Horizon Technology Finance Corporation
Horizon Technology Finance Corp (Form: 10-Q, Received: 05/03/2016 16:27:37)

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016
     
    OR
     
¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    FOR THE TRANSITION PERIOD FROM                      TO                   

 

COMMISSION FILE NUMBER: 814-00802

 

HORIZON TECHNOLOGY FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   27-2114934
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

312 Farmington Avenue    
Farmington, CT   06032
(Address of principal executive offices)   (Zip Code)

 

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

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

 

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

 

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

 

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

 

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

 

As of May 3, 2016, the Registrant had 11,542,430 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 March 31, 2016 and December 31, 2015 (unaudited)  3
  Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 (unaudited)  4
  Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2016 and 2015 (unaudited)  5
  Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (unaudited)  6
  Consolidated Schedules of Investments as of March 31, 2016 and December 31, 2015 (unaudited)  7
  Notes to the Consolidated Financial Statements (unaudited)  19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  37
Item 3. Quantitative And Qualitative Disclosures About Market Risk  49
Item 4. Controls and Procedures  49
     
  PART II  
Item 1. Legal Proceedings  50
Item 1A. Risk Factors  50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  50
Item 3. Defaults Upon Senior Securities  50
Item 4. Mine Safety Disclosures  50
Item 5. Other Information  50
Item 6. Exhibits  50
  Signatures  51

 

EX-31.1    
EX-31.2    
EX-32.1    
EX-32.2    

 

  2  

 

 

PART I: FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Assets and Liabilities (Unaudited)

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

 

   

March 31,

2016

   

December 31,

2015

 
             
Assets                
Non-affiliate investments at fair value (cost of $251,276 and $255,494, respectively) (Note 4)   $ 245,035     $ 250,267  
Investments in money market funds     291       285  
Cash     17,263       20,765  
Restricted investments in money market funds     652       1,091  
Interest receivable     7,558       6,258  
Other assets     2,036       2,230  
Total assets   $ 272,835     $ 280,896  
                 
Liabilities                
Borrowings (Note 6)   $ 109,151     $ 114,954  
Distributions payable     3,982       3,980  
Base management fee payable (Note 3)     425       385  
Incentive fee payable (Note 3)     1,099       1,028  
Other accrued expenses     958       798  
Total liabilities     115,615       121,145  
                 
Commitments and Contingencies (Note 7)                
                 
Net assets                
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2016 and December 31, 2015            
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 11,653,972 and 11,648,594 shares issued and 11,540,590 and 11,535,212 shares outstanding as of March 31, 2016 and December 31, 2015, respectively     12       12  
Paid-in capital in excess of par     179,761       179,707  
Distributions in excess of net investment income     (1,591 )     (2,006 )
Net unrealized depreciation on investments     (6,241 )     (5,227 )
Net realized loss on investments     (14,721 )     (12,735 )
Total net assets     157,220       159,751  
Total liabilities and net assets   $ 272,835     $ 280,896  
Net asset value per common share   $ 13.62     $ 13.85  

 

See Notes to Consolidated Financial Statements

 

  3  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Operations (Unaudited)

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

 

    For the Three Months Ended  
    March 31,  
    2016     2015  
Investment income                
Interest income on non-affiliate investments   $ 9,003     $ 6,562  
Prepayment fee income on non-affiliate investments     167       520  
Fee income on non-affiliate investments     127       184  
Total investment income     9,297       7,266  
Expenses                
Interest expense     1,534       1,587  
Base management fee (Note 3)     1,284       1,031  
Performance based incentive fee (Note 3)     1,099       736  
Administrative fee (Note 3)     281       268  
Professional fees     501       431  
General and administrative     201       260  
Total expenses     4,900       4,313  
Net investment income before excise tax     4,397       2,953  
Provision for excise tax           10  
Net investment income     4,397       2,943  
                 
Net realized and unrealized (loss) gain on investments                
Net realized loss on investments     (1,986 )     (230 )
Net unrealized (depreciation) appreciation on investments     (1,014 )     1,132  
Net realized and unrealized (loss) gain on investments     (3,000 )     902  
Net increase in net assets resulting from operations   $ 1,397     $ 3,845  
Net investment income per common share   $ 0.38     $ 0.30  
Net increase in net assets per common share   $ 0.12     $ 0.39  
Distributions declared per share   $ 0.345     $ 0.345  
Weighted average shares outstanding     11,538,003       9,807,198  

 

See Notes to Consolidated Financial Statements

 

  4  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Changes in Net Assets (Unaudited)

(Dollars in thousands, except share data)

 

    Common Stock    

Paid-In

Capital in

Excess of

   

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, 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       26,667                         26,669  
Net increase in net assets resulting from operations                       2,943       1,132       (230 )     3,845  
Issuance of common stock under dividend reinvestment plan     2,493             34                         34  
Distributions declared                       (3,783 )                 (3,783 )
Reclassification of permanent tax differences (Note 2)                 (971 )     893             78        
Balance at March 31, 2015     11,630,617     $ 12     $ 180,970     $ (1,049 )   $ (3,605 )   $ (11,315 )   $ 165,013  
                                                         
Balance at December 31, 2015     11,535,212     $ 12     $ 179,707     $ (2,006 )   $ (5,227 )   $ (12,735 )   $ 159,751  
Net increase in net assets resulting from operations                       4,397       (1,014 )     (1,986 )     1,397  
Issuance of common stock under dividend reinvestment plan     5,378             54                         54  
Distributions declared                       (3,982 )                 (3,982 )
Balance at March 31, 2016     11,540,590     $ 12     $ 179,761     $ (1,591 )   $ (6,241 )   $ (14,721 )   $ 157,220  

 

See Notes to Consolidated Financial Statements

 

  5  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

    For the Three Months Ended  
    March 31,  
    2016     2015  
Cash flows from operating activities:                
Net increase in net assets resulting from operations   $ 1,397     $ 3,845  
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:                
Amortization of debt issuance costs     153       278  
Net realized loss on investments     1,986       230  
Net unrealized (depreciation) appreciation on investments     1,014       (1,132 )
Purchase of investments     (16,500 )     (23,933 )
Principal payments received on investments     18,033       25,790  
Proceeds from sale of investments     836        
Changes in assets and liabilities:                
Net increase in investments in money market funds     (6 )     (372 )
Net decrease in restricted investments in money market funds     439       555  
(Increase) decrease in interest receivable     (243 )     71  
Increase in end-of-term payments     (1,075 )     (370 )
Decrease in unearned income     (118 )     (154 )
Decrease in other assets     89       212  
Increase in other accrued expenses     160       486  
Increase (decrease) in base management fee payable     40       (2 )
Increase (decrease) in incentive fee payable     71       (63 )
Net cash provided by operating activities     6,276       5,441  
Cash flows from financing activities:                
Proceeds from issuance of common stock, net of offering costs           26,667  
Repayment of Asset-Backed Notes     (5,850 )     (7,411 )
Distributions paid     (3,928 )     (3,286 )
Net cash (used in) provided by financing activities     (9,778 )     15,970  
Net (decrease) increase in cash     (3,502 )     21,411  
Cash:                
Beginning of period     20,765       8,417  
End of period   $ 17,263     $ 29,828  
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 1,350     $ 1,032  
Supplemental non-cash investing and financing activities:                
Warrant investments received and recorded as unearned income   $ 81     $ 156  
Distributions payable   $ 3,982     $ 3,783  
End-of-term payments receivable   $ 6,143     $ 4,155  

 

See Notes to Consolidated Financial Statements

 

  6  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2016

(Dollars in thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Amount     Investments (6)     Value  
Debt Investments — 151.7% (8)                                
Debt Investments — Life Science — 35.6% (8)                                
Argos Therapeutics, Inc. (2)(5)   Biotechnology   Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;   $ 5,000     $ 4,948     $ 4,948  
        Ceiling 10.75%), 5.00% ETP, Due 10/1/18)                        
        Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;     5,000       4,958       4,958  
        Ceiling 10.75%), 5.00% ETP, Due 3/1/19)                        
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.50% cash (Libor + 11.00%; Floor     1,301       1,293       1,293  
        11.50%), 11.42% ETP, Due 3/1/19)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     434       431       431  
        11.50%), 11.42% ETP, Due 3/1/19)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,000       1,988       1,988  
        10.50%), 6.10% ETP, Due 3/1/19)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor     6,265       6,196       6,196  
        10.00%), 4.00% ETP, Due 4/1/19)                        
Palatin Technologies, Inc. (2)(5)   Biotechnology   Term Loan (9.00% cash (Libor + 8.50%; Floor     5,000       4,944       4,944  
        9.00%), 5.00% ETP, Due 1/1/19)                        
        Term Loan (9.00% cash (Libor + 8.50%; Floor     5,000       4,942       4,942  
        9.00%), 5.00% ETP, Due 8/1/19)                        
Sample6, Inc. (2)   Biotechnology   Term Loan (9.50% cash (Libor + 9.00%; Floor     1,555       1,551       1,551  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.50% cash (Libor + 9.00%; Floor     945       941       941  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.50% cash (Libor + 9.00%; Floor     2,500       2,483       2,483  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
IntegenX Inc. (2)   Medical Device   Term Loan (10.75% cash (Libor + 10.25%; Floor     3,750       3,708       3,708  
        10.75%; Ceiling 12.75%), 3.50% ETP, Due 7/1/18)                        
Lantos Technologies, Inc. (2)   Medical Device   Term Loan (11.50% cash (Libor + 11.00%; Floor     3,354       3,313       3,313  
        11.50%), 5.00% ETP, Due 2/1/18)                        
Mederi Therapeutics, Inc. (2)   Medical Device   Term Loan (12.26% cash (Libor + 11.82%), 4.00% ETP,     2,490       2,470       2,463  
        Due 7/1/17)                        
        Term Loan (12.26% cash (Libor + 11.82%), 4.00% ETP,     2,490       2,470       2,463  
        Due 7/1/17)                        
NinePoint Medical, Inc. (2)   Medical Device   Term Loan (9.25% cash (Libor + 8.75%; Floor     5,000       4,948       4,948  
        9.25%), 4.50% ETP, Due 3/1/19)                        
        Term Loan (9.25% cash (Libor + 8.75%; Floor     2,500       2,467       2,467  
        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,     1,875       1,869       1,869  
        Due 9/1/16)                        
Total Debt Investments — Life Science                     55,920       55,906  
Debt Investments — Technology — 83.1% (8)                          
Ekahau, Inc. (2)   Communications   Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     549       548       548  
        Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     183       182       182  
mBlox, Inc. (2)   Communications   Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,979       4,979  
        11.50%; Ceiling 13.00%), 3.40% ETP, Due 7/1/18)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,979       4,979  
        11.50%; Ceiling 13.00%), 3.40% ETP, Due 7/1/18)                        
        Term Loan (12.00% cash, 100.00% ETP, Due 7/1/16)     1,000       1,000       1,000  
        Term Loan (12.00% cash, 100.00% ETP, Due 7/1/16)     500       500       500  
Additech, Inc. (2)   Consumer-related Technologies   Term Loan (11.75% cash (Libor + 11.25%; Floor     2,333       2,307       2,307  
        11.75%; Ceiling 13.25%), 4.00% ETP, Due 7/1/18)                        
        Term Loan (11.75% cash (Libor + 11.25%; Floor     2,500       2,467       2,467  
        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     1,267       1,248       1,248  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 11/1/17)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     733       718       718  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 2/1/18)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     800       788       788  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 4/1/18)                        
Rhapsody International, Inc. (2)   Consumer-related Technologies   Term Loan (11.00% cash (Libor + 10.50%; Floor     7,500       7,291       7,291  
        11.00%), 3.00% ETP, Due 10/1/19)                        
SavingStar, Inc. (2)   Consumer-related Technologies   Term Loan (10.90% cash (Libor + 10.40%; Floor     3,000       2,947       2,947  
        10.90%), 3.00% ETP, Due 6/1/19)                        
        Term Loan (10.90% cash (Libor + 10.40%; Floor     2,000       1,957       1,957  
        10.90%), 3.00% ETP, Due 3/1/20)                        
                                 

 

See Notes to Consolidated Financial Statements

 

  7  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2016

(Dollars in thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Amount     Investments (6)     Value  
The NanoSteel Company, Inc. (2)   Materials   Term Loan (10.00% cash (Libor + 9.50%; Floor     5,000       4,922       4,922  
        10.00%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor     2,500       2,461       2,461  
        10.00%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor     2,500       2,455       2,455  
        10.00%), 5.00% ETP, Due 1/1/20)                        
Nanocomp Technologies, Inc. (2)   Networking   Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)     614       607       607  
        Term Loan (11.50% cash (Libor + 11.00%; Floor     3,000       2,941       2,941  
        11.50%), 3.00% ETP, Due 4/1/20)                        
Powerhouse Dynamics, Inc. (2)   Power Management   Term Loan (11.20% cash (Libor + 10.70%; Floor     2,500       2,459       2,459  
        11.20%), 3.00% ETP, Due 3/1/19)                        
Avalanche Technology, Inc. (2)   Semiconductors   Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     1,357       1,353       1,353  
        Ceiling 11.75%), 2.40% ETP, Due 4/1/17)                        
        Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     1,882       1,876       1,876  
        Ceiling 11.75%), 2.40% ETP, Due 10/1/18)                        
        Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     2,083       2,042       2,042  
        Ceiling 11.75%), 2.00% ETP, Due 2/1/19)                        
InVisage Technologies, Inc. (2)   Semiconductors   Term Loan (12.00% cash (Libor + 11.50%; Floor     2,125       2,094       2,014  
        12.00%; Ceiling 14.00%), 2.00% ETP, Due 4/1/18)                        
        Term Loan (12.00% cash (Libor + 11.50%; Floor     850       836       805  
        12.00%; Ceiling 14.00%), 2.00% ETP, Due 10/1/18)                        
Luxtera, Inc. (2)   Semiconductors   Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;     1,404       1,386       1,386  
        Ceiling 12.25%), 13.00% ETP, Due 7/1/17)                        
        Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;     783       780       780  
        Ceiling 12.25%), 13.00% ETP, Due 7/1/17)                        
        Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%),     833       829       829  
        4.50% ETP, Due 12/1/18)                        
        Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%),     833       828       828  
        4.50% ETP, Due 12/1/18)                        
Xtera Communications, Inc. (2)(5)   Semiconductors   Term Loan (12.50% cash, 15.65% ETP, Due 12/31/16)     3,380       3,353       3,353  
        Term Loan (12.50% cash, 21.75% ETP, Due 12/31/16)     939       931       931  
Bridge2 Solutions, Inc.   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     4,000       3,970       3,970  
        11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     1,000       995       995  
        11.50%; Ceiling 14.50%), 2.00% ETP, Due 1/1/20)                        
Crowdstar, Inc. (2)   Software   Term Loan (10.75% cash (Libor + 10.25%; Floor     1,758       1,735       1,735  
        10.75%), 3.00% ETP, Due 9/1/18)                        
Decisyon, Inc. (2)   Software   Term Loan (12.75% cash (Libor + 12.308%; Floor     1,603       1,599       1,490  
        12.50%), 6.50% ETP, Due 10/1/17)                        
        Term Loan (12.75% cash (Libor + 12.308%; Floor     853       714       665  
        12.50%), 6.50% ETP, Due 1/1/18)                        
Digital Signal Corporation   Software   Term Loan (10.69% cash (Libor + 10.25%; Floor     1,500       1,460       1,425  
        10.43%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.69% cash (Libor + 10.25%; Floor     1,500       1,460       1,425  
        10.43%), 5.00% ETP, Due 7/1/19)                        
Education Elements, Inc. (2)   Software   Term Loan (10.50% cash (Libor + 10.00%; Floor     2,000       1,970       1,970  
        10.50%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     1,500       1,472       1,472  
        10.50%), 4.00% ETP, Due 8/1/19)                        
Netuitive, Inc. (2)   Software   Term Loan (12.75% cash, Due 7/1/16)     760       759       759  
Nomi Corporation   Software   Term Loan (10.59% cash (Libor + 10.15%; Floor     3,750       3,714       3,226  
        10.35%), 2.00% ETP, Due 1/1/20)                        
        Term Loan (10.59% cash (Libor + 10.15%; Floor     3,750       3,714       3,226  
        10.35%), 2.00% ETP, Due 1/1/20)                        
ScoreBig, Inc. (2)   Software   Term Loan (10.50% cash (Libor + 10.00%; Floor     3,500       3,453       3,453  
        10.50%), 4.00% ETP, Due 4/1/19)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     3,500       3,453       3,453  
        10.50%), 4.00% ETP, Due 4/1/19)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,000       1,944       1,944  
        10.50%), 4.00% ETP, Due 3/1/20)                        
SIGNiX, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     2,800       2,757       2,430  
        11.50%), Due 7/1/18)                        
SilkRoad Technology, Inc. (2)   Software   Term Loan (10.85% cash (Libor + 10.35%; Floor     7,500       7,441       7,441  
        10.85%; Ceiling 12.85%), 3.00% ETP, Due 6/1/19)                        

 

See Notes to Consolidated Financial Statements

 

  8  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2016

(Dollars in thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Amount     Investments (6)     Value  
Skyword, Inc.   Software   Term Loan (11.45% cash (Libor + 10.95%; Floor     4,000       3,928       3,928  
        11.45%), 3.00% ETP, Due 8/1/19)                        
Social Intelligence Corp. (2)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     565       552       541  
        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     4,125       4,082       4,082  
        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     4,600       4,572       4,572  
        11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)                        
        Term Loan (11.65% cash (Libor + 11.15%; Floor     4,167       4,137       4,137  
        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     1,600       1,589       1,589  
        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)     2,810       2,810       2,810  
xTech Holdings, Inc. (2)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     2,000       1,972       1,972  
        11.00%), 3.00% ETP, Due 4/1/19)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     2,000       1,963       1,963  
        11.00%), 3.00% ETP, Due 3/1/20)                        
Total Debt Investments — Technology                     132,279       130,626  
Debt Investments — Cleantech — 6.8% (8)                                
Renmatix, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, Due 10/1/16)     1,182       1,180       1,180  
Semprius, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, 5.00% ETP, Due 6/1/16)     435       422       422  
Rypos, Inc. (2)   Energy Efficiency   Term Loan (11.99% cash, 4.25% ETP, Due 6/1/17)     2,250       2,229       2,229  
        Term Loan (11.99% cash, 4.25% ETP, Due 1/1/18)     897       885       885  
Lehigh Technologies, Inc. (2)   Waste Recycling   Term Loan (10.16% cash (Libor + 9.72%), 6.75% ETP,     3,000       2,963       2,963  
        Due 8/1/19)                        
        Term Loan (10.16% cash (Libor + 9.72%), 6.75% ETP,     3,000       2,977       2,977  
        Due 8/1/19)                        
Total Debt Investments — Cleantech                     10,656       10,656  
Debt Investments — Healthcare information and services — 26.2% (8)                                
Interleukin Genetics, Inc. (2)(5)   Diagnostics   Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%)     5,000       4,892       4,892  
        4.50% ETP, Due 10/1/18)                        
LifePrint Group, Inc. (2)   Diagnostics   Term Loan (11.00% cash (Libor + 10.50%; Floor     2,100       2,070       2,070  
        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       3,494       3,494  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;     3,500       3,494       3,494  
        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)                        
Innovatient Solutions, Inc. (2)(11)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     972       949       250  
        11.00%, Ceiling 13.00%); 4.00% ETP, Due 7/1/18)                        
MedAvante, Inc. (2)   Software   Term Loan (9.75% cash (Libor + 9.25%; Floor     3,000       2,961       2,961  
        9.75%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (9.75% cash (Libor + 9.25%; Floor     3,000       2,961       2,961  
        9.75%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (9.75% cash (Libor + 9.25%; Floor     4,000       3,938       3,938  
        9.75%), 4.00% ETP, Due 7/1/19)                        
Medsphere Systems Corporation (2)   Software   Term Loan (10.50% cash (Libor + 10.00%; Floor     5,000       4,927       4,927  
        10.50%), 7.00% ETP, Due 7/1/19)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,500       2,463       2,463  
        10.50%), 7.00% ETP, Due 7/1/19)                        
Recondo Technology, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     1,211       1,207       1,207  
        11.50%), 6.60% ETP, Due 12/1/17)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     2,188       2,182       2,182  
        11.00%), 4.50% ETP, Due 12/1/17)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,188       2,183       2,183  
        10.50%), 2.75% ETP, Due 12/1/17)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     3,000       2,968       2,968  
        10.50%), 2.50% ETP, Due 1/1/19)                        
Total Debt Investments — Healthcare information and services                     41,937       41,238  
Total Debt Investments                     240,792       238,426  
                                 

 

See Notes to Consolidated Financial Statements

 

  9  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2016

(Dollars in thousands)

 

            Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Investments (6)     Value  
Warrant Investments — 3.3% (8)                        
Warrants — Life Science — 0.4% (8)                        
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants     83        
Argos Therapeutics, Inc. (2)(5)   Biotechnology   33,112 Common Stock Warrants     33       6  
Celsion Corporation (5)   Biotechnology   5,708 Common Stock Warrants     15        
Inotek Pharmaceuticals Corporation (5)   Biotechnology   28,204 Common Stock Warrants     17       43  
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   103,982 Preferred Stock Warrants     88       173  
Nivalis Therapeutics, Inc. (5)   Biotechnology   18,534 Common Stock Warrants     122        
Ocera Therapeutics, Inc. (2)(5)   Biotechnology   6,491 Common Stock Warrants     6        
Palatin Technologies, Inc. (2)(5)   Biotechnology   608,058 Common Stock Warrants     51       3  
Revance Therapeutics, Inc. (5)   Biotechnology   34,377 Common Stock Warrants     68       133  
Sample6, Inc. (2)   Biotechnology   351,018 Preferred Stock Warrants     45       30  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   12,302 Common Stock Warrants     5        
AccuVein Inc. (2)   Medical Device   75,769 Preferred Stock Warrants     24       28  
Direct Flow Medical, Inc.   Medical Device   176,922 Preferred Stock Warrants     144        
EnteroMedics, Inc. (5)   Medical Device   9,402 Common Stock Warrants     347        
IntegenX, Inc. (2)   Medical Device   158,006 Preferred Stock Warrants     33       24  
Lantos Technologies, Inc. (2)   Medical Device   1,287,817 Preferred Stock Warrants     38       41  
Mederi Therapeutics, Inc. (2)   Medical Device   248,736 Preferred Stock Warrants     26       39  
Mitralign, Inc. (2)   Medical Device   641,909 Preferred Stock Warrants     52       36  
NinePoint Medical, Inc. (2)   Medical Device   566,038 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       10  
ViOptix, Inc.   Medical Device   375,763 Preferred Stock Warrants     13        
Total Warrants — Life Science             1,336       599  
Warrants — Technology — 2.2% (8)                        
Ekahau, Inc. (2)   Communications   978,261 Preferred Stock Warrants     33       19  
OpenPeak, Inc.   Communications   18,997 Common Stock Warrants     89        
Additech, Inc. (2)   Consumer-related Technologies   150,000 Preferred Stock Warrants     33       26  
Everyday Health, Inc. (5)   Consumer-related Technologies   43,783 Common Stock Warrants     69       1  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   268,591 Preferred Stock Warrants     68       629  
If(we), Inc.   Consumer-related Technologies   190,868 Preferred Stock Warrants     27       62  
Rhapsody International Inc. (2)   Consumer-related Technologies   852,273 Common Stock Warrants     164       158  
SavingStar, Inc. (2)   Consumer-related Technologies   98,860 Preferred Stock Warrants     59       57  
XIOtech, Inc.   Data Storage   2,217,979 Preferred Stock Warrants     22       18  
SimpleTuition, Inc.   Internet and media   189,573 Preferred Stock Warrants     63       65  
The NanoSteel Company, Inc. (2)   Materials   147,424 Preferred Stock Warrants     93       90  
IntelePeer, Inc.   Networking   141,549 Common Stock Warrants     39       26  
Nanocomp Technologies, Inc. (2)   Networking   681,819 Preferred Stock Warrants     54       49  
Aquion Energy, Inc.   Power Management   115,051 Preferred Stock Warrants     7       61  
Powerhouse Dynamics, Inc. (2)   Power Management   290,698 Preferred Stock Warrants     28       27  
Avalanche Technology, Inc. (2)   Semiconductors   202,602 Preferred Stock Warrants     101       41  
eASIC Corporation (2)   Semiconductors   40,445 Preferred Stock Warrants     25       27  
InVisage Technologies, Inc. (2)   Semiconductors   185,790 Preferred Stock Warrants     48       44  
Kaminario, Inc.   Semiconductors   1,087,203 Preferred Stock Warrants     59       62  
Luxtera, Inc.(2)   Semiconductors   2,304,667 Preferred Stock Warrants     48       100  
Soraa, Inc. (2)   Semiconductors   180,000 Preferred Stock Warrants     80       98  
Xtera Communications, Inc. (5)   Semiconductors   37,831 Common Stock Warrants     205        
Bolt Solutions Inc. (2)   Software   202,892 Preferred Stock Warrants     113       112  
Bridge2 Solutions, Inc.   Software   75,458 Common Stock Warrants     18       326  
Clarabridge, Inc.   Software   53,486 Preferred Stock Warrants     14       81  
Crowdstar, Inc. (2)   Software   75,428 Preferred Stock Warrants     14       14  
Decisyon, Inc. (2)   Software   82,967 Common Stock Warrants     46        
Digital Signal Corporation   Software   85,308 Common Stock Warrants     32       31  
Education Elements, Inc. (2)   Software   238,122 Preferred Stock Warrants     28       23  
Lotame Solutions, Inc. (2)   Software   288,115 Preferred Stock Warrants     22       268  
Netuitive, Inc.   Software   41,569 Common Stock Warrants     48        
Nomi Corporation   Software   2,535,864 Preferred Stock Warrants            
Riv Data Corp. (2)   Software   237,361 Preferred Stock Warrants     12       12  
ScoreBig, Inc. (2)   Software   767,626 Preferred Stock Warrants     82       73  
SIGNiX, Inc. (2)   Software   63,365 Preferred Stock Warrants     48       46  
Skyword, Inc.   Software   301,056 Preferred Stock Warrants     48       46  
SpringCM, Inc. (2)   Software   2,385,686 Preferred Stock Warrants     55       119  
Sys-Tech Solutions, Inc.   Software   375,000 Preferred Stock Warrants     242       539  

 

See Notes to Consolidated Financial Statements

 

  10  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2016

(Dollars in thousands)

 

            Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Investments (6)     Value  
Vidsys, Inc.   Software   85,399 Preferred Stock Warrants     23       21  
Visage Mobile, Inc.   Software   1,692,047 Preferred Stock Warrants     19        
xTech Holdings, Inc. (2)   Software   158,730 Preferred Stock Warrants     43       43  
Total Warrants — Technology             2,321       3,414  
Warrants — Cleantech — 0.2% (8)                        
Renmatix, Inc.   Alternative Energy   53,022 Preferred Stock Warrants     68       64  
Semprius, Inc.   Alternative Energy   519,981 Preferred Stock Warrants     25       20  
Rypos, Inc. (2)   Energy Efficiency   5,627 Preferred Stock Warrants     44       31  
Tigo Energy, Inc. (2)   Energy Efficiency   804,604 Preferred Stock Warrants     100       109  
Lehigh Technologies, Inc. (2)   Waste Recycling   272,727 Preferred Stock Warrants     32       33  
Total Warrants — Cleantech             269       257  
Warrants — Healthcare information and services — 0.5% (8)                        
Accumetrics, Inc.   Diagnostics   100,928 Preferred Stock Warrants     107       63  
BioScale, Inc. (2)   Diagnostics   3,156 Common Stock Warrants     54        
Candescent Health, Inc. (2)   Diagnostics   519,991 Preferred Stock Warrants     378        
Helomics Corporation   Diagnostics   13,461 Common Stock Warrants     73        
Interleukin Genetics, Inc. (2)(5)   Diagnostics   2,492,523 Common Stock Warrants     112       50  
LifePrint Group, Inc. (2)   Diagnostics   49,000 Preferred Stock Warrants     29       23  
Singulex, Inc.   Other Healthcare   293,632 Preferred Stock Warrants     44       165  
Verity Solutions Group, Inc.   Other Healthcare   300,360 Preferred Stock Warrants     100       36  
Watermark Medical, Inc. (2)   Other Healthcare   27,373 Preferred Stock Warrants     74       62  
Innovatient Solutions, Inc. (2)   Software   157,895 Preferred Stock Warrants     35        
MedAvante, Inc. (2)   Software   114,285 Preferred Stock Warrants     66       65  
Medsphere Systems Corporation (2)   Software   7,097,791 Preferred Stock Warrants     60       204  
Recondo Technology, Inc. (2)   Software   556,796 Preferred Stock Warrants     95       194  
Total Warrants — Healthcare information and services             1,227       862  
Total Warrants             5,153       5,132  
                         
Other Investments — 0.4% (8)                        
ZetrOZ, Inc.   Medical Device   Royalty Agreement     383       400  
Vette Technology, LLC   Data Storage   Royalty Agreement Due 4/18/2019     4,399       300  
Total Other Investments             4,782       700  
Equity — 0.5% (8)                        
Insmed Incorporated (5)   Biotechnology   33,208 Common Stock     238       421  
Revance Therapeutics, Inc.(5)   Biotechnology   4,861 Common Stock     73       85  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   78,493 Common Stock     83       42  
SnagAJob.com, Inc.   Consumer-related Technologies   82,974 Common Stock     9       83  
Decisyon, Inc.   Software   3,324,444 Common Stock     146       146  
Total Equity             549       777  
Total Portfolio Investment Assets — 155.9% (8)   $ 251,276     $ 245,035  
                         
Short Term Investments — Money Market Funds — 0.2% (8)                
US Bank Money Market Deposit Account   $ 291     $ 291  
Total Short Term Investments — Money Market Funds   $ 291     $ 291  
Short Term Investments — Restricted Investments— 0.7% (8)                
US Bank Money Market Deposit Account (2)   $ 652     $ 652  
Total Short Term Investments — Restricted Investments   $ 652     $ 652  

 

 

 

(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 March 31, 2016 is provided.
     
(5)   Portfolio company is a public company.
     
(6)   For debt investments, represents principal balance less unearned income.

 

See Notes to Consolidated Financial Statements

 

  11  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2016

(Dollars in thousands)

 

(7)   Warrants, Equity and Other Investments are non-income producing.
     
(8)   Value as a percent of net assets.
     
(9)   The Company did not have any non-qualifying assets under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”), as of March 31, 2016. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
     
(10)  

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

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

 

See Notes to Consolidated Financial Statements

 

  12  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2015

(Dollars in thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Amount     Investments (6)     Value  
Debt Investments — 151.6 % (8)                                
Debt Investments — Life Science — 36.6% (8)                                
Argos Therapeutics, Inc. (2)(5)   Biotechnology   Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;   $ 5,000     $ 4,944     $ 4,944  
        Ceiling 10.75%), 5.00% ETP, Due 10/1/18)                        
        Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;     5,000       4,954       4,954  
        Ceiling 10.75%), 5.00% ETP, Due 3/1/19)                        
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   Term Loan (11.50% cash (Libor + 11.00%; Floor     1,301       1,293       1,293  
        11.50%), 11.42% ETP, Due 3/1/19)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     434       431       431  
        11.50%), 11.42% ETP, Due 3/1/19)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,000       1,987       1,987  
        10.50%), 6.10% ETP, Due 3/1/19)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor     6,265       6,190       6,190  
        10.00%), 4.00% ETP, Due 4/1/19)                        
Palatin Technologies, Inc. (2)(5)   Biotechnology   Term Loan (9.00% cash (Libor + 8.50%; Floor     5,000       4,939       4,939  
        9.00%), 5.00% ETP, Due 1/1/19)                        
        Term Loan (9.00% cash (Libor + 8.50%; Floor     5,000       4,937       4,937  
        9.00%), 5.00% ETP, Due 8/1/19)                        
Sample6, Inc. (2)   Biotechnology   Term Loan (9.50% cash (Libor + 9.00%; Floor     1,555       1,550       1,550  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.50% cash (Libor + 9.00%; Floor     945       940       940  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.50% cash (Libor + 9.00%; Floor     2,500       2,481       2,481  
        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       544       544  
        Term Loan (9.00% cash, 4.65% ETP, Due 10/1/16)     818       815       815  
IntegenX Inc. (2)   Medical Device   Term Loan (10.75% cash (Libor + 10.25%; Floor     3,750       3,703       3,703  
        10.75%; Ceiling 12.75%), 3.50% ETP, Due 7/1/18)                        
Lantos Technologies, Inc. (2)   Medical Device   Term Loan (11.50% cash (Libor + 10.50%; Floor     3,500       3,454       3,333  
        11.50%), 5.00% ETP, Due 2/1/18)                        
Mederi Therapeutics, Inc. (2)   Medical Device   Term Loan (12.06% cash (Libor + 11.82%), 4.00% ETP,     2,850       2,826       2,738  
        Due 7/1/17)                        
        Term Loan (12.06% cash (Libor + 11.82%), 4.00% ETP,     2,850       2,826       2,738  
        Due 7/1/17)                        
NinePoint Medical, Inc. (2)   Medical Device   Term Loan (9.25% cash (Libor + 8.75%; Floor     5,000       4,943       4,943  
        9.25%), 4.50% ETP, Due 3/1/19)                        
        Term Loan (9.25% cash (Libor + 8.75%; Floor     2,500       2,464       2,464  
        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,     2,063       2,053       2,053  
        Due 9/1/16)                        
ZetrOZ, Inc. (2)(11)   Medical Device   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,350       1,330       250  
        11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     1,350       1,326       250  
        11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)                        
Total Debt Investments — Life Science                     60,930       58,477  
Debt Investments — Technology — 80.5% (8)                                
Ekahau, Inc. (2)   Communications   Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     704       700       700  
        Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     235       233       233  
mBlox, Inc. (2)   Communications   Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,977       4,977  
        11.50%; Ceiling 13.00%), 3.40% ETP, Due 7/1/18)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     5,000       4,977       4,977  
        11.50%; Ceiling 13.00%), 3.40% ETP, Due 7/1/18)                        
        Term Loan (12.00% cash, 100.00% ETP, Due 7/1/16)     1,000       1,000       1,000  
        Term Loan (12.00% cash, 100.00% ETP, Due 7/1/16)     500       500       500  
Overture Networks, Inc. (2)   Communications   Term Loan (10.75% cash, (Libor + 10.25%; Floor     4,104       4,089       4,089  
        10.75%), 5.75% ETP, Due 12/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     2,052       2,043       2,043  
        10.75%), 5.75% ETP, Due 12/1/17)                        
        Term Loan (10.75% cash (Libor + 10.25%; Floor     1,000       992       992  
        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       2,470       2,470  
        11.75%; Ceiling 13.25%), 4.00% ETP, Due 7/1/18)                        

 

See Notes to Consolidated Financial Statements

 

  13  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2015

(Dollars in thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Amount     Investments (6)     Value  
        Term Loan (11.75% cash (Libor + 11.25%; Floor     2,500       2,464       2,464  
        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     1,467       1,445       1,445  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 11/1/17)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     833       816       816  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 2/1/18)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     900       886       886  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 4/1/18)                        
Rhapsody International, Inc. (2)   Consumer-related Technologies   Term Loan (11.00% cash (Libor + 10.50%; Floor     7,500       7,276       7,276  
        11.00%), 3.00% ETP, Due 10/1/19)                        
SavingStar, Inc. (2)   Consumer-related Technologies   Term Loan (10.90% cash (Libor + 10.40%; Floor     3,000       2,911       2,911  
        10.90%), 3.00% ETP, Due 6/1/19)                        
The NanoSteel Company, Inc. (2)   Materials   Term Loan (10.00% cash (Libor + 9.50%; Floor     5,000       4,915       4,915  
        10.00%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor     2,500       2,458       2,458  
        10.00%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor     2,500       2,452       2,452  
        10.00%), 5.00% ETP, Due 1/1/20)                        
Nanocomp Technologies, Inc. (2)   Networking   Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)     701       693       693  
Powerhouse Dynamics, Inc. (2)   Power Management   Term Loan (11.20% cash (Libor + 10.70%; Floor     2,500       2,456       2,456  
        11.20%), 3.00% ETP, Due 3/1/19)                        
Avalanche Technology, Inc. (2)   Semiconductors   Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     1,565       1,561       1,561  
        Ceiling 11.75%), 2.40% ETP, Due 4/1/17)                        
        Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     2,003       1,997       1,997  
        Ceiling 11.75%), 2.40% ETP, Due 10/1/18)                        
        Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     2,202       2,157       2,157  
        Ceiling 11.75%), 2.00% ETP, Due 2/1/19)                        
InVisage Technologies, Inc. (2)   Semiconductors   Term Loan (12.00% cash (Libor + 11.50%; Floor     2,380       2,345       2,242  
        12.00%; Ceiling 14.00%), 2.00% ETP, Due 4/1/18)                        
        Term Loan (12.00% cash (Libor + 11.50%; Floor     850       835       798  
        12.00%; Ceiling 14.00%), 2.00% ETP, Due 10/1/18)                        
Luxtera, Inc. (2)   Semiconductors   Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;     1,646       1,645       1,645  
        Ceiling 12.25%), 13.00% ETP, Due 7/1/17)                        
        Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;     951       926       926  
        Ceiling 12.25%), 13.00% ETP, Due 7/1/17)                        
        Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%),     833       828       828  
        4.50% ETP, Due 12/1/18)                        
        Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%),     833       827       827  
        4.50% ETP, Due 12/1/18)                        
Xtera Communications, Inc. (2)(5)   Semiconductors   Term Loan (12.50% cash, 15.65% ETP, Due 12/31/16)     4,157       4,114       4,114  
        Term Loan (12.50% cash, 21.75% ETP, Due 12/31/16)     1,155       1,142       1,142  
Bridge2 Solutions, Inc.   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     4,000       3,966       3,966  
        11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19)                        
        Term Loan (11.50% cash (Libor + 11.00%; Floor     1,000       995       995  
        11.50%; Ceiling 14.50%), 2.00% ETP, Due 1/1/20)                        
Crowdstar, Inc. (2)   Software   Term Loan (10.75% cash (Libor + 10.25%; Floor     1,939       1,915       1,915  
        10.75%), 3.00% ETP, Due 9/1/18)                        
Decisyon, Inc. (2)   Software   Term Loan (12.69% cash (Libor + 12.308%; Floor     1,603       1,599       1,514  
        12.50%), 6.50% ETP, Due 10/1/17)                        
        Term Loan (12.69% cash (Libor + 12.308%; Floor     853       847       802  
        12.50%), 6.50% ETP, Due 1/1/18)                        
Digital Signal Corporation   Software   Term Loan (10.54% cash (Libor + 10.25%; Floor     1,500       1,421       1,421  
        10.43%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.54% cash (Libor + 10.25%; Floor     1,500       1,457       1,457  
        10.43%), 5.00% ETP, Due 7/1/19)                        
Education Elements, Inc. (2)   Software   Term Loan (10.50% cash (Libor + 10.00%; Floor     2,000       1,967       1,967  
        10.50%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     1,500       1,470       1,470  
        10.50%), 4.00% ETP, Due 8/1/19)                        
Netuitive, Inc. (2)   Software   Term Loan (12.75% cash, Due 7/1/16)     1,000       998       998  
ScoreBig, Inc. (2)   Software   Term Loan (10.50% cash (Libor + 10.00%; Floor     3,500       3,449       3,449  
        10.50%), 4.00% ETP, Due 4/1/19)                        

 

See Notes to Consolidated Financial Statements

 

  14  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2015

(Dollars in thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Amount     Investments (6)     Value  
        Term Loan (10.50% cash (Libor + 10.00%; Floor     3,500       3,449       3,449  
        10.50%), 4.00% ETP, Due 4/1/19)                        
SIGNiX, Inc. (2)   Software   Term Loan (11.50% cash (Libor + 11.00%; Floor     3,000       2,953       2,953  
        11.50%), Due 7/1/18)                        
SilkRoad Technology, Inc. (2)   Software   Term Loan (10.85% cash (Libor + 10.35%; Floor     7,500       7,436       7,436  
        10.85%; Ceiling 12.85%), 3.00% ETP, Due 6/1/19)                        
Skyword, Inc.   Software   Term Loan (11.45% cash (Libor + 10.95%; Floor     4,000       3,900       3,900  
        11.45%), 3.00% ETP, Due 8/1/19)                        
Social Intelligence Corp. (2)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,091       1,076       1,067  
        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       4,450       4,450  
        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     5,200       5,168       5,168  
        11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)                        
        Term Loan (11.65% cash (Libor + 11.15%; Floor     4,667       4,633       4,633  
        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     1,900       1,887       1,887  
        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)     2,810       2,810       2,810  
xTech Holdings, Inc. (2)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     2,000       1,957       1,957  
        11.00%), 3.00% ETP, Due 4/1/19)                        
Total Debt Investments — Technology                     128,933       128,654  
Debt Investments — Cleantech — 7.5% (8)                                
Renmatix, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     173       173       173  
        Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)     173       173       173  
        Term Loan (10.25% cash, Due 10/1/16)     1,667       1,663       1,663  
Semprius, Inc. (2)   Alternative Energy   Term Loan (10.25% cash, 5.00% ETP, Due 6/1/16)     860       840       840  
Rypos, Inc. (2)   Energy Efficiency   Term Loan (11.80% cash, 4.25% ETP, Due 6/1/17)     2,430       2,314       2,314  
        Term Loan (11.80% cash, 4.25% ETP, Due 1/1/18)     947       913       913  
Lehigh Technologies, Inc. (2)   Waste Recycling   Term Loan (9.96% cash (Libor + 9.72%), 6.75% ETP,     3,000       2,961       2,961  
        Due 8/1/19)                        
        Term Loan (9.96% cash (Libor + 9.72%), 6.75% ETP,     3,000       2,975       2,975  
        Due 8/1/19)                        
Total Debt Investments — Cleantech                     12,012       12,012  
Debt Investments — Healthcare information and services — 27.0% (8)                                
Interleukin Genetics, Inc. (2)(5)   Diagnostics   Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%)     5,000       4,881       4,881  
        4.50% ETP, Due 10/1/18)                        
LifePrint Group, Inc. (2)   Diagnostics   Term Loan (11.00% cash (Libor + 10.50%; Floor     2,400       2,366       2,366  
        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       3,494       3,494  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
        Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;     3,500       3,494       3,494  
        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)                        
Innovatient Solutions, Inc. (2)   Software   Term Loan (11.00% cash (Libor + 10.50%; Floor     1,000       977       977  
        11.00%, Ceiling 13.00%); 4.00% ETP, Due 7/1/18)                        
MedAvante, Inc. (2)   Software   Term Loan (9.75% cash (Libor + 9.25%; Floor     3,000       2,957       2,957  
        9.75%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (9.75% cash (Libor + 9.25%; Floor     3,000       2,957       2,957  
        9.75%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (9.75% cash (Libor + 9.25%; Floor     4,000       3,934       3,934  
        9.75%), 4.00% ETP, Due 7/1/19)                        
Medsphere Systems Corporation (2)   Software   Term Loan (10.50% cash (Libor + 10.00%; Floor     5,000       4,921       4,921  
        10.50%), 7.00% ETP, Due 7/1/19)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,500       2,461       2,461  
        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       1,380       1,380  
        11.50%), 6.60% ETP, Due 12/1/17)                        
        Term Loan (11.00% cash (Libor + 10.50%; Floor     2,500       2,494       2,494  
        11.00%), 4.50% ETP, Due 12/1/17)                        

 

See Notes to Consolidated Financial Statements

 

  15  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2015

(Dollars in thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Amount     Investments (6)     Value  
        Term Loan (10.50% cash (Libor + 10.00%; Floor     2,500       2,495       2,495  
        10.50%), 2.75% ETP, Due 12/1/17)                        
        Term Loan (10.50% cash (Libor + 10.00%; Floor     3,000       2,965       2,965  
        10.50%), 2.50% ETP, Due 1/1/19)                        
Total Debt Investments — Healthcare information and services                     43,024       43,024  
Total Debt Investments                     244,899       242,167  
                                 
Warrant Investments — 4.2% (8)                                
Warrants — Life Science — 0.8% (8)                                
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants             83        
Argos Therapeutics, Inc. (2)(5)   Biotechnology   33,112 Common Stock Warrants             33        
Celsion Corporation (5)   Biotechnology   5,708 Common Stock Warrants             15        
Inotek Pharmaceuticals Corporation (5)   Biotechnology   28,204 Preferred Stock Warrants             17       149  
New Haven Pharmaceuticals, Inc. (2)   Biotechnology   103,982 Preferred Stock Warrants             88       178  
Nivalis Therapeutics, Inc. (5)   Biotechnology   18,534 Common Stock Warrants             122        
Ocera Therapeutics, Inc. (2)(5)   Biotechnology   6,460 Common Stock Warrants             6        
Palatin Technologies, Inc. (2)(5)   Biotechnology   608,058 Common Stock Warrants             51       16  
Revance Therapeutics, Inc. (5)   Biotechnology   34,377 Common Stock Warrants             68       684  
Sample6, Inc. (2)   Biotechnology   351,018 Preferred Stock Warrants             45       40  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   12,302 Common Stock Warrants             5        
AccuVein Inc. (2)   Medical Device   75,769 Preferred Stock Warrants             24       30  
Direct Flow Medical, Inc.   Medical Device   176,922 Preferred Stock Warrants             144       41  
EnteroMedics, Inc. (5)   Medical Device   141,025 Common Stock Warrants             347        
IntegenX, Inc. (2)   Medical Device   158,006 Preferred Stock Warrants             33       25  
Lantos Technologies, Inc. (2)   Medical Device   1,287,817 Preferred Stock Warrants             38       43  
Mederi Therapeutics, Inc. (2)   Medical Device   248,736 Preferred Stock Warrants             26       41  
Mitralign, Inc. (2)   Medical Device   641,909 Preferred Stock Warrants             52       38  
NinePoint Medical, Inc. (2)   Medical Device   566,038 Preferred Stock Warrants             33       34  
OraMetrix, Inc. (2)   Medical Device   812,348 Preferred Stock Warrants             78        
Tryton Medical, Inc. (2)   Medical Device   122,362 Preferred Stock Warrants             15       12  
ViOptix, Inc.   Medical Device   375,763 Preferred Stock Warrants             13        
ZetrOZ, Inc. (2)   Medical Device   475,561 Preferred Stock Warrants             25        
Total Warrants — Life Science                     1,361       1,331  
Warrants — Technology — 2.6% (8)                                
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       386  
Additech, Inc. (2)   Consumer-related Technologies   150,000 Preferred Stock Warrants             32       27  
Everyday Health, Inc. (5)   Consumer-related Technologies   43,783 Common Stock Warrants             69       1  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   268,591 Preferred Stock Warrants             68       634  
If(we), Inc.   Consumer-related Technologies   190,868 Preferred Stock Warrants             27       62  
Rhapsody International Inc. (2)   Consumer-related Technologies   852,273 Common Stock Warrants             164       165  
SavingStar, Inc. (2)   Consumer-related Technologies   79,088 Preferred Stock Warrants             48       49  
XIOtech, Inc.   Data Storage   2,217,979 Preferred Stock Warrants             22       19  
SimpleTuition, Inc.   Internet and media   189,573 Preferred Stock Warrants             63       69  
The NanoSteel Company, Inc. (2)   Materials   147,424 Preferred Stock Warrants             93       95  
IntelePeer, Inc.   Networking   141,549 Common Stock Warrants             39       27  
Nanocomp Technologies, Inc. (2)   Networking   272,728 Preferred Stock Warrants             25       20  
Aquion Energy, Inc.   Power Management   115,051 Preferred Stock Warrants             7       57  
Powerhouse Dynamics, Inc. (2)   Power Management   290,698 Preferred Stock Warrants             27       28  
Avalanche Technology, Inc. (2)   Semiconductors   202,602 Preferred Stock Warrants             101       45  
eASIC Corporation (2)   Semiconductors   40,445 Preferred Stock Warrants             25       29  
InVisage Technologies, Inc. (2)   Semiconductors   185,790 Preferred Stock Warrants             48       47  
Kaminario, Inc.   Semiconductors   1,087,203 Preferred Stock Warrants             59       65  
Luxtera, Inc.(2)   Semiconductors   2,304,667 Preferred Stock Warrants             48       103  
Soraa, Inc. (2)   Semiconductors   180,000 Preferred Stock Warrants             80       102  
Xtera Communications, Inc. (5)   Semiconductors   37,831 Preferred Stock Warrants             206        
Bolt Solutions Inc. (2)   Software   202,892 Preferred Stock Warrants             113       119  
Bridge2 Solutions, Inc.   Software   1,769 Common Stock Warrants             18       688  

 

See Notes to Consolidated Financial Statements

 

  16  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2015

(Dollars in thousands)

 

            Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Investments (6)     Value  
Clarabridge, Inc.   Software   53,486 Preferred Stock Warrants     14       82  
Crowdstar, Inc. (2)   Software   75,428 Preferred Stock Warrants     14       14  
Decisyon, Inc. (2)   Software   2,526,909 Common Stock Warrants     46        
Digital Signal Corporation   Software   85,308 Common Stock Warrants     32       32  
Education Elements, Inc. (2)   Software   238,122 Preferred Stock Warrants     28       29  
Lotame Solutions, Inc. (2)   Software   288,115 Preferred Stock Warrants     22       271  
Lytx, Inc.   Software   71,639 Preferred Stock Warrants     20       121  
Netuitive, Inc.   Software   41,569 Common Stock Warrants     48        
Riv Data Corp. (2)   Software   237,361 Preferred Stock Warrants     13       12  
ScoreBig, Inc. (2)   Software   481,198 Preferred Stock Warrants     55       57  
SIGNiX, Inc. (2)   Software   63,365 Preferred Stock Warrants     48       49  
Skyword, Inc.   Software   301,056 Preferred Stock Warrants     48       48  
SpringCM, Inc. (2)   Software   2,385,686 Preferred Stock Warrants     55       54  
Sys-Tech Solutions, Inc.   Software   375,000 Preferred Stock Warrants     242       524  
Vidsys, Inc.   Software   37,346 Preferred Stock Warrants     23        
Visage Mobile, Inc.   Software   1,692,047 Preferred Stock Warrants     19        
xTech Holdings, Inc. (2)   Software   111,111 Preferred Stock Warrants     30       32  
Total Warrants — Technology             2,316       4,181  
Warrants — Cleantech — 0.2% (8)                        
Renmatix, Inc.   Alternative Energy   53,022 Preferred Stock Warrants     68       68  
Semprius, Inc.   Alternative Energy   519,981 Preferred Stock Warrants     25       21  
Rypos, Inc. (2)   Energy Efficiency   5,627 Preferred Stock Warrants     44       32  
Tigo Energy, Inc. (2)   Energy Efficiency   804,604 Preferred Stock Warrants     100       111  
Lehigh Technologies, Inc. (2)   Waste Recycling   272,727 Preferred Stock Warrants     32       34  
Total Warrants — Cleantech             269       266  
Warrants — Healthcare information and services — 0.6% (8)                        
Accumetrics, Inc.   Diagnostics   100,928 Preferred Stock Warrants     108       63  
BioScale, Inc. (2)   Diagnostics   315,618 Common Stock Warrants     54        
Candescent Health, Inc. (2)   Diagnostics   519,992 Preferred Stock Warrants     378        
Helomics Corporation   Diagnostics   13,461Common Stock Warrants     73        
Interleukin Genetics, Inc. (2)(5)   Diagnostics   2,492,523 Common Stock Warrants     112       2  
LifePrint Group, Inc. (2)   Diagnostics   49,000 Preferred Stock Warrants     29       24  
Singulex, Inc.   Other Healthcare   293,632 Preferred Stock Warrants     43       167  
Verity Solutions Group, Inc.   Other Healthcare   300,360 Preferred Stock Warrants     100       36  
Watermark Medical, Inc. (2)   Other Healthcare   27,373 Preferred Stock Warrants     74       65  
Innovatient Solutions, Inc. (2)   Software   157,895 Preferred Stock Warrants     35       35  
MedAvante, Inc. (2)   Software   114,285 Preferred Stock Warrants     66       68  
Medsphere Systems Corporation (2)   Software   7,097,791 Preferred Stock Warrants     60       210  
Recondo Technology, Inc. (2)   Software   556,796 Preferred Stock Warrants     95       197  
Total Warrants — Healthcare information and services             1,227       867  
Total Warrants             5,173       6,645  
                         
Other Investments — 0.2% (8)                        
Vette Technology, LLC   Data Storage   Royalty Agreement Due 4/18/2019     4,422       300  
Total Other Investments             4,422       300  
Equity — 0.7% (8)                        
Insmed Incorporated (5)   Biotechnology   33,208 Common Stock     238       603  
Revance Therapeutics, Inc.(5)   Biotechnology   4,861 Common Stock     73       166  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   78,493 Common Stock     83       70  
Overture Networks Inc.   Communications   772,382 Common Stock     482        
SnagAJob.com, Inc.   Consumer-related Technologies   151,655 Common Stock     23       215  
Decisyon, Inc.   Technology   2,301,717 Common Stock     101       101  
Total Equity             1,000       1,155  
Total Portfolio Investment Assets — 156.7%  (8)   $ 255,494     $ 250,267  
                         
Short Term Investments — Money Market Funds — 0.2% (8)                
US Bank Money Market Deposit Account   $ 285     $ 285  
Total Short Term Investments — Money Market Funds   $ 285     $ 285  

 

See Notes to Consolidated Financial Statements

 

  17  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2015

(Dollars in thousands)

 

            Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Investments (6)     Value  
Short Term Investments — Restricted Investments— 0.7% (8)                
US Bank Money Market Deposit Account (2)   $ 1,091     $ 1,091  
Total Short Term Investments — Restricted Investments   $ 1,091     $ 1,091  

 

 

 

(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 December 31, 2015 is provided.
     
(5)   Portfolio company is a public company.
     
(6)   For debt investments, represents principal balance less unearned income.
     
(7)   Warrants, Equity and Other Investments are non-income producing.
     
(8)   Value as a percent of net assets.
     
(9)   The Company did not have any non-qualifying assets under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”), as of December 31, 2015. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
     
(10)  

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

     
(11)   Debt investment is on non-accrual status at December 31, 2015.

 

See Notes to Consolidated Financial Statements

 

  18  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Note 1.  Organization

 

Horizon Technology Finance Corporation (the “Company”) was organized as a Delaware corporation on March 16, 2010 and is an externally managed, non-diversified, closed-end investment company. The Company has elected to be regulated as a business development company (“BDC”) under the 1940 Act. In addition, for tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, the Company generally is not subject to corporate-level federal income tax on the portion of its taxable income 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, a Delaware limited liability company, which commenced operations in March 2008 and became the Company’s wholly owned subsidiary upon the completion of the Company’s IPO.

 

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

 

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

 

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

 

On March 24, 2015, the Company completed a 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 $26.5 million, after deducting underwriting commission and discounts and other offering expenses.

 

  19  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

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, 2015.

 

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.

 

  20  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

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 March 31, 2016, there was one debt investment on non-accrual status with a cost of $0.9 million and a fair value of $0.3 million. For the three ended March 31, 2015, the Company recognized interest income payments of $0.1 million received from one portfolio company whose debt investment was on non-accrual status. As of December 31, 2015, there was one investment on non-accrual status with a cost of $2.7 million and a fair value of $0.5 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 the ETP when 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 March 31, 2016 and 2015 was 20.5% and 7.4%, 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.

 

Debt issuance costs

 

Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities. The unamortized balance of debt issuance costs as of March 31, 2016 and December 31, 2015 was $1.7 million and $1.9 million, respectively. These amounts are amortized and included in interest expense in the consolidated statements of operations over the life of the borrowings. The accumulated amortization balances as of March 31, 2016 and December 31, 2015 were $4.1 million and $3.9 million, respectively. The amortization expense for the three months ended March 31, 2016 and 2015 was $0.2 million and $0.3 million, respectively.

 

  21  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

Income taxes

 

As a BDC, the Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC and to avoid 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 distribution to its stockholders of an amount generally at least equal to 90% of its 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 generally relieves the Company from corporate-level U.S. federal income taxes. Accordingly, no provision for federal income tax has been recorded in the financial statements. Differences between taxable income and net increase in net assets resulting from operations either can be temporary, meaning they will reverse in the future, or permanent. In accordance with Paragraph 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 three months ended March 31, 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% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three months ended March 31, 2016, there was no U.S. federal excise tax accrual recorded. For the three months ended March 31, 2015, $0.01 million accrual 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 March 31, 2016 and December 31, 2015. The 2014, 2013 and 2012 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 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.

 

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Notes to Consolidated Financial Statements

Stock Repurchase Program

 

On September 28, 2015, the Board authorized a stock repurchase program which allows the Company to repurchase up to $5.0 million of its common stock at prices below the Company’s net asset value per share as reported in its most recent consolidated financial statements. Under the repurchase program, the Company may, but is not obligated to, repurchase shares of its outstanding common stock in the open market or in privately negotiated transactions from time to time. Any repurchases by the Company will comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended, and any applicable requirements of the 1940 Act. Unless extended by the Board, the repurchase program will terminate on the earlier of September 30, 2016 or the repurchase of $5.0 million of the Company’s common stock. During the three months ended March 31, 2016, the Company did not make any repurchases of its common stock. Since inception, the Company repurchased 113,382 shares of its common stock at an average price of $11.53 on the open market at a total cost of $1.3 million.

 

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.

 

Recently adopted accounting pronouncement

 

In April 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) containing guidance that requires 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. The Company has adopted ASU 2015-03 which did not have a material impact on the Company’s consolidated financial statements other than corresponding reductions to total assets and total liabilities on the consolidated statements of assets and liabilities. Prior to adoption, the Company recorded debt issuance costs in other assets as an asset on the consolidated statements of assets and liabilities. Upon adoption, the Company reclassified these costs as unamortized debt issuance costs that reduce debt in the liabilities on the consolidated statements of assets and liabilities and retrospectively reclassified the debt issuance costs that were previously presented in other assets as an asset as of December 31, 2015, as discussed further in Note 6.

 

Note 3.  Related party transactions

 

Investment Management Agreement

 

The Investment Management Agreement was reapproved by the Board on July 29, 2015. 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.

 

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Notes to Consolidated Financial Statements

 

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

 

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

 

The base management fee payable at March 31, 2016 and December 31, 2015 was $0.4 million. The base management fee expense was $1.3 million and $1.0 million for the three months ended March 31, 2016 and 2015, respectively.

 

The incentive fee has two parts, as follows:

 

The first part, which is subject to the Incentive Fee Cap and Deferral Mechanism, as defined below, is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar quarter, minus 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.

 

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Notes to Consolidated Financial Statements

 

Commencing with the calendar quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee cap and deferral mechanism which is determined based upon a look-back period of up to three years and is expensed when incurred. For this purpose, the look-back period for the incentive fee based on Pre-Incentive Fee Net Investment Income (the “Incentive Fee Look-back Period”) commenced on July 1, 2014 and increases by one quarter in length at the end of each calendar quarter until June 30, 2017, after which time, the Incentive Fee Look-back Period will include the relevant calendar quarter and the 11 preceding full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income is subject to a cap (the “Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such deferred incentive fees (collectively, the “Incentive Fee Cap and Deferral Mechanism”). The Incentive Fee Cap is equal to (a) 20.00% of Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to the Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or a negative value in any calendar quarter, the Company will not pay an incentive fee on Pre-Incentive Fee Net Investment Income to the Advisor in that quarter. To the extent that the payment of incentive fees on Pre-Incentive Fee Net Investment Income is limited by the Incentive Fee Cap, the payment of such fees will be deferred and paid in subsequent calendar quarters up to three years after their date of deferment, subject to certain limitations, which are set forth in the Investment Management Agreement. The Company only pays incentive fees on Pre-Incentive Fee Net Investment Income to the extent allowed by the Incentive Fee Cap and Deferral Mechanism. “Cumulative Pre-Incentive Fee Net Return” during any Incentive Fee Look-back Period means the sum of (a) Pre-Incentive Fee Net Investment Income and the base management fee for each calendar quarter during the Incentive Fee Look-back Period and (b) the sum of cumulative realized capital gains and losses, cumulative unrealized capital appreciation and cumulative unrealized capital depreciation during the applicable Incentive Fee Look-back Period. As of March 31, 2016 and December 31, 2015, the quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income was not limited by the Incentive Fee Cap and Deferral Mechanism.

 

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 $1.1 million and $0.7 million for the three months ended March 31, 2016 and 2015, respectively. The performance based incentive fee payable as of March 31, 2016 and December 31, 2015 was $1.1 million and $1.0 million, respectively. The entire incentive fee payable as of March 31, 2016 and December 31, 2015 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 Financial Officer and Chief Compliance Officer and their respective staffs. The administrative fee expense was $0.3 million for the three months ended March 31, 2016 and 2015.

 

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Notes to Consolidated Financial Statements

Note 4.  Investments

 

The following table shows the Company’s investments as of March 31, 2016 and December 31, 2015:

 

    March 31, 2016     December 31, 2015  
    Cost     Fair Value     Cost     Fair Value  
          (In thousands)        
Money market funds   $ 291     $ 291     $ 285     $ 285  
Restricted investments in money market funds   $ 652     $ 652     $ 1,091     $ 1,091  
Non-affiliate investments                                
Debt   $ 240,792     $ 238,426     $ 244,899     $ 242,167  
Warrants     5,153       5,132       5,173       6,645  
Other     4,782       700       4,422       300  
Equity     549       777       1,000       1,155  
Total non-affiliate investments   $ 251,276     $ 245,035     $ 255,494     $ 250,267  

 

The following table shows the Company’s non-affiliate investments by industry sector as of March 31, 2016 and December 31, 2015:

 

    March 31, 2016     December 31, 2015  
    Cost     Fair Value     Cost     Fair Value  
          (In thousands)        
Life Science                                
Biotechnology   $ 35,602     $ 35,611     $ 36,932     $ 37,911  
Medical Device     22,431       21,842       25,753       22,736  
Technology                                
Communications     12,310       12,207       20,170       19,916  
Consumer-Related     20,152       20,739       18,699       19,421  
Data Storage     4,421       318       4,444       319  
Internet and Media     63       65       63       69  
Materials     9,931       9,928       9,918       9,920  
Networking     3,641       3,623       757       740  
Power Management     2,494       2,547       2,490       2,541  
Semiconductors     16,874       16,569       18,944       18,628  
Software     69,268       68,573       60,792       61,897  
Cleantech                                
Alternative Energy     1,695       1,686       2,942       2,938  
Energy Efficiency     3,258       3,254       3,371       3,370  
Waste Recycling     5,972       5,973       5,968       5,970  
Healthcare Information and Services                                
Diagnostics     7,715       7,098       8,001       7,336  
Other     8,454       8,499       8,453       8,504  
Software     26,995       26,503       27,797       28,051  
Total non-affiliate investments   $ 251,276     $ 245,035     $ 255,494     $ 250,267  

 

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.

 

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Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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 March 31, 2016 and December 31, 2015, the hypothetical market yield used ranged from 11% to 25%. 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.

 

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Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

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Notes to Consolidated Financial Statements

 

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of March 31, 2016 and December 31, 2015. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining its fair value measurements.

 

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

 

 

March 31, 2016
    Fair     Valuation Techniques/   Unobservable         Weighted  
Investment Type   Value     Methodologies   Input   Range     Average  
(Dollars in thousands, except per share data)  
Debt investments   $ 238,176     Discounted Expected Future Cash Flows   Hypothetical Market Yield     11% – 25 %     13 %
                                 
      250     Liquidation Scenario   Discount Rate     18 %     18 %
                Probability Weighting     50 %     50 %
                                 
Warrant investments     4,897     Black-Scholes Valuation Model   Price Per Share   $0.00 – $63.98     $ 3.80  
                Average Industry Volatility     18 %     18 %
                Marketability Discount     20 %     20 %
                Estimated Time to Exit     1 to 5 years       3 years  
                                 
Other investments     700     Multiple Probability Weighted   Discount Rate     25 %     25 %
            Cash Flow Model   Probability Weighting     0% – 100 %     33 %
                                 
Equity investments     229     Last Equity Financing   Price Per Share   $0. 04 – $1.00     $ 0.39  
Total Level 3 investments   $ 244,252                          

  

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, 2015:

 

December 31, 2015
    Fair     Valuation Techniques/   Unobservable         Weighted  
Investment Type   Value     Methodologies   Input   Range     Average  
(Dollars in thousands, except per share data)  
Debt investments   $ 241,667     Discounted Expected Future Cash Flows   Hypothetical Market Yield     11% – 25 %     13 %
                                 
      500     Liquidation Scenario   Discount Rate     25 %     25 %
                Probability Weighting     0% – 100 %     30 %
                                 
Warrant investments     5,407     Black-Scholes Valuation Model   Price Per Share   $0.00 – $615.46     $ 81.27  
                Average Industry Volatility Volatility     18 %     18 %
                Marketability Discount     20 %     20 %
                Estimated Time to Exit     1 to 5 years       3 years  
                                 
      386     Expected Acquisition Settlement   Price Per Share   $ 2.09     $ 2.09  
                                 
Other investments     300     Multiple Probability Weighted   Discount Rate     25 %     25 %
            Cash Flow Model   Probability Weighting     100 %     100 %
                                 
Equity investments     101     Last Equity Financing   Price Per Share   $ 0.04     $ 0.04  
                                 
      215     Expected Settlement   Price Per Share   $0.00 – $1.41     $ 1.41  
Total Level 3 investments   $ 248,576                          

 

Borrowings:   The carrying amount of borrowings under the Company’s revolving credit facility (the “Key Facility”) with KeyBank National Association (“Key”) approximates fair value due to the variable interest rate of the Key Facility and is categorized as Level 2 within the fair value hierarchy described above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed rate 2019 Notes (as defined in Note 6) is based on the closing public share price on the date of measurement. On March 31, 2016, the closing price of the 2019 Notes on the New York Stock Exchange was $25.40 per note, or $33.5 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. Based on market quotations on March 31, 2016, the Asset-Backed Notes (as defined in Note 6) were trading at par value, or $8.7 million, and are categorized as Level 3 within the fair value hierarchy described above. These borrowings are not recorded at fair value on a recurring basis.

 

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

 

The following tables detail the assets that are carried at fair value and measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

    March 31, 2016  
    Total     Level 1     Level 2     Level 3  
    (In thousands)  
Money market funds   $ 291     $     $ 291     $  
Restricted investments in money market funds   $ 652     $     $ 652     $  
Debt investments   $ 238,426     $     $     $ 238,426  
Warrant investments   $ 5,132     $     $ 235     $ 4,897  
Other investments   $ 700     $     $     $ 700  
Equity investments   $ 777     $ 548     $     $ 229  

 

    December 31, 2015  
    Total     Level 1     Level 2     Level 3  
    (In thousands)  
Money market funds   $ 285     $     $ 285     $  
Restricted investments in money market funds   $ 1,901     $     $ 1,901     $  
Debt investments   $ 242,167     $     $     $ 242,167  
Warrant investments   $ 6,645     $     $ 852     $ 5,793  
Other investments   $ 300     $     $     $ 300  
Equity investments   $ 1,155     $ 839     $     $ 316  
                                 

 

 

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2016:

 

    Three Months Ended March 31, 2016  
   

Debt

Investments

   

Warrant

Investments

   

Equity

Investments

   

Other

Investments

    Total  
    (In thousands)  
Level 3 assets, beginning of period   $ 242,167     $ 5,793     $ 316     $ 300     $ 248,576  
Purchase of investments     16,500                         16,500  
Warrants and equity received and classified as Level 3           81       45             126  
Principal payments received on investments     (18,060 )                 (23 )     (18,083 )
Proceeds from sale of investments           (709 )     (127 )           (836 )
Net realized (loss) gain on investments     (2,157 )     608       (369 )           (1,918 )
Unrealized appreciation (depreciation) included in earnings     366       (876 )     364       40       (106 )
Transfer from debt investments to other investments     (383 )                 383        
Other     (7 )                       (7 )
Level 3 assets, end of period   $ 238,426     $ 4,897     $ 229     $ 700     $ 244,252  

 

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Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The Company’s transfers between levels are recognized at the end of each reporting period. During the three months ended March 31, 2016, there were no transfers between levels.

 

The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at March 31, 2016 includes $1.8 million in unrealized depreciation on debt and other investments, $0.5 million in unrealized depreciation on warrant investments and $0.1 million in unrealized appreciation on equity investments.

 

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2015:

 

    Three Months Ended March 31, 2015  
   

Debt

Investments

   

Warrant

Investments

   

Equity

Investments

   

Other

Investments

    Total  
    (In thousands)  
Level 3 assets, beginning of period   $ 199,180     $ 3,966     $ 222     $ 300     $ 203,668  
Purchase of investments     23,933                         23,933  
Warrants and equity received and classified as Level 3           151