Horizon Technology Finance Corporation
Horizon Technology Finance Corp (Form: 10-Q, Received: 08/04/2015 16:45:40)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
     
    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 ¨   Accelerated filer þ   Non-accelerated filer ¨   Smaller Reporting Company ¨
        (Do not check if a smaller reporting company)    

 

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

 

As of August 4, 2015, the Registrant had 11,637,525 shares of common stock, $0.001 par value, outstanding. 

 

 

 

 
     

 

HORIZON TECHNOLOGY FINANCE CORPORATION

 

FORM 10-Q

TABLE OF CONTENTS

 

      Page
PART I    
Item 1. Consolidated Financial Statements   3
       
  Consolidated Statements of Assets and Liabilities as of June 30, 2015 and December 31, 2014 (unaudited)   3
  Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014 (unaudited)   4
  Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2015 and 2014 (unaudited)   5
  Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)   6
  Consolidated Schedules of Investments as of June 30, 2015 and December 31, 2014 (unaudited)   7
  Notes to the Consolidated Financial Statements (unaudited)   17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   36
Item 3. Quantitative And Qualitative Disclosures About Market Risk   49
Item 4. Controls and Procedures   50
       
PART II    
Item 1. Legal Proceedings   50
Item 1A. Risk Factors   5 0
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   50
Item 3. Defaults Upon Senior Securities   51
Item 4. Mine Safety Disclosures   51
Item 5. Other Information   51
Item 6. Exhibits   51
  Signatures   52
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 and per share data)

 

    June 30, 
2015
    December 31,
2014
 
             
Assets                
Non-affiliate investments at fair value (cost of $244,867 and $209,838, respectively) (Note 4)   $ 240,148     $ 205,101  
Investments in money market funds     334       27  
Cash     11,270       8,417  
Restricted investments in money market funds     1,842       2,906  
Interest receivable     5,625       4,758  
Other assets     2,993       3,987  
Total assets   $ 262,212     $ 225,196  
                 
Liabilities                
Borrowings (Note 6)   $ 93,562     $ 81,753  
Distributions payable     4,014       3,322  
Base management fee payable (Note 3)     367       356  
Incentive fee payable (Note 3)     722       799  
Other accrued expenses     745       718  
Total liabilities     99,410       86,948  
                 
Commitments and Contingencies (Notes 7 and 8)                
                 
Net assets                
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of June 30, 2015 and December 31, 2014            
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 11,635,480 and 9,628,124 shares outstanding as of June 30, 2015 and December 31, 2014, respectively     12       10  
Paid-in capital in excess of par     181,028       155,240  
Distributions in excess of net investment income     (2,175 )     (1,102 )
Net unrealized depreciation on investments     (4,719 )     (4,737 )
Net realized loss on investments     (11,344 )     (11,163 )
Total net assets     162,802       138,248  
Total liabilities and net assets   $ 262,212     $ 225,196  
Net asset value per common share   $ 13.99     $ 14.36  

 

See Notes to Consolidated Financial Statements

 

3
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)

 

    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2015     2014     2015     2014  
Investment income                                
Interest income on non-affiliate investments   $ 6,599     $ 7,747     $ 13,161     $ 14,928  
Prepayment fee income on non-affiliate investments     208       535       728       535  
Fee income on non-affiliate investments     50       415       234       769  
Total investment income     6,857       8,697       14,123       16,232  
Expenses                                
Interest expense     1,263       3,760       2,850       5,831  
Base management fee (Note 3)     1,146       1,268       2,177       2,580  
Performance based incentive fee (Note 3)     722             1,458       513  
Administrative fee (Note 3)     309       293       577       537  
Professional fees     287       1,280       718       2,114  
General and administrative     299       351       559       602  
Total expenses     4,026       6,952       8,339       12,177  
Management and performance based incentive fees waived (Note 3)     (67 )     (131 )     (67 )     (345 )
Net expenses     3,959       6,821       8,272       11,832  
Net investment income before excise tax     2,898       1,876       5,851       4,400  
Provision for excise tax     10       40       20       80  
Net investment income     2,888       1,836       5,831       4,320  
                                 
Net realized and unrealized (loss) gain on investments                                
Net realized loss on investments     (29 )     (630 )     (259 )     (6,514 )
Net unrealized (depreciation) appreciation on investments     (1,114 )     1,229       18       9,759  
Net realized and unrealized (loss) gain on investments     (1,143 )     599       (241 )     3,245  
                                 
Net increase in net assets resulting from operations   $ 1,745     $ 2,435     $ 5,590     $ 7,565  
Net investment income per common share   $ 0.25     $ 0.19     $ 0.54     $ 0.45  
Net increase in net assets per common share   $ 0.15     $ 0.25     $ 0.52     $ 0.78  
Distributions declared per share   $ 0.345     $ 0.345     $ 0.69     $ 0.69  
Weighted average shares outstanding     11,632,724       9,620,027       10,725,004       9,616,930  

 

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 Stock     Paid-In
Capital in
Excess of
    Accumulated
Undistributed
(Distributions
in excess of)
Net
Investment
    Net Unrealized
Depreciation
on
    Net Realized
Loss on
    Total Net  
    Shares     Amount     Par     Income     Investments     Investments     Assets  
Balance at December 31, 2013     9,608,949     $ 10     $ 154,975     $ 1,463     $ (13,026 )   $ (7,587 )   $ 135,835  
Net increase in net assets resulting from operations                       4,320       9,759       (6,514 )     7,565  
Issuance of common stock under dividend reinvestment plan     12,687             174                         174  
Distributions declared                       (6,639 )                 (6,639 )
Balance at June 30, 2014     9,621,636     $ 10     $ 155,149       (856 )   $ (3,267 )   $ (14,101 )   $ 136,935  
                                                         
Balance at December 31, 2014     9,628,124     $ 10     $ 155,240     $ (1,102 )   $ (4,737 )   $ (11,163 )   $ 138,248  
Issuance of common stock, net of offering costs     2,000,000       2       26,657                         26,659  
Net increase in net assets resulting from operations                       5,831       18       (259 )     5,590  
Issuance of common stock under dividend reinvestment plan     7,356             102                         102  
Distributions declared                       (7,797 )                 (7,797 )
Reclassification of permanent tax differences (Note 2)                 (971 )     893             78        
Balance at June 30, 2015     11,635,480     $ 12     $ 181,028     $ (2,175 )   $ (4,719 )   $ (11,344 )   $ 162,802  

 

See Notes to Consolidated Financial Statements

 

5
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

    For the Six Months Ended  
    June 30,  
    2015     2014  
Cash flows from operating activities:                
Net increase in net assets resulting from operations   $ 5,590     $ 7,565  
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:                
Amortization of debt issuance costs     523       2,022  
Net realized loss on investments     259       7,651  
Net unrealized appreciation on investments     (18 )     (9,726 )
Purchase of investments     (71,933 )     (43,990 )
Principal payments received on investments     36,577       47,489  
Proceeds from sale of investments           1,123  
Changes in assets and liabilities:                
Net increase in investments in money market funds     (307 )     (8,394 )
Net decrease in restricted investments in money market funds     1,064       1,111  
Increase in interest receivable     (194 )     (955 )
Increase in end-of-term payments     (673 )     (537 )
Increase (decrease) in unearned income     97       (558 )
Decrease (increase) in other assets     431       (418 )
Increase in other accrued expenses     38       816  
Increase (decrease) in base management fee payable     11       (153 )
Decrease in incentive fee payable     (77 )     (852 )
Net cash (used in) provided by  operating activities     (28,612 )     2,194  
Cash flows from financing activities:                
Proceeds from issuance of common stock, net of offering costs     26,659        
Repayment of Asset-Backed Notes     (14,191 )     (14,807 )
Advances on credit facilities     26,000        
Distributions paid     (7,003 )     (6,460 )
Net cash provided by (used in) financing activities     31,465       (21,267 )
Net increase (decrease) in cash     2,853       (19,073 )
Cash:                
Beginning of period     8,417       25,341  
End of period   $ 11,270     $ 6,268  
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 2,317     $ 3,929  
Supplemental non-cash investing and financing activities:                
Warrant investments received and recorded as unearned income   $ 485     $ 260  
Distributions payable   $ 4,014     $ 3,319  
End-of-term payments receivable   $ 4,458     $ 3,715  
Net assets received in settlement of debt investment   $     $ 985  
Receivable resulting from sale of investment   $     $ 209  

 

See Notes to Consolidated Financial Statements

 

6
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2015

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
Debt Investments — 142.8% (9)                                
Debt Investments — Life Science — 26.4% (9)                                
Argos Therapeutics, Inc. (2)(5)   Biotechnology   Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;   $ 5,000     $ 4,883     $ 4,883  
        Ceiling 10.75%), 5.00% ETP, Due 10/1/18)                        
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.50% cash (Libor + 11.00%; Floor     1,301       1,294       1,294  
        11.50%), 6.50% ETP, Due 11/1/17)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     434       431       431  
        11.50%), 6.50% ETP, Due 11/1/17)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,000       1,971       1,971  
        10.50%), 4.00% ETP, Due 7/1/18)                        
Palatin Technologies, Inc. (2)(5)   Biotechnology   Term Loan (9.00% cash (Libor + 8.50%; Floor     5,000       4,929       4,929  
        9.00%), 5.00% ETP, Due 1/1/19)                        
Sample6, Inc. (2)   Biotechnology   Term Loan (9.50% cash (Libor + 9.00%; Floor     1,555       1,549       1,549  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.50% cash (Libor + 9.00%; Floor     945       939       939  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.50% cash (Libor + 9.00%; Floor     2,500       2,477       2,477  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
Sunesis Pharmaceuticals, Inc. (2)(5)   Biotechnology   Term Loan (8.95% cash, 4.65% ETP, Due 10/1/16)     545       543       543  
        Term Loan (9.00% cash, 4.65% ETP, Due 10/1/16)     818       812       812  
IntegenX Inc. (2)   Medical Device   Term Loan (10.75% cash (Libor + 10.25%; Floor     3,750       3,694       3,694  
        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       3,458       3,267  
        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       2,975       2,975  
        10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     3,000       2,975       2,975  
        10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)                        
NinePoint Medical, Inc. (2)   Medical Device   Term Loan (9.25% cash (Libor + 8.75%; Floor     5,000       4,922       4,922  
        9.25%), 4.50% ETP, Due 3/1/19)                        
Tryton Medical, Inc. (2)   Medical Device   Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,     2,438       2,421       2,421  
        Due 9/1/16)                        
ZetrOZ, Inc. (2)   Medical Device   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,500       1,458       1,458  
        11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     1,500       1,474       1,474  
        11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)                        
Total Debt Investments — Life Science                     43,205       43,014  
Debt Investments — Technology — 86.5% (9)                                
Ekahau, Inc. (2)   Communications   Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     1,048       1,040       1,040  
        Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     349       346       346  
mBlox, Inc. (2)   Communications   Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,972       4,972  
        11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,972       4,972  
        11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)                        
        Term Loan (12.00% cash, 100.0% ETP, Due 7/1/16)     1,000       1,000       1,000  
        Term Loan (12.00% cash, 100.0% ETP, Due 7/1/16)     1,000       1,000       1,000  
Overture Networks, Inc. (2)   Communications   Term Loan (10.75% cash, (Libor + 10.25%; Floor     4,104       4,085       4,085  
        10.75%), 5.75% ETP, Due 12/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     2,052       2,041       2,041  
        10.75%), 5.75% ETP, Due 12/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     1,000       991       991  
        10.75%), 5.00% ETP, Due 11/1/18)                        
Additech, Inc. (2)   Consumer-related Technologies   Term Loan (11.75% cash (Libor + 11.25%; Floor     2,500       2,464       2,464  
        11.75%; Ceiling 13.25%), 4.00% ETP, Due 7/1/18)                        
        Term Loan (11.75% cash (Libor + 11.25%; Floor     2,500       2,458       2,458  
        11.75%; Ceiling 13.25%), 4.00% ETP, Due 1/1/19)                        
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,867       1,839       1,839  
        11.00%; Ceiling 12.50%), 2.0% ETP, Due 11/1/17)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     1,000       978       978  
        11.00%; Ceiling 12.50%), 2.0% ETP, Due 2/1/18)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     1,000       983       983  
        11.00%; Ceiling 12.50%), 2.0% ETP, Due 4/1/18)                        
SavingStar, Inc.   Consumer-related Technologies   Term Loan (10.90% cash (Libor + 10.40%; Floor     3,000       2,903       2,903  
        10.90%), 3.0% ETP, Due 6/1/19)                        

 

See Notes to Consolidated Financial Statements

 

7
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2015

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
The NanoSteel Company, Inc.   Materials   Term Loan (10.00% cash (Libor + 9.50%; Floor     5,000       4,855       4,855  
        10.00%), 5.0% ETP, Due 7/1/19)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor     2,500       2,452       2,452  
        10.00%), 5.0% ETP, Due 7/1/19)                        
Nanocomp Technologies, Inc. (2)   Networking   Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)     868       855       855  
Powerhouse Dynamics, Inc.   Power Management   Term Loan (11.20% cash (Libor + 10.70%; Floor     2,500       2,449       2,449  
        11.20%), 3.0% ETP, Due 3/1/19)                        
Avalanche Technology, Inc. (2)   Semiconductors   Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     1,983       1,976       1,976  
        Ceiling 11.75%), 2.40% ETP, Due 4/1/17)                        
        Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     2,246       2,239       2,239  
        Ceiling 11.75%) ,2.40% ETP, Due 10/1/18)                        
        Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     2,500       2,447       2,447  
        Ceiling 11.75%), 2.00% ETP, Due 2/1/19)                        
eASIC Corporation (2)   Semiconductors   Term Loan (11.00% cash, 2.50% ETP, Due 10/1/17)     2,000       1,987       1,987  
        Term Loan (10.75% cash, 2.50% ETP, Due 4/1/18)     2,000       1,987       1,987  
InVisage Technologies, Inc. (2)   Semiconductors   Term Loan (12.00% cash (Libor + 11.50%; Floor     2,550       2,492       2,492  
        12.00%; Ceiling 14.00%), 2.0% ETP, Due 4/1/18)                        
        Term Loan (12.00% cash (Libor + 11.50%; Floor     850       832       832  
        12.00%; Ceiling 14.00%), 2.0% ETP, Due 10/1/18)                        
Luxtera, Inc. (2)   Semiconductors   Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;     2,193       2,162       2,162  
        Ceiling 12.25%), 13.00% ETP, Due 7/1/17)                        
        Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;     1,224       1,219       1,219  
        Ceiling 12.25%), 13.00% ETP, Due 7/1/17)                        
        Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%),     833       823       823  
        4.50% ETP, Due 12/1/18)                        
NexPlanar Corporation (2)   Semiconductors   Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     1,796       1,786       1,786  
        Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     1,197       1,188       1,188  
Xtera Communications, Inc. (2)   Semiconductors   Term Loan (12.50% cash, 15.65% ETP, Due 12/31/16)     5,301       5,214       5,214  
        Term Loan (12.50% cash, 21.75% ETP, Due 12/31/16)     1,473       1,447       1,447  
Bridge2 Solutions, Inc.   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     4,000       3,975       3,975  
        11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19)                        
Crowdstar, Inc. (2)   Software   Term Loan (10.75% cash (Libor + 10.25%; Floor     2,000       1,961       1,961  
        10.75%), 3.00% ETP, Due 9/1/18)                        
Decisyon, Inc. (2)   Software   Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)     2,145       2,134       2,134  
        Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)     971       961       961  
Education Elements, Inc. (2)   Software   Term Loan (10.50% cash (Libor + 10.00%; Floor     2,000       1,962       1,962  
        10.50%), 4.00% ETP, Due 1/1/19)                        
Lotame Solutions, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     3,410       3,394       3,394  
        11.50%), 5.25% ETP, Due 9/1/17)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     1,500       1,493       1,493  
        11.50%), 5.25% ETP, Due 9/1/17)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     2,100       2,075       2,075  
        11.50%), 3.00% ETP, Due 4/1/18)                        
Netuitive, Inc. (2)   Software   Term Loan (12.75% cash, Due 7/1/16)     1,459       1,454       1,454  
Raydiance, Inc. (2)(8)   Software   Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     2,995       2,995       2,158  
        Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     596       596       429  
        Term Loan (11.50% cash (Libor + 11.00%; Floor     2,961       2,961       2,134  
        11.50%; Ceiling 13.50%), 2.75% ETP, Due 2/1/18)                        
Razorsight Corporation (2)   Software   Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)     903       898       898  
        Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)     755       750       750  
        Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)     853       845       845  
ScoreBig, Inc. (2)   Software   Term Loan (10.50% cash (Libor + 10.00%; Floor     3,500       3,442       3,442  
        10.50%), 4.00% ETP, Due 4/1/19)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     3,500       3,442       3,442  
        10.50%), 4.00% ETP, Due 4/1/19)                        
SIGNiX, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     3,000       2,911       2,911  
        11.50%), Due 7/1/18)                        
SilkRoad Technology, Inc.   Software   Term Loan (10.85% cash (Libor + 10.35%; Floor     7,500       7,427       7,427  
        10.85%; Ceiling 12.85%), 3.00% ETP, Due 6/1/19)                        
Social Intelligence Corp. (2)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,364       1,345       1,345  
        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       4,438       4,438  
        11.50%; Ceiling 13.00%), 2.00% ETP, Due 1/1/18)                        
Sys-Tech Solutions, Inc. (2)   Software   Term Loan (11.65% cash (Libor + 11.15%; Floor     6,000       5,961       5,961  
        11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)                        
        Term Loan (11.65% cash (Libor + 11.15%; Floor     5,000       4,960       4,960  
        11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)                        

 

See Notes to Consolidated Financial Statements

 

8
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2015

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
VBrick Systems, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     2,500       2,483       2,483  
        11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)                        
Vidsys, Inc. (2)   Software   Term Loan (13.00% cash, 7.58% ETP, Due 12/1/17)     3,000       2,999       2,999  
Visage Mobile, Inc. (2)   Software   Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)     465       462       462  
Xceedium, Inc.   Software   Term Loan (11.75% cash (Libor + 11.25%; Floor     2,000       1,980       1,980  
        11.75%), Due 6/1/19)                        
xTech Holdings, Inc. (2)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     2,000       1,952       1,952  
        11.00%), 3.00% ETP, Due 4/1/19                        
Total Debt Investments — Technology                     142,738       140,907  
Debt Investments — Cleantech — 5.6% (9)                                
Renmatix, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     673       672       672  
        Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     673       672       672  
        Term Loan (10.25% cash, Due 10/1/16)     2,601       2,591       2,591  
Semprius, Inc. (2)(8)   Alternative Energy   Term Loan (10.25% cash, 5.00% ETP, Due 6/1/16)     1,676       1,656       1,656  
Rypos, Inc. (2)   Energy Efficiency   Term Loan (11.80% cash, 4.25% ETP, Due 6/1/17)     2,490       2,455       2,455  
        Term Loan (11.80% cash, 4.25% ETP, Due 1/1/18)     962       945       945  
Total Debt Investments — Cleantech                     8,991       8,991  
Debt Investments — Healthcare information and services — 24.3% (9)                                
Interleukin Genetics, Inc. (2)(5)   Diagnostics   Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%)     5,000       4,859       4,859  
        4.50% ETP, Due 10/1/18)                        
LifePrint Group, Inc. (2)   Diagnostics   Term Loan (11.00% cash (Libor + 10.50%; Floor     3,000       2,958       2,958  
        11.00%; Ceiling 12.50%), 3.00% ETP, Due 1/1/18)                        
Watermark Medical, Inc. (2)   Other Healthcare   Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;     3,500       3,492       3,492  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;     3,500       3,492       3,492  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;     1,250       1,248       1,248  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
Innnovatient Solutions, Inc.   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,000       945       945  
        11.00%, Ceiling 13.00%); 4.00% ETP, Due 7/1/18)                        
MedAvante, Inc.   Software   Term Loan (9.75% cash (Libor + 9.25%; Floor     3,000       2,884       2,884  
        9.75%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (9.75% cash (Libor + 9.25%; Floor     3,000       2,950       2,950  
        9.75%), 4.00% ETP, Due 1/1/19)                        
Medsphere Systems Corporation   Software   Term Loan (10.50% cash (Libor + 10.00%; Floor     5,000       4,910       4,910  
        10.50%), 7.00% ETP, Due 7/1/19)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,500       2,455       2,455  
        10.50%), 7.00% ETP, Due 7/1/19)                        
Recondo Technology, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     1,384       1,379       1,379  
        11.50%), 6.60% ETP, Due 12/1/17)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     2,500       2,492       2,492  
        11.00%), 4.50% ETP, Due 12/1/17)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,500       2,493       2,493  
        10.50%), 2.75% ETP, Due 12/1/17)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     3,000       2,959       2,959  
        10.50%), 2.50% ETP, Due 1/1/19)                        
Total Debt Investments — Healthcare information and services             39,516     39,516  
Total Debt Investments               234,450       232,428  
Warrant Investments — 3.6% (9)                          
Warrants — Life Science — 1.0% (9)                          
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants           83        
Argos Therapeutics, Inc. (2)(5)   Biotechnology   16,556 Common Stock Warrants           33       5  
Celsion Corporation (5)   Biotechnology   5,708 Common Stock Warrants           15        
Inotek Pharmaceuticals Corporation (5)   Biotechnology   33,762 Preferred Stock Warrants           17       14  
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   55,347 Preferred Stock Warrants           42       129  
Nivalis Theraputics, Inc. (5)   Biotechnology   18,534 Common Stock Warrants           122       12  
Palatin Technologies, Inc. (2)(5)   Biotechnology   333,333 Common Stock Warrants           31       67  
Revance Therapeutics, Inc. (5)   Biotechnology   34,377 Common Stock Warrants           68       603  
Sample6, Inc. (2)   Biotechnology   351,018 Preferred Stock Warrants           45       39  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   12,302 Common Stock Warrants           6       11  

 

See Notes to Consolidated Financial Statements

 

9
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2015

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
Supernus Pharmaceuticals, Inc. (2)(5)   Biotechnology   42,083 Common Stock Warrants           93       529  
Tranzyme, Inc. (2)(5)   Biotechnology   6,460 Common Stock Warrants           6        
AccuVein Inc. (2)   Medical Device   75,769 Preferred Stock Warrants           24       28  
Direct Flow Medical, Inc.   Medical Device   176,922 Preferred Stock Warrants           144       40  
EnteroMedics, Inc. (5)   Medical Device   141,026 Common Stock Warrants           347        
IntegenX, Inc. (2)   Medical Device   158,006 Preferred Stock Warrants           33       31  
Lantos Technologies, Inc. (2)   Medical Device   858,545 Preferred Stock Warrants           24       23  
Mederi Therapeutics, Inc. (2)   Medical Device   248,736 Preferred Stock Warrants           26       40  
Mitralign, Inc. (2)   Medical Device   641,909 Preferred Stock Warrants           52       37  
NinePoint Medical, Inc. (2)   Medical Device   410,959 Preferred Stock Warrants           33       33  
OraMetrix, Inc. (2)   Medical Device   812,348 Preferred Stock Warrants           78        
Tryton Medical, Inc. (2)   Medical Device   122,362 Preferred Stock Warrants           15       13  
ViOptix, Inc.   Medical Device   375,763 Preferred Stock Warrants           13        
ZetrOZ, Inc. (2)   Medical Device   475,561 Preferred Stock Warrants           25       24  
Total Warrants — Life Science                     1,375       1,678  
Warrants — Technology — 2.0% (9)                          
Ekahau, Inc. (2)   Communications   978,261 Preferred Stock Warrants           33       19  
OpenPeak, Inc.   Communications   18,997 Common Stock Warrants           89        
Overture Networks, Inc.   Communications   385,617 Preferred Stock Warrants           55        
Additech, Inc. (2)   Consumer-related Technologies   150,000 Preferred Stock Warrants           34       26  
Everyday Health, Inc. (5)   Consumer-related Technologies   43,783 Common Stock Warrants           69       109  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   268,591 Preferred Stock Warrants           68       439  
SavingStar, Inc.   Consumer-related Technologies   79,088 Preferred Stock Warrants           48       48  
SnagAJob.com, Inc.   Consumer-related Technologies   365,396 Preferred Stock Warrants           23       303  
Tagged, Inc.   Consumer-related Technologies   190,868 Preferred Stock Warrants           26       65  
XIOtech, Inc.   Data Storage   2,217,979 Preferred Stock Warrants           22       18  
Cartera Commerce, Inc.   Internet and media   90,909 Preferred Stock Warrants           16       160  
SimpleTuition, Inc.   Internet and media   189,573 Preferred Stock Warrants           63       28  
The NanoSteel Company, Inc.   Materials   147,424 Preferred Stock Warrants           93       93  
IntelePeer, Inc.   Networking   141,549 Preferred Stock Warrants           39       3  
Nanocomp Technologies, Inc. (2)   Networking   272,728 Preferred Stock Warrants           25       24  
Aquion Energy, Inc.   Power Management   115,051 Preferred Stock Warrants           7       55  
Powerhouse Dynamics, Inc.   Power Management   290,698 Preferred Stock Warrants           27       27  
Avalanche Technology, Inc. (2)   Semiconductors   352,828 Preferred Stock Warrants           101       86  
eASIC Corporation (2)   Semiconductors   40,445 Preferred Stock Warrants           25       28  
InVisage Technologies, Inc. (2)   Semiconductors   185,790 Preferred Stock Warrants           48       46  
Kaminario, Inc.   Semiconductors   1,087,203 Preferred Stock Warrants           59       63  
Luxtera, Inc.(2)   Semiconductors   2,304,667 Preferred Stock Warrants           48       109  
NexPlanar Corporation   Semiconductors   216,001 Preferred Stock Warrants           36       56  
Soraa, Inc. (2)   Semiconductors   180,000 Preferred Stock Warrants           80       77  
Xtera Communications, Inc.   Semiconductors   983,607 Preferred Stock Warrants           206        
Bolt Solutions, Inc. (2)   Software   202,892 Preferred Stock Warrants           113       117  
Clarabridge, Inc.   Software   53,486 Preferred Stock Warrants           14       104  
Crowdstar, Inc. (2)   Software   75,428 Preferred Stock Warrants           14       14  
Decisyon, Inc. (2)   Software   457,876 Preferred Stock Warrants           46       21  
DriveCam, Inc.   Software   71,639 Preferred Stock Warrants           20       120  
Education Elements, Inc. (2)   Software   136,070 Preferred Stock Warrants           16       16  
Lotame Solutions, Inc. (2)   Software   288,115 Preferred Stock Warrants           22       267  
Netuitive, Inc.   Software   41,569 Preferred Stock Warrants           48        
Raydiance, Inc. (2)   Software   1,051,120 Preferred Stock Warrants           71        
Razorsight Corporation (2)   Software   259,404 Preferred Stock Warrants           43       34  
Riv Data Corp. (2)   Software   237,361 Preferred Stock Warrants           13       12  
ScoreBig, Inc. (2)   Software   481,198 Preferred Stock Warrants           55       56  
SIGNiX, Inc. (2)   Software   63,365 Preferred Stock Warrants           48       48  
SpringCM, Inc. (2)   Software   2,385,686 Preferred Stock Warrants           55       53  
Sys-Tech Solutions, Inc.   Software   375,000 Preferred Stock Warrants           242       509  
Vidsys, Inc.   Software   37,346 Preferred Stock Warrants           23        
Visage Mobile, Inc.   Software   1,692,047 Preferred Stock Warrants           19       12  
xTech Holdings, Inc. (2)   Software   111,111 Preferred Stock Warrants           29       31  
Total Warrants — Technology               2,231       3,296  
Warrants — Cleantech — 0.1% (9)                          
Renmatix, Inc.   Alternative Energy   53,022 Preferred Stock Warrants           68       66  
Semprius, Inc.   Alternative Energy   519,981 Preferred Stock Warrants           25        
Rypos, Inc. (2)   Energy Efficiency   5,627 Preferred Stock Warrants           44       31  

 

See Notes to Consolidated Financial Statements

 

10
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2015

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
Tigo Energy, Inc. (2)   Energy Efficiency   804,604 Preferred Stock Warrants           100       109  
Total Warrants — Cleantech                     237       206  
Warrants — Healthcare information and services — 0.5% (9)                          
Accumetrics, Inc.   Diagnostics   100,928 Preferred Stock Warrants           107       63  
BioScale, Inc. (2)   Diagnostics   315,618 Preferred Stock Warrants           54        
Candescent Health, Inc. (2)   Diagnostics   519,992 Preferred Stock Warrants           378        
Helomics Corporation   Diagnostics   13,461 Preferred Stock Warrants           73        
Interleukin Genetics, Inc. (2)(5)   Diagnostics   2,492,523 Common Stock Warrants           112       90  
LifePrint Group, Inc. (2)   Diagnostics   49,000 Preferred Stock Warrants           29       28  
Singulex, Inc.   Other Healthcare   293,632 Preferred Stock Warrants           44       166  
Talyst, Inc.   Other Healthcare   300,360 Preferred Stock Warrants           100       35  
Watermark Medical, Inc. (2)   Other Healthcare   27,373 Preferred Stock Warrants           74       63  
Innovatient Solutions, Inc.   Software   157,895 Preferred Stock Warrants           35       35  
MedAvante, Inc.   Software   114,285 Preferred Stock Warrants           66       66  
Medsphere Systems Corporation   Software   7,097,791 Preferred Stock Warrants           60       60  
Recondo Technology, Inc. (2)   Software   556,796 Preferred Stock Warrants           95       209  
Total Warrants — Healthcare information and services               1,227       815  
Total Warrants                     5,070       5,995  
                                 
Other Investments — 0.2% (9)                          
Vette Technology, LLC   Data Storage   Royalty Agreement Due 4/18/2019           4,470       300  
Total Other Investments                     4,470       300  
Equity — 0.9% (9)                                
Insmed Incorporated (5)   Biotechnology   33,208 Common Stock           239       811  
Revance Therapeutics, Inc.(5)   Biotechnology   4,861 Common Stock           73       156  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   78,493 Common Stock           83       236  
Overture Networks Inc.   Communications   386,191 Common Stock           482       222  
Total Equity                     877       1,425  
Total Portfolio Investment Assets — 147.5%  (9)             $ 244,867     $ 240,148  
                                 
Short Term Investments — Money Market Funds — 0.2% (9)                          
US Bank Money Market Deposit Account             $ 334     $ 334  
Total Short Term Investments — Money Market Funds             $ 334     $ 334  
Short Term Investments — Restricted Investments— 1.1% (9)                          
US Bank Money Market Deposit Account (2)             $ 1,842     $ 1,842  
Total Short Term Investments — Restricted Investments             $ 1,842     $ 1,842  

 

 

 

(1)   All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States.
     
(2)   Has been pledged as collateral under the Key Facility or the 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 end-of-term payments (“ETPs”) 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 debt investment, unless otherwise indicated. Debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of June 30, 2015 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 investment is on non-accrual status at June 30, 2015.
     
(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 Investment Company Act of 1940, as amended (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 debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee the Company may pay its Advisor will be based on income that the Company has not yet received in cash.

 

See Notes to Consolidated Financial Statements

 

11
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 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 — 144.1% (9)                          
Debt Investments — Life Science — 31.4% (9)                          
Argos Therapeutics, Inc. (2)(5)   Biotechnology   Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;   $ 5,000     $ 4,872     $ 4,872  
        Ceiling 10.75%), 5.00% ETP, Due 10/1/18)                        
Inotek Pharmaceuticals Corporation (2)   Biotechnology   Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)     2,795       2,777       2,777  
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.50% cash (Libor + 11.00%; Floor     1,301       1,292       1,292  
        11.50%), 6.50% ETP, Due 11/1/17)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     434       431       431  
        11.50%), 6.50% ETP, Due 11/1/17)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,000       1,967       1,967  
        10.50%), 4.00% ETP, Due 7/1/18)                        
Palatin Technologies, Inc. (2)(5)   Biotechnology   Term Loan (9.00% cash (Libor + 8.50%; Floor     5,000       4,919       4,919  
        9.00%), 5.00% ETP, Due 1/1/19)                        
Sample6, Inc. (2)   Biotechnology   Term Loan (9.50% cash (Libor + 9.00%; Floor     1,555       1,548       1,548  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.50% cash (Libor + 9.00%; Floor     945       912       912  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
Sunesis Pharmaceuticals, Inc. (2)(5)   Biotechnology   Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)     677       675       675  
        Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)     1,016       1,008       1,008  
Xcovery Holding Company, LLC (2)   Biotechnology   Term Loan (12.50% cash, Due 8/1/15)     292       292       292  
        Term Loan (12.50% cash, Due 8/1/15)     459       459       459  
        Term Loan (12.50% cash, Due 10/1/15)     101       101       101  
AccuVein Inc. (2)   Medical Device   Term Loan (10.40% cash (Libor + 9.90%; Floor     4,000       3,956       3,956  
        10.40%; Ceiling 11.90%), 5.00% ETP, Due 2/1/18)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor     1,000       981       981  
        10.00%; Ceiling 12.50%), 4.00% ETP, Due 7/1/18)                        
IntegenX Inc. (2)   Medical Device   Term Loan (10.75% cash (Libor + 10.25%; Floor     3,750       3,685       3,685  
        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       3,449       3,449  
        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       2,969       2,969  
        10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     3,000       2,969       2,969  
        10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)                        
Tryton Medical, Inc. (2)   Medical Device   Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,     2,813       2,789       2,789  
        Due 9/1/16)                        
ZetrOZ, Inc. (2)   Medical Device   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,500       1,427       1,427  
        11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)                        
Total Debt Investments — Life Science               43,478       43,478  
Debt Investments — Technology — 78.9% (9)                          
Ekahau, Inc. (2)   Communications   Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     1,279       1,267       1,267  
        Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     426       422       422  
mBlox, Inc. (2)   Communications   Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,967       4,967  
        11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,967       4,967  
        11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)                        
Overture Networks, Inc. (2)   Communications   Term Loan (10.75% cash, (Libor + 10.25%; Floor     4,104       4,071       4,071  
        10.75%), 5.75% ETP, Due 12/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     2,052       2,038       2,038  
        10.75%), 5.75% ETP, Due 12/1/17)                        
Additech, Inc. (2)   Consumer-related Technologies   Term Loan (11.75% cash (Libor + 11.25%; Floor     2,500       2,417       2,417  
        11.75%; Ceiling 13.25%), 4.00% ETP, Due 7/1/18)                        
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   Term Loan (11.00% cash (Libor + 10.50%; Floor     2,000       1,966       1,966  
        11.00%; Ceiling 12.50%), 2.0% ETP, Due 11/1/17)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     1,000       974       974  
        11.00%; Ceiling 12.50%), 2.0% ETP, Due 2/1/18)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     1,000       980       980  
        11.00%; Ceiling 12.50%), 2.0% ETP, Due 4/1/18)                        
Nanocomp Technologies, Inc. (2)   Networking   Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)     1,000       981       981  
Avalanche Technology, Inc. (2)   Semiconductors   Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     1,983       1,972       1,972  
        Ceiling 11.75%), 2.40% ETP, Due 4/1/17)                        
        Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     2,246       2,179       2,179  
        Ceiling 11.75%) ,2.40% ETP, Due 10/1/18)                        

 

See Notes to Consolidated Financial Statements

 

12
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
eASIC Corporation (2)   Semiconductors   Term Loan (11.00% cash, 2.50% ETP, Due 4/1/17)     2,000       1,982       1,982  
        Term Loan (10.75% cash, 2.50% ETP, Due 4/1/18)     2,000       1,983       1,983  
InVisage Technologies, Inc. (2)   Semiconductors   Term Loan (12.00% cash (Libor + 11.50%; Floor     2,550       2,469       2,469  
        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)     2,275       2,255       2,255  
        Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)     2,275       2,255       2,255  
Luxtera, Inc. (2)   Semiconductors   Term Loan (10.25% cash, 13.00% ETP, Due 7/1/17)     2,632       2,590       2,590  
        Term Loan (10.25% cash, 13.00% ETP, Due 7/1/17)     1,469       1,462       1,462  
NexPlanar Corporation (2)   Semiconductors   Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     2,368       2,352       2,352  
        Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)     1,579       1,564       1,564  
Xtera Communications, Inc. (2)   Semiconductors   Term Loan (11.50% cash, 15.65% ETP, Due 1/1/17)     5,846       5,708       5,708  
        Term Loan (11.50% cash, 21.75% ETP, Due 1/1/17)     1,624       1,584       1,584  
Courion Corporation (2)   Software   Term Loan (11.45% cash, Due 10/1/15)     1,279       1,277       1,277  
        Term Loan (11.45% cash, Due 10/1/15)     1,279       1,277       1,277  
Crowdstar, Inc. (2)   Software   Term Loan (10.75% cash (Libor + 10.25%; Floor     2,000       1,956       1,956  
        10.75%), 3.00% ETP, Due 9/1/18)                        
Decisyon, Inc. (2)   Software   Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)     2,919       2,899       2,899  
        Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)     1,000       986       986  
Lotame Solutions, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     3,410       3,390       3,390  
        11.50%), 5.25% ETP, Due 9/1/17)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     1,500       1,491       1,491  
        11.50%), 5.25% ETP, Due 9/1/17)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     2,100       2,070       2,070  
        11.50%), 3.00% ETP, Due 4/1/18)                        
Netuitive, Inc. (2)   Software   Term Loan (12.75% cash, Due 7/1/16)     1,717       1,707       1,707  
Raydiance, Inc. (2)   Software   Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     3,490       3,468       3,468  
        Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)     698       688       688  
        Term Loan (11.50% cash (Libor + 11.00%; Floor     3,000       2,955       2,955  
        11.50%; Ceiling 13.50%), 2.75% ETP, Due 2/1/18)                        
Razorsight Corporation (2)   Software   Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)     1,142       1,132       1,132  
        Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)     1,000       990       990  
        Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)     1,000       988       988  
SIGNiX, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     3,000       2,902       2,902  
        11.50%), Due 7/1/18)                        
Social Intelligence Corp. (2)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,500       1,477       1,477  
        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       4,412       4,412  
        11.50%; Ceiling 13.00%), 2.00% ETP, Due 1/1/18)                        
Sys-Tech Solutions, Inc. (2)   Software   Term Loan (11.65% cash (Libor + 11.15%; Floor     6,000       5,954       5,954  
        11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)                        
        Term Loan (11.65% cash (Libor + 11.15%; Floor     5,000       4,952       4,952  
        11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)                        
VBrick Systems, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     3,000       2,979       2,979  
        11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)                        
Vidsys, Inc. (2)   Software   Term Loan (11.00% cash, 7.58% ETP, Due 4/1/15)     3,000       2,993       2,993  
Visage Mobile, Inc. (2)   Software   Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)     645       640       640  
Total Debt Investments — Technology               108,988       108,988  
Debt Investments — Cleantech — 9.3% (9)                          
Renmatix, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     1,148       1,145       1,145  
        Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     1,148       1,145       1,145  
        Term Loan (10.25% cash, Due 10/1/16)     3,488       3,469       3,469  
Semprius, Inc. (2)(8)   Alternative Energy   Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)     2,432       2,432       2,250  
Aurora Algae, Inc. (2)   Consumer-related Technologies   Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)     397       396       396  
Rypos, Inc. (2)   Energy Efficiency   Term Loan (11.80% cash, Due 1/1/17)     2,670       2,643       2,643  
        Term Loan (11.80% cash, Due 9/1/17)     1,000       986       986  
Tigo Energy, Inc. (2)   Energy Efficiency   Term Loan (13.00% cash, 3.16% ETP, Due 6/1/15)     786       785       785  
Total Debt Investments — Cleantech               13,001       12,819  
Debt Investments — Healthcare information and services — 24.5% (9)                      
Interleukin Genetics, Inc. (2)(5)   Diagnostics   Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%)     5,000       4,837       4,837  
        4.50% ETP, Due 10/1/18)                        
LifePrint Group, Inc. (2)   Diagnostics   Term Loan (11.00% cash (Libor + 10.50%; Floor     3,000       2,949       2,747  
        11.00%; Ceiling 12.50%), 3.00% ETP, Due 1/1/18)                        

 

See Notes to Consolidated Financial Statements

 

13
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
Radisphere National Radiology Group, Inc. (2)   Diagnostics   Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)     10,092       10,053       10,053  
Watermark Medical, Inc. (2)   Other Healthcare   Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,473       3,473  
        Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)     3,500       3,473       3,473  
Recondo Technology, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     1,384       1,379       1,379  
        11.50%), 6.60% ETP, Due 12/1/17)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     2,500       2,490       2,490  
        11.00%), 4.50% ETP, Due 12/1/17)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,500       2,490       2,490  
        10.50%), 2.75% ETP, Due 12/1/17)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     3,000       2,953       2,953  
        10.50%), 2.50% ETP, Due 1/1/19)                        
Total Debt Investments — Healthcare information and services               34,097       33,895  
Total Debt Investments                     199,564       199,180  
Warrant Investments — 3.4% (9)                          
Warrants — Life Science — 0.6% (9)                          
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants           83        
Argos Therapeutics, Inc. (2)(5)   Biotechnology   16,556 Common Stock Warrants           33       31  
Celsion Corporation (5)   Biotechnology   5,708 Common Stock Warrants           15        
Inotek Pharmaceuticals Corporation   Biotechnology   33,762 Preferred Stock Warrants           17       15  
N30 Pharmaceuticals, Inc.   Biotechnology   53,550 Common Stock Warrants           122        
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   55,347 Preferred Stock Warrants           42       136  
Palatin Technologies, Inc. (2)(5)   Biotechnology   333,333 Common Stock Warrants           31       31  
Revance Therapeutics, Inc. (5)   Biotechnology   34,377 Common Stock Warrants           68       120  
Sample6, Inc. (2)   Biotechnology   351,018 Preferred Stock Warrants           45       39  
Supernus Pharmaceuticals, Inc. (2)(5)   Biotechnology   42,083 Common Stock Warrants           93       165  
Tranzyme, Inc. (2)(5)   Biotechnology   6,460 Common Stock Warrants           6        
AccuVein Inc. (2)   Medical Device   75,769 Preferred Stock Warrants           24       29  
Direct Flow Medical, Inc.   Medical Device   176,922 Preferred Stock Warrants           144       40  
EnteroMedics, Inc. (5)   Medical Device   141,026 Common Stock Warrants           347        
IntegenX, Inc. (2)   Medical Device   158,006 Preferred Stock Warrants           33       31  
Lantos Technologies, Inc. (2)   Medical Device   858,545 Preferred Stock Warrants           24       23  
Mederi Therapeutics, Inc. (2)   Medical Device   248,736 Preferred Stock Warrants           26       40  
Mitralign, Inc. (2)   Medical Device   641,909 Preferred Stock Warrants           52       37  
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. (2)   Medical Device   122,362 Preferred Stock Warrants           15       13  
ViOptix, Inc.   Medical Device   375,763 Preferred Stock Warrants           13        
ZetrOZ, Inc. (2)   Medical Device   475,561 Preferred Stock Warrants           25       24  
Total Warrants — Life Science               1,459       774  
Warrants — Technology — 2.2% (9)                          
Ekahau, Inc. (2)   Communications   978,261 Preferred Stock Warrants           33       19  
OpenPeak, Inc.   Communications   18,997 Common Stock Warrants           89        
Overture Networks, Inc.   Communications   385,617 Preferred Stock Warrants           56        
Additech, Inc. (2)   Consumer-related Technologies   150,000 Preferred Stock Warrants           33       33  
Everyday Health, Inc. (5)   Consumer-related Technologies   43,783 Common Stock Warrants           69       179  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   268,591 Preferred Stock Warrants           68       312  
SnagAJob.com, Inc.   Consumer-related Technologies   365,396 Preferred Stock Warrants           23       305  
Tagged, Inc.   Consumer-related Technologies   190,868 Preferred Stock Warrants           26       62  
XIOtech, Inc.   Data Storage   2,217,979 Preferred Stock Warrants           22       18  
Cartera Commerce, Inc.   Internet and media   90,909 Preferred Stock Warrants           16       159  
SimpleTuition, Inc.   Internet and media   189,573 Preferred Stock Warrants           63       29  
IntelePeer, Inc.   Networking   141,549 Preferred Stock Warrants           39       33  
Nanocomp Technologies, Inc. (2)   Networking   272,728 Preferred Stock Warrants           25       24  
Aquion Energy, Inc.   Power Management   115,051 Preferred Stock Warrants           7       56  
Avalanche Technology, Inc. (2)   Semiconductors   352,828 Preferred Stock Warrants           101       98  
eASIC Corporation (2)   Semiconductors   40,445 Preferred Stock Warrants           25       28  
InVisage Technologies, Inc. (2)   Semiconductors   165,147 Preferred Stock Warrants           43       41  
Kaminario, Inc.   Semiconductors   1,087,203 Preferred Stock Warrants           59       64  
Luxtera, Inc.   Semiconductors   2,087,766 Preferred Stock Warrants           43       105  

 

See Notes to Consolidated Financial Statements

 

14
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(10)(11)   Amount     Investments (6)     Value  
NexPlanar Corporation   Semiconductors   216,001 Preferred Stock Warrants           36       56  
Soraa, Inc. (2)   Semiconductors   180,000 Preferred Stock Warrants           80       77  
Xtera Communications, Inc.   Semiconductors   983,607 Preferred Stock Warrants           206        
Bolt Solutions, Inc. (2)   Software   202,892 Preferred Stock Warrants           113       118  
Clarabridge, Inc.   Software   53,486 Preferred Stock Warrants           14       104  
Courion Corporation   Software   772,543 Preferred Stock Warrants           107        
Crowdstar, Inc. (2)   Software   75,428 Preferred Stock Warrants           14       14  
Decisyon, Inc. (2)   Software   457,876 Preferred Stock Warrants           46       28  
DriveCam, Inc.   Software   71,639 Preferred Stock Warrants           20       121  
Lotame Solutions, Inc. (2)   Software   288,115 Preferred Stock Warrants           23       160  
Netuitive, Inc.   Software   41,569 Preferred Stock Warrants           48        
Raydiance, Inc. (2)   Software   1,051,120 Preferred Stock Warrants           71       67  
Razorsight Corporation (2)   Software   259,404 Preferred Stock Warrants           43       44  
SIGNiX, Inc. (2)   Software   63,365 Preferred Stock Warrants           48       48  
Riv Data Corp. (2)   Software   237,361 Preferred Stock Warrants           13       12  
SpringCM, Inc. (2)   Software   2,385,686 Preferred Stock Warrants           55       53  
Sys-Tech Solutions, Inc.   Software   375,000 Preferred Stock Warrants           242       536  
Vidsys, Inc.   Software   37,346 Preferred Stock Warrants           23        
Visage Mobile, Inc.   Software   1,692,047 Preferred Stock Warrants           19       17  
Total Warrants — Technology                     2,061       3,020  
Warrants — Cleantech — 0.1% (9)                          
Renmatix, Inc.   Alternative Energy   52,296 Preferred Stock Warrants           67       67  
Semprius, Inc.   Alternative Energy   519,981 Preferred Stock Warrants           25        
Rypos, Inc. (2)   Energy Efficiency   5,627 Preferred Stock Warrants           44       40  
Tigo Energy, Inc. (2)   Energy Efficiency   804,604 Preferred Stock Warrants           99       33  
Total Warrants — Cleantech               235       140  
Warrants — Healthcare information and services — 0.5% (9)                          
Accumetrics, Inc.   Diagnostics   100,928 Preferred Stock Warrants           107       63  
BioScale, Inc. (2)   Diagnostics   315,618 Preferred Stock Warrants           55        
LifePrint Group, Inc. (2)   Diagnostics   49,000 Preferred Stock Warrants           29       29  
Interleukin Genetics, Inc. (2)(5)   Diagnostics   2,492,523 Common Stock Warrants           112       112  
Helomics Corporation   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       141  
Talyst, Inc.   Other Healthcare   300,360 Preferred Stock Warrants           100       52  
Watermark Medical, Inc.   Other Healthcare   12,216 Preferred Stock Warrants           67       62  
Recondo Technology, Inc. (2)   Software   556,796 Preferred Stock Warrants           95       210  
Total Warrants — Healthcare information and services               1,060       669  
Total Warrants                     4,815       4,603  
                                 
Other Investments — 0.2% (9)                          
Vette Technology, LLC   Data Storage   Royalty Agreement Due 4/18/2019           4,582       300  
Total Other Investments                     4,582       300  
Equity — 0.7% (9)                                
Insmed Incorporated (5)   Biotechnology   33,208 Common Stock           239       514  
Revance Therapeutics, Inc.(5)   Biotechnology   4,861 Common Stock           73       82  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   78,493 Common Stock           83       200  
Overture Networks Inc.   Communications   386,191 Common Stock           482       222  
Total Equity                     877       1,018  
Total Portfolio Investment Assets — 148.4%  (9)             $ 209,838     $ 205,101  
                                 
Short Term Investments — Money Market Funds — 0.0% (9)                          
US Bank Money Market Deposit Account             $ 27     $ 27  
Total Short Term Investments — Money Market Funds             $ 27     $ 27  
Short Term Investments — Restricted Investments— 2.1% (9)                          
US Bank Money Market Deposit Account (2)             $ 2,906     $ 2,906  
Total Short Term Investments — Restricted Investments             $ 2,906     $ 2,906  

 

See Notes to Consolidated Financial Statements

 

15
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

 

 

(1)   All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States.
     
(2)   Has been pledged as collateral under the Key Facility 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 debt investment, unless otherwise indicated. Debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 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 investment is on non-accrual status at December 31, 2014, and interest payments received were recognized as income on a cash basis.
     
(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 debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee the Company may pay its Advisor will be based on income that the Company has not yet received in cash.

 

See Notes to Consolidated Financial Statements

 

16
 

 

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 debt investments to development-stage companies in the technology, life science, healthcare information and services and cleantech industries. All of the Company’s debt investments consist of loans secured by all of, or a portion of, the applicable debtor company’s tangible and intangible assets.

 

On October 28, 2010, the Company completed an initial public offering (“IPO”) and its common stock trades on the NASDAQ Global Select Market under the symbol “HRZN”. The Company was formed to continue and expand the business of Compass Horizon Funding Company LLC (“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 Company’s 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 six months ended June 30, 2015.

 

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 the sole equity member. Credit III is a separate legal entity from the Company. There has been no activity at Credit III during the six months ended June 30, 2015.

 

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

 

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

 

The Company has also established additional wholly owned subsidiaries, each of which is structured as a Delaware limited liability company, to hold the assets of portfolio companies 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 investment management agreement, which was amended and restated effective July 1, 2014 (the “Investment Management Agreement”), with Horizon Technology Finance Management LLC (the “Advisor”), under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.

 

17
 

 

On March 24, 2015, the Company completed a follow-on public offering of 2,000,000 shares of its common stock at a public offering price of $13.95 per share, for total net proceeds to the Company of $26.7 million, after deducting underwriting commission and discounts and other offering expenses.

 

Note 2.  Basis of presentation and significant accounting policies

 

The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X (“Regulation S-X”) under the Securities Act of 1933, as amended (the “Securities Act”). In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. 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, 2014.

 

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 debt investments and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment.

 

18
 

 

Investments

 

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

 

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. As of June 30, 2015, there were two investments on non-accrual status with a cost of $8.2 million and a fair value of $6.4 million. For the three and six months ended June 30, 2015, the Company recognized interest income payments of $0.05 million and $0.1 million, respectively, received from one portfolio company whose debt investment was on non-accrual status. As of December 31, 2014, there was one investment on non-accrual status with a cost of $2.4 million and a fair value of $2.3 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. Debt investment origination fees, net of certain direct origination costs, are deferred and, along with unearned income, are amortized as a level-yield adjustment over the respective term of the debt investment. All other income is recognized when earned. Fees for counterparty debt investment commitments with multiple debt investments are allocated to each debt investment based upon each debt investment’s relative fair value. When a debt investment is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the debt investment is returned to accrual status.

 

Certain debt investment agreements also require the borrower to make an ETP, that is accrued into interest receivable and taken into income over the life of the debt investment to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay all principal and interest due. The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the three months ended June 30, 2015 and 2014 was 7.4% and 7.1%, respectively. The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the six months ended June 30, 2015 and 2014 was 7.4% and 8.3%, respectively.

 

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

 

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

 

19
 

 

Debt issuance costs

 

Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities. Debt issuance costs are recognized as assets and are amortized as interest expense over the term of the related debt financing. The unamortized balance of debt issuance costs as of June 30, 2015 and December 31, 2014, included in other assets, was $1.9 million and $2.4 million, respectively. The accumulated amortization balances as of June 30, 2015 and December 31, 2014 were $3.5 million and $3.0 million, respectively. The amortization expense for the three months ended June 30, 2015 and 2014 was $0.2 million and $1.5 million, respectively. The amortization expense for the six months ended June 30, 2015 and 2014 was $0.5 million and $2.0 million, respectively.

 

Income taxes

 

As a BDC, the Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income distributed to stockholders, among other things, the Company is required to meet certain source of income and asset diversification requirements and to timely distribute dividends out of assets legally available for distributions to its stockholders of an amount generally 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. Accordingly, no provision for federal income tax has been recorded in the financial statements. Taxable income differs from net increase in net assets resulting from operations which can be temporary, meaning they will reverse in the future or be permanent. In accordance with Section 946-205-45-3 of the Financial Accounting Standards Board’s (“FASB’s), Accounting Standards Codification, as amended (“ASC”), permanent tax differences, such as non-deductible excise taxes paid, are reclassified from distributions in excess of net investment income and net realized loss on investments to paid-in-capital at the end of each year. These permanent book-to-tax differences are reclassified on the consolidated statements of changes in net assets to reflect their tax character but have no impact on total net assets. For the six months ended June 30, 2015 the Company reclassified $1.0 million to paid-in capital from distributions in excess of net investment income of $0.9 million and net realized loss on investments of $0.1 million, which related to excise taxes paid in prior years.

 

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and 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 distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the six months ended June 30, 2015 and 2014, $0.02 million and $0.1 million, respectively, 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 in accordance with ASC Topic 740, as modified by ASC Topic 946. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no material uncertain tax positions at June 30, 2015 and December 31, 2014. 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 as distributions 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.

 

20
 

 

Transfers of financial assets

 

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

 

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

 

New accounting pronouncement

 

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs , or ASU 2015-03, containing new guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, instead of being recorded as a separate asset. This guidance will be effective for annual and interim periods beginning on or after December 15, 2015. The Company is evaluating the impact ASU 2015-03 will have on its consolidated financial position and disclosures.

 

Note 3.  Related party transactions

 

Investment Management Agreement

 

The Investment Management Agreement was reapproved by the Board in August 2014. Under the terms of the Investment Management Agreement, the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.

 

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

 

The base management fee under the Investment Management Agreement 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. In addition, the Advisor has agreed to waive its base management fee relating to the proceeds raised in the public offering of the Company’s common stock that closed on March 24, 2015, to the extent such fee is not otherwise waived and regardless of the application of the proceeds raised, until the earlier to occur of (i) March 31, 2016 or (ii) the last day of the second consecutive calendar quarter in which the Company’s net investment income exceeds distributions declared on its shares of common stock for the applicable quarter.

 

During the three months ended June 30, 2015, the Advisor waived base management fees of $0.1 million which the Advisor would have otherwise earned on the proceeds raised in the public offering of the Company’s common stock that closed on March 24, 2015. During the three and six months ended June 30, 2014, the Advisor waived base management fees of $0.1 million and $0.2 million, respectively, which the Advisor would have otherwise earned on cash held by the Company at the time of calculation. The base management fee payable at June 30, 2015 and December 31, 2014 was $0.4 million. After giving effect of the waivers, the base management fee expense was $1.1 million for the three months ended June 30, 2015 and 2014. After giving effect of the waivers, the base management fee expense was $2.1 million and $2.3 million for the six months ended June 30, 2015 and 2014, respectively.

 

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The incentive fee has two parts, as follows:

 

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

 

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

 

Commencing with the calendar quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee cap and deferral mechanism which is determined based upon a look-back period of up to three years and 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 preceding full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income is subject to a cap (the “Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such deferred incentive fees (collectively, the “Incentive Fee Cap and Deferral Mechanism”). The Incentive Fee Cap is equal to (a) 20.00% of Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to the Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or a negative value in any calendar quarter, the Company will not pay an incentive fee on Pre-Incentive Fee Net Investment Income to the Advisor in that quarter. To the extent that the payment of incentive fees on Pre-Incentive Fee Net Investment Income is limited by the Incentive Fee Cap, the payment of such fees will be deferred and paid in subsequent calendar quarters up to three years after their date of deferment, subject to certain limitations, which are set forth in the Investment Management Agreement. The Company only pays incentive fees on Pre-Incentive Fee Net Investment Income to the extent allowed by the Incentive Fee Cap and Deferral Mechanism. “Cumulative Pre-Incentive Fee Net Return” during any Incentive Fee Look-back Period means the sum of (a) Pre-Incentive Fee Net Investment Income and the base management fee for each calendar quarter during the Incentive Fee Look-back Period and (b) the sum of cumulative realized capital gains and losses, cumulative unrealized capital appreciation and cumulative unrealized capital depreciation during the applicable Incentive Fee Look-back Period. As of June 30, 2015 and December 31, 2014, the quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income was not limited by the Incentive Fee Cap and Deferral Mechanism.

 

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

 

The performance based incentive fee expense was $0.7 million for the three months ended June 30, 2015. There was no performance based incentive fee expense for the three months ended June 30, 2014. During the six months ended June 30, 2014, the Advisor waived performance based incentive fees of $0.1 million which the Advisor would have otherwise earned. After giving effect of the waiver, the performance based incentive fee expense was $1.5 million and $0.4 million for the six months ended June 30, 2015 and 2014, respectively. The performance based incentive fee payable as of June 30, 2015 and December 31, 2014 was $0.7 million and $0.8 million, respectively. The entire incentive fee payable as of June 30, 2015 and December 31, 2014 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 the three months ended June 30, 2015 and 2014. The administrative fee expense was $0.6 million and $0.5 million for the six months ended June 30, 2015 and 2014, respectively.

 

Note 4.  Investments

 

The following table shows the Company’s investments:

 

    June 30, 2015     December 31, 2014  
    Cost     Fair Value     Cost     Fair Value  
          (In thousands)        
Money market funds   $ 334     $ 334     $ 27     $ 27  
Restricted investments in money market funds   $ 1,842     $ 1,842     $ 2,906     $ 2,906  
Non-affiliate investments                                
Debt   $ 234,450     $ 232,428     $ 199,564     $ 199,180  
Warrants     5,070       5,995       4,815       4,603  
Other Investments     4,470       300       4,582       300  
Equity     877       1,425       877       1,018  
Total non-affiliate investments   $ 244,867     $ 240,148     $ 209,838     $ 205,101  

 

23
 

 

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

 

    June 30, 2015     December 31, 2014  
    Cost     Fair Value     Cost     Fair Value  
          (In thousands)        
Life Science                                
Biotechnology   $ 20,784     $ 22,440     $ 22,203     $ 22,586  
Medical Device     24,191       23,455       23,129       22,462  
Technology                                
Communications     21,106       20,688       18,392       17,973  
Consumer-Related     11,893       12,615       6,556       7,228  
Data Storage     4,492       318       4,604       318  
Internet and Media     79       188       79       188  
Materials     7,400       7,400              
Networking     919       882       1,045       1,038  
Power Management     2,483       2,531       7       56  
Semiconductors     28,402       28,264       30,948       30,824  
Software     73,147       71,839       54,482       54,905  
Cleantech                                
Alternative Energy     5,684       5,657       8,283       8,076  
Consumer-Related                 396       396  
Energy Efficiency     3,544       3,540       4,557       4,487  
Healthcare Information and Services                                
Diagnostics     8,570       7,998       18,593       17,841  
Other     8,450       8,496       7,157       7,201  
Software     23,723       23,837       9,407       9,522  
Total non-affiliate investments   $ 244,867     $ 240,148     $ 209,838     $ 205,101  

 

Note 5.  Fair value

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Debt investments:   For variable rate debt investments which re-price frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values. The fair value of fixed rate debt investments is estimated by discounting the expected future cash flows using the period end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the same remaining maturities. At June 30, 2015 and December 31, 2014, the hypothetical market yield used ranged from 9% to 25% and 9% to 18%, respectively. Significant increases (decreases) in this unobservable input would result in a significantly lower (higher) fair value measurement. These assets are recorded at fair value on a recurring basis and are categorized as Level 3 within the fair value hierarchy described above.

 

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

 

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

 

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

 

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

 

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

 

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

 

25
 

 

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

 

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

 

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

 

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

 

Other investments: Other investments are valued based on the facts and circumstances of the underlying 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 June 30, 2015 and December 31, 2014. 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.

 

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The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements as of June 30, 2015:

 

June 30, 2015
    Fair     Valuation Techniques/   Unobservable         Weighted  
Investment Type   Value     Methodologies   Input   Range     Average  
    (In thousands, except share data)    
Debt investments   $ 226,050     Discounted Expected Future Cash Flows   Hypothetical Market Yield     9% – 25%       12%  
                                 
      6,378     Multiple Probability Weighted Cash   Probability Weighting     25% – 100%       50 %  
            Flow Model                    
                                 
Warrant investments     4,556     Black-Scholes Valuation Model   Price per share     $0.00 – $63.98    

$3.30

 
                Average Industry Volatility     18%       18%  
                Marketability Discount     20%     20 %  
                Estimated Time to Exit     1 to 5 years       3 years  
                                 
Other investments     300     Multiple Probability Weighted Cash   Discount Rate     25%      

25 %

 
            Flow Model   Probability Weighting     100%       100%  
                                 
Equity investments     222     Market Comparable Companies   Price Per Share   $ 0.58     $ 0.58  
Total Level 3 investments   $ 237,506                          

 

The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements as of December 31, 2014:

 

December 31, 2014
    Fair     Valuation Techniques/   Unobservable         Weighted  
Investment Type   Value     Methodologies   Input   Range     Average  
    (In thousands, except share data)    
Debt investments   $ 193,937     Discounted Expected Future Cash Flows   Hypothetical Market Yield     9% – 18%       11%  
                                 
      5,243     Multiple Probability Weighted Cash   Probability Weighting     10% – 65%       33%  
            Flow Model                    
                                 
Warrant investments     3,966     Black-Scholes Valuation Model   Price per share     $0.04 – $63.98    

$3.81

 
                Average Industry Volatility     18%       18%  
                Marketability Discount     20%       20%  
                Estimated Time to Exit     1 to 5 years       3 years  
                                 
Other investments     300     Multiple Probability Weighted Cash   Discount Rate     25% 100%      

25%