Horizon Technology Finance Corporation
Horizon Technology Finance Corp (Form: 10-Q, Received: 08/05/2014 16:36:51)

 

 

 

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 JUNE 30, 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 ¨ .

 

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

 

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

 

Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨ Smaller Reporting Company ¨
  (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 ¨ No þ .

 

As of August 5, 2014, the Registrant had 9,622,420 shares of common stock, $0.001 par value, outstanding.

 

 

 

 
 

 

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 June 30, 2014 and December 31, 2013 (unaudited) 3
  Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013 (unaudited) 4
  Consolidated Statements of Changes in Net Assets for the three and six months ended June 30, 2014 and 2013 (unaudited) 5
  Consolidated Statements of Cash Flows for the three and six months ended June 30, 2014 and 2013 (unaudited) 6
  Consolidated Schedules of Investments as of June 30, 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 33
Item 3. Quantitative And Qualitative Disclosures About Market Risk 47
Item 4. Controls and Procedures 47
     
PART II
Item 1. Legal Proceedings 48
Item 1A. Risk Factors 48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 48
Item 3. Defaults Upon Senior Securities 48
Item 4. Mine Safety Disclosures 48
Item 5. Other Information 48
Item 6. Exhibits 48
  Signatures 49
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)

 

    June 30,
2014
    December 31,
2013
 
Assets                
Non-affiliate investments at fair value (cost of $222,495 and $234,310, respectively) (Note 4)   $ 219,295     $ 221,284  
Cash     6,268       25,341  
Investments in money market funds     9,582       1,188  
Restricted investments in money market funds     4,840       5,951  
Interest receivable     5,732       4,240  
Other assets     4,128       5,733  
Total assets   $ 249,845     $ 263,737  
                 
Liabilities                
Borrowings (Note 6)   $ 107,536     $ 122,343  
Distributions payable     3,319       3,315  
Base management fee payable (Note 3)     286       439  
Incentive fee payable (Note 3)           852  
Other accrued expenses     1,769       953  
Total liabilities     112,910       127,902  
Commitments and Contingencies (Notes 7 and 8)                
                 
Net assets                
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of June 30, 2014 and December 31, 2013            
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 9,621,636 and 9,608,949 shares outstanding as of June 30, 2014 and December 31, 2013     10       10  
Paid-in capital in excess of par     155,149       154,975  
Accumulated (distributions in excess of) undistributed net investment income     (856 )     1,463  
Net unrealized depreciation on investments     (3,267 )     (13,026 )
Net realized loss on investments     (14,101 )     (7,587 )
Total net assets     136,935       135,835  
Total liabilities and net assets   $ 249,845     $ 263,737  
Net asset value per common share   $ 14.23     $ 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     For the Six Months Ended  
    June 30,     June 30,  
    2014     2013     2014     2013  
Investment income                                
Interest income on non-affiliate investments   $ 7,747     $ 8,407     $ 14,928     $ 15,754  
Fee income on non-affiliate investments     950       380       1,304       402  
Total investment income     8,697       8,787       16,232       16,156  
Expenses                                
Interest expense     3,760       1,924       5,831       3,697  
Base management fee 1 (Note 3)     1,137       1,329       2,342       2,570  
Performance based incentive fee 1 (Note 3)           900       406       1,593  
Administrative fee (Note 3)     293       317       537       602  
Professional fees     1,280       311       2,114       693  
General and administrative     351       325       602       546  
Total expenses     6,821       5,106       11,832       9,701  
Net investment income before excise tax     1,876       3,681       4,400       6,455  
Provision for excise tax     (40 )     (80 )     (80 )     (80 )
Net investment income     1,836       3,601       4,320       6,375  
                                 
Net realized and unrealized gain (loss) on investments                                
Net realized loss on investments     (630 )     (62 )     (6,514 )     (272 )
Net unrealized appreciation (depreciation) on investments     1,229       (2,391 )     9,759       (1,972 )
Net realized and unrealized gain (loss) on investments     599       (2,453 )     3,245       (2,244 )
                                 
Net increase in net assets resulting from operations   $ 2,435     $ 1,148     $ 7,565     $ 4,131  
Net investment income per common share   $ 0.19     $ 0.38     $ 0.45     $ 0.67  
Net increase in net assets per common share   $ 0.25     $ 0.12     $ 0.78     $ 0.43  
Distributions declared per share   $ 0.345     $ 0.345     $ 0.69     $ 0.69  
Weighted average shares outstanding     9,620,027       9,578,421       9,616,930       9,574,626  

 

(1) During the three and six months ended June 30, 2014, the Advisor waived $131 and $238 of base management fee, respectively. During the six months ended June 30, 2014, the Advisor waived $107 of performance based incentive fee. Had these expenses not been waived, the base management fee for three and six months ended June 30, 2014 would have been $1,268 and $2,580, respectively. The performance based incentive fee for six months ended June 30, 2014 would have been $513.

 

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
(Distribution
in Excess of)
Undistributed
Net
Investment
    Net Unrealized
Depreciation
on
    Net Realized
Loss 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                       6,375       (1,972 )     (272 )     4,131  
Issuance of common stock under dividend reinvestment plan     13,221             193                         193  
Distributions declared                       (6,609 )                 (6,609 )
Balance at June 30, 2013     9,580,446     $ 10     $ 154,577     $ 1,194     $ (12,744 )   $ (350 )   $ 142,687  
                                                         
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                       4,320       9,759       (6,514 )     7,565  
Issuance of common stock under dividend reinvestment plan     12,687             174                         174  
Distributions declared                       (6,639 )                 (6,639 )
Balance at June 30, 2014     9,621,636     $ 10     $ 155,149     $ (856 )   $ (3,267 )   $ (14,101 )   $ 136,935  

 

See Notes to Consolidated Financial Statements

 

5
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

    For the Six Months Ended  
    June 30,  
    2014     2013  
Cash flows from operating activities:                
Net increase in net assets resulting from operations   $ 7,565     $ 4,131  
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:                
Amortization of debt issuance costs     2,022       406  
Net realized loss on investments     7,651       62  
Net unrealized (appreciation) depreciation on investments     (9,726 )     1,972  
Purchase of investments     (43,990 )     (57,643 )
Principal payments received on investments     47,489       37,935  
Proceeds from sale of investments     1,123       39  
Changes in assets and liabilities:                
Increase in investments in money market funds     (8,394 )     (240 )
Decrease in restricted investments in money market funds     1,111        
Increase in interest receivable     (955 )     (100 )
Increase in end-of-term payments     (537 )     (956 )
Decrease in unearned loan income     (558 )     (613 )
(Increase) decrease in other assets     (418 )     23  
Increase in other accrued expenses     816       251  
(Decrease) increase in base management fee payable     (153 )     68  
(Decrease) increase in incentive fee payable     (852 )     45  
Net cash provided by (used in) operating activities     2,194       (14,620 )
                 
Cash flows from financing activities:                
Proceeds from issuance of Asset-Backed Notes           90,000  
Distributions paid     (6,460 )     (6,412 )
Net decrease in borrowings     (14,807 )     (46,020 )
Debt issuance costs           (2,125 )
Net cash (used in) provided by financing activities     (21,267 )     35,443  
Net (decrease) increase in cash     (19,073 )     20,823  
                 
Cash:                
Beginning of period     25,341       1,048  
End of period   $ 6,268     $ 21,871  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 3,817     $ 3,286  
                 
Supplemental non-cash investing and financing activities:                
Warrant investments received & recorded as unearned loan income   $ 260     $ 426  
Distributions payable   $ 3,319     $ 3,305  
Net assets received in settlement of debt investment   $ 985     $  
Receivable resulting from sale of investment   $ 209     $  

 

See Notes to Consolidated Financial Statements

 

6
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
Debt Investments — 152.8% (9)                                
Debt Investments — Life Science — 24.0% (9)                            
Inotek Pharmaceuticals Corporation (2)   Biotechnology   Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)   $ 3,500     $ 3,471     $ 3,471  
N30 Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)     346       345       345  
        Term Loan (11.25% cash, 3.00% ETP, Due 10/1/15)     1,763       1,751       1,751  
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)     1,451       1,432       1,432  
        Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)     484       479       479  
Sample6, Inc. (2)   Biotechnology   Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16)     1,734       1,721       1,721  
Sunesis Pharmaceuticals, Inc. (2)(5)   Biotechnology   Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)     1,059       1,056       1,056  
        Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)     1,590       1,570       1,570  
Xcovery Holding Company, LLC (2)   Biotechnology   Term Loan (12.50% cash, Due 8/1/15)     563       562       562  
        Term Loan (12.50% cash, Due 8/1/15)     886       885       885  
        Term Loan (12.50% cash, Due 10/1/15)     173       173       173  
Accuvein, Inc. (2)   Medical Device   Term Loan (10.40% cash (Libor + 9.90%; Floor     4,000       3,949       3,949  
        10.40% Ceiling 11.90%) 5.00% ETP, Due 8/1/17)                        
Lantos Technologies, Inc. (2)   Medical Device   Term Loan (10.50% cash (Libor + 10.00%; Floor     3,500       3,416       3,416  
        10.50% Ceiling 12.00%) 3.00% ETP, Due 2/1/18)                        
Mederi Therapeutics, Inc. (2)   Medical Device   Term Loan (10.75% cash (Libor + 10.25%; Floor     3,000       2,963       2,963  
        10.75% Ceiling 12.75%), 4.00% ETP, Due 7/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     3,000       2,963       2,963  
        10.75% Ceiling 12.75%), 4.00% ETP, Due 7/1/17)                        
Mitralign, Inc. (2)   Medical Device   Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15)     1,188       1,179       1,179  
        Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15)     835       829       829  
        Term Loan (10.50% cash, 3.00% ETP, Due 7/1/16)     1,143       1,124       1,124  
Tryton Medical, Inc.   Medical Device   Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP, Due 9/1/16)     3,000       2,969       2,969  
Total Debt Investments — Life Science                     32,837       32,837  
Debt Investments — Technology — 96.2% (9)                            
Ekahau, Inc. (2)   Communications   Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     1,500       1,481       1,481  
        Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     500       493       493  
mBlox, Inc. (2)   Communications   Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,962       4,962  
        11.50% Ceiling 13.00%), 2.5% ETP, Due 7/1/18)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,962       4,962  
        11.50% Ceiling 13.00%), 2.5% ETP, Due 7/1/18)                        
Overture Networks, Inc. (2)   Communications   Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)     5,000       4,953       4,953  
        Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)     2,500       2,472       2,472  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   Term Loan (11.00% cash (Libor + 10.50%; Floor     2,000       1,948       1,948  
        11.00% Ceiling 12.50%), 2.0% ETP, Due 11/1/17)                        
Optaros, Inc. (2)   Internet and Media   Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)     1,250       1,245       1,245  
        Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)     400       399       399  
SimpleTuition, Inc. (2)   Internet and Media   Term Loan (11.75% cash, Due 3/1/16)     3,127       3,098       3,098  
Nanocomp Technologies, Inc. (2)   Networking   Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)     1,000       983       983  
Avalanche Technology, Inc. (2)   Semiconductors   Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)     2,455       2,440       2,440  
        Term Loan (10.00% cash, 2.00% ETP, Due 1/1/18)     2,500       2,464       2,464  
eASIC Corporation (2)   Semiconductors   Term Loan (11.00% cash, 2.50% ETP, Due 4/1/17)     2,000       1,975       1,975  
Kaminario, Inc. (2)   Semiconductors   Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)     2,912       2,880       2,880  
        Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)     2,912       2,880       2,880  
Luxtera, Inc. (2)   Semiconductors   Term Loan (10.25% cash, 8.00% ETP, Due 7/1/17)     2,632       2,576       2,576  
        Term Loan (10.25% cash, 8.00% ETP, Due 7/1/17)     1,469       1,459       1,459  
Newport Media, Inc. (2)   Semiconductors   Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)     3,500       3,440       3,440  
        Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)     3,500       3,440       3,440  
NexPlanar Corporation (2)   Semiconductors   Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     2,912       2,886       2,886  
        Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     1,941       1,918       1,918  
Soraa, Inc. (2)   Semiconductors   Term Loan (10.75% cash (Libor + 10.25%; Floor     2,500       2,460       2,460  
        10.75%; Ceiling 13.075%), 4.00% ETP, Due 11/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     2,500       2,460       2,460  
        10.75%; Ceiling 13.075%), 4.00% ETP, Due 11/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     2,500       2,460       2,460  
        10.75%; Ceiling 13.075%), 4.00% ETP, Due 11/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     2,500       2,460       2,460  
        10.75%; Ceiling 13.075%), 4.00% ETP, Due 11/1/17)                        
Xtera Communications, Inc. (2)   Semiconductors   Term Loan (11.50% cash, 14.77% ETP, Due 7/1/15)     5,762       5,749       5,749  
        Term Loan (11.50% cash, 13.65% ETP, Due 2/1/16)     1,601       1,594       1,594  

 

See Notes to Consolidated Financial Statements

 

7
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
Construction Software Technologies, Inc. (2)   Software   Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)     4,050       4,030       4,030  
        Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)     4,050       4,030       4,030  
Courion Corporation (2)   Software   Term Loan (11.45% cash, Due 10/1/15)     1,990       1,986       1,986  
        Term Loan (11.45% cash, Due 10/1/15)     1,990       1,986       1,986  
Decisyon, Inc. (2)   Software   Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)     3,650       3,616       3,616  
        Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)     1,000       982       982  
Kontera Technologies, Inc. (2)   Software   Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     3,767       3,767       3,767  
        Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     3,767       3,767       3,767  
Lotame Solutions, Inc. (2)   Software   Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     3,767       3,747       3,747  
        Term Loan (11.50% cash, 3.00% ETP, Due 9/1/16)     1,500       1,491       1,491  
Netuitive, Inc. (2)   Software   Term Loan (11.75% cash, Due 1/1/16)     1,844       1,827       1,827  
Raydiance, Inc. (2)   Software   Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     4,562       4,527       4,527  
        Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     912       896       896  
Razorsight Corporation (2)   Software   Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)     1,457       1,441       1,441  
        Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)     1,324       1,308       1,308  
        Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)     1,000       984       984  
Social Intelligence Corp. (2)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,500       1,473       1,473  
        11.00%; Ceiling 13.00%), 3.50% ETP, Due 12/1/17)                        
SpringCM, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     4,500       4,400       4,400  
        11.50%; Ceiling 13.00%), 2.00% ETP, Due 1/1/18)                        
Sys-Tech Solutions, Inc. (2)   Software   Term Loan (11.65% cash, Due 6/1/16)     6,300       6,176       6,176  
VBrick Systems, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 10.00%; Floor     3,000       2,974       2,974  
        10.50%;Ceiling 13.50%), 5.00% ETP, Due 7/1/17)                        
Vidsys, Inc. (2)   Software   Term Loan (11.00% cash, 7.60% ETP, Due 6/1/16)     3,000       2,981       2,981  
Visage Mobile, Inc. (2)   Software   Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)     814       806       806  
Total Debt Investments — Technology                     131,732       131,732  
Debt Investments — Cleantech — 12.1% (9)                            
Renmatix, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     1,599       1,592       1,592  
        Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     1,599       1,592       1,592  
        Term Loan (10.25% cash, Due 10/1/16)     4,329       4,298       4,298  
Semprius, Inc. (2)(8)   Alternative Energy   Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)     3,051       3,031       2,721  
Aurora Algae, Inc. (2)   Energy Efficiency   Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)     850       848       848  
Rypos, Inc. (2)   Energy Efficiency   Term Loan (11.80% cash, Due 1/1/17)     3,000       2,961       2,961  
        Term Loan (11.80% cash, Due 9/1/17)     1,000       982       982  
Tigo Energy, Inc.  (2)   Energy Efficiency   Term Loan (13.00% cash, 3.16% ETP, Due 6/1/15)     1,523       1,517       1,517  
Total Debt Investments — Cleantech                     16,821       16,511  
Debt Investments — Healthcare information and services — 20.5% (9)                            
LifePrint Group, Inc. (2)   Diagnostics   Term Loan (11.00% cash (Libor + 10.50%; Floor     3,000       2,941       2,941  
        11.00%;Ceiling 12.50%), 3.00% ETP, Due 1/1/18)                        
Radisphere National Radiology Group, Inc. (2)   Diagnostics   Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)     12,000       11,934       11,934  
Watermark Medical, Inc. (2)   Other Healthcare   Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,463       3,463  
        Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,462       3,462  
Recondo Technology, Inc. (2)   Software   Term Loan (11.50% cash, 4.14% ETP, Due 4/1/16)     1,384       1,364       1,364  
        Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)     2,500       2,480       2,480  
        Term Loan (10.50% cash, 2.50% ETP, Due 1/1/18)     2,500       2,473       2,473  
Total Debt Investments — Healthcare information and services                 28,117       28,117  
Total Debt Investments                     209,507       209,197  
Warrant Investments — 4.6% (9)                                
Warrants — Life Science — 2.0% (9)                                
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants           83        
Ambit Biosciences, Inc.(5)   Biotechnology   44,795 Common Stock Warrants           143       1  
Anacor Pharmaceuticals, Inc. (2)(5)   Biotechnology   84,583 Common Stock Warrants           93       950  
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        
New Haven Pharmaceuticals, Inc.   Biotechnology   41,482 Preferred Stock Warrants           27       30  
Revance Therapeutics, Inc. (5)   Biotechnology   34,377 Common Stock Warrants           68       671  
Sample6, Inc.   Biotechnology   200,582 Preferred Stock Warrants           27       23  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   116,203 Common Stock Warrants           83       511  
Supernus Pharmaceuticals, Inc. (2)(5)   Biotechnology   42,083 Preferred Stock Warrants           94       274  
Tranzyme, Inc. (5)   Biotechnology   6,460 Common Stock Warrants           6        
Accuvein, Inc.   Biotechnology   58,284 Preferred Stock Warrants           18       23  

 

See Notes to Consolidated Financial Statements

 

8
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
Direct Flow Medical, Inc.   Medical Device   176,922 Preferred Stock Warrants           144       112  
EnteroMedics, Inc. (5)   Medical Device   141,026 Common Stock Warrants           347        
Lantos Technologies, Inc. (2)   Medical Device   858,545 Preferred Stock Warrants           24       24  
Mederi Therapeutics, Inc. (2)   Medical Device   248,736 Preferred Stock Warrants           26       41  
Mitralign, Inc.   Medical Device   295,238 Preferred 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           123        
Tryton Medical, Inc.   Medical Device   47,977 Preferred Stock Warrants           15       14  
ViOptix, Inc.   Medical Device   375,763 Preferred Stock Warrants           13        
Total Warrants — Life Science                     1,615       2,724  
Warrants — Technology — 2.0% (9)                                
Ekahau, Inc. (2)   Communications   978,261 Preferred Stock Warrants           33       26  
OpenPeak, Inc.   Communications   18,997 Preferred Stock Warrants           90        
Overture Networks, Inc.   Communications   344,574 Preferred Stock Warrants           55       1  
Everyday Health, Inc. (5)   Consumer-related Technologies   43,783 Common Stock Warrants           69       328  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   173,076 Preferred Stock Warrants           29       29  
SnagAJob.com, Inc.   Consumer-related Technologies   365,396 Preferred Stock Warrants           23       269  
Tagged, Inc.   Consumer-related Technologies   190,868 Preferred Stock Warrants           26       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           20        
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           5       9  
Nanocomp Technologies, Inc. (2)   Networking   204,546 Preferred Stock Warrants           19       19  
Aquion Energy, Inc.   Power Management   115,051 Preferred Stock Warrants           7       57  
Avalanche Technology, Inc.   Semiconductors   244,649 Preferred Stock Warrants           56       55  
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           42       113  
Newport Media, Inc.   Semiconductors   188,764 Preferred Stock Warrants           40       25  
NexPlanar Corporation   Semiconductors   216,001 Preferred Stock Warrants           36       56  
Soraa, Inc. (2)   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       122  
Clarabridge, Inc.   Software   53,486 Preferred Stock Warrants           14       104  
Construction Software Technologies, Inc.   Software   386,415 Preferred Stock Warrants           69       280  
Courion Corporation   Software   772,543 Preferred Stock Warrants           107       90  
Decisyon, Inc.   Software   457,876 Preferred Stock Warrants           46       11  
DriveCam, Inc.   Software   71,639 Preferred Stock Warrants           20       120  
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       48  
Razorsight Corporation (2)   Software   259,404 Preferred Stock Warrants           43       32  
Riv Data Corp. (2)   Software   237,361 Preferred Stock Warrants           12       12  
SpringCM, Inc. (2)   Software   2,385,686 Preferred Stock Warrants           55       55  
Sys-Tech Solutions, Inc.   Software   375,000 Preferred Stock Warrants           242       247  
Vidsys, Inc.   Software   37,346 Preferred Stock Warrants           23        
Visage Mobile, Inc.   Software   1,692,047 Preferred Stock Warrants           19       18  
Total Warrants — Technology                     1,944       2,759  
Warrants — Cleantech — 0.2% (9)                                
Renmatix, Inc.   Alternative Energy   52,296 Preferred Stock Warrants           68       70  
Semprius, Inc.   Alternative Energy   519,981 Preferred Stock Warrants           25        
Rypos, Inc. (2)   Energy Efficiency   5,627 Preferred Stock Warrants           44       41  
Solarbridge Technologies, Inc.   Energy Efficiency   7,381,412 Preferred Stock Warrants           236       164  
Tigo Energy, Inc. (2)   Energy Efficiency   804,604 Preferred Stock Warrants           100       33  
Total Warrants — Cleantech                     473       308  
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        
LifePrint Group, Inc. (2)   Diagnostics   49,000 Preferred Stock Warrants           29       29  
Precision Therapeutics, Inc.   Diagnostics   13,461 Preferred Stock Warrants           73        

 

See Notes to Consolidated Financial Statements

 

9
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
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           100       53  
Watermark Medical, Inc.   Other Healthcare   12,216 Preferred Stock Warrants           67       64  
Recondo Technology, Inc. (2)   Software   436,088 Preferred Stock Warrants           73       177  
Total Warrants — Healthcare information and services                 1,194       556  
Total Warrants                     5,226       6,347  
                                 
Other Investments — 0.3% (9)                                
Vette Technology, LLC   Data Storage   Royalty Agreement Due 4/18/2019           4,668       400  
Total Other Investments                     4,668       400  
Equity — 2.5% (9)                                
Insmed Incorporated (5)   Biotechnology   33,208 Common Stock           239       664  
Revance Therapeutics, Inc.(5)   Biotechnology   4,861 Common Stock           73       165  
Overture Networks Inc.   Communications   386,191 Common Stock           482       222  
Solarbridge Technologies, Inc.   Energy Efficiency   11,716,760 Preferred Stock           2,300       2,300  
Total Equity                     3,094       3,351  
Total Portfolio Investment Assets — 160.2% (9)               $ 222,495     $ 219,295  
Short Term Investments — Money Market Funds — 7.0% (9)                            
US Bank Money Market Deposit Account                   $ 9,582     $ 9,582  
Total Short Term Investments — Money Market Funds               $ 9,582     $ 9,582  
Short Term Investments — Restricted Investments— 3.5% (9)                            
US Bank Money Market Deposit Account (2)                   $ 4,840     $ 4,840  
Total Short Term Investments — Restricted Investments               $ 4,840     $ 4,840  
 
(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 Key Facility 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 June 30, 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 June 30, 2014 and is, therefore, considered non-income producing.
(9) Value as a percent of net assets.
(10) The Company did not have any non-qualifying assets under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
(11) ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable loan, including upon any prepayment, and are a fixed percentage of the original principal balance of the loan unless otherwise noted. Interest will accrue during the life of the loan on each end-of-term payment and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee will be based on income that the Company has not yet received in cash.

 

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)(10)(11)   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%), 4.00% ETP, Due 7/1/17)     3,000       2,957       2,957  
        Term Loan (10.75% cash (Floor 10.75%; Ceiling 2.75%), 4.00% ETP, Due 7/1/17)     3,000       2,917       2,917  
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, Due 9/1/16)     3,000       2,962       2,962  
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)(10)(11)   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%), 5.00% ETP, Due 7/1/17)     3,000       2,970       2,970  
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)(10)(11)   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)(10)(11)   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 Deposit Account                   $ 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 Deposit Account (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.
(10) The Company did not have any non-qualifying assets under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
(11) ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable loan, including upon any prepayment, and are a fixed percentage of the original principal balance of the loan unless otherwise noted. Interest will accrue during the life of the loan on each end-of-term payment and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee will be based on income that the Company has not yet received in cash.

 

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 six months ended June 30, 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 (“SBA”). 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 holds certain assets acquired in connection with the bankruptcy sale of the assets of PixelOptics, Inc.

 

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.

 

15
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 consolidate its investment in a company that is an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s 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 June 30, 2014, there was one investment on non-accrual status with a cost basis of $3.0 million and a fair value of $2.7 million. As of December 31, 2013, there were five investments on non-accrual status with an aggregate cost of $23.2 million and an aggregate 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 fair value of the warrants is determined using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized 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 June 30, 2014 and December 31, 2013, included in other assets, was $3.1 million and $5.1 million, respectively. The accumulated amortization balances as of June 30, 2014 and December 31, 2013 were $2.3 million and $2.0 million, respectively. The amortization expense for the six months ended June 30, 2014 and 2013 was $2.0 million and $0.4 million, respectively. On June 17, 2014, the Company terminated its term loan credit facility, the “Fortress Facility”, and accelerated $1.1 million of unamortized debt issuance cost. The Company expects to incur no ongoing obligations or expenses in connection with the termination and prepayment of the Fortress Facility.

 

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 both the six months ended June 30, 2014 and 2013, $0.1 million 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 June 30, 2014 and December 31, 2013. The 2012, 2011 and 2010 tax years remain subject to examination by U.S. federal and state tax authorities.

 

Distributions

 

Distributions to common stockholders are recorded on the declaration date. The amount to be paid out 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 distribution, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution. The Company may use newly issued shares to implement the plan (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 to fulfill its 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 Advisor waived, $0.1 million and $0.2 million of base management fee, that the Advisor would have otherwise earned on cash held by the Company at the time of calculation, for the three and six months ended June 30, 2014, respectively. After giving effect of this waiver, the management fee payable at June 30, 2014 and December 31, 2013 was $0.3 million and $0.4 million, respectively. After giving effect to this waiver, the base management fee expense was $1.1 million and $1.3 million for the three months ended June 30, 2014 and 2013, respectively. After giving effect of this waiver, the base management fee expense was $2.3 million and $2.6 million for the six months ended June 30, 2014 and 2013, respectively.

 

19
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 the hurdle rate did not apply.

 

Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee 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.

 

There was no performance based incentive fee expense for the three months ended June 30, 2014. The performance based incentive fee expense was $0.9 million for the three months ended June 30, 2013. The performance based incentive fee expense was $0.4 million and $1.6 million for the six months ended June 30, 2014 and 2013, respectively. There was no incentive fee payable as of June 30, 2014. The incentive fee payable as of December 31, 2013 was $0.9 million. The entire incentive fee payable as of 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. The administrative fee expense was $0.3 million for both the three months ended June 30, 2014 and 2013. The administrative fee expense was $0.5 million and $0.6 million for the six months ended June 30, 2014 and 2013, respectively.

 

20
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Note 4.  Investments

 

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

 

    June 30, 2014     December 31, 2013  
    Cost     Fair Value     Cost     Fair Value  
Money market funds   $ 9,582     $ 9,582     $ 1,188     $ 1,188  
Restricted investments in money market funds   $ 4,840     $ 4,840     $ 5,951     $ 5,951  
Non-affiliate investments                                
Debt   $ 209,507     $ 209,197     $ 223,054     $ 213,754  
Warrants     5,226       6,347       5,745       6,036  
Other Investments     4,668       400       4,729       400  
Equity     3,094       3,351       782       1,094  
Total non-affiliate investments   $ 222,495     $ 219,295     $ 234,310     $ 221,284  

 

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

 

    June 30, 2014     December 31, 2013  
    Cost     Fair Value     Cost     Fair Value  
Life Science                                
Biotechnology   $ 14,535     $ 16,749     $ 17,604     $ 19,631  
Medical Device     20,229       19,641       20,079       14,972  
Technology                                
Communications     19,983       19,572       10,019       9,847  
Consumer-Related Technologies     2,095       2,647       118       435  
Data Storage     4,690       419       4,751       419  
Internet and Media     4,841       4,911       6,119       6,201  
Networking     1,046       1,045       1,025       1,034  
Power Management     7       57       14,382       13,101  
Semiconductors     46,076       45,940       37,897       37,793  
Software     60,088       60,522       67,510       67,869  
Cleantech                                
Alternative Energy     10,606       10,273       12,263       11,840  
Energy Efficiency     8,988       8,846       13,743       11,596  
Waste Recycling                 2,294       680  
Healthcare Information and Services                                
Diagnostics     15,516       14,967       12,752       12,203  
Other Healthcare Related Services     7,405       7,212       7,384       7,190  
Software     6,390       6,494       6,370       6,473  
Total non-affiliate investments   $ 222,495     $ 219,295     $ 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.

 

21
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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.

 

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 June 30, 2014 and December 31, 2013, the hypothetical market yield used ranged from 9% to 18% and from 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.

 

22
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 are 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.

 

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

 

23
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 June 30, 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.

 

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 as of June 30, 2014:

 

June 30, 2014
    Fair     Valuation Techniques/   Unobservable         Weighted  
Investment Type   Value     Methodologies   Input   Range     Average  
Debt investments   $ 206,476     Discounted Expected Future Cash Flows   Hypothetical Market Yield     9% - 18%       11%
                                 
      2,721     Multiple Probability Weighted Cash   Probability Weighting     33% - 67%       50%
            Flow Model                    
                                 
Warrant investments     3,612     Black-Scholes Valuation Model   Price per share
Average Industry Volatility
   

$0.0 – 63.98

19%

     

$10.24

19%

 
                Marketability Discount     20%     11%
                Estimated Time to Exit     .25 to 9 years       2.56 years  
                                 
Other investments     400     Multiple Probability Weighted Cash Flow Model   Discount Rate
Probability Weighting
   

25%

100%

     

25%

100%

 
                                 
Equity investments     2,300     Most Recent Equity Investment   Price Per Share   $0.19     $0.19  
      222     Market Comparable Companies   Price Per Share   $0.57     $0.57  
Total Level 3 investments   $ 215,731                          

  

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 as of December 31, 2013:

 

December 31, 2013
    Fair     Valuation Techniques/   Unobservable         Weighted  
Investment Type   Value     Methodologies   Input   Range     Average  
Debt investments   $ 199,815     Discounted Expected Future Cash Flows
  Hypothetical Market Yield
   

9% - 25%

 

      11%
                                 
      13,939     Multiple Probability Weighted Cash   Probability Weighting     10% - 100%       67%
            Flow Model                    
                                 
Warrant investments     4,579     Black-Scholes Valuation Model   Price per share
Average Industry Volatility
   

$0.0 – $63.98

19%

     

$5.64

19%

 
                Marketability Discount     20%     15%
                Estimated Time to Exit     1 to 10 years       3 years  
                                 
Other investments     400     Multiple Probability Weighted Cash Flow Model   Discount Rate
Probability Weighting
   

25%

100%

     

25%

100%

 
                                 
Equity investments     529     Most Recent Equity Investment   Price Per Share     $1.09 – $1.50     $1.17  
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 June 30, 2014, the 2019 Notes were trading on the New York Stock Exchange for $25.84 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 June 30, 2014, the Asset-Backed Notes (as defined in Note 6) were trading at par value, or $64.5 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.

 

24
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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.

 

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 June 30, 2014 and December 31, 2013 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

    June 30, 2014  
    Total     Level 1     Level 2     Level 3  
Money market funds   $ 9,582     $     $ 9,582     $  
Restricted investments in money market funds   $ 4,840     $     $ 4,840     $  
Debt investments   $ 209,197     $     $     $ 209,197  
Warrant investments   $ 6,347     $     $ 2,735     $ 3,612  
Other investments   $ 400     $     $     $ 400  
Equity investments   $ 3,351     $ 829     $     $ 2,522  

 

    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 June 30, 2014:

 

    Three Months Ended June 30, 2014  
    Debt
Investments
    Warrant
Investments
    Equity
Investments
    Other
Investments
    Total  
Level 3 assets, beginning of period   $ 217,924     $ 3,890     $ 2,720     $ 400     $ 224,934  
Purchase of investments     26,052                         26,052  
Warrants and equity received and classified as Level 3           154                   154  
Principal payments received on investments     (35,682 )                 (34 )     (35,716 )
Proceeds from sale of investments           (209 )                 (209 )
Net realized (loss) gain on investments     (714 )     32                   (682 )
Unrealized appreciation (depreciation)  included in earnings     1,439       (255 )     (198 )     34       1,020  
Other     178                         178  
Level 3 assets, end of period   $ 209,197     $ 3,612     $ 2,522     $ 400     $ 215,731  

 

The Company’s transfers between levels are recognized at the end of each reporting period. During the three months ended June 30, 2014, there were no transfers between Level 1 and Level 2.

 

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 June 30, 2013:

 

25
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

    Three Months Ended June 30, 2013  
    Debt
Investments
    Warrant
Investments
    Equity
Investments
    Other
Investments
    Total  
Level 3 assets, beginning of period   $ 238,749     $ 5,378     $ 635     $ 2,100     $ 246,862  
Purchase of investments     29,143                         29,143  
Warrants and equity received and classified as Level 3           254                   254  
Principal payments received on investments     (27,973