Horizon Technology Finance Corporation
Horizon Technology Finance Corp (Form: 10-Q, Received: 11/04/2014 16:29:11)

 

 

 

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 SEPTEMBER 30, 2014
     
    OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                      TO     

 

COMMISSION FILE NUMBER: 814-00802

 

HORIZON TECHNOLOGY FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of November 4, 2014, the Registrant had 9,626,175 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 September 30, 2014 and December 31, 2013 (unaudited) 3
  Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited) 4
  Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2014 and 2013 (unaudited) 5
  Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2014 and 2013 (unaudited) 6
  Consolidated Schedules of Investments as of September 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 34
Item 3. Quantitative And Qualitative Disclosures About Market Risk 48
Item 4. Controls and Procedures 48
     
PART II  
Item 1. Legal Proceedings 49
Item 1A. Risk Factors 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 49
Item 3. Defaults Upon Senior Securities 49
Item 4. Mine Safety Disclosures 49
Item 5. Other Information 49
Item 6. Exhibits 49
  Signatures 50
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)

 

    September 30,
2014
    December 31,
2013
 
Assets                
Non-affiliate investments at fair value (cost of $208,727 and $234,310, respectively) (Note 4)   $ 204,694     $ 221,284  
Cash     15,194       25,341  
Investments in money market funds     800       1,188  
Restricted investments in money market funds     3,368       5,951  
Interest receivable     4,905       4,240  
Other assets     3,622       5,733  
Total assets   $ 232,583     $ 263,737  
                 
Liabilities                
Borrowings (Note 6)   $ 87,902     $ 122,343  
Distributions payable     3,321       3,315  
Base management fee payable (Note 3)     355       439  
Incentive fee payable (Note 3)     800       852  
Other accrued expenses     1,778       953  
Total liabilities     94,156       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 September 30, 2014 and December 31, 2013            
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 9,625,274 and 9,608,949 shares outstanding as of September 30, 2014 and December 31, 2013, respectively     10       10  
Paid-in capital in excess of par     155,202       154,975  
Accumulated (distributions in excess of) undistributed net investment income     (975 )     1,463  
Net unrealized depreciation on investments     (4,033 )     (13,026 )
Net realized loss on investments     (11,777 )     (7,587 )
Total net assets     138,427       135,835  
Total liabilities and net assets   $ 232,583     $ 263,737  
Net asset value per common share   $ 14.38     $ 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 Nine Months Ended  
    September 30,     September 30,  
    2014     2013     2014     2013  
Investment income                                
Interest income on non-affiliate investments   $ 6,786     $ 8,225     $ 21,714     $ 23,979  
Fee income on non-affiliate investments     953       487       2,257       889  
Total investment income     7,739       8,712       23,971       24,868  
Expenses                                
Interest expense     1,495       2,189       7,326       5,886  
Base management fee 1 (Note 3)     1,038       1,266       3,380       3,836  
Performance based incentive fee 1 (Note 3)     800       872       1,207       2,465  
Administrative fee (Note 3)     335       287       872       889  
Professional fees     607       284       2,721       977  
General and administrative     223       247       823       793  
Total expenses     4,498       5,145       16,329       14,846  
Net investment income before excise tax     3,241       3,567       7,642       10,022  
Provision for excise tax     (40 )     (80 )     (120 )     (160 )
Net investment income     3,201       3,487       7,522       9,862  
                                 
Net realized and unrealized gain (loss) on investments                                
Net realized gain (loss) on investments     2,325       (5,566 )     (4,190 )     (5,839 )
Net unrealized (depreciation) appreciation on investments     (766 )     5,967       8,993       3,996  
Net realized and unrealized gain (loss) on investments     1,559       401       4,803       (1,843 )
                                 
Net increase in net assets resulting from operations   $ 4,760     $ 3,888     $ 12,325     $ 8,019  
Net investment income per common share   $ 0.33     $ 0.36     $ 0.78     $ 1.03  
Net increase in net assets per common share   $ 0.50     $ 0.41     $ 1.28     $ 0.84  
Distributions declared per share   $ 0.345     $ 0.345     $ 1.035     $ 1.035  
Weighted average shares outstanding     9,623,468       9,584,376       9,619,133       9,577,912  

 

(1) During the three months ended September 30, 2013, the Advisor waived $144 of base management fee. During the nine months ended September 30, 2014 and 2013, the Advisor waived $238 and $144 of base management fee, respectively. During the nine months ended September 30, 2014, the Advisor waived $107 of performance based incentive fee. Had these expenses not been waived, the base management fee for the three months ended September 30, 2013 would have been $1,410. Had these expenses not been waived, the base management fee for the nine months ended September 30, 2014 and 2013 would have been $3,618 and $3,980, respectively, and performance based incentive fee for the nine months ended September 30, 2014 would have been $1,314.

 

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                       9,862       3,996       (5,839 )     8,019  
Issuance of common stock under dividend reinvestment plan     21,768             312                         312  
Distributions declared                       (9,919 )                 (9,919 )
Balance at September 30, 2013     9,588,993     $ 10     $ 154,696     $ 1,371     $ (6,776 )   $ (5,917 )   $ 143,384  
                                                         
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                       7,522       8,993       (4,190 )     12,325  
Issuance of common stock under dividend reinvestment plan     16,325             227                         227  
Distributions declared                       (9,960 )                 (9,960 )
Balance at September 30, 2014     9,625,274     $ 10     $ 155,202     $ (975 )   $ (4,033 )   $ (11,777 )   $ 138,427  

 

See Notes to Consolidated Financial Statements

 

5
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

    For the Nine Months Ended  
    September 30,  
    2014     2013  
Cash flows from operating activities:                
Net increase in net assets resulting from operations   $ 12,325     $ 8,019  
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     2,370       902  
Net realized loss on investments     4,190       5,629  
Net unrealized appreciation on investments     (8,993 )     (3,996 )
Purchase of investments     (66,836 )     (69,143 )
Principal payments received on investments     83,906       55,954  
Proceeds from sale of investments     5,119       39  
Changes in assets and liabilities:                
Decrease (increase) in investments in money market funds     388       (22,459 )
Decrease (increase) in restricted investments in money market funds     2,583       (3,568 )
Increase in interest receivable     (168 )     (160 )
Increase in end-of-term payments     (497 )     (1,148 )
Decrease in unearned loan income     (796 )     (1,190 )
(Increase) decrease in other assets     (259 )     458  
Increase (decrease) in other accrued expenses     825       (143 )
Decrease in base management fee payable     (84 )     (76 )
(Decrease) increase in incentive fee payable     (52 )     17  
Net cash provided by (used in) operating activities     34,021       (30,865 )
                 
Cash flows from financing activities:                
Proceeds from issuance of Asset-Backed Notes           90,000  
Repayment of Asset-Backed Notes     (34,441 )      
Distributions paid     (9,727 )     (9,599 )
Net decrease in credit facilities           (46,020 )
Debt issuance costs           (2,125 )
Net cash (used in) provided by financing activities     (44,168 )     32,256  
Net (decrease) increase in cash     (10,147 )     1,391  
                 
Cash:                
Beginning of period     25,341       1,048  
End of period   $ 15,194     $ 2,439  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 4,968     $ 4,982  
                 
Supplemental non-cash investing and financing activities:                
Warrant investments received & recorded as unearned loan income   $ 501     $ 626  
Distributions payable   $ 3,321     $ 3,308  

 

See Notes to Consolidated Financial Statements

 

6
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

September 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 — 141.3% (9)                        
Debt Investments — Life Science — 29.0% (9)                        
Argos Therapeutics, Inc. (5)   Biotechnology   Term Loan (9.25% cash (Libor + 9.25%; Floor 9.25%;   $ 5,000     $ 4,867     $ 4,867  
        Ceiling 10.75%), 5% ETP, Due 10/1/18)                        
Inotek Pharmaceuticals Corporation (2)   Biotechnology   Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)     3,152       3,130       3,130  
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)     1,451       1,424       1,424  
        Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)     484       480       480  
Sample6, Inc. (2)   Biotechnology   Term Loan (9.50% cash (Libor + 9.50%; Floor     1,555       1,548       1,548  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
    Biotechnology   Term Loan (9.50% cash (Libor + 9.50%; Floor 9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)     945       910       910  
Sunesis Pharmaceuticals, Inc. (2)(5)   Biotechnology   Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)     870       868       868  
        Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)     1,306       1,293       1,293  
Xcovery Holding Company, LLC (2)   Biotechnology   Term Loan (12.50% cash, Due 8/1/15)     488       487       487  
        Term Loan (12.50% cash, Due 8/1/15)     767       766       766  
        Term Loan (12.50% cash, Due 10/1/15)     153       153       153  
Accuvein, Inc. (2)   Medical Device   Term Loan (10.40% cash (Libor + 9.90%; Floor     4,000       3,952       3,952  
        10.40%; Ceiling 11.90%), 5.00% ETP, Due 8/1/17)                        
IntegenX, Inc. (2)   Medical Device   Term Loan (10.75% cash (Libor + 10.25%; Floor     3,750       3,680       3,680  
        10.75%; Ceiling 12.75%), 3.50% ETP, Due 7/1/18)                        
Lantos Technologies, Inc. (2)   Medical Device   Term Loan (10.50% cash (Libor + 10.00%; Floor     3,500       3,420       3,420  
        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       2,966       2,966  
        10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     3,000       2,966       2,966  
        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 12/31/14)     1,049       1,044       1,044  
        Term Loan (10.88% cash, 3.00% ETP, Due 12/31/14)     743       739       739  
        Term Loan (10.50% cash, 3.00% ETP, Due 12/31/14)     1,100       1,055       1,055  
Tryton Medical, Inc.   Medical Device   Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP, Due 9/1/16)     3,000       2,973       2,973  
ZetrOZ, Inc.   Medical Device   Term Loan (11.00% cash (Libor + 11.00%; Floor 11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)     1,500       1,425       1,425  
Total Debt Investments — Life Science                     40,146       40,146  
Debt Investments — Technology — 81.5% (9)                        
Ekahau, Inc. (2)   Communications   Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     1,413       1,397       1,397  
        Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     471       465       465  
mBlox, Inc. (2)   Communications   Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,965       4,965  
        11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,965       4,965  
        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)     4,408       4,370       4,370  
        Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)     2,204       2,181       2,181  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   Term Loan (11.00% cash (Libor + 10.50%; Floor     2,000       1,963       1,963  
        11.00%; Ceiling 12.50%), 2.0% ETP, Due 11/1/17)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     1,000       971       971  
        11.00%; Ceiling 12.50%), 2.0% ETP, Due 2/1/18)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     1,000       979       979  
        11.00%; Ceiling 12.50%), 2.0% ETP, Due 4/1/18)                        
Optaros, Inc. (2)   Internet and Media   Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)     1,031       1,027       1,027  
        Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)     348       347       347  
SimpleTuition, Inc. (2)   Internet and Media   Term Loan (11.75% cash, Due 3/1/16)     2,719       2,698       2,698  
Nanocomp Technologies, Inc. (2)   Networking   Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)     1,000       985       985  
Avalanche Technology, Inc. (2)   Semiconductors   Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)     2,174       2,162       2,162  
        Term Loan (10.00% cash, 2.00% ETP, Due 1/1/18)     2,349       2,318       2,318  
eASIC Corporation (2)   Semiconductors   Term Loan (11.00% cash, 2.50% ETP, Due  4/1/17)     2,000       1,978       1,978  
        Term Loan (10.75% cash, 2.50% ETP, Due 4/1/18)     2,000       1,981       1,981  
InVisage Technologies, Inc. (2)   Semiconductors   Term Loan (12.00% cash (Libor + 11.50%; Floor     2,550       2,465       2,465  
        12.00%; Ceiling 14.00%), 2.0% ETP, Due 4/1/18)                        
Kaminario, Inc. (2)   Semiconductors   Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)     2,644       2,618       2,618  
        Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)     2,644       2,618       2,618  
Luxtera, Inc. (2)   Semiconductors   Term Loan (10.25% cash, 8.00% ETP, Due 7/1/17)     2,632       2,583       2,583  
        Term Loan (10.25% cash, 8.00% ETP, Due 7/1/17)     1,469       1,460       1,460  
NexPlanar Corporation (2)   Semiconductors   Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     2,644       2,623       2,623  
        Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     1,763       1,743       1,743  

 

See Notes to Consolidated Financial Statements

 

7
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

September 30, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
Xtera Communications, Inc. (2)   Semiconductors   Term Loan (11.50% cash, 14.77% ETP, Due 7/1/15)     5,918       5,754       5,754  
        Term Loan (11.50% cash, 13.65% ETP, Due 2/1/16)     1,645       1,596       1,596  
Construction Software Technologies, Inc. (2)   Software   Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)     3,825       3,808       3,808  
        Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)     3,825       3,808       3,808  
Courion Corporation (2)   Software   Term Loan (11.45% cash, Due 10/1/15)     1,640       1,637       1,637  
        Term Loan (11.45% cash, Due 10/1/15)     1,640       1,637       1,637  
Decisyon, Inc. (2)   Software   Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)     3,290       3,263       3,263  
        Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)     1,000       984       984  
Lotame Solutions, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.50%; Floor     3,410       3,388       3,388  
        11.50%), 5.25% ETP, Due 9/1/17)                        
        Term Loan (11.50% cash (Libor + 11.50%; Floor     1,500       1,490       1,490  
        11.50%), 5.25% ETP, Due 9/1/17)                        
        Term Loan (11.50% cash (Libor + 11.50%; Floor     2,100       2,068       2,068  
        11.50%), 3.00% ETP, Due 4/1/18)                        
Netuitive, Inc. (2)   Software   Term Loan (12.75% cash, Due 7/1/16)     1,780       1,768       1,768  
Raydiance, Inc. (2)   Software   Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     4,111       4,083       4,083  
        Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     822       809       809  
        Term Loan (11.50% cash, 2.75%, ETP, Due 2/1/18     3,000       2,952       2,952  
Razorsight Corporation (2)   Software   Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)     1,324       1,312       1,312  
        Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)     1,188       1,175       1,175  
        Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)     1,000       986       986  
Social Intelligence Corp. (2)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,500       1,475       1,475  
        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       4,406       4,406  
        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)     6,000       5,902       5,902  
VBrick Systems, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 10.00%; Floor     3,000       2,977       2,977  
        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 4/1/15)     3,000       2,987       2,987  
Visage Mobile, Inc. (2)   Software   Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)     731       724       724  
Total Debt Investments — Technology                     112,851       112,851  
Debt Investments — Cleantech — 10.5% (9)                        
Renmatix, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     1,377       1,371       1,371  
        Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     1,377       1,371       1,371  
        Term Loan (10.25% cash, Due 10/1/16)     3,915       3,891       3,891  
Semprius, Inc. (2)(8)   Alternative Energy   Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)     2,588       2,587       2,282  
Aurora Algae, Inc. (2)   Energy Efficiency   Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)     626       625       625  
Rypos, Inc. (2)   Energy Efficiency   Term Loan (11.80% cash, Due 1/1/17)     2,850       2,818       2,818  
        Term Loan (11.80% cash, Due 9/1/17)     1,000       984       984  
Tigo Energy, Inc.  (2)   Energy Efficiency   Term Loan (13.00% cash, 3.16% ETP,  Due 6/1/15)     1,161       1,157       1,157  
Total Debt Investments — Cleantech                     14,804       14,499  
Debt Investments — Healthcare information and services — 20.3% (9)                    
LifePrint Group, Inc. (2)   Diagnostics   Term Loan (11.00% cash (Libor + 10.50%; Floor     3,000       2,945       2,945  
        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       11,948       11,948  
Watermark Medical, Inc. (2)   Other Healthcare   Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,467       3,467  
        Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,467       3,467  
Recondo Technology, Inc. (2)   Software   Term Loan (11.50% cash, 4.14% ETP, Due 4/1/16)     1,384       1,369       1,369  
        Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)     2,500       2,483       2,483  
        Term Loan (10.50% cash, 2.50% ETP, Due 1/1/18)     2,500       2,476       2,476  
Total Debt Investments — Healthcare information and services                     28,155       28,155  
Total Debt Investments                     195,956       195,651  
Warrant Investments — 4.1% (9)                        
Warrants — Life Science — 1.0% (9)                        
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants           83        
Ambit Biosciences, Inc.(5)   Biotechnology   44,795 Common Stock Warrants           143        
Argos Therapeutics, Inc.(5)   Biotechnology   16,556 Common Stock Warrants           33       33  
Celsion Corporation (5)   Biotechnology   5,708 Common Stock Warrants           15        
Inotek Pharmaceuticals Corporation   Biotechnology   114,387 Preferred Stock Warrants           17       16  
N30 Pharmaceuticals, Inc.   Biotechnology   53,550 Common Stock Warrants           122        
New Haven Pharmaceuticals, Inc.   Biotechnology   41,482 Preferred Stock Warrants           27       123  
Revance Therapeutics, Inc. (5)   Biotechnology   34,377 Common Stock Warrants           68       189  

 

See Notes to Consolidated Financial Statements

 

8
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

September 30, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
Sample6, Inc.   Biotechnology   351,018 Preferred Stock Warrants           45       40  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   116,203 Common Stock Warrants           83       582  
Supernus Pharmaceuticals, Inc. (2)(5)   Biotechnology   42,083 Preferred Stock Warrants           93       181  
Tranzyme, Inc. (5)   Biotechnology   6,460 Common Stock Warrants           6        
Accuvein, Inc.   Medical Device   58,284 Preferred Stock Warrants           18       23  
Direct Flow Medical, Inc.   Medical Device   176,922 Preferred Stock Warrants           144       113  
EnteroMedics, Inc. (5)   Medical Device   141,026 Common Stock Warrants           347        
IntegenX, Inc. (2)   Medical Device   158,006 Preferred Stock Warrants           33       33  
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       42  
Mitralign, Inc.   Medical Device   295,238 Preferred Stock Warrants           52       4  
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   122,362 Preferred Stock Warrants           15       14  
ViOptix, Inc.   Medical Device   375,763 Preferred Stock Warrants           13        
Zetroz   Medical Device   475,561 Preferred Stock Warrants           25       25  
Total Warrants — Life Science                     1,633       1,442  
Warrants — Technology — 2.5% (9)                        
Ekahau, Inc. (2)   Communications   978,261 Preferred Stock Warrants           33       25  
OpenPeak, Inc.   Communications   18,997 Common Stock Warrants           89        
Overture Networks, Inc.   Communications   344,574 Preferred Stock Warrants           55       1  
Everyday Health, Inc. (5)   Consumer-related Technologies   43,783 Common Stock Warrants           69       153  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   268,591 Preferred Stock Warrants           68       190  
SnagAJob.com, Inc.   Consumer-related Technologies   365,396 Preferred Stock Warrants           23       305  
Tagged, Inc.   Consumer-related Technologies   190,868 Preferred Stock Warrants           26       71  
XIOtech, Inc.   Data Storage   2,217,979 Preferred Stock Warrants           21       19  
Cartera Commerce, Inc.   Internet and media   90,909 Preferred Stock Warrants           16       159  
Optaros, Inc.   Internet and media   477,403 Preferred Stock Warrants           21        
SimpleTuition, Inc.   Internet and media   189,573 Preferred Stock Warrants           63       31  
IntelePeer, Inc.   Networking   141,549 Preferred Stock Warrants           39       35  
Nanocomp Technologies, Inc. (2)   Networking   204,546 Preferred Stock Warrants           19       19  
Aquion Energy, Inc.   Power Management   115,051 Preferred Stock Warrants           7       58  
Avalanche Technology, Inc.   Semiconductors   244,649 Preferred Stock Warrants           56       56  
eASIC Corporation   Semiconductors   40,445 Preferred Stock Warrants           25       24  
InVisage Technologies, Inc. (2)   Semiconductors   165,147 Preferred Stock Warrants           43       43  
Kaminario, Inc.   Semiconductors   1,087,203 Preferred Stock Warrants           59       56  
Luxtera, Inc.   Semiconductors   2,087,766 Preferred Stock Warrants           42       114  
NexPlanar Corporation   Semiconductors   216,001 Preferred Stock Warrants           36       57  
Soraa, Inc. (2)   Semiconductors   180,000 Preferred Stock Warrants           80       81  
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       105  
Construction Software Technologies, Inc.   Software   386,415 Preferred Stock Warrants           69       512  
Courion Corporation   Software   772,543 Preferred Stock Warrants           107       91  
Decisyon, Inc.   Software   457,876 Preferred Stock Warrants           46       11  
DriveCam, Inc.   Software   71,639 Preferred Stock Warrants           20       121  
Lotame Solutions, Inc.   Software   288,115 Preferred Stock Warrants           22       161  
Netuitive, Inc.   Software   41,569 Preferred Stock Warrants           48        
Raydiance, Inc.   Software   1,051,120 Preferred Stock Warrants           71       70  
Razorsight Corporation (2)   Software   259,404 Preferred Stock Warrants           43       45  
Riv Data Corp. (2)   Software   237,361 Preferred Stock Warrants           13       13  
SpringCM, Inc. (2)   Software   2,385,686 Preferred Stock Warrants           55       56  
Sys-Tech Solutions, Inc.   Software   375,000 Preferred Stock Warrants           242       582  
Vidsys, Inc.   Software   37,346 Preferred Stock Warrants           23        
Visage Mobile, Inc.   Software   1,692,047 Preferred Stock Warrants           19       18  
Total Warrants — Technology                     2,001       3,406  
Warrants — Cleantech — 0.2% (9)                        
Renmatix, Inc.   Alternative Energy   52,296 Preferred Stock Warrants           68       71  
Semprius, Inc.   Alternative Energy   519,981 Preferred Stock Warrants           26        
Rypos, Inc. (2)   Energy Efficiency   5,627 Preferred Stock Warrants           44       42  
Solarbridge Technologies, Inc.   Energy Efficiency   7,381,412 Preferred Stock Warrants           235       168  
Tigo Energy, Inc. (2)   Energy Efficiency   804,604 Preferred Stock Warrants           100       34  
Total Warrants — Cleantech                     473       315  

 

See Notes to Consolidated Financial Statements

 

9
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

September 30, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
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        
Radisphere National Radiology Group, Inc. (2)   Diagnostics   519,992 Preferred Stock Warrants           378        
Singulex, Inc.   Other Healthcare   293,632 Preferred Stock Warrants           44       143  
Talyst, Inc.   Other Healthcare   300,360 Preferred Stock Warrants           101       54  
Watermark Medical, Inc.   Other Healthcare   12,216 Preferred Stock Warrants           67       65  
Recondo Technology, Inc. (2)   Software   436,088 Preferred Stock Warrants           73       177  
 Total Warrants — Healthcare information and services                     926       531  
Total Warrants                     5,033       5,694  
                                 
Other Investments — 0.2% (9)                                
Vette Technology, LLC   Data Storage   Royalty Agreement Due 4/18/2019           4,645       300  
Total Other Investments                     4,645       300  
Equity — 2.2% (9)                                
Insmed Incorporated (5)   Biotechnology   33,208 Common Stock           239       433  
Revance Therapeutics, Inc.(5)   Biotechnology   4,861 Common Stock           72       94  
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                     3,093       3,049  
Total Portfolio Investment Assets — 147.8%  (9)           $ 208,727     $ 204,694  
Short Term Investments — Money Market Funds — 0.6% (9)                        
US Bank Money Market Deposit Account           $ 800     $ 800  
Total Short Term Investments — Money Market Funds           $ 800     $ 800  
Short Term Investments — Restricted  Investments— 2.4% (9)                        
US Bank Money Market Deposit Account (2)           $ 3,368     $ 3,368  
Total Short Term Investments — Restricted  Investments           $ 3,368     $ 3,368  

_____________________________

 

(1)   All of the Company’s investments are in entities which are organized under the laws of the United States and have a principal place of business in the United States.
(2)   Has been pledged as collateral under the Key Facility 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 September 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 September 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 (Libor + 10.25%; Floor     3,000       2,957       2,957  
        10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     3,000       2,917       2,917  
        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)     1,587       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 (Libor + 10.00%; Floor     3,000       2,970       2,970  
        10.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)                        
Vidsys, Inc. (2)   Software   Term Loan (11.00% cash, 6.50% ETP, Due 6/1/16)     3,000       2,970       2,970  
Visage Mobile, Inc. (2)   Software   Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)     974       962       962  
Total Debt Investments — Technology                     134,673       133,418  
Debt Investments — Cleantech — 17.6% (9)                        
Renmatix, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, 9.00% ETP, Due 2/1/16)     2,028       2,015       2,015  
        Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     2,028       2,015       2,015  
        Term Loan (10.25% cash, Due 10/1/16)     5,000       4,956       4,956  
Semprius, Inc. (2)(8)   Alternative Energy   Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)     3,203       3,183       2,785  
Aurora Algae, Inc. (2)   Energy Efficiency   Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)     1,280       1,276       1,276  
Rypos, Inc.   Energy Efficiency   Term Loan (11.80% cash, Due 1/1/17)     3,000       2,928       2,928  
Solarbridge Technologies, Inc. (2)(8)   Energy Efficiency   Term Loan (12.15% cash, 3.21% ETP, Due 12/1/16)     7,000       6,785       5,000  
Tigo Energy, Inc.  (2)   Energy Efficiency   Term Loan (13.00% cash, 3.16% ETP,  Due 6/1/15)     2,214       2,199       2,199  
Cereplast, Inc. (5)(8)   Waste Recycling   Term Loan (12.00% cash, Due 8/1/14)     1,081       978       328  
        Term Loan (12.00% cash, Due 8/1/14)     1,160       1,141       352  
Total Debt Investments — Cleantech                     27,476       23,854  
Debt Investments — Healthcare information and services — 18.7% (9)                        
BioScale, Inc. (2)   Diagnostics   Term Loan (11.51% cash, Due 1/1/14)     232       232       232  
Radisphere National Radiology Group, Inc. (2)   Diagnostics   Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)     12,000       11,908       11,908  
Watermark Medical, Inc. (2)   Other Healthcare   Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,452       3,452  
        Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,452       3,452  
Recondo Technology, Inc. (2)   Software   Term Loan (11.50% cash, 4.14% ETP, Due 4/1/16)     1,384       1,356       1,356  
        Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)     2,500       2,473       2,473  
    Other Healthcare   Term Loan (10.50% cash, 2.50% ETP, Due 1/1/18)     2,500       2,468       2,468  
Total Debt Investments — Healthcare information and services                     25,341       25,341  
Total Debt Investments                     223,054       213,754  
Warrant Investments — 4.5% (9)                        
Warrants — Life Science — 2.1% (9)                        
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants           83        
Ambit Biosciences, Inc.(5)   Biotechnology   44,795 Common Stock Warrants           143       9  
Anacor Pharmaceuticals, Inc. (2)(5)   Biotechnology   84,583 Common Stock Warrants           93       882  
Celsion Corporation (5)   Biotechnology   5,708 Common Stock Warrants           15        
Inotek Pharmaceuticals Corporation   Biotechnology   114,387 Preferred Stock Warrants           17       15  
N30 Pharmaceuticals, Inc.   Biotechnology   214,200 Preferred Stock Warrants           122       247  
New Haven Pharmaceuticals, Inc.   Biotechnology   34,729 Preferred Stock Warrants           22       20  
Revance Therapeutics, Inc.   Biotechnology   687,091 Preferred Stock Warrants           223       945  
Sample6, Inc.   Biotechnology   200,582 Preferred Stock Warrants           27       23  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   116,203 Common Stock Warrants           83       308  
Supernus Pharmaceuticals, Inc. (2)(5)   Biotechnology   42,083 Preferred Stock Warrants           94       132  
Tranzyme, Inc. (5)   Biotechnology   77,902 Common Stock Warrants           6        
Direct Flow Medical, Inc.   Medical Device   176,922 Preferred Stock Warrants           144       132  
EnteroMedics, Inc. (5)   Medical Device   141,026 Common Stock Warrants           347        
Mederi Therapeutics, Inc.   Medical Device   248,736 Preferred Stock Warrants           26       26  
Mitralign, Inc.   Medical Device   295,238 Common Stock Warrants           49       35  
OraMetrix, Inc. (2)   Medical Device   812,348 Preferred Stock Warrants           78        
PixelOptics, Inc.   Medical Device   381,612 Preferred Stock Warrants           96        
Tengion, Inc. (2)(5)   Medical Device   1,864,876 Common Stock Warrants           124        
Tryton Medical, Inc. (2)   Medical Device   47,977 Preferred Stock Warrants           14       14  
ViOptix, Inc.   Medical Device   375,763 Preferred Stock Warrants           13        
Total Warrants — Life Science                     1,819       2,788  

 

See Notes to Consolidated Financial Statements

 

12
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2013

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(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 organized under the laws of the United States and have a principal place of business in the United States.
(2)   Has been pledged as collateral under the 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 its 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 its sole equity member. Credit I is a separate legal entity from the Company and CHF. There has been no activity at Credit I during the nine months ended September 30, 2014.

 

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

 

Horizon Credit III LLC (“Credit III”) was formed as a Delaware limited liability company on May 30, 2012, with the Company as its 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”).

 

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

 

The Company’s investment strategy is to maximize the investment portfolio’s return by generating current income from the debt investments the Company makes and capital appreciation from the warrants the Company receives when making such debt investments. The Company has entered into an amended and restated 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.

 

15
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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. Certain prior period amounts have been reclassified to conform to the current period presentation. 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.

 

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.

 

16
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 debt investments for the foreseeable future or until maturity or payoff.

 

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the debt investments is placed on non-accrual status and the recognition of interest income is discontinued. Interest payments received on debt investments that are on non-accrual status are treated as reductions of principal until the principal is repaid or until principal and interest payments are determined to be fully collectible. As of September 30, 2014, there was one debt investment on non-accrual status with a cost basis of $2.6 million and a fair value of $2.3 million. As of December 31, 2013, there were five debt 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 debt investments. All other income is recognized when earned. Fees for counterparty debt investment commitments with multiple debt investments are allocated to each debt investment based upon each debt investment’s relative fair value. When a debt investment is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the debt investment is returned to accrual status.

 

Certain 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 debt investments 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 debt investment in accordance with the Company’s income recognition policy. Subsequent to debt investment origination, the fair value of the warrants is determined using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss on investments. Gains and losses from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains and losses on investments.

 

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

 

Debt Issuance Costs

 

Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities. 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 September 30, 2014 and December 31, 2013, included in other assets, was $2.7 million and $5.1 million, respectively. The accumulated amortization balances as of September 30, 2014 and December 31, 2013 were $2.7 million and $2.0 million, respectively. The amortization expense for the nine months ended September 30, 2014 and 2013 was $2.4 million and $0.9 million, respectively.

 

17
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Income Taxes

 

As a BDC, the Company has elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, 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 corporate-level 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 nine months ended September 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 September 30, 2014 and December 31, 2013. The 2013, 2012 and 2011 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).

 

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.

 

18
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 amended and restated effective July 1, 2014, under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company. Under the terms of the amended and restated 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 to the Company under the Investment Management Agreement, consisting of two components, a base management fee and an incentive fee.

 

The base management fee under the Investment Management Agreement through and including June 30, 2014 was calculated at an annual rate of 2.00% of the Company’s gross assets, payable monthly in arrears. As a result of an amendment and restatement of the Investment Management Agreement, the base management fee on and after July 1, 2014 is calculated at an annual rate of 2.00% of (i) the Company’s gross assets, less (ii) assets consisting of cash and cash equivalents, and is payable monthly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. During the first six months of the period ended September 30, 2014, the Advisor waived base management fees of $0.2 million, which the Advisor would have otherwise earned on cash held by the Company at the time of calculation. The base management fee payable at both September 30, 2014 and December 31, 2013 was $0.4 million. The base management fee expense was $1.0 million and $1.3 million for the three months ended September 30, 2014 and 2013, respectively. After giving effect of the waiver, the base management fee expense was $3.4 million and $3.8 million for the nine months ended September 30, 2014 and 2013, respectively.

 

The incentive fee has two parts, as follows:

 

The first part which is subject to the Incentive Fee Cap and Deferral Mechanism, as defined below, is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar quarter, minus 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 investment income is 20.00% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 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 pre-incentive fee net investment income equals the hurdle rate of 1.75%, but then receives, as a “catch-up,” 100.00% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875%. 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.

 

19
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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

 

Fee Cap and Deferral Mechanism. Commencing with the calendar quarter beginning July 1, 2014, the incentive fee on pre-incentive fee net investment income is subject to a fee cap and deferral mechanism which is determined based upon a look-back period of up to three years and will be expensed when incurred. For this purpose, the look-back period for the incentive fee based on pre-incentive fee net investment income (the “Incentive Fee Look-back Period”) commenced on July 1, 2014 and will increase by one quarter in length at the end of each of the 12 succeeding calendar quarters, after which time, the Incentive Fee Look-back period will include the relevant calendar quarter and the 11 full preceding calendar quarters. Each quarterly Incentive Fee payable on pre-incentive fee net investment income is subject to a cap (the “Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such deferred incentive fees (collectively, the “Incentive Fee Cap and Deferral Mechanism”). The “Incentive Fee Cap” is equal to (a) 20.0% of Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to the Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or a negative value in any calendar quarter, the Company will not pay an incentive fee on pre-incentive fee net investment income to the Advisor in that quarter. To the extent that the payment of incentive fees on pre-incentive fee net investment income is limited by the Incentive Fee Cap, the payment of such fees will be deferred and paid in subsequent calendar quarters up to three years after their date of deferment, subject to certain limitations, which are set forth in the Investment Management Agreement. The Company only pays incentive fees on pre-incentive fee net investment income to the extent allowed by the Incentive Fee Cap and Deferral Mechanism. “Cumulative Pre-Incentive Fee Net Return” during any Incentive Fee Look-back Period means the sum of (a) pre-incentive fee net investment income and the base management fee for each calendar quarter during the Incentive Fee Look-back Period and (b) the sum of cumulative realized capital gains and losses, cumulative unrealized capital appreciation and cumulative unrealized capital depreciation during the applicable Incentive Fee Look-back Period.

 

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or, upon termination of the Investment Management Agreement, as of the termination date), and equals 20.00% of the Company’s realized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis through the end of such year, less all previous amounts paid in respect of the capital gain incentive fee.

 

20
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

The performance based incentive fee expense was $0.8 million and $0.9 million for the three months ended September 30, 2014 and September 30, 2013, respectively. The performance based incentive fee expense was $1.2 million and $2.5 million for the nine months ended September 30, 2014 and 2013, respectively. The incentive fees payable as of September 30, 2014 and December 31, 2013 were $0.8 million and $0.9 million, respectively. The entire incentive fees payable as of September 30, 2014 and December 31, 2013 represented 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 reimburses the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief compliance officer and chief financial officer and their respective staffs. The administrative fee expense was $0.3 million for both the three months ended September 30, 2014 and 2013. The administrative fee expense was $0.9 million for both the nine months ended September 30, 2014 and 2013.

 

Note 4.  Investments

 

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

 

    September 30, 2014     December 31, 2013  
    Cost     Fair Value     Cost     Fair Value  
Money market funds   $ 800     $ 800     $ 1,188     $ 1,188  
Restricted investments in money market funds   $ 3,368     $ 3,368     $ 5,951     $ 5,951  
Non-affiliate investments                                
Debt   $ 195,956     $ 195,651     $ 223,054     $ 213,754  
Warrants     5,033       5,694       5,745       6,036  
Other Investments     4,645       300       4,729       400  
Equity     3,093       3,049       782       1,094  
Total non-affiliate investments   $ 208,727     $ 204,694     $ 234,310     $ 221,284  

 

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

 

    September 30, 2014     December 31, 2013  
    Cost     Fair Value     Cost     Fair Value  
Life Science                                
Biotechnology   $ 16,972     $ 17,617     $ 17,604     $ 19,631  
Medical Device     25,118       24,498       20,079       14,972  
Technology                                
Communications     19,002       18,591       10,019       9,847  
Consumer-Related Technologies     4,099       4,632       118       435  
Data Storage     4,666       319       4,751       419  
Internet and Media     4,172       4,262       6,119       6,201  
Networking     1,043       1,039       1,025       1,034  
Power Management     7       58       14,382       13,101  
Semiconductors     32,446       32,330       37,897       37,793  
Software     54,544       55,548       67,510       67,869  
Cleantech                                
Alternative Energy     9,314       8,986       12,263       11,840  
Energy Efficiency     8,263       8,128       13,743       11,596  
Waste Recycling                 2,294       680  
Healthcare Information and Services                                
Diagnostics     15,534       14,985       12,752       12,203  
Other Healthcare Related Services     7,146       7,196       7,384       7,190  
Software     6,401       6,505       6,370       6,473  
Total non-affiliate investments   $ 208,727     $ 204,694     $ 234,310     $ 221,284  

 

 

21
 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Note 5.  Fair Value

 

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

 

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

 

The Company’s fair value measurements are classified into a fair value hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three categories within the hierarchy are as follows:

 

Level 1 Quoted prices in active markets for identical assets and liabilities.
   
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, and model-based valuation techniques for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
   
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

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

 

22
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 period end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the same remaining maturities. At September 30, 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.

 

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

 

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

 

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

 

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

 

23
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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.

 

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. This asset is recorded at fair value on a recurring basis.

 

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of September 30, 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 September 30, 2014:

 

September 30, 2014
    Fair     Valuation Techniques/   Unobservable         Weighted  
Investment Type   Value     Methodologies   Input   Range     Average  
Debt investments   $ 193,369     Discounted Expected Future Cash Flows   Hypothetical Market Yield     9% – 18%       11 %
                                 
      2,282     Multiple Probability Weighted Cash   Probability Weighting     30% – 40%       33 %
            Flow Model                    
                                 
Warrant investments     4,044     Black-Scholes Valuation Model   Price per share    

$0.04 – $63.98

     $

3.70

 
                Average Industry Volatility     19 %     19 %
                Marketability Discount     20 %     20 %
                Estimated Time to Exit     1 to 5 years       3 years  
      512     Expected Settlement   Per Share Merger Consideration   $ 2.65     $ 2.65  
                                 
Other investments     300     Multiple Probability Weighted Cash Flow Model   Discount Rate     25 %     25 %
                Probability Weighting     100 %     100 %
                                 
Equity investments     2,300     Most Recent Equity Investment   Price Per Share   $ 0.20     $ 0.20  
      222     Market Comparable Companies   Price Per Share   $ 0.57     $ 0.57  
Total Level 3 investments    $ 203,029                          

  

24
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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

$0.0 – $63.98

     $

3.48

 
                Average Industry Volatility     19 %     19 %
                Marketability Discount     20 %     20 %
                Estimated Time to Exit     1 to 10 years       3 years  
                                 
Other investments     400     Multiple Probability Weighted Cash Flow Model   Discount Rate     25 %     25 %
                Probability Weighting     100 %     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 is 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 September 30, 2014, the 2019 Notes were trading on the New York Stock Exchange for $25.60 per note, or an aggregate of $33.8 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. Based on market quotations on September 30, 2014, the Asset-Backed Notes (as described in Note 6) were trading at par value, or $44.9 million, and are categorized as Level 3 within the fair value hierarchy described above. These liabilities are not recorded at fair value on a recurring basis.

 

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

 

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 September 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:

 

    September 30, 2014  
    Total     Level 1     Level 2     Level 3  
Money market funds   $ 800     $     $ 800     $  
Restricted investments in money market funds   $ 3,368     $     $ 3,368     $  
Debt investments   $ 195,651     $     $     $ 195,651  
Warrant investments   $ 5,694     $     $ 1,138     $ 4,556  
Other investments   $ 300     $     $     $ 300  
Equity investments   $ 3,049     $ 527     $     $ 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  

 

25
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

  

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 September 30, 2014:

 

    Three Months Ended September 30, 2014  
    Debt
Investments
    Warrant
Investments
    Equity
Investments
    Other
Investments
    Total  
Level 3 assets, beginning of period   $ 209,197     $ 3,612     $ 2,522     $ 400     $ 215,731  
Purchase of investments     22,845                         22,845  
Warrants and equity received and classified as Level 3           208                   208