $ 262,142     $ 263,737  
                 
Liabilities                
Borrowings (Note 6)   $ 119,405     $ 122,343  
Dividends payable     3,318       3,315  
Base management fee payable (Note 3)     330       439  
Incentive fee payable (Note 3)     406       852  
Other accrued expenses     903       953  
Total liabilities     124,362       127,902  
                 
Net assets                
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2014 and December 31, 2013            
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 9,618,690 and 9,608,949 shares outstanding as of March 31, 2014 and December 31, 2013     10       10  
Paid-in capital in excess of par     155,108       154,975  
Accumulated undistributed net investment income     629       1,463  
Net unrealized depreciation on investments     (4,496 )     (13,026 )
Net realized loss on investments     (13,471 )     (7,587 )
Total net assets     137,780       135,835  
Total liabilities and net assets   $ 262,142     $ 263,737  
Net asset value per common share   $ 14.32     $ 14.14  

 

See Notes to Consolidated Financial Statements

 

3
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Operations (Unaudited)

(In thousands, except share data)

 

    For the Three Months Ended  
    March 31,  
    2014     2013  
Investment income                
Interest income on non-affiliate investments   $ 7,180     $ 7,346  
Fee income on non-affiliate investments     354       22  
Total investment income     7,534       7,368  
Expenses                
Interest expense     2,070       1,773  
Base management fee (Note 3)     1,205       1,241  
Performance based incentive fee (Note 3)     406       693  
Administrative fee (Note 3)     244       285  
Professional fees     835       382  
General and administrative     250       221  
Total expenses     5,010       4,595  
Net investment income before excise tax     2,524       2,773  
Provision for excise tax     (40 )      
Net investment income     2,484       2,773  
Net realized and unrealized gain on investments                
Net realized loss on investments     (5,884 )     (210 )
Net unrealized appreciation on investments     8,530       420  
Net realized and unrealized gain on investments     2,646       210  
Net increase in net assets resulting from operations   $ 5,130     $ 2,983  
Net investment income per common share   $ 0.26     $ 0.29  
Net increase in net assets per common share   $ 0.53     $ 0.31  
Dividends declared per share   $ 0.345     $ 0.345  
Weighted average shares outstanding     9,613,829       9,570,789  

 

See Notes to Consolidated Financial Statements

 

4
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Changes in Net Assets (Unaudited)

(In thousands, except share data)

 

          Common     Paid-In
Capital in
Excess of
    Accumulated
Undistributed 
Net
Investment
    Net Unrealized
Depreciation
on
    Net Realized
Losses on
    Total Net  
    Shares     Stock     Par     Income     Investments     Investments     Assets  
Balance at December 31, 2012     9,567,225     $ 10     $ 154,384     $ 1,428     $ (10,772 )   $ (78 )   $ 144,972  
Net increase in net assets resulting from operations                       2,773       420       (210 )     2,983  
Issuance of common stock under dividend reinvestment plan     7,220             108                         108  
Dividends declared                       (3,303 )                 (3,303 )
Balance at March 31, 2013     9,574,445     $ 10     $ 154,492     $ 898     $ (10,352 )   $ (288 )   $ 144,760  
                                                         
Balance at December 31, 2013     9,608,949     $ 10     $ 154,975     $ 1,463     $ (13,026 )   $ (7,587 )   $ 135,835  
Net increase in net assets resulting from operations                       2,484       8,530       (5,884 )     5,130  
Issuance of common stock under dividend reinvestment plan     9,741             133                         133  
Dividends declared                       (3,318 )                 (3,318 )
Balance at March 31, 2014     9,618,690     $ 10     $ 155,108     $ 629     $ (4,496 )   $ (13,471 )   $ 137,780  

 

See Notes to Consolidated Financial Statements

 

5
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

    For the Three Months Ended  
    March 31,  
    2014     2013  
Cash flows from operating activities:                
Net increase in net assets resulting from operations   $ 5,130     $ 2,983  
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:                
Amortization of debt issuance costs     492       183  
Net realized loss on investments     6,913       18  
Net unrealized appreciation on investments     (8,530 )     (420 )
Purchase of investments     (17,926 )     (28,500 )
Principal payments received on investments     11,773       9,962  
Proceeds from sale of investments     720        
Changes in assets and liabilities:                
Net increase in investments in money market funds     (913 )     (1,559 )
Decrease in restricted investments in money market funds     221        
Increase in interest receivable     (597 )     (88 )
Increase in end-of-term payments     (552 )     (614 )
Decrease in unearned loan income     (226 )     (228 )
(Increase) decrease in other assets     (1,129 )     199  
Decrease in other accrued expenses     (50 )     (199 )
(Decrease) increase in base management fee payable     (109 )     31  
Decrease in incentive fee payable     (446 )     (162 )
Net cash used in operating activities     (5,229 )     (18,394 )
Cash flows from financing activities:                
Dividends paid     (3,181 )     (3,193 )
Net (decrease) increase in borrowings     (2,938 )     21,017  
Net cash (used in) provided by financing activities     (6,119 )     17,824  
Net decrease in cash     (11,348 )     (570 )
Cash:                
Beginning of period     25,341       1,048  
End of period   $ 13,993     $ 478  
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 1,582     $ 1,517  
Supplemental non-cash investing and financing activities:                
Warrant investments received & recorded as unearned loan income   $ 106     $ 172  
Dividends payable   $ 3,318     $ 3,303  
Net assets received in settlement of debt investment   $ 985     $  

 

See Notes to Consolidated Financial Statements

 

6
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)   Amount     Investments (6)     Value  
Debt Investments — 158.2% (9)                                
Debt Investments — Life Science — 23.0% (9)                                
Inotek Pharmaceuticals Corporation (2)   Biotechnology   Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)   $ 3,500     $ 3,466     $ 3,466  
N30 Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)     514       512       512  
        Term Loan (11.25% cash, 3.00% ETP, Due 10/1/15)     1,952       1,936       1,936  
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)     1,451       1,431       1,431  
        Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)     484       477       477  
Sample6, Inc. (2)   Biotechnology   Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16)     1,996       1,979       1,979  
Sunesis Pharmaceuticals, Inc. (2)(5)   Biotechnology   Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)     1,244       1,239       1,239  
        Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)     1,867       1,839       1,839  
Xcovery Holding Company, LLC (2)   Biotechnology   Term Loan (12.50% cash, Due 8/1/15)     745       744       744  
        Term Loan (12.50% cash, Due 8/1/15)     1,172       1,171       1,171  
        Term Loan (12.50% cash, Due 10/1/15)     222       222       222  
Accuvein, Inc.   Medical Device   Term Loan (10.40% cash (Floor 10.40%; Ceiling 11.90%),     4,000       3,945       3,945  
        5.00% ETP, Due 8/1/17)                        
Mederi Therapeutics, Inc.   Medical Device   Term Loan (10.75% cash (Floor 10.75%; Ceiling 12.75%),     3,000       2,960       2,960  
        4.00% ETP, Due 7/1/17)                        
        Term Loan (10.75% cash (Floor 10.75%; Ceiling 12.75%),     3,000       2,920       2,920  
        4.00% ETP, Due 7/1/17)                        
Mitralign, Inc. (2)   Medical Device   Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15)     1,390       1,378       1,378  
        Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15)     969       961       961  
        Term Loan (10.50% cash, 3.00% ETP, Due 7/1/16)     1,143       1,119       1,119  
Tengion, Inc. (2)(5)   Medical Device   Term Loan (13.00% cash, Due 5/1/14)     351       350       350  
Tryton Medical, Inc. (2)   Medical Device   Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,     3,000       2,966       2,966  
        Due 9/1/16)                        
Total Debt Investments — Life Science                     31,615       31,615  
Debt Investments — Technology — 103.4% (9)                                
Ekahau, Inc.   Communications   Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     1,500       1,477       1,477  
        Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     500       492       492  
Overture Networks, Inc. (2)   Communications   Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)     5,000       4,944       4,944  
        Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)     2,500       2,466       2,466  
Optaros, Inc. (2)   Internet and Media   Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)     1,463       1,455       1,455  
        Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)     451       448       448  
SimpleTuition, Inc. (2)   Internet and Media   Term Loan (11.75% cash, Due 3/1/16)     3,524       3,487       3,487  
Nanocomp Technologies, Inc.   Networking   Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)     1,000       981       981  
Aquion Energy, Inc. (2)   Power Management   Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)     2,421       2,413       2,413  
        Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)     2,421       2,413       2,413  
        Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16)     2,703       2,691       2,691  
Xtreme Power, Inc. (2)   Power Management   Term Loan (10.75% cash, 9.00% ETP, Due 5/1/16)     6,000       5,960       5,960  
        Term Loan (15.00% cash, Due 4/14/14)     2,435       2,435       2,435  
Avalanche Technology, Inc. (2)   Semiconductors   Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)     2,728       2,710       2,710  
        Term Loan (10.00% cash, 2.00% ETP, Due 1/1/18)     2,500       2,460       2,460  
eASIC Corporation (2)   Semiconductors   Term Loan (11.00% cash, 2.50% ETP, Due  4/1/17)     2,000       1,971       1,971  
Kaminario, Inc. (2)   Semiconductors   Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)     3,000       2,961       2,961  
        Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)     3,000       2,961       2,961  
Luxtera, Inc. (2)   Semiconductors   Term Loan (10.25% cash, 8.00% ETP, Due 7/1/17)     2,632       2,568       2,568  
        Term Loan (10.25% cash, 8.00% ETP, Due 7/1/17)     1,469       1,458       1,458  
Newport Media, Inc. (2)   Semiconductors   Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)     3,500       3,429       3,429  
        Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)     3,500       3,429       3,429  
NexPlanar Corporation (2)   Semiconductors   Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     3,000       2,969       2,969  
        Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     2,000       1,972       1,972  
Soraa, Inc.   Semiconductors   Term Loan (10.75% cash (Floor 10.75%; Ceiling 13.075%),     2,500       2,457       2,457  
        4.00% ETP, Due 11/1/17)                        
        Term Loan (10.75% cash (Floor 10.75%; Ceiling 13.075%),     2,500       2,457       2,457  
        4.00% ETP, Due 11/1/17)                        
        Term Loan (10.75% cash (Floor 10.75%; Ceiling 13.075%),     2,500       2,457       2,457  
        4.00% ETP, Due 11/1/17)                        
        Term Loan (10.75% cash (Floor 10.75%; Ceiling 13.075%),     2,500       2,457       2,457  
        4.00% ETP, Due 11/1/17)                        
Xtera Communications, Inc. (2)   Semiconductors   Term Loan (11.50% cash, 14.77% ETP, Due 7/1/15)     6,468       6,448       6,448  
        Term Loan (11.50% cash, 13.65% ETP, Due 2/1/16)     1,731       1,721       1,721  
Bolt Solutions, Inc. (2)   Software   Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)     4,264       4,234       4,234  
        Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)     4,264       4,234       4,234  
Construction Software Technologies, Inc. (2)   Software   Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)     4,200       4,176       4,176  

 

See Notes to Consolidated Financial Statements

 

7
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)   Amount     Investments (6)     Value  
        Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)     4,200       4,176       4,176  
Courion Corporation (2)   Software   Term Loan (11.45% cash, Due 10/1/15)     2,331       2,325       2,325  
        Term Loan (11.45% cash, Due 10/1/15)     2,331       2,325       2,325  
Decisyon, Inc. (2)   Software   Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)     4,000       3,940       3,940  
Kontera Technologies, Inc. (2)   Software   Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     4,000       3,957       3,957  
        Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     4,000       3,957       3,957  
Lotame Solutions, Inc. (2)   Software   Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     4,000       3,975       3,975  
        Term Loan (11.50% cash, 3.00% ETP, Due 9/1/16)     1,500       1,489       1,489  
Netuitive, Inc. (2)   Software   Term Loan (11.75% cash, Due 1/1/16)     2,105       2,083       2,083  
Raydiance, Inc. (2)   Software   Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     4,855       4,812       4,812  
        Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     971       950       950  
Razorsight Corporation (2)   Software   Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)     1,500       1,481       1,481  
        Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)     1,457       1,436       1,436  
    Software   Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)     1,000       982       982  
Sys-Tech Solutions, Inc. (2)   Software   Term Loan (11.65% cash, Due 6/1/16)     7,100       6,598       6,598  
VBrick Systems, Inc.   Software   Term Loan (11.50% cash (Floor 10.50%; Ceiling 3.50%),     3,000       2,972       2,972  
        5.00% ETP, Due 7/1/17)                        
Vidsys, Inc. (2)   Software   Term Loan (11.00% cash, 6.50% ETP, Due 6/1/16)     3,000       2,976       2,976  
Visage Mobile, Inc. (2)   Software   Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)     896       885       885  
Total Debt Investments — Technology                     142,510       142,510  
Debt Investments — Cleantech — 13.5% (9)                                
Renmatix, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, 9.00% ETP, Due 2/1/16)     1,816       1,806       1,806  
        Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     1,816       1,806       1,806  
        Term Loan (10.25% cash, Due 10/1/16)     4,733       4,696       4,696  
Semprius, Inc. (2)(8)   Alternative Energy   Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)     3,135       3,115       2,805  
Aurora Algae, Inc. (2)   Energy Efficiency   Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)     1,068       1,065       1,065  
Rypos, Inc. (2)   Energy Efficiency   Term Loan (11.80% cash, Due 1/1/17)     3,000       2,955       2,955  
        Term Loan (11.80% cash, Due 9/1/17)     1,000       980       980  
Tigo Energy, Inc.  (2)   Energy Efficiency   Term Loan (13.00% cash, 3.16% ETP,  Due 6/1/15)     1,874       1,864       1,864  
Cereplast, Inc. (5)(8)   Waste Recycling   Term Loan (12.00% cash, Due 8/1/14)     1,081       978       328  
        Term Loan (12.00% cash, Due 8/1/14)     1,160       1,141       352  
Total Debt Investments — Cleantech                     20,406       18,657  
Debt Investments — Healthcare information and services — 18.3% (9)                            
Radisphere National Radiology Group, Inc. (2)   Diagnostics   Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)     12,000       11,921       11,921  
Watermark Medical, Inc. (2)   Other Healthcare   Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,457       3,457  
        Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,457       3,457  
Recondo Technology, Inc. (2)   Software   Term Loan (11.50% cash, 4.14% ETP, Due 4/1/16)     1,384       1,360       1,360  
        Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)     2,500       2,476       2,476  
        Term Loan (10.50% cash, 2.50% ETP, Due 1/1/18)     2,500       2,471       2,471  
Total Debt Investments — Healthcare information and services                     25,142       25,142  
Total Debt Investments                     219,673       217,924  
Warrant Investments — 4.9% (9)                                
Warrants — Life Science — 2.1% (9)                                
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants           83        
Ambit Biosciences, Inc.(5)   Biotechnology   44,795 Common Stock Warrants           143       6  
Anacor Pharmaceuticals, Inc. (2)(5)   Biotechnology   84,583 Common Stock Warrants           93       1,143  
Celsion Corporation (5)   Biotechnology   5,708 Common Stock Warrants           15        
Inotek Pharmaceuticals Corporation   Biotechnology   114,387 Preferred Stock Warrants           17       16  
N30 Pharmaceuticals, Inc.   Biotechnology   214,200 Preferred Stock Warrants           122       247  
New Haven Pharmaceuticals, Inc.   Biotechnology   34,729 Preferred Stock Warrants           22       25  
Revance Therapeutics, Inc. (5)   Biotechnology   34,377 Common Stock Warrants           68       586  
Sample6, Inc.   Biotechnology   200,582 Preferred Stock Warrants           27       23  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   116,203 Common Stock Warrants           83       520  
Supernus Pharmaceuticals, Inc. (2)(5)   Biotechnology   42,083 Preferred Stock Warrants           94       190  
Tranzyme, Inc. (5)   Biotechnology   77,902 Common Stock Warrants           6        
Accuvein, Inc.   Biotechnology   58,284 Preferred Stock Warrants           18       18  
Direct Flow Medical, Inc.   Medical Device   176,922 Preferred Stock Warrants           144       112  
EnteroMedics, Inc. (5)   Medical Device   141,026 Common Stock Warrants           347        
Mederi Therapeutics, Inc.   Medical Device   248,736 Preferred Stock Warrants           26       27  
Mitralign, Inc.   Medical Device   295,238 Common Stock Warrants           49       35  
OraMetrix, Inc. (2)   Medical Device   812,348 Preferred Stock Warrants           78        
Tengion, Inc. (2)(5)   Medical Device   1,864,876 Common Stock Warrants           124        
Tryton Medical, Inc. (2)   Medical Device   47,977 Preferred Stock Warrants           14       14  

 

See Notes to Consolidated Financial Statements

 

8
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)   Amount     Investments (6)     Value  
ViOptix, Inc.   Medical Device   375,763 Preferred Stock Warrants           13        
Total Warrants — Life Science                     1,586       2,962  
Warrants — Technology — 2.0% (9)                                
Ekahau, Inc.   Communications   978,261 Preferred Stock Warrants           33       26  
OpenPeak, Inc.   Communications   18,997 Preferred Stock Warrants           89        
Overture Networks, Inc.   Communications   344,574 Preferred Stock Warrants           55       43  
Everyday Health, Inc. (5)   Consumer-related Technologies   43,783 Common Stock Warrants           69       152  
SnagAJob.com, Inc.   Consumer-related Technologies   365,396 Preferred Stock Warrants           23       269  
Tagged, Inc.   Consumer-related Technologies   190,868 Preferred Stock Warrants           27       73  
XIOtech, Inc.   Data Storage   2,217,979 Preferred Stock Warrants           22       19  
Cartera Commerce, Inc.   Internet and media   90,909 Preferred Stock Warrants           16       161  
Optaros, Inc.   Internet and media   477,403 Preferred Stock Warrants           21       13  
SimpleTuition, Inc.   Internet and media   189,573 Preferred Stock Warrants           63       8  
IntelePeer, Inc.   Networking   141,549 Preferred Stock Warrants           39       34  
Motion Computing, Inc.   Networking   104,283 Preferred Stock Warrants           4       18  
Nanocomp Technologies, Inc.   Networking   204,546 Preferred Stock Warrants           19       19  
Aquion Energy, Inc.   Power Management   115,051 Preferred Stock Warrants           7       57  
Xtreme Power, Inc.   Power Management   2,466,821 Preferred Stock Warrants           76        
Avalanche Technology, Inc.   Semiconductors   244,649 Preferred Stock Warrants           56       56  
eASIC Corporation`   Semiconductors   1,877,799 Preferred Stock Warrants           16       15  
Kaminario, Inc.   Semiconductors   1,087,203 Preferred Stock Warrants           59       55  
Luxtera, Inc.   Semiconductors   2,087,766 Preferred Stock Warrants           43       113  
Newport Media, Inc.   Semiconductors   188,764 Preferred Stock Warrants           40       37  
NexPlanar Corporation   Semiconductors   216,001 Preferred Stock Warrants           36       56  
Soraa, Inc.   Semiconductors   180,000 Preferred Stock Warrants           80       80  
Xtera Communications, Inc.   Semiconductors   983,607 Preferred Stock Warrants           206        
Bolt Solutions, Inc.   Software   202,892 Preferred Stock Warrants           113       123  
Clarabridge, Inc.   Software   53,486 Preferred Stock Warrants           14       104  
Construction Software Technologies, Inc. (2)   Software   386,415 Preferred Stock Warrants           69       299  
Courion Corporation   Software   772,543 Preferred Stock Warrants           106       91  
Decisyon, Inc.   Software   314,686 Preferred Stock Warrants           44       39  
DriveCam, Inc.   Software   71,639 Preferred Stock Warrants           20       120  
Kontera Technologies, Inc. (2)   Software   99,476 Preferred Stock Warrants           102       82  
Lotame Solutions, Inc.   Software   216,810 Preferred Stock Warrants           4       143  
Netuitive, Inc.   Software   748,453 Preferred Stock Warrants           75       45  
Raydiance, Inc.   Software   735,784 Preferred Stock Warrants           51       49  
Razorsight Corporation   Software   259,404 Preferred Stock Warrants           44       40  
Sys-Tech Solutions, Inc.   Software   375,000 Preferred Stock Warrants           242       241  
Vidsys, Inc.   Software   37,346 Preferred Stock Warrants           23        
Visage Mobile, Inc.   Software   1,692,047 Preferred Stock Warrants           20       18  
Total Warrants — Technology                     2,026       2,698  
Warrants — Cleantech — 0.4% (9)                                
Renmatix, Inc.   Alternative Energy   52,296 Preferred Stock Warrants           68       70  
Semprius, Inc.   Alternative Energy   519,981 Preferred Stock Warrants           25        
Enphase Energy, Inc. (5)   Energy Efficiency   161,959 Common Stock Warrants           175       243  
Rypos, Inc.   Energy Efficiency   5,627 Preferred Stock Warrants           44       41  
Solarbridge Technologies, Inc. (2)   Energy Efficiency   7,381,412 Preferred Stock Warrants           235       164  
Tigo Energy, Inc. (2)   Energy Efficiency   804,604 Preferred Stock Warrants           100       26  
Cereplast, Inc. (5)   Waste Recycling   365,000 Common Stock Warrants           175        
Total Warrants — Cleantech                     822       544  
Warrants — Healthcare information and services — 0.4% (9)                                
Accumetrics, Inc.   Diagnostics   100,928 Preferred Stock Warrants           107       63  
BioScale, Inc. (2)   Diagnostics   315,618 Preferred Stock Warrants           54        
Precision Therapeutics, Inc.   Diagnostics   13,461 Preferred Stock Warrants           73        
Radisphere National Radiology Group, Inc. (2)   Diagnostics   519,992 Preferred Stock Warrants           378        
Patientkeeper, Inc.   Other Healthcare   396,410 Preferred Stock Warrants           269       29  
Singulex, Inc.   Other Healthcare   293,632 Preferred Stock Warrants           44       141  
Talyst, Inc.   Other Healthcare   300,360 Preferred Stock Warrants           101       53  
Watermark Medical, Inc.   Other Healthcare   12,216 Preferred Stock Warrants           66       64  
Recondo Technology, Inc.   Software   436,088 Preferred Stock Warrants           73       177  
Total Warrants — Healthcare information and services                     1,165       527  
Total Warrants                     5,599       6,731  

 

See Notes to Consolidated Financial Statements

 

9
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)   Amount     Investments (6)     Value  
Other Investments — 0.3% (9)                                
Vette Technology, LLC   Data Storage   Royalty Agreement Due 4/18/2019           4,702       400  
Total Other Investments                     4,702       400  
Equity — 2.5% (9)                                
Insmed Incorporated (5)   Biotechnology   33,208 Common Stock           227       632  
Revance Therapeutics, Inc.(5)   Biotechnology   4,861 Common Stock           73       153  
Overture Networks Inc.   Communications   386,191 Common Stock           482       420  
Solarbridge Technologies, Inc. (2)   Energy Efficiency   11,716,760 Preferred Stock           2,300       2,300  
Cereplast, Inc. (5)   Waste Recycling   200,000 Common Stock                  
Total Equity                     3,082       3,505  
Total Portfolio Investment Assets — 165.9% (9)                   $ 233,056     $ 228,560  
Short Term Investments — Money Market Funds — 1.5% (9)                                
US Bank Money Market                   $ 2,101     $ 2,101  
Total Short Term Investments — Money Market Funds                   $ 2,101     $ 2,101  
Short Term Investments — Restricted  Investments— 4.2% (9)                                
US Bank Money Market (2)                   $ 5,730     $ 5,730  
Total Short Term Investments — Restricted  Investments                   $ 5,730     $ 5,730  

 

(1) All of the Company’s investments are in entities which are domiciled in the United States and/or have a principal place of business in the United States.
   
(2) Has been pledged as collateral under the Credit Facilities or 2013-1 Securitization.
   
(3) All investments are less than 5% ownership of the class and ownership 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 ETP and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the loan, unless otherwise indicated. For each debt investment, the current interest rate in effect as of March 31, 2014 is provided.
   
(5) Portfolio company is a public company.
   
(6) For debt investments, represents principal balance less unearned income.
   
(7) Preferred and common stock warrants, equity interests and other investments are non-income producing.
   
(8) Debt is on non-accrual status at March 31, 2014 and is, therefore, considered non-income producing.
   
(9) Value as a percent of net assets.

 

See Notes to Consolidated Financial Statements

 

10
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2013

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)   Amount     Investments (6)     Value  
Debt Investments — 157.5% (9)                                
Debt Investments — Life Science — 22.9% (9)                                
Inotek Pharmaceuticals Corporation (2)   Biotechnology   Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)   $ 3,500     $ 3,460     $ 3,460  
N30 Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)     760       756       756  
        Term Loan (11.25% cash, 3.00% ETP, Due 10/1/15)     2,230       2,209       2,209  
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)     1,500       1,476       1,476  
        Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)     500       492       492  
Sample6, Inc. (2)   Biotechnology   Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16)     2,252       2,229       2,229  
Sunesis Pharmaceuticals, Inc. (2)(5)   Biotechnology   Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)     1,425       1,418       1,418  
        Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)     2,138       2,100       2,100  
Xcovery Holding Company, LLC (2)   Biotechnology   Term Loan (12.50% cash, Due 8/1/15)     781       779       779  
        Term Loan (12.50% cash, Due 8/1/15)     1,228       1,226       1,226  
        Term Loan (12.50% cash, Due 10/1/15)     231       231       231  
Mederi Therapeutics, Inc.   Medical Device   Term Loan (10.75% cash (Floor 10.75%; Ceiling 2.75%),     3,000       2,957       2,957  
        4.00% ETP, Due 7/1/17)                        
        Term Loan (10.75% cash (Floor 10.75%; Ceiling 2.75%),     3,000       2,917       2,917  
        4.00% ETP, Due 7/1/17)                        
Mitralign, Inc. (2)   Medical Device   Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15)     1,587       1,571       1,571  
        Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15)     1,100       1,089       1,089  
        Term Loan (10.50% cash, 3.00% ETP, Due 7/1/16)     1,143       1,115       1,115  
PixelOptics, Inc. (8)   Medical Device   Term Loan (10.75% cash, 3.00% ETP, Due 11/1/14)     5,000       4,985       562  
        Term Loan (10.00% cash, Due 1/31/14)     219       219       219  
Tengion, Inc. (2)(5)   Medical Device   Term Loan (13.00% cash, Due 5/1/14)     1,382       1,373       1,373  
Tryton Medical, Inc. (2)   Medical Device   Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,     3,000       2,962       2,962  
        Due 9/1/16)                        
Total Debt Investments — Life Science                     35,564       31,141  
Debt Investments — Technology — 98.3% (9)                                
Ekahau, Inc.   Communications   Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     1,500       1,474       1,474  
        Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     500       490       490  
Overture Networks, Inc. (2)   Communications   Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)     5,000       4,935       4,935  
        Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)     2,500       2,460       2,460  
Optaros, Inc. (2)   Internet and Media   Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)     1,670       1,660       1,660  
        Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)     500       497       497  
SimpleTuition, Inc. (2)   Internet and Media   Term Loan (11.75% cash, Due 3/1/16)     3,909       3,862       3,862  
Nanocomp Technologies, Inc.   Networking   Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)     1,000       963       963  
Aquion Energy, Inc. (2)   Power Management   Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)     2,704       2,693       2,693  
        Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)     2,704       2,693       2,693  
        Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16)     2,978       2,966       2,966  
Xtreme Power, Inc. (2)(8)   Power Management   Term Loan (10.75% cash, 9.00% ETP, Due 5/1/16)     6,000       5,947       4,692  
Avalanche Technology, Inc. (2)   Semiconductors   Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)     2,996       2,973       2,973  
        Term Loan (10.00% cash, 2.00% ETP, Due 1/1/18)     2,500       2,455       2,455  
eASIC Corporation (2)   Semiconductors   Term Loan (11.00% cash, 2.50% ETP, Due  4/1/17)     2,000       1,968       1,968  
Kaminario, Inc. (2)   Semiconductors   Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)     3,000       2,954       2,954  
        Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)     3,000       2,954       2,954  
Luxtera, Inc. (2)   Semiconductors   Term Loan (10.25% cash, 8.00% ETP, Due 12/1/15)     2,734       2,714       2,714  
        Term Loan (10.25% cash, 8.00% ETP, Due 3/1/16)     1,519       1,506       1,506  
Newport Media, Inc. (2)   Semiconductors   Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)     3,500       3,418       3,418  
        Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)     3,500       3,418       3,418  
NexPlanar Corporation (2)   Semiconductors   Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     3,000       2,964       2,964  
        Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     2,000       1,967       1,967  
Xtera Communications, Inc. (2)   Semiconductors   Term Loan (11.50% cash, 14.77% ETP, Due 7/1/15)     6,468       6,441       6,441  
        Term Loan (11.50% cash, 13.65% ETP, Due 2/1/16)     1,731       1,718       1,718  
Bolt Solutions, Inc. (2)   Software   Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)     4,856       4,819       4,819  
        Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)     4,856       4,819       4,819  
Construction Software Technologies, Inc. (2)   Software   Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)     4,200       4,172       4,172  
        Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)     4,200       4,172       4,172  
Courion Corporation (2)   Software   Term Loan (11.45% cash, Due 10/1/15)     2,662       2,654       2,654  
        Term Loan (11.45% cash, Due 10/1/15)     2,662       2,654       2,654  
Decisyon, Inc. (2)   Software   Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)     4,000       3,932       3,932  
Kontera Technologies, Inc. (2)   Software   Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     4,000       3,949       3,949  
        Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     4,000       3,949       3,949  

 

See Notes to Consolidated Financial Statements

 

11
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2013

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)   Amount     Investments (6)     Value  
Lotame Solutions, Inc. (2)   Software   Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     4,000       3,971       3,971  
        Term Loan (11.50% cash, 3.00% ETP, Due 9/1/16)     1,500       1,486       1,486  
Netuitive, Inc. (2)   Software   Term Loan (11.75% cash, Due 1/1/16)     2,359       2,330       2,330  
Raydiance, Inc. (2)   Software   Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     5,000       4,948       4,948  
        Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     1,000       975       975  
Razorsight Corporation (2)   Software   Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)     1,500       1,477       1,477  
        Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)     1,500       1,475       1,475  
    Software   Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)     1,000       980       980  
Sys-Tech Solutions, Inc. (2)   Software   Term Loan (11.65% cash, Due 6/1/16)     7,100       6,919       6,919  
VBrick Systems, Inc.   Software   Term Loan (11.50% cash (Floor 10.50%; Ceiling 3.50%),     3,000       2,970       2,970  
        5.00% ETP, Due 7/1/17)                        
Vidsys, Inc. (2)   Software   Term Loan (11.00% cash, 6.50% ETP, Due 6/1/16)     3,000       2,970       2,970  
Visage Mobile, Inc. (2)   Software   Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)     974       962       962  
Total Debt Investments — Technology                     134,673       133,418  
Debt Investments — Cleantech — 17.6% (9)                                
Renmatix, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, 9.00% ETP, Due 2/1/16)     2,028       2,015       2,015  
        Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     2,028       2,015       2,015  
        Term Loan (10.25% cash, Due 10/1/16)     5,000       4,956       4,956  
Semprius, Inc. (2)(8)   Alternative Energy   Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)     3,203       3,183       2,785  
Aurora Algae, Inc. (2)   Energy Efficiency   Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)     1,280       1,276       1,276  
Rypos, Inc.   Energy Efficiency   Term Loan (11.80% cash, Due 1/1/17)     3,000       2,928       2,928  
Solarbridge Technologies, Inc. (2)(8)   Energy Efficiency   Term Loan (12.15% cash, 3.21 ETP, Due 12/1/16)     7,000       6,785       5,000  
Tigo Energy, Inc.  (2)   Energy Efficiency   Term Loan (13.00% cash, 3.16% ETP,  Due 6/1/15)     2,214       2,199       2,199  
Cereplast, Inc. (5)(8)   Waste Recycling   Term Loan (12.00% cash, Due 8/1/14)     1,081       978       328  
        Term Loan (12.00% cash, Due 8/1/14)     1,160       1,141       352  
Total Debt Investments — Cleantech                     27,476       23,854  
Debt Investments — Healthcare information and services — 18.7% (9)                                
BioScale, Inc. (2)   Diagnostics   Term Loan (11.51% cash, Due 1/1/14)     232       232       232  
Radisphere National Radiology Group, Inc. (2)   Diagnostics   Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)     12,000       11,908       11,908  
Watermark Medical, Inc. (2)   Other Healthcare   Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,452       3,452  
        Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,452       3,452  
Recondo Technology, Inc. (2)   Software   Term Loan (11.50% cash, 4.14% ETP, Due 4/1/16)     1,384       1,356       1,356  
        Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)     2,500       2,473       2,473  
    Other Healthcare   Term Loan (10.50% cash, 2.50% ETP, Due 1/1/18)     2,500       2,468       2,468  
Total Debt Investments — Healthcare information and services                     25,341       25,341  
Total Debt Investments                     223,054       213,754  
Warrant Investments — 4.5% (9)                                
Warrants — Life Science — 2.1% (9)                                
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants           83        
Ambit Biosciences, Inc.(5)   Biotechnology   44,795 Common Stock Warrants           143       9  
Anacor Pharmaceuticals, Inc. (2)(5)   Biotechnology   84,583 Common Stock Warrants           93       882  
Celsion Corporation (5)   Biotechnology   5,708 Common Stock Warrants           15        
Inotek Pharmaceuticals Corporation   Biotechnology   114,387 Preferred Stock Warrants           17       15  
N30 Pharmaceuticals, Inc.   Biotechnology   214,200 Preferred Stock Warrants           122       247  
New Haven Pharmaceuticals, Inc.   Biotechnology   34,729 Preferred Stock Warrants           22       20  
Revance Therapeutics, Inc.   Biotechnology   687,091 Preferred Stock Warrants           223       945  
Sample6, Inc.   Biotechnology   200,582 Preferred Stock Warrants           27       23  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   116,203 Common Stock Warrants           83       308  
Supernus Pharmaceuticals, Inc. (2)(5)   Biotechnology   42,083 Preferred Stock Warrants           94       132  
Tranzyme, Inc. (5)   Biotechnology   77,902 Common Stock Warrants           6        
Direct Flow Medical, Inc.   Medical Device   176,922 Preferred Stock Warrants           144       132  
EnteroMedics, Inc. (5)   Medical Device   141,026 Common Stock Warrants           347        
Mederi Therapeutics, Inc.   Medical Device   248,736 Preferred Stock Warrants           26       26  
Mitralign, Inc.   Medical Device   295,238 Common Stock Warrants           49       35  
OraMetrix, Inc. (2)   Medical Device   812,348 Preferred Stock Warrants           78        
PixelOptics, Inc.   Medical Device   381,612 Preferred Stock Warrants           96        
Tengion, Inc. (2)(5)   Medical Device   1,864,876 Common Stock Warrants           124        
Tryton Medical, Inc. (2)   Medical Device   47,977 Preferred Stock Warrants           14       14  
ViOptix, Inc.   Medical Device   375,763 Preferred Stock Warrants           13        
Total Warrants — Life Science                     1,819       2,788  

 

See Notes to Consolidated Financial Statements

 

12
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2013

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)   Amount     Investments (6)     Value  
Warrants — Technology — 1.8% (9)                                
Ekahau, Inc.   Communications   978,261 Preferred Stock Warrants           34       26  
OpenPeak, Inc.   Communications   18,997 Preferred Stock Warrants           89        
Overture Networks, Inc.   Communications   344,574 Preferred Stock Warrants           55       42  
Everyday Health, Inc.   Consumer-related Technologies   65,674 Preferred Stock Warrants           69       94  
SnagAJob.com, Inc.   Consumer-related Technologies   365,396 Preferred Stock Warrants           23       269  
Tagged, Inc.   Consumer-related Technologies   190,868 Preferred Stock Warrants           26       72  
XIOtech, Inc.   Data Storage   2,217,979 Preferred Stock Warrants           22       19  
Cartera Commerce, Inc.   Internet and media   90,909 Preferred Stock Warrants           16       160  
Optaros, Inc.   Internet and media   477,403 Preferred Stock Warrants           21       13  
SimpleTuition, Inc.   Internet and media   189,573 Preferred Stock Warrants           63       9  
IntelePeer, Inc.   Networking   141,549 Preferred Stock Warrants           39       34  
Motion Computing, Inc.   Networking   104,283 Preferred Stock Warrants           4       18  
Nanocomp Technologies, Inc.   Networking   204,546 Preferred Stock Warrants           19       19  
Aquion Energy, Inc.   Power Management   115,051 Preferred Stock Warrants           8       57  
Xtreme Power, Inc.   Power Management   2,466,821 Preferred Stock Warrants           76        
Avalanche Technology, Inc.   Semiconductors   244,649 Preferred Stock Warrants           56       66  
eASIC Corporation`   Semiconductors   1,877,799 Preferred Stock Warrants           16       15  
Kaminario, Inc.   Semiconductors   1,087,203 Preferred Stock Warrants           59       54  
Luxtera, Inc.   Semiconductors   1,827,485 Preferred Stock Warrants           34       105  
Newport Media, Inc.   Semiconductors   188,764 Preferred Stock Warrants           40       47  
NexPlanar Corporation   Semiconductors   216,001 Preferred Stock Warrants           36       56  
Xtera Communications, Inc.   Semiconductors   983,607 Preferred Stock Warrants           206        
Bolt Solutions, Inc.   Software   202,892 Preferred Stock Warrants           113       124  
Clarabridge, Inc.   Software   53,486 Preferred Stock Warrants           14       104  
Construction Software Technologies, Inc. (2)   Software   386,415 Preferred Stock Warrants           69       335  
Courion Corporation   Software   772,543 Preferred Stock Warrants           106       89  
Decisyon, Inc.   Software   314,686 Preferred Stock Warrants           44       39  
DriveCam, Inc.   Software   71,639 Preferred Stock Warrants           20       120  
Kontera Technologies, Inc. (2)   Software   99,476 Preferred Stock Warrants           102       82  
Lotame Solutions, Inc.   Software   216,810 Preferred Stock Warrants           4       3  
Netuitive, Inc.   Software   748,453 Preferred Stock Warrants           75       45  
Raydiance, Inc.   Software   735,784 Preferred Stock Warrants           51       48  
Razorsight Corporation   Software   259,404 Preferred Stock Warrants           44       40  
Sys-Tech Solutions, Inc.   Software   375,000 Preferred Stock Warrants           242       239  
Vidsys, Inc.   Software   37,346 Preferred Stock Warrants           23        
Visage Mobile, Inc.   Software   1,692,047 Preferred Stock Warrants           20       18  
Total Warrants — Technology                     1,938       2,461  
Warrants — Cleantech — 0.2% (9)                                
Renmatix, Inc.   Alternative Energy   52,296 Preferred Stock Warrants           68       69  
Semprius, Inc.   Alternative Energy   519,981 Preferred Stock Warrants           26        
Enphase Energy, Inc. (5)   Energy Efficiency   161,959 Common Stock Warrants           175       126  
Rypos, Inc.   Energy Efficiency   5,627 Preferred Stock Warrants           44       41  
Solarbridge Technologies, Inc. (2)   Energy Efficiency   3,645,302 Preferred Stock Warrants           236        
Tigo Energy, Inc. (2)   Energy Efficiency   804,604 Preferred Stock Warrants           100       26  
Cereplast, Inc. (5)   Waste Recycling   365,000 Common Stock Warrants           175        
Total Warrants — Cleantech                     824       262  
Warrants — Healthcare information and services — 0.4% (9)                            
Accumetrics, Inc.   Diagnostics   100,928 Preferred Stock Warrants           107       63  
BioScale, Inc. (2)   Diagnostics   315,618 Preferred Stock Warrants           54        
Precision Therapeutics, Inc.   Diagnostics   13,461 Preferred Stock Warrants           73        
Radisphere National Radiology Group, Inc. (2)   Diagnostics   519,992 Preferred Stock Warrants           378        
Patientkeeper, Inc.   Other Healthcare   396,410 Preferred Stock Warrants           269       29  
Singulex, Inc.   Other Healthcare   293,632 Preferred Stock Warrants           44       140  
Talyst, Inc.   Other Healthcare   300,360 Preferred Stock Warrants           100       53  
Watermark Medical, Inc.   Other Healthcare   12,216 Preferred Stock Warrants           66       64  
Recondo Technology, Inc.   Software   436,088 Preferred Stock Warrants           73       176  
Total Warrants — Healthcare information and services                     1,164       525  
Total Warrants                     5,745       6,036  

 

See Notes to Consolidated Financial Statements

 

13
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2013

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)   Amount     Investments (6)     Value  
Other Investments — 0.3% (9)                                
Vette Technology, LLC   Data Storage   Royalty Agreement Due 4/18/2019           4,729       400  
Total Other Investments                     4,729       400  
Equity — 0.8% (9)                                
Insmed Incorporated (5)   Biotechnology   33,208 Common Stock           227       565  
Revance Therapeutics, Inc.   Biotechnology   72,925 Preferred Stock           73       109  
Overture Networks Inc.   Communications   386,191 Common Stock           482       420  
Cereplast, Inc. (5)   Waste Recycling   200,000 Common Stock                  
Total Equity                     782       1,094  
Total Portfolio Investment Assets — 163.1% (9)                     $ 234,310      $ 221,284  
Short Term Investments — Money Market Funds — 0.9% (9)                          
US Bank Money Market                     $ 1,188         $ 1,188  
Total Short Term Investments — Money Market Funds                   $ 1,188     $ 1,188  
Short Term Investments — Restricted  Investments— 4.4% (9)                        
US Bank Money Market (2)                    $ 5,951       $ 5,951  
Total Short Term Investments — Restricted  Investments                   $ 5,951     $ 5,951  

   

 

(1) All of the Company’s investments are in entities which are domiciled in the United States and/or have a principal place of business in the United States.
   
(2) Has been pledged as collateral under the Credit Facilities or 2013-1 Securitization.
   
(3) All investments are less than 5% ownership of the class and ownership 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 ETP and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the loan, unless otherwise indicated. For each debt investment, the current interest rate in effect as of December 31, 2013 is provided.
   
(5) Portfolio company is a public company .
   
(6) For debt investments, represents principal balance less unearned income.
   
(7) Preferred and common stock warrants, equity interests and other investments are non-income producing.
   
(8) Debt is on non-accrual status at December 31, 2013 and is, therefore, considered non-income producing.
   
(9) Value as a percent of net assets.

 

See Notes to Consolidated Financial Statements

 

14
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 Investment Company Act of 1940, as amended (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 and capital gains the Company distributes to the stockholders. The Company primarily makes secured loans 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 (“CHF”), a Delaware limited liability company, which commenced operations in March 2008 and became the Company’s wholly owned subsidiary upon the completion of the IPO.

 

Horizon Credit I LLC (“Credit I”) was formed as a Delaware limited liability company on January 23, 2008, with CHF as the sole equity member. Credit I is a special purpose bankruptcy remote entity and is a separate legal entity from the Company and CHF. There has been no activity at Credit I during the three months ended March 31, 2014.

 

Horizon Credit II LLC (“Credit II”) was formed as a Delaware limited liability company on June 28, 2011, with the Company as the 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.

 

Horizon Credit III LLC (“Credit III”) was formed as a Delaware limited liability company on May 30, 2012, with the Company as the sole equity member. Credit III is a special purpose bankruptcy remote entity and is a separate legal entity from the Company. Any assets conveyed to Credit III are not available to creditors of the Company or any other entity other than Credit III’s lenders.

 

Longview SBIC GP LLC and Longview SBIC LP (collectively, “Horizon SBIC”) were formed as a Delaware limited liability company and Delaware limited partnership, respectively on February 11, 2011. Horizon SBIC are wholly owned subsidiaries of the Company and were formed in anticipation of obtaining a license to operate a small business investment company from the U. S. Small Business Administration. There has been no activity in Horizon SBIC since its inception.

 

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 2013-1 LLC, the “2013-1 Entities”) as a Delaware trust on June 18, 2013. The 2013-1 Entities are special purpose bankruptcy remote entities and are separate legal entities from the Company. The Company formed the 2013-1 Entities for purposes of securitizing $189.3 million of secured loans and issuing fixed-rate asset-backed notes in an aggregate principal amount of $90 million (the “Asset-Backed Notes”).

 

HPO Assets LLC (“HPO”) was formed as a Delaware limited liability company on January 21, 2014, with the Company as the sole equity member. HPO is a separate legal entity from the Company. HPO was formed to take title to assets, if any, acquired by the Company in connection with the bankruptcy sale of the assets of PixelOptics, Inc. and to then sell such assets. On January 31, 2014, HPO acquired fixed assets and intellectual property of PixelOptics, Inc. in full settlement of the debt investment.

 

15
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

HCP Assets LLC (“HCP”) was formed as a Delaware limited liability company on January 21, 2014, with the Company as the sole equity member. HCP is a separate legal entity from the Company. HCP was formed to take title to assets, if any, acquired by the Company in connection with the foreclosure or bankruptcy sale of the assets of Cereplast, Inc. and to then sell such assets. There has been no activity in HCP since its inception.

 

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 (“HTFM” or 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 Article 6 or 10 of Regulation S-X. 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, 2013.

 

Principles of Consolidation

 

As required under GAAP and Regulation S-X, the Company will generally not consolidate its investment in a company other than 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 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 5. 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 5 for additional information regarding fair value.

 

16
 

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 loan 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 (“Board”) determines the fair value of its portfolio investments. The Company has the intent to hold its loans 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 loan becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the loan is placed on non-accrual status and the recognition of interest income is discontinued. Interest payments received on loans that are on non-accrual status are treated as reductions of principal until the principal is repaid. As of March 31, 2014, there were two investments on non-accrual status with a cost basis of $5.2 million and a fair value of $3.5 million. As of December 31, 2013, there were five investments on non-accrual status with a cost of $23.2 million and a fair value of $13.9 million.

 

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. Loan 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 loan. All other income is recorded into income when earned. Fees for counterparty loan commitments with multiple loans are allocated to each loan based upon each loan’s relative fair value. When a loan is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the loan is returned to accrual status.

 

Certain loan agreements also require the borrower to make an end-of-term payment (“ETP”) that is accrued into interest income over the life of the loan 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 all principal and interest due.

 

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 also recorded as unearned loan income on the grant date. The unearned income is recognized as interest income over the contractual life of the related loan in accordance with the Company’s income recognition policy. Subsequent to loan origination, the warrants are also measured at fair value using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss on investments. Gains from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains 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.

 

17
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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. Debt issuance costs are recognized as assets and are amortized as interest expense over the term of the related debt financing. The unamortized balance of debt issuance costs as of March 31, 2014 and December 31, 2013, included in other assets, was $4.6 million and $5.1 million, respectively. The accumulated amortization balances as of March 31, 2014 and December 31, 2013 were $2.5 million and $2.0 million, respectively. The amortization expense for the three months ended March 31, 2014 and 2013 was $0.5 million and $0.2 million, respectively.

 

Income Taxes

 

As a BDC, the Company also 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, among other things, the Company is required to meet certain source of income and asset diversification requirements and to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each tax year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes.

 

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 dividend distributions into the next tax year and pay a 4% 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 dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three months ended March 31, 2014, $0.04 million was recorded for U.S. federal excise tax. For the three months ended March 31, 2013, no amount was recorded for U.S. federal excise tax.

 

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. 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 March 31, 2014 and December 31, 2013. The 2012, 2011 and 2010 tax years remain subject to examination by U.S. federal and state tax authorities.

 

Dividends

 

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

 

The Company has adopted a dividend reinvestment plan that provides for reinvestment of cash distributions and other distributions on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board authorizes, and the Company declares, a cash dividend, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividend. The Company may use newly issued shares to implement the plan (especially if the Company’s shares are trading at a premium to net asset value), or the Company may purchase shares in the open market in connection with the obligations under the plan.

 

Transfers of Financial Assets

 

Assets related to transactions that do not meet Accounting Standards Codification (“ASC”) Topic 860 — Transfers and Servicing requirements for accounting sale treatment are reflected in the Company’s consolidated statements of financial condition 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 affiliate of the Company).

 

18
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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.

 

New Accounting Pronouncement

 

In June 2013, FASB issued Accounting Standards Update 2013-08, Financial Services — Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements , or ASU 2013-08, containing new guidance on assessing whether an entity is an investment company, requiring non-controlling ownership interest in investment companies to be measured at fair value and requiring certain additional disclosures. This guidance is effective for annual and interim periods beginning on or after December 15, 2013. ASU 2013-08 did not have a material impact on the Company’s consolidated financial position or disclosures.

 

Note 3.  Related Party Transactions

 

Investment Management Agreement

 

On October 28, 2010, the Company entered into the Investment Management Agreement with the Advisor, which was renewed in August 2013, under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company. 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 “SEC”). The Advisor receives fees for providing services, 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 the Company’s gross assets, 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 management fee payable at March 31, 2014 and December 31, 2013 was $0.3 million and $0.4 million, respectively. The base management fee expense was $1.2 million for both of the three months ended March 31, 2014 and 2013.

 

The incentive fee has two parts, as follows:

 

The first part 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 operating 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 that the Company has not yet received in cash. The incentive fee with respect to the pre-incentive fee net 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 1.75% (which is 7.00% annualized) hurdle rate and 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 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%. The effect of this 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 a hurdle rate did not apply.

 

19
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 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.

 

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.

 

The performance based incentive fee expense was $0.4 million and $0.7 million for the three months ended March 31, 2014 and 2013, respectively. The incentive fee payable as of March 31, 2014 and December 31, 2013 was $0.4 million and $0.9 million, respectively. The entire incentive fee payable as of March 31, 2014 and December 31, 2013 represents part one of the incentive fee.

 

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 will reimburse 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 compliance officer and chief financial officer and their respective staffs. For the three months ended March 31, 2014 and 2013, $0.2 million and $0.3 million, respectively, were charged to operations under the Administration Agreement.

 

Note 4.  Investments

 

Investments, all of which are with portfolio companies in the United States, consisted of the following:

 

    March 31, 2014     December 31, 2013  
    Cost     Fair Value     Cost     Fair Value  
Money market funds   $ 2,101     $ 2,101     $ 1,188     $ 1,188  
Restricted investments in money market funds   $ 5,730     $ 5,730     $ 5,951     $ 5,951  
Non-affiliate investments                                
Debt   $ 219,673     $ 217,924     $ 223,054     $ 213,754  
Warrants     5,599       6,731       5,745       6,036  
Other Investments     4,702       400       4,729       400  
Equity     3,082       3,505       782       1,094  
Total non-affiliate investments   $ 233,056     $ 228,560     $ 234,310     $ 221,284  

 

20
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

The following table shows the Company’s portfolio investments by industry sector:

 

    March 31, 2014     December 31, 2013  
    Cost     Fair Value     Cost     Fair Value  
Life Science                                
Biotechnology   $ 16,089     $ 18,557     $ 17,604     $ 19,631  
Medical Device     17,412       16,805       20,079       14,972  
Technology                                
Consumer-Related Technologies     119       494       118       435  
Networking     1,043       1,052       1,025       1,034  
Software     64,890       65,357       67,510       67,869  
Data Storage     4,724       419       4,751       419  
Internet and Media     5,490       5,572       6,119       6,201  
Communications     10,038       9,868       10,019       9,847  
Semiconductors     47,421       47,297       37,897       37,793  
Power Management     15,995       15,969       14,382       13,101  
Cleantech                                
Energy Efficiency     9,718       9,638       13,743       11,596  
Waste Recycling     2,294       680       2,294       680  
Alternative Energy     11,516       11,183       12,263       11,840  
Healthcare Information and Services                                
Diagnostics     12,533       11,984       12,752       12,203  
Other Healthcare Related Services     7,394       7,201       7,384       7,190  
Software     6,380       6,484       6,370       6,473  
Total non-affiliate investments   $ 233,056     $ 228,560     $ 234,310     $ 221,284  

 

Note 5.  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 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 1 Quoted prices in active markets for identical assets and liabilities.

 

Level 2 Observable 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 3 Unobservable 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.

 

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Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 that have been 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 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.

 

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:   For variable rate debt investments which re-price frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values. The fair value of fixed rate debt investments is estimated by discounting the expected future cash flows using the year end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the same remaining maturities. At March 31, 2014 and December 31, 2013, the discount rates used ranged from 9% to 18% and 9% 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 measurements.

 

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 were used. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value investment.

 

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.

 

22
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Other adjustments, including a marketability discount on private company warrants, are estimated based on management’s judgment about the general industry environment. Significant increases (decreases) in this unobservable input would result in significantly lower (higher) fair value measurement.

 

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.

 

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 with 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 with the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.

 

Other Investments: Other investments will be valued based on the facts and circumstances of the underlying agreement. The Company currently values one contractual agreement 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 this other investment as Level 3 within the fair value hierarchy described above. These assets 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 March 31, 2014 and December 31, 2013. 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.

 

23
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

The table below 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 for the three months ended March 31, 2014:

 

March 31, 2014  
    Fair     Valuation Techniques/     Unobservable        
Investment Type   Value     Methodologies     Input     Range  
Debt investments   $ 214,440       Discounted Expected Future Cash Flows       Hypothetical Market Yield       9% - 18%  
                                 
      3,484       Multiple Probability Weighted Cash       Probability Weighting       0% - 100%  
              Flow Model                  
                                 
Warrant investments     3,890       Black-Scholes Valuation Model       Price per share       $0.0 – 63.98  
                      Average Industry Volatility       19%  
                      Marketability Discount       20%  
                      Estimated Time to Exit       1 to 9 years  
                                 
Other investments     400       Multiple Probability Weighted Cash       Discount Rate       25%  
              Flow Model       Probability Weighting       100%  
                                 
Equity investments     2,720       Most Recent Equity Investment       Price Per Share       $0.19 – $1.09  
Total Level 3 investments   $ 224,934                          

 

The table below 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 for the year ended December 31, 2013:

 

December 31, 2013  
    Fair     Valuation Techniques/     Unobservable        
Investment Type   Value     Methodologies     Input     Range  
Debt investments   $ 199,815       Discounted Expected Future Cash Flows       Hypothetical Market Yield       9% - 25%  
                                 
      13,939       Multiple Probability Weighted Cash       Probability Weighting       10% - 100%  
              Flow Model                  
                                 
Warrant investments     4,579       Black-Scholes Valuation Model       Price per share       $0.0 – $63.98  
                      Average Industry Volatility       19%
                      Marketability Discount       20%
                      Estimated Time to Exit       1 to 10 years  
                                 
Other investments     400       Multiple Probability Weighted Cash       Discount Rate       25%
              Flow Model       Probability Weighting       0 to 100%  
                                 
Equity investments     529       Most Recent Equity Investment       Price Per Share       $1.09 – $1.50  
Total Level 3 investments   $ 219,262                          

 

Borrowings:   The carrying amount of borrowings under the Credit Facilities (as defined in Note 6) approximates fair value due to the variable interest rate of the Credit Facilities and are categorized as Level 2 within the fair value hierarchy described above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed rate 2019 Notes (as defined in Note 6) is based on the closing public share price on the date of measurement. At March 31, 2014, the 2019 Notes were trading on the New York Stock Exchange for $25.80 per note, or $34.1 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. Based on market quotations on March 31, 2014, the Asset-Backed Notes (as defined in Note 6) were trading at par value, or $76.4 million, and are categorized as Level 3 within the fair value hierarchy described above. These liabilities are not recorded at fair value on a recurring basis.

 

Off-Balance-Sheet Instruments:   Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings. Therefore, the Company has categorized these instruments as Level 3 within the fair value hierarchy described above.

 

24
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

The following tables detail the assets and liabilities that are carried at fair value and measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

    March 31, 2014  
    Total     Level 1     Level 2     Level 3  
Money market funds   $ 2,101     $     $ 2,101     $  
Restricted investments in money market funds   $ 5,730     $     $ 5,730     $  
Debt investments   $ 217,924     $     $     $ 217,924  
Warrant investments   $ 6,731     $     $ 2,841     $ 3,890  
Other investments   $ 400     $     $     $ 400  
Equity investments   $ 3,505     $ 785     $     $ 2,720  

 

    December 31, 2013  
    Total     Level 1     Level 2     Level 3  
Money market funds   $ 1,188     $     $ 1,188     $  
Restricted investments in money market funds   $ 5,951     $     $ 5,951     $  
Debt investments   $ 213,754     $     $     $ 213,754  
Warrant investments   $ 6,036     $     $ 1,457     $ 4,579  
Other investments   $ 400     $     $     $ 400  
Equity investments   $ 1,094     $ 565     $     $ 529  

 

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2014:

 

    Three Months Ended March 31, 2014  
    Debt
Investments
    Warrant
Investments
    Equity
Investments
    Other
Investments
    Total  
Level 3 assets, beginning of period   $ 213,754     $ 4,579     $ 529     $ 400     $ 219,262  
Purchase of investments     17,926                         17,926  
Warrants and equity received and classified as Level 3           106                   106  
Principal payments received on investments     (11,746 )                 (27 )     (11,773 )
Proceeds from sale of investments           (720 )                 (720 )
Net realized (loss) gain on investments     (7,382 )     469                   (6,913 )
Unrealized appreciation (depreciation)  included in earnings     7,551       (224 )           27       7,354  
Transfer out of Level 3           (320 )     (109 )           (429 )
Transfer from debt to equity investments     (2,300 )           2,300              
Other     121                         121  
Level 3 assets, end of period   $ 217,924     $ 3,890     $ 2,720     $ 400     $ 224,934  

 

The Company’s transfers between levels are recognized at the end of the applicable reporting period. During the three months ended March 31, 2014, there were no transfers between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in two portfolio companies and equity held in one portfolio company, with an aggregate value of $0.4 million, that were transferred into Level 2 upon the portfolio companies becoming public companies during the period. Because the fair value of 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, the Company has categorized the warrants as Level 2 within the fair value hierarchy described above as of March 31, 2014. During the three months ended March 31, 2014, there was one transfer between debt investments and equity investments. The transfer out of debt investments relates to the settlement of one of the Company’s debt investments for a cash payment of $2.7 million and $2.3 million in newly issued preferred stock of the applicable portfolio company.

 

25
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at March 31, 2014 includes $1.3 million unrealized appreciation on loans and $0.2 million unrealized appreciation on warrants.

 

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2013:

 

    Three Months Ended March 31, 2013  
    Debt
Investments
    Warrant
Investments
    Equity
Investments
    Other
Investments
    Total  
Level 3 assets, beginning of period   $ 220,297     $ 4,914     $ 526     $ 2,100     $ 227,837  
Purchase of investments     28,500                         28,500  
Warrants and equity received and classified as Level 3           172                   172  
Principal payments received on investments     (9,962 )                       (9,962 )
Unrealized (depreciation) appreciation included in earnings     (70 )     292       36             258  
Transfer from debt to equity investments     (73 )           73              
Other     57                         57  
Level 3 assets, end of period   $ 238,749     $ 5,378     $ 635     $ 2,100     $ 246,862  

 

During the three months ended March 31, 2013, there were no transfers between levels.

 

The Company discloses fair value information about financial instruments, whether or not recognized in the statement of assets and liabilities, for which it is practicable to estimate that value. Certain financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

 

The fair value amounts have been measured as of the reporting date, and have not been reevaluated or updated for purposes of these financial statements subsequent to that date. As such, the fair values of these financial instruments subsequent to the reporting date may be different than amounts reported.

 

As of March 31, 2014 and December 31, 2013, the recorded balances equaled fair values of all the Company’s financial instruments, except for the Company’s 2019 Notes, as previously described.

 

Off-balance-sheet instruments

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

26
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Note 6.  Borrowings

 

A summary of the Company’s borrowings as of March 31, 2014 and December 31, 2013 is as follows:

 

    March 31, 2014     December 31, 2013  
    Total
Commitment
    Balance
Outstanding
    Unused
Commitment
    Total
Commitment
    Balance
Outstanding
    Unused
Commitment
 
Asset-Backed Notes   $ 90,000     $ 76,405     $     $ 90,000     $ 79,343     $  
Fortress Facility     75,000       10,000       65,000       75,000       10,000       65,000  
Key Facility     50,000             50,000       50,000             50,000  
2019 Notes     33,000       33,000             33,000       33,000        
Total   $ 248,000     $ 119,405     $ 115,000     $ 248,000     $ 122,343     $ 115,000  

 

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that the Company’s asset coverage, as defined in the 1940 Act, is at least 200% after such borrowings. As of March 31, 2014, the asset coverage ratio for borrowed amounts was 215%.

 

On November 4, 2013, the Company renewed and amended the revolving credit facility (“Wells Facility”) previously administered by Wells Fargo Capital Finance LLC (“Wells”) and facilitated the assignment of all rights and obligations of Wells under the Wells Facility to Key Equipment Finance (“Key”) (here and after referred to as the “Key Facility”). The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million from the current $50 million commitment provided by Key. The Key Facility is collateralized by all loans and warrants held by Credit II and permits an advance rate of up to 50% of eligible loans held by Credit II. The Key Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the Key Facility to certain criteria for qualified loans and includes portfolio company concentration limits as defined in the related loan agreement. The Key Facility has a three-year revolving period followed by a two-year amortization period and matures on November 4, 2018. The interest rate is based upon the one-month London Interbank Offered Rate, or LIBOR, plus a spread of 3.25%, with a LIBOR floor of 0.75%. The rate at March 31, 2014 and December 31, 2013 was 4.00%. There were no advances made under the Key Facility during the three months ended March 31, 2014.

 

On March 23, 2012, the Company issued and sold an aggregate principal amount of $30 million of 7.375% senior unsecured notes due in 2019, and, on April 18, 2012, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $3 million of such notes (collectively, the “2019 Notes”). The 2019 Notes will mature on March 15, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after March 15, 2015 at a redemption price of $25 per security plus accrued and unpaid interest. The 2019 Notes bear interest at a rate of 7.375% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2019 Notes are the Company’s direct unsecured obligations and (i) rank equally in right of payment with the Company’s future senior unsecured indebtedness; (ii) are senior in right of payment to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2019 Notes; (iii) are effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness and (iv) are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. A s of March 31, 2014, the Company was in material compliance with the terms of the 2019 Notes. The 2019 Notes are listed on the New York Stock Exchange under the symbol “HTF.”

 

The Company entered into a term loan credit facility (the “Fortress Facility” and together with the Key Facility, the “Credit Facilities”) with Fortress Credit Co LLC (“Fortress”) effective August 23, 2012. The Fortress Facility is collateralized by all loans and warrants held by Credit III. The Fortress Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the Fortress Facility to certain criteria for qualified loans and includes portfolio company concentration limits as defined in the related loan agreement. The Fortress Facility, among other things, has a three-year term subject to two one-year extensions with a draw period of up to four years. The Fortress Facility requires the payment of an unused line fee in an amount equal to 1.00% of unborrowed amounts available under the facility annually and has an effective advance rate of 66% against eligible loans. The Fortress Facility generally bears interest based upon the one-month LIBOR plus a spread of 6.00%, with a LIBOR floor of 1.00%. The rate at March 31, 2014 and December 31, 2013 was 7.00%, and the average rate for the three months ended March 31, 2014 and 2013 was 7.00%.

 

27
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

On June 28, 2013, the Company completed a $189.3 million securitization of secured loans which it originated. 2013-1 Trust, a wholly owned subsidiary of the Company, issued $90 million in the Asset-Backed Notes, which are rated A2(sf) by Moody’s Investors Service, Inc. The Company is the sponsor, originator and servicer for the transaction. The Asset-Backed Notes bear interest at a fixed rate of 3.00% per annum and have a stated maturity of May 15, 2018.

 

The Asset-Backed Notes were issued by 2013-1 Trust pursuant to a note purchase agreement (the “Note Purchase Agreement”), dated as of June 28, 2013, by and among the Company, 2013-1 LLC, as trust depositor, 2013-1 Trust and Guggenheim Securities, LLC (“Guggenheim Securities”), as initial purchaser, and are backed by a pool of loans made to certain portfolio companies of the Company and secured by certain assets of such portfolio companies. The pool of loans is to be serviced by the Company. In connection with the issuance and sale of the Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the Note Purchase Agreement. The Asset-Backed Notes are secured obligations of 2013-1 Trust and are non-recourse to the Company.

 

As part of the transaction, the Company entered into a sale and contribution agreement, dated as of June 28, 2013 (the “Sale and Contribution Agreement”), with 2013-1 LLC, pursuant to which the Company has agreed to sell or has contributed to 2013-1 LLC certain secured loans made to certain portfolio companies of the Company (the “Loans”). The Company has made customary representations, warranties and covenants in the Sale and Contribution Agreement with respect to the Loans as of the date of the transfer of the Loans to 2013-1 LLC. The Company has also entered into a sale and servicing agreement, dated as of June 28, 2013 (the “Sale and Servicing Agreement”), with 2013-1 LLC and 2013-1 Trust pursuant to which 2013-1 LLC has agreed to sell or has contributed the Loans to 2013-1 Trust. The Company has made customary representations, warranties and covenants in the Sale and Servicing Agreement. The Company will also serve as administrator to 2013-1 Trust pursuant to an administration agreement, dated as of June 28, 2013, with 2013-1 Trust, Wilmington Trust, National Association, and U.S. Bank National Association. 2013-1 Trust also entered into an indenture, dated as of June 28, 2013, which governs the Asset-Backed Notes and includes customary covenants and events of default. In addition, 2013-1 LLC entered into an amended and restated trust agreement, dated as of June 28, 2013, which includes customary representations, warranties and covenants. The Asset-Backed Notes were sold through an unregistered private placement to “qualified institutional buyers” in compliance with the exemption from registration provided by Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who, in each case, are “qualified purchasers” for purposes of Section 3(c)(7) under the 1940 Act.

 

On June 3, 2013, the Company and Guggenheim Securities entered into a promissory note (the “Promissory Note”) whereby Guggenheim Securities made a term loan to the Company in the aggregate principal amount of $15 million (the “Term Loan”). The Company granted Guggenheim Securities a security interest in all of its assets to secure the Term Loan. On June 28, 2013, the Company used a portion of the proceeds of the private placement of the Asset-Backed Notes to repay all of its outstanding obligations under the Term Loan and the security interest of Guggenheim Securities was released.

 

Under the terms of the Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through principal collections from the underlying securitized debt portfolio, which may be used to make monthly interest and principal payments on the Asset-Backed Notes. The Company has segregated these funds and classified them as restricted investments in money market funds on the Consolidated Statement of Assets and Liabilities. The balance of restricted investments in money market funds was $5.7 million and $6.0 million as of March 31, 2014 and December 31, 2013, respectively.

 

28
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Note 7.  Financial Instruments with Off-Balance-Sheet Risk

 

In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its borrowers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statement of assets and liabilities. The Company attempts to limit its credit risk by conducting extensive due diligence and obtaining collateral where appropriate.

 

The balance of unfunded commitments to extend credit was $7.0 million and $9.0 million as of March 31, 2014 and December 31, 2013, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving credit arrangements or similar transactions. Commitments may also include a financial or non-financial milestone that has to be achieved before the commitment can be drawn. Commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

N ote 8.  Concentrations of Credit Risk

 

The Company’s debt investments consist primarily of loans to development-stage companies at various stages of development in the technology, life science, healthcare information and services and cleantech industries. Many of these companies may have relatively limited operating histories and also may experience variation in operating results. Many of these companies conduct business in regulated industries and could be affected by changes in government regulations. Most of the Company’s borrowers will need additional capital to satisfy their continuing working capital needs and other requirements, and in many instances, to service the interest and principal payments on the loans.

 

The largest loans may vary from period to period as new loans are recorded and repaid. The Company’s five largest loans represented 21% and 22% of total loans outstanding as of March 31, 2014 and December 31, 2013, respectively. No single loan represented more than 10% of the total loans as of March 31, 2014 and December 31, 2013. Loan income, consisting of interest and fees, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for 22% and 23% of total interest income and fee income on investments for the three months ended March 31, 2014 and 2013, respectively.

 

29
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Note 9. Dividends and Distributions

 

The Company’s dividends and distributions are recorded on the record date. The following table summarizes the Company’s dividend declaration and distribution activity since inception:

 

Date
Declared
  Record
Date
  Payment
Date
  Amount
Per Share
    Cash
Distribution
    DRIP
Shares
Issued
    DRIP
Share
Value
 
Three Months Ended March 31, 2014                                
3/6/14   5/20/14   6/16/14   $ 0.115     $           $  
3/6/14   4/17/14   5/15/14     0.115                    
3/6/14   3/19/14   4/15/14     0.115       1,098       644       8