Horizon Technology Finance Corporation
Horizon Technology Finance Corp (Form: 10-Q, Received: 05/02/2017 16:54:52)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017
   
  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)

 

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

 

 

 

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 x 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨ Accelerated filer x
       
Non-accelerated filer ¨   (Do not check if a smaller reporting company) Smaller reporting company ¨
       
Emerging growth company ¨    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨

 

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

 

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of May 2, 2017 was 11,516,691. 

 

 

 

 

 

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, 2017 and December 31, 2016 (unaudited) 3
  Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited) 4
  Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2017 and 2016 (unaudited) 5
  Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited) 6
  Consolidated Schedules of Investments as of March 31, 2017 and December 31, 2016 (unaudited) 7
  Notes to the Consolidated Financial Statements (unaudited) 18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
Item 3. Quantitative and Qualitative Disclosures About Market Risk 46
Item 4. Controls and Procedures 47
     
  PART II  
Item 1. Legal Proceedings 48
Item 1A. Risk Factors 48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 48
Item 3. Defaults Upon Senior Securities 48
Item 4. Mine Safety Disclosures 48
Item 5. Other Information 48
Item 6. Exhibits 48
  Signatures 49

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

 

  2  

 

 

PART I: FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Assets and Liabilities (Unaudited)

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

 

    March 31,
2017
    December 31,
2016
 
             
Assets                
Non-affiliate investments at fair value (cost of $188,446 and $211,627, respectively) (Note 4)   $ 180,114     $ 194,003  
Cash     43,644       37,135  
Interest receivable     4,586       6,036  
Other assets     1,613       2,078  
Total assets     229,957     $ 239,252  
                 
Liabilities                
Borrowings (Note 6)   $ 85,644     $ 95,597  
Distributions payable     3,455       3,453  
Base management fee payable (Note 3)     312       337  
Incentive fee payable (Note 3)     430        
Other accrued expenses     677       673  
Total liabilities     90,518       100,060  
                 
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, 2017 and December 31, 2016            
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 11,676,723 and 11,671,966 shares issued and 11,515,181 and 11,510,424 shares outstanding as of March 31, 2017 and December 31, 2016, respectively     12       12  
Paid-in capital in excess of par     179,600       179,551  
Distributions in excess of net investment income     (485 )     (397 )
Net unrealized depreciation on investments     (8,332 )     (19,463 )
Net realized loss on investments     (31,356 )     (20,511 )
Total net assets     139,439       139,192  
Total liabilities and net assets   $ 229,957     $ 239,252  
Net asset value per common share   $ 12.11     $ 12.09  

 

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,  
    2017     2016  
Investment income                
Interest income on non-affiliate investments   $ 6,279     $ 9,003  
Prepayment fee income on non-affiliate investments     460       167  
Fee income on non-affiliate investments     223       127  
Total investment income     6,962       9,297  
Expenses                
Interest expense     1,316       1,534  
Base management fee (Note 3)     974       1,284  
Performance based incentive fee (Note 3)     430       1,099  
Administrative fee (Note 3)     194       281  
Professional fees     506       501  
General and administrative     175       201  
Total expenses     3,595       4,900  
Net investment income     3,367       4,397  
                 
Net realized and unrealized gain (loss) on investments                
Net realized loss on investments     (10,845 )     (1,986 )
Net unrealized appreciation (depreciation) on investments     11,131       (1,014 )
Net realized and unrealized gain (loss) on investments     286       (3,000 )
                 
Net increase in net assets resulting from operations   $ 3,653     $ 1,397  
Net investment income per common share   $ 0.29     $ 0.38  
Net increase in net assets per common share   $ 0.32     $ 0.12  
Distributions declared per share   $ 0.30     $ 0.345  
Weighted average shares outstanding     11,512,853       11,538,003  

 

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
    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, 2015     11,535,212     $ 12     $ 179,707     $ (2,006 )   $ (5,227 )   $ (12,735 )   $ 159,751  
Net increase in net assets resulting from operations, net of excise tax                       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  
                                                         
Balance at December 31, 2016     11,510,424     $ 12     $ 179,551     $ (397 )   $ (19,463 )   $ (20,511 )   $ 139,192  
Net increase in net assets resulting from operations, net of excise tax                       3,367       11,131       (10,845 )     3,653  
Issuance of common stock under dividend reinvestment plan     4,757             49                         49  
Distributions declared                       (3,455 )                 (3,455 )
Balance at March 31, 2017     11,515,181     $ 12     $ 179,600     $ (485 )   $ (8,332 )   $ (31,356 )   $ 139,439  

 

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,  
    2017     2016  
Cash flows from operating activities:                
Net increase in net assets resulting from operations   $ 3,653     $ 1,397  
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:                
Amortization of debt issuance costs     127       153  
Net realized loss on investments     10,845       1,986  
Net unrealized (appreciation) depreciation on investments     (11,131 )     1,014  
Purchase of investments     (25,916 )     (16,500 )
Principal payments received on investments     39,511       18,033  
Proceeds from sale of investments     1,226       836  
Changes in assets and liabilities:                
Net increase in investments in money market funds           (6 )
Net decrease in restricted investments in money market funds           439  
Decrease (increase) in interest receivable     112       (243 )
Decrease (increase) in end-of-term payments     927       (1,075 )
Decrease in unearned income     (235 )     (118 )
Decrease in other assets     385       89  
Increase in other accrued expenses     4       160  
(Decrease) increase in base management fee payable     (25 )     40  
Increase in incentive fee payable     430       71  
Net cash provided by operating activities     19,913       6,276  
Cash flows from financing activities:                
Repayment of Asset-Backed Notes           (5,850 )
Advances on credit facility     15,000        
Repayment of credit facility     (25,000 )      
Distributions paid     (3,404 )     (3,928 )
Net cash used in financing activities     (13,404 )     (9,778 )
Net increase (decrease) in cash     6,509       (3,502 )
Cash:                
Beginning of period     37,135       20,765  
End of period   $ 43,644     $ 17,263  
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 1,257     $ 1,350  
Supplemental non-cash investing and financing activities:                
Warrant investments received and recorded as unearned income   $ 877     $ 81  
Distributions payable   $ 3,455     $ 3,982  
End-of-term payments receivable   $ 3,736     $ 6,143  

 

See Notes to Consolidated Financial Statements

 

  6  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2017

(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 — 119.1% (8)                        
Debt Investments — Life Science — 27.5% (8)                        
Palatin Technologies, Inc. (2)(5)   Biotechnology   Term Loan (9.31% cash (Libor + 8.50%; Floor   $ 3,500     $ 3,465     $ 3,465  
        9.00%), 5.00% ETP, Due 1/1/19)                        
        Term Loan (9.31% cash (Libor + 8.50%; Floor     4,667       4,627       4,627  
        9.00%), 5.00% ETP, Due 8/1/19)                        
Sample6, Inc. (2)   Biotechnology   Term Loan (9.81% cash (Libor + 9.00%; Floor     778       775       775  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.81% cash (Libor + 9.00%; Floor     472       470       470  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.81% cash (Libor + 9.00%; Floor     1,667       1,658       1,658  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
Strongbridge U.S. Inc. (5)   Biotechnology   Term Loan (9.01% cash (Libor + 8.22%; Floor     7,500       7,358       7,358  
        8.75%), 8.00% ETP, Due 12/1/20)                        
vTv Therapeutics Inc. (2)(5)   Biotechnology   Term Loan (10.81% cash (Libor + 10.00%; Floor     6,250       6,154       6,154  
        10.50%), 6.00% ETP, Due 5/1/20)                        
        Term Loan (10.98% cash (Libor + 10.00%; Floor     3,750       3,687       3,687  
        10.50%), 6.00% ETP, Due 10/1/20)                        
Lantos Technologies, Inc. (2)   Medical Device   Term Loan (11.50% cash (Libor + 10.50%; Floor     2,479       2,459       2,345  
        11.50%), 5.00% ETP, Due 2/1/18)                        
Mederi Therapeutics, Inc. (2)   Medical Device   Term Loan (12.45% cash (Libor + 11.82%; Floor     959       953       953  
        12.00%), 6.00% ETP, Due 12/1/17)                        
        Term Loan (12.45% cash (Libor + 11.82%; Floor     959       953       953  
        12.00%), 6.00% ETP, Due 12/1/17)                        
NinePoint Medical, Inc. (2)   Medical Device   Term Loan (9.56% cash (Libor + 8.75%; Floor     4,000       3,966       3,966  
        9.25%), 4.50% ETP, Due 3/1/19)                        
        Term Loan (9.56% cash (Libor + 8.75%; Floor     2,000       1,978       1,978  
        9.25%), 4.50% ETP, Due 3/1/19)                        
Total Debt Investments — Life Science             38,503       38,389  
Debt Investments — Technology — 81.5% (8)                        
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   Term Loan (11.29% cash (Libor + 10.50%; Floor     467       460       460  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 11/1/17)                        
        Term Loan (11.29% cash (Libor + 10.50%; Floor     333       326       326  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 2/1/18)                        
        Term Loan (11.29% cash (Libor + 10.50%; Floor     400       394       394  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 4/1/18)                        
Le Tote, Inc. (2)   Consumer-related Technologies   Term Loan (10.46% cash (Libor + 9.65%; Floor     4,000       3,946       3,946  
        10.15%), 5.00% ETP, Due 3/1/20)                        
        Term Loan (10.46% cash (Libor + 9.65%; Floor     3,000       2,959       2,959  
        10.15%), 5.00% ETP, Due 3/1/20)                        
Rhapsody International, Inc. (2)   Consumer-related Technologies   Term Loan (11.31% cash (Libor + 10.50%; Floor     7,500       7,351       7,351  
        11.00%), 3.00% ETP, Due 10/1/19)                        
SavingStar, Inc. (2)   Consumer-related Technologies   Term Loan (11.21% cash (Libor + 10.40%; Floor     2,600       2,564       2,564  
        10.90%), 3.00% ETP, Due 6/1/19)                        
        Term Loan (11.21% cash (Libor + 10.40%; Floor     2,000       1,968       1,968  
        10.90%), 3.00% ETP, Due 3/1/20)                        
IgnitionOne, Inc. (2)   Internet and Media   Term Loan (11.21% cash (Libor + 10.23%; Floor     3,000       2,802       2,802  
        10.23%), 2.00% ETP, Due 4/1/22)                        
        Term Loan (11.21% cash (Libor + 10.23%; Floor     3,000       2,802       2,802  
        10.23%), 2.00% ETP, Due 4/1/22)                        
        Term Loan (11.21% cash (Libor + 10.23%; Floor     3,000       2,802       2,802  
        10.23%), 2.00% ETP, Due 4/1/22)                        
        Term Loan (11.21% cash (Libor + 10.23%; Floor     3,000       2,802       2,802  
        10.23%), 2.00% ETP, Due 4/1/22)                        
Jump Ramp Games, Inc. (2)   Internet and Media   Term Loan (10.71% cash (Libor + 9.73%),     4,000       3,928       3,928  
        3.00% ETP, Due 4/1/20)                        
MediaBrix, Inc. (2)   Internet and Media   Term Loan (11.81% cash (Libor + 11.00%; Floor     4,000       3,969       3,969  
        11.50%), 3.00% ETP, Due 1/1/20)                        
Zinio Holdings, LLC (2)   Internet and Media   Term Loan (12.06% cash (Libor + 11.25%; Floor     4,000       3,970       3,970  
        11.75%), 4.00% ETP, Due 2/1/20)                        
The NanoSteel Company, Inc. (2)   Materials   Term Loan (10.31% cash (Libor + 9.50%; Floor     5,000       4,946       4,946  
        10.00%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.31% cash (Libor + 9.50%; Floor     2,500       2,473       2,473  
        10.00%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.31% cash (Libor + 9.50%; Floor     2,500       2,467       2,467  
        10.00%), 5.00% ETP, Due 1/1/20)                        

 

See Notes to Consolidated Financial Statements

 

  7  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2017

(Dollars in thousands)

 

            Principal     Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Amount     Investments (6)     Value  
Nanocomp Technologies, Inc. (2)   Networking   Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)     272       271       271  
        Term Loan (11.81% cash (Libor + 11.00%; Floor     3,000       2,944       2,944  
        11.50%), 3.00% ETP, Due 4/1/20)                        
Powerhouse Dynamics, Inc. (2)   Power Management   Term Loan (11.51% cash (Libor + 10.70%; Floor     2,000       1,973       1,973  
        11.20%), 3.00% ETP, Due 3/1/19)                        
Avalanche Technology, Inc. (2)   Semiconductors   Term Loan (10.06% cash (Libor + 9.25%; Floor 10.00%;     104       104       104  
        Ceiling 11.75%), 2.40% ETP, Due 4/1/17)                        
        Term Loan (10.06% cash (Libor + 9.25%; Floor 10.00%;     1,153       1,150       1,150  
        Ceiling 11.75%), 2.40% ETP, Due 10/1/18)                        
        Term Loan (10.06% cash (Libor + 9.25%; Floor 10.00%;     1,369       1,342       1,342  
        Ceiling 11.75%), 2.00% ETP, Due 2/1/19)                        
Luxtera, Inc.   Semiconductors   Term Loan (10.75% cash (Prime + 6.75%), Due 3/28/20)     2,000       1,869       1,869  
Bridge2 Solutions, Inc. (2)   Software   Term Loan (11.81% cash (Libor + 11.00%; Floor     3,733       3,712       3,712  
        11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19)                        
        Term Loan (11.81% cash (Libor + 11.00%; Floor     1,000       997       997  
        11.50%; Ceiling 14.50%), 2.00% ETP, Due 1/1/20)                        
ControlScan, Inc. (2)   Software   Term Loan (11.06% cash (Libor + 10.25%),     4,500       4,452       4,452  
        3.00% ETP, Due 7/1/20)                        
Decisyon, Inc.   Software   Term Loan (13.118% cash (Libor + 12.308%; Floor     1,523       1,521       1,180  
        12.50%), 6.50% ETP, Due 6/1/18)                        
        Term Loan (13.118% cash (Libor + 12.308%; Floor     833       735       569  
        12.50%), 6.50% ETP, Due 6/1/18)                        
Digital Signal Corporation (11)(13)   Software   Term Loan (11.06% cash (Libor + 10.25%; Floor     1,285       1,251       919  
        10.43%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (11.06% cash (Libor + 10.25%; Floor     1,285       1,251       919  
        10.43%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.00% cash, Due 6/30/17)     221       221       162  
Education Elements, Inc. (2)   Software   Term Loan (10.81% cash (Libor + 10.00%; Floor     1,400       1,381       1,381  
        10.50%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (10.81% cash (Libor + 10.00%; Floor     1,400       1,381       1,381  
        10.50%), 4.00% ETP, Due 8/1/19)                        
Netuitive, Inc.   Software   Term Loan (13.06% cash (Libor + 12.25%; Floor     265       265       265  
        12.50%), 3.33% ETP, Due 9/1/17)                        
ScoreBig, Inc. (2)(11)(12)   Software   Term Loan (10.63% cash (Libor + 10.00%; Floor     3,403       3,332       1,526  
        10.50%), 4.00% ETP, Due 4/1/19)                        
        Term Loan (10.63% cash (Libor + 10.00%; Floor     3,403       3,360       1,539  
        10.50%), 4.00% ETP, Due 4/1/19)                        
        Term Loan (10.63% cash (Libor + 10.00%; Floor     2,000       1,950       894  
        10.50%), 4.00% ETP, Due 3/1/20)                        
        Term Loan (10.63% cash (Libor + 10.00%; Floor     203       203       93  
        10.50%), 4.00% ETP, Due 10/31/16)                        
        Term Loan (10.63% cash (Libor + 10.00%; Floor     324       324       148  
        10.50%), 4.00% ETP, Due 11/11/19)                        
ShopKeep.com, Inc. (2)   Software   Term Loan (10.76% cash (Libor + 9.95%; Floor     6,000       5,898       5,898  
        10.45%), 3.00% ETP, Due 4/1/20)                        
        Term Loan (10.76% cash (Libor + 9.95%; Floor     4,000       3,923       3,923  
        10.45%), 3.00% ETP, Due 9/1/20)                        
SIGNiX, Inc.   Software   Term Loan (11.81% cash (Libor + 11.00%; Floor     2,200       2,060       1,974  
        11.50%), ETP 3.5%, Due 4/1/19)                        
SilkRoad Technology, Inc. (2)   Software   Term Loan (11.16% cash (Libor + 10.35%; Floor     7,000       6,888       6,888  
        10.85%; Ceiling 12.85%), 4.00% ETP, Due 12/1/19)                        
Skyword, Inc.   Software   Term Loan (11.76% cash (Libor + 10.95%; Floor     3,867       3,817       3,817  
        11.45%), 3.00% ETP, Due 8/1/19)                        
Sys-Tech Solutions, Inc. (2)   Software   Term Loan (11.96% cash (Libor + 11.15%; Floor     2,400       2,387       2,387  
        11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)                        
        Term Loan (11.96% cash (Libor + 11.15%; Floor     2,333       2,318       2,318  
        11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)                        
VBrick Systems, Inc. (2)   Software   Term Loan (11.81% cash (Libor + 11.00%; Floor     400       398       398  
        11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)                        
xTech Holdings, Inc. (2)   Software   Term Loan (11.31% cash (Libor + 10.50%; Floor     1,333       1,315       1,315  
        11.00%), 3.00% ETP, Due 4/1/19)                        

 

See Notes to Consolidated Financial Statements

 

  8  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2017

(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 (11.31% cash (Libor + 10.50%; Floor     1,944       1,917       1,917  
        11.00%), 3.00% ETP, Due 3/1/20)                        
Total Debt Investments — Technology             119,839       113,554  
Debt Investments — Cleantech — 4.3% (8)                        
Lehigh Technologies, Inc. (2)   Waste Recycling   Term Loan (10.53% cash (Libor + 9.72%), 1.67% ETP,     3,000       2,983       2,983  
        Due 8/1/19)                        
        Term Loan (10.53% cash (Libor + 9.72%), 1.67% ETP,     3,000       2,983       2,983  
        Due 8/1/19)                        
Total Debt Investments — Cleantech             5,966       5,966  
Debt Investments — Healthcare information and services — 5.8% (8)                        
Interleukin Genetics, Inc. (2)(5)   Diagnostics   Term Loan (11.31% cash (Libor + 10.50%;     3,649       3,526       3,469  
        Floor 11.00%), 6.50% ETP, Due 10/1/18)                        
Watermark Medical, Inc. (2)   Other Healthcare   Term Loan (10.31% cash (Libor + 9.50%; Floor 10.00%;     1,896       1,893       1,893  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
        Term Loan (10.31% cash (Libor + 9.50%; Floor 10.00%;     1,896       1,893       1,893  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
        Term Loan (10.31% cash (Libor + 9.50%; Floor 10.00%;     903       902       902  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
Total Debt Investments — Healthcare information and services             8,214       8,157  
Total Debt Investments             172,522       166,066  
                                 
Warrant Investments — 5.1% (8)                        
Warrants — Life Science — 0.7% (8)                                
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants             83        
Argos Therapeutics, Inc. (2)(5)   Biotechnology   73,112 Common Stock Warrants             33        
Celsion Corporation (5)   Biotechnology   5,708 Common Stock Warrants             15        
Inotek Pharmaceuticals Corporation (5)   Biotechnology   28,204 Common Stock Warrants             17        
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        
Revance Therapeutics, Inc. (5)   Biotechnology   34,113 Common Stock Warrants             68       239  
Sample6, Inc. (2)   Biotechnology   494,988 Preferred Stock Warrants             45       16  
Strongbridge U.S. Inc. (5)   Biotechnology   160,714 Common Stock Warrants             72       400  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   2,050 Common Stock Warrants             5        
vTv Therapeutics Inc. (2)(5)   Biotechnology   93,896 Common Stock Warrants             44       108  
AccuVein Inc. (2)   Medical Device   75,769 Preferred Stock Warrants             24       27  
EnteroMedics, Inc. (5)   Medical Device   134 Common Stock Warrants             347        
IntegenX, Inc. (2)   Medical Device   170,646 Preferred Stock Warrants             35       32  
Lantos Technologies, Inc. (2)   Medical Device   66,665,256 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       44  
NinePoint Medical, Inc. (2)   Medical Device   566,038 Preferred Stock Warrants             33       39  
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        
Total Warrants — Life Science                     1,222       997  
Warrants — Technology — 3.8% (8)                        
Ekahau, Inc. (2)   Communications   978,261 Preferred Stock Warrants             32       23  
Additech, Inc. (2)   Consumer-related Technologies   150,000 Preferred Stock Warrants             32       31  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   268,591 Preferred Stock Warrants             68       698  
If(we), Inc.    Consumer-related Technologies   190,868 Preferred Stock Warrants             27       33  
Le Tote, Inc. (2)   Consumer-related Technologies   202,974 Preferred Stock Warrants             63       358  
Rhapsody International Inc. (2)   Consumer-related Technologies   852,273 Common Stock Warrants             164       55  
SavingStar, Inc. (2)   Consumer-related Technologies   98,860 Preferred Stock Warrants             60       71  
XIOtech, Inc.    Data Storage   96 Preferred Stock Warrants             22        
IgnitionOne, Inc. (2)   Internet and Media   262,910 Preferred Stock Warrants             672       672  
Jump Ramp Games, Inc. (2)   Internet and Media   159,766 Preferred Stock Warrants             32       32  
The NanoSteel Company, Inc. (2)   Materials   299,211 Preferred Stock Warrants             93       349  
IntelePeer, Inc.    Networking   141,549 Common Stock Warrants             39        
Nanocomp Technologies, Inc. (2)   Networking   1,414,921 Preferred Stock Warrants             67       47  
Powerhouse Dynamics, Inc. (2)   Power Management   290,698 Preferred Stock Warrants             28       26  
Avalanche Technology, Inc. (2)   Semiconductors   202,602 Preferred Stock Warrants             101       40  
eASIC Corporation (2)   Semiconductors   40,445 Preferred Stock Warrants             25       28  

 

See Notes to Consolidated Financial Statements

 

  9  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2017

(Dollars in thousands)

 

            Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Investments (6)     Value  
InVisage Technologies, Inc. (2)   Semiconductors   395,009 Preferred Stock Warrants     48       45  
Kaminario, Inc.   Semiconductors   1,087,203 Preferred Stock Warrants     59       45  
Luxtera, Inc.(2)   Semiconductors   3,212,948 Preferred Stock Warrants     160       305  
Soraa, Inc. (2)   Semiconductors   203,616 Preferred Stock Warrants     80       432  
Bolt Solutions Inc. (2)   Software   202,892 Preferred Stock Warrants     112       118  
Bridge2 Solutions, Inc. (2)   Software   75,458 Common Stock Warrants     18       341  
Clarabridge, Inc.    Software   53,486 Preferred Stock Warrants     14       81  
ControlScan, Inc. (2)   Software   2,295,918 Preferred Stock Warrants     19       288  
Decisyon, Inc.   Software   82,967 Common Stock Warrants     46        
Digital Signal Corporation   Software   125,116 Common Stock Warrants     32        
Education Elements, Inc. (2)   Software   238,122 Preferred Stock Warrants     28       28  
Lotame Solutions, Inc. (2)   Software   288,115 Preferred Stock Warrants     22       276  
Netuitive, Inc.    Software   41,569 Common Stock Warrants     48        
Riv Data Corp. (2)   Software   237,361 Preferred Stock Warrants     12       12  
ShopKeep.com, Inc. (2)   Software   165,779 Preferred Stock Warrants     98       118  
SIGNiX, Inc.   Software   114,767 Preferred Stock Warrants     210       86  
Skyword, Inc.   Software   301,056 Preferred Stock Warrants     48       56  
SpringCM, Inc. (2)   Software   2,385,686 Preferred Stock Warrants     55       131  
Sys-Tech Solutions, Inc.   Software   375,000 Preferred Stock Warrants     242       406  
Visage Mobile, Inc.   Software   1,692,047 Preferred Stock Warrants     19        
xTech Holdings, Inc. (2)   Software   158,730 Preferred Stock Warrants     43       41  
Total Warrants — Technology             2,938       5,272  
Warrants — Cleantech — 0.1% (8)                
Renmatix, Inc.   Alternative Energy   53,022 Preferred Stock Warrants     68        
Rypos, Inc. (2)   Energy Efficiency   5,627 Preferred Stock Warrants     44       47  
Tigo Energy, Inc. (2)   Energy Efficiency   804,604 Preferred Stock Warrants     100       115  
Total Warrants — Cleantech             212       162  
Warrants — Healthcare information and services — 0.5% (8)                
Candescent Health, Inc. (2)     Diagnostics   519,991 Preferred Stock Warrants     378        
Interleukin Genetics, Inc. (2)(5)    Diagnostics   7,662,100 Common Stock Warrants     168       143  
LifePrint Group, Inc. (2)    Diagnostics   49,000 Preferred Stock Warrants     29       2  
ProterixBio, Inc. (2)    Diagnostics   3,156 Common Stock Warrants     54        
Singulex, Inc.     Other Healthcare   294,231 Preferred Stock Warrants     44       51  
Verity Solutions Group, Inc.     Other Healthcare   300,360 Preferred Stock Warrants     100       42  
Watermark Medical, Inc. (2)    Other Healthcare   27,373 Preferred Stock Warrants     74       59  
Medsphere Systems Corporation (2)    Software   7,097,791 Preferred Stock Warrants     60       205  
Recondo Technology, Inc. (2)     Software   556,796 Preferred Stock Warrants     95       205  
Total Warrants — Healthcare information and services             1,002       707  
Total Warrants             5,374       7,138  
                         
Other Investments — 4.2% (8)                        
Espero  Pharmaceuticals, Inc. (14)    Biotechnology   Royalty Agreement     5,300       5,300  
ZetrOZ, Inc.    Medical Device   Royalty Agreement     354       500  
Vette Technology, LLC    Data Storage   Royalty Agreement Due 4/18/2019     4,308       100  
Total Other Investments             9,962       5,900  
Equity — 0.7% (8)                        
Insmed Incorporated (5)    Biotechnology   33,208 Common Stock     238       581  
Revance Therapeutics, Inc.(5)    Biotechnology   5,125 Common Stock     73       107  
Sunesis Pharmaceuticals, Inc. (5)    Biotechnology   13,082 Common Stock     83       54  
SnagAJob.com, Inc.     Consumer-related Technologies   82,974 Common Stock     9       83  
Decisyon, Inc.    Software   4,200,934 Common Stock     185       185  
Total Equity             588       1,010  
Total Portfolio Investment Assets — 129.1% (8)   $ 188,446     $ 180,114  

 

 

 

 

(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.
   
(3) All investments are less than 5% ownership of the class and ownership of the portfolio company.

 

See Notes to Consolidated Financial Statements

 

  10  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2017

(Dollars in thousands)

 

(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, 2017 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 March 31, 2017. 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, 2017.
   
(12)

ScoreBig, Inc., a Delaware corporation (“ScoreBig”), made an assignment for the benefit of its creditors whereby ScoreBig assigned all of its assets to SB (assignment for the benefit of creditors), LLC, a California limited liability company (“SBABC”), established under California law to effectuate the Assignment for the Benefit of Creditors of ScoreBig. SBABC subsequently entered into a License Agreement with a third party (“Licensee”), whereby SBABC granted a license of certain of SBABC’s intellectual property and general intangibles to Licensee in exchange for certain royalty payments on the future net profits, if any, of Licensee. SBABC, in consideration for the Company’s consent to the License Agreement, agreed to pay all payments due under the License Agreement, if any, to the Company until the payment in full in cash of the Company’s debt investments in ScoreBig. 

   
(13)

Digital Signal Corporation, a Delaware corporation (“DSC”), made an assignment for the benefit of its creditors whereby DSC assigned all of its assets to DSC (assignment for the benefit of creditors), LLC, a Delaware limited liability company, established under Delaware law to effectuate the Assignment for the Benefit of Creditors of DSC. 

   
(14) Royalty Agreement received in partial satisfaction of obligations of New Haven Pharmaceuticals, Inc. (“NHP”) to the Company in connection with the sale of substantially all of the assets of NHP to Espero Pharmaceuticals, Inc.

 

See Notes to Consolidated Financial Statements

 

  11  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 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 — 133.8% (8)                        
Debt Investments — Life Science — 38.5% (8)                        
Argos Therapeutics, Inc. (2)(5)   Biotechnology   Term Loan (9.38% cash (Libor + 8.75%; Floor 9.25%;   $ 4,375     $ 4,339     $ 4,339  
        Ceiling 10.75%), 5.00% ETP, Due 10/1/18)                        
        Term Loan (9.38% cash (Libor + 8.75%; Floor 9.25%;     5,000       4,969       4,969  
        Ceiling 10.75%), 5.00% ETP, Due 3/1/19)                        
New Haven Pharmaceuticals, Inc. (11)   Biotechnology   Term Loan (11.63% cash (Libor + 11.00%; Floor     1,282       1,274       651  
        11.50%), 11.42% ETP, Due 3/1/19)                        
        Term Loan (11.63% cash (Libor + 11.00%; Floor     427       424       217  
        11.50%), 11.42% ETP, Due 3/1/19)                        
        Term Loan (10.63% cash (Libor + 10.00%; Floor     1,973       1,960       1,002  
        10.50%), 6.10% ETP, Due 3/1/19)                        
        Term Loan (10.13% cash (Libor + 9.50%; Floor     6,185       6,118       3,127  
        10.00%), 4.00% ETP, Due 4/1/19)                        
        Term Loan (10.13% cash (Libor + 9.50%; Floor     593       593       303  
        10.00%), Due 1/31/17)                        
Palatin Technologies, Inc. (2)(5)   Biotechnology   Term Loan (9.13% cash (Libor + 8.50%; Floor     4,000       3,960       3,960  
        9.00%), 5.00% ETP, Due 1/1/19)                        
        Term Loan (9.13% cash (Libor + 8.50%; Floor     5,000       4,955       4,955  
        9.00%), 5.00% ETP, Due 8/1/19)                        
Sample6, Inc. (2)   Biotechnology   Term Loan (9.63% cash (Libor + 9.00%; Floor     972       969       969  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.63% cash (Libor + 9.00%; Floor     591       588       588  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
        Term Loan (9.63% cash (Libor + 9.00%; Floor     2,083       2,073       2,073  
        9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)                        
Strongbridge U.S. Inc. (5)   Biotechnology   Term Loan (8.84% cash (Libor + 8.22%; Floor     7,500       7,353       7,353  
        8.75%), 8.00% ETP, Due 12/1/20)                        
vTv Therapeutics Inc. (2)(5)   Biotechnology   Term Loan (10.63% cash (Libor + 10.00%; Floor     6,250       6,106       6,106  
        10.50%), 6.00% ETP, Due 5/1/20)                        
Lantos Technologies, Inc. (2)   Medical Device   Term Loan (11.50% cash (Libor + 10.50%; Floor     2,479       2,455       2,320  
        11.50%), 5.00% ETP, Due 2/1/18)                        
Mederi Therapeutics, Inc. (2)   Medical Device   Term Loan (12.27% cash (Libor + 11.82%; Floor     1,352       1,344       1,344  
        12.00%), 4.00% ETP, Due 7/1/17)                        
        Term Loan (12.27% cash (Libor + 11.82%; Floor     1,352       1,344       1,344  
        12.00%), 4.00% ETP, Due 7/1/17)                        
NinePoint Medical, Inc. (2)   Medical Device   Term Loan (9.38% cash (Libor + 8.75%; Floor     4,500       4,461       4,461  
        9.25%), 4.50% ETP, Due 3/1/19)                        
        Term Loan (9.38% cash (Libor + 8.75%; Floor     2,250       2,225       2,225  
        9.25%), 4.50% ETP, Due 3/1/19)                        
Tryton Medical, Inc. (2)   Medical Device   Term Loan (10.66% cash (Prime + 7.16%), 2.50% ETP,     1,313       1,309       1,309  
        Due 3/1/17)                        
Total Debt Investments — Life Science             58,819       53,615  
Debt Investments — Technology — 75.4% (8)                        
Ekahau, Inc. (2)   Communications   Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     57       57       57  
        Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     19       19       19  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   Term Loan (11.13% cash (Libor + 10.50%; Floor     667       657       657  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 11/1/17)                        
        Term Loan (11.13% cash (Libor + 10.50%; Floor     433       424       424  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 2/1/18)                        
        Term Loan (11.13% cash (Libor + 10.50%; Floor     500       492       492  
        11.00%; Ceiling 12.50%), 2.00% ETP, Due 4/1/18)                        
Le Tote, Inc. (2)   Consumer-related Technologies   Term Loan (10.28% cash (Libor + 9.65%; Floor     4,000       3,942       3,942  
        10.15%), 5.00% ETP, Due 3/1/20)                        
        Term Loan (10.28% cash (Libor + 9.65%; Floor     3,000       2,955       2,955  
        10.15%), 5.00% ETP, Due 3/1/20)                        
Rhapsody International, Inc. (2)   Consumer-related Technologies   Term Loan (11.13% cash (Libor + 10.50%; Floor     7,500       7,336       7,336  
        11.00%), 3.00% ETP, Due 10/1/19)                        
SavingStar, Inc. (2)   Consumer-related Technologies   Term Loan (11.03% cash (Libor + 10.40%; Floor     2,900       2,860       2,860  
        10.90%), 3.00% ETP, Due 6/1/19)                        
        Term Loan (11.03% cash (Libor + 10.40%; Floor     2,000       1,965       1,965  
        10.90%), 3.00% ETP, Due 3/1/20)                        

 

See Notes to Consolidated Financial Statements

 

  12  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 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  
MediaBrix, Inc. (2)   Internet and Media   Term Loan (11.63% cash (Libor + 11.00%; Floor     4,000       3,966       3,966  
        11.50%), 3.00% ETP, Due 1/1/20)                        
Zinio Holdings, LLC (2)   Internet and Media   Term Loan (11.88% cash (Libor + 11.25%; Floor     4,000       3,967       3,967  
        11.75%), 4.00% ETP, Due 2/1/20)                        
The NanoSteel Company, Inc. (2)   Materials   Term Loan (10.13% cash (Libor + 9.50%; Floor     5,000       4,940       4,940  
        10.00%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.13% cash (Libor + 9.50%; Floor     2,500       2,470       2,470  
        10.00%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.13% cash (Libor + 9.50%; Floor     2,500       2,464       2,464  
        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)     369       367       367  
        Term Loan (11.63% cash (Libor + 11.00%; Floor     3,000       2,939       2,939  
        11.50%), 3.00% ETP, Due 4/1/20)                        
Powerhouse Dynamics, Inc. (2)   Power Management   Term Loan (11.33% cash (Libor + 10.70%; Floor     2,250       2,220       2,220  
        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%;     417       416       416  
        Ceiling 11.75%), 2.40% ETP, Due 4/1/17)                        
        Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     1,335       1,331       1,331  
        Ceiling 11.75%), 2.40% ETP, Due 10/1/18)                        
        Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;     1,548       1,517       1,517  
        Ceiling 11.75%), 2.00% ETP, Due 2/1/19)                        
Luxtera, Inc. (2)   Semiconductors   Term Loan (10.38% cash (Libor + 9.75%; Floor 10.25%;     614       607       607  
        Ceiling 12.25%), 13.00% ETP, Due 7/1/17)                        
        Term Loan (10.38% cash (Libor + 9.75%; Floor 10.25%;     343       341       341  
        Ceiling 12.25%), 13.00% ETP, Due 7/1/17)                        
        Term Loan (9.13% cash (Libor + 8.50%; Floor 9.00%),     667       663       663  
        4.50% ETP, Due 12/1/18)                        
        Term Loan (9.13% cash (Libor + 8.50%; Floor 9.00%),     667       663       663  
        4.50% ETP, Due 12/1/18)                        
        Term Loan (9.63% cash (Libor + 9.00%; Floor 9.50%),     2,000       1,990       1,990  
        4.50% ETP, Due 11/1/19)                        
Xtera Communications, Inc. (5)(11)   Semiconductors   Term Loan (12.50% cash, 22.92% ETP, Due 11/1/16)     3,056       3,047        
        Term Loan (12.50% cash, 22.92% ETP, Due 11/1/16)     936       933        
Bridge2 Solutions, Inc.   Software   Term Loan (11.63% cash (Libor + 11.00%; Floor     4,000       3,976       3,976  
        11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19)                        
        Term Loan (11.63% cash (Libor + 11.00%; Floor     1,000       996       996  
        11.50%; Ceiling 14.50%), 2.00% ETP, Due 1/1/20)                        
ControlScan, Inc. (2)   Software   Term Loan (10.88% cash (Libor + 10.25%),     4,500       4,413       4,413  
        3.00% ETP, Due 7/1/20)                        
Decisyon, Inc.   Software   Term Loan (12.94% cash (Libor + 12.308%; Floor     1,523       1,521       1,519  
        12.50%), 6.50% ETP, Due 6/1/18)                        
        Term Loan (12.94% cash (Libor + 12.308%; Floor     833       715       713  
        12.50%), 6.50% ETP, Due 6/1/18)                        
Digital Signal Corporation (11)(13)   Software   Term Loan (10.88% cash (Libor + 10.25%; Floor     1,280       1,246       928  
        10.43%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.88% cash (Libor + 10.25%; Floor     1,280       1,246       928  
        10.43%), 5.00% ETP, Due 7/1/19)                        
        Term Loan (10.00% cash, Due 6/30/17)     194       194       144  
Education Elements, Inc. (2)   Software   Term Loan (10.63% cash (Libor + 10.00%; Floor     1,600       1,578       1,578  
        10.50%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (10.63% cash (Libor + 10.00%; Floor     1,500       1,479       1,479  
        10.50%), 4.00% ETP, Due 8/1/19)                        
Netuitive, Inc.   Software   Term Loan (12.88% cash (Libor + 12.25%; Floor     461       460       460  
        12.50%), 3.33% ETP, Due 9/1/17)                        
ScoreBig, Inc. (2)(11)(12)   Software   Term Loan (10.63% cash (Libor + 10.00%; Floor     3,403       3,332       1,526  
        10.50%), 4.00% ETP, Due 4/1/19)                        
        Term Loan (10.63% cash (Libor + 10.00%; Floor     3,403       3,360       1,539  
        10.50%), 4.00% ETP, Due 4/1/19)                        
        Term Loan (10.63% cash (Libor + 10.00%; Floor     2,000       1,950       894  
        10.50%), 4.00% ETP, Due 3/1/20)                        
        Term Loan (10.63% cash (Libor + 10.00%; Floor     203       203       93  
        10.50%), 4.00% ETP, Due 10/31/16)                        
        Term Loan (10.63% cash (Libor + 10.00%; Floor     324       324       148  
        10.50%), 4.00% ETP, Due 11/11/19)                        

 

See Notes to Consolidated Financial Statements

 

  13  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 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  
ShopKeep.com, Inc. (2)   Software   Term Loan (10.47% cash (Libor + 9.95%; Floor     6,000       5,811       5,811  
        10.45%), 3.00% ETP, Due 4/1/20)                        
SIGNiX, Inc.   Software   Term Loan (11.63% cash (Libor + 11.00%; Floor     2,250       2,124       2,012  
        11.50%), Due 10/1/18)                        
SilkRoad Technology, Inc. (2)   Software   Term Loan (10.98% cash (Libor + 10.35%; Floor     7,500       7,455       7,455  
        10.85%; Ceiling 12.85%), 3.00% ETP, Due 6/1/19)                        
Skyword, Inc.   Software   Term Loan (11.58% cash (Libor + 10.95%; Floor     4,000       3,944       3,870  
        11.45%), 3.00% ETP, Due 8/1/19)                        
Social Intelligence Corp. (2)   Software   Term Loan (11.13% cash (Libor + 10.50%; Floor     323       316       315  
        11.00%; Ceiling 13.00%), 3.50% ETP, Due 12/1/17)                        
Sys-Tech Solutions, Inc. (2)   Software   Term Loan (11.78% cash (Libor + 11.15%; Floor     3,000       2,983       2,983  
        11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)                        
        Term Loan (11.78% cash (Libor + 11.15%; Floor     2,833       2,814       2,814  
        11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)                        
VBrick Systems, Inc. (2)   Software   Term Loan (11.63% cash (Libor + 11.00%; Floor     700       696       696  
        11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)                        
Vidsys, Inc. (2)   Software   Term Loan (13.00% cash, 12.58% ETP, Due 12/1/17)     2,610       2,610       2,610  
xTech Holdings, Inc. (2)   Software   Term Loan (11.13% cash (Libor + 10.50%; Floor     1,500       1,479       1,479  
        11.00%), 3.00% ETP, Due 4/1/19)                        
        Term Loan (11.13% cash (Libor + 10.50%; Floor     2,000       1,970       1,970  
        11.00%), 3.00% ETP, Due 3/1/20)                        
Total Debt Investments — Technology             114,743       104,917  
Debt Investments — Cleantech — 5.7% (8)                        
Rypos, Inc. (2)   Energy Efficiency   Term Loan (11.93% cash (Libor + 11.55%;     1,260       1,252       1,252  
        Floor 11.80%), 4.25% ETP, Due 6/1/17)                        
        Term Loan (11.93% cash (Libor + 11.55%;     697       690       690  
        Floor 11.80%), 4.25% ETP, Due 1/1/18)                        
Lehigh Technologies, Inc. (2)   Waste Recycling   Term Loan (10.35% cash (Libor + 9.72%), 6.75% ETP,     3,000       2,982       2,982  
        Due 8/1/19)                        
        Term Loan (10.35% cash (Libor + 9.72%), 6.75% ETP,     3,000       2,982       2,982  
        Due 8/1/19)                        
Total Debt Investments — Cleantech             7,906       7,906  
Debt Investments — Healthcare information and services — 14.2% (8)                        
Interleukin Genetics, Inc. (2)(5)   Diagnostics   Term Loan (11.13% cash (Libor + 10.50%;     4,225       4,081       4,081  
        Floor 11.00%), 6.50% ETP, Due 10/1/18)                        
Watermark Medical, Inc. (2)   Other Healthcare   Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%;     2,333       2,330       2,330  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
        Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%;     2,333       2,330       2,330  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
        Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%;     1,111       1,110       1,110  
        Ceiling 11.00%); 4.00% ETP, Due 4/1/18)                        
MedAvante, Inc. (2)   Software   Term Loan (9.88% cash (Libor + 9.25%; Floor     3,000       2,972       2,972  
        9.75%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (9.88% cash (Libor + 9.25%; Floor     3,000       2,972       2,972  
        9.75%), 4.00% ETP, Due 1/1/19)                        
        Term Loan (9.88% cash (Libor + 9.25%; Floor     4,000       3,953       3,953  
        9.75%), 4.00% ETP, Due 7/1/19)                        
Total Debt Investments — Healthcare information and services             19,748       19,748  
Total Debt Investments                     201,216       186,186  

 

See Notes to Consolidated Financial Statements

 

  14  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 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 — 4.6% (8)                
Warrants — Life Science — 0.5% (8)                
ACT Biotech Corporation   Biotechnology   1,521,820 Preferred Stock Warrants     83        
Argos Therapeutics, Inc. (2)(5)   Biotechnology   33,112 Common Stock Warrants     33       2  
Celsion Corporation (5)   Biotechnology   5,708 Common Stock Warrants     15        
Inotek Pharmaceuticals Corporation (5)   Biotechnology   28,204 Common Stock Warrants     17       21  
New Haven Pharmaceuticals, Inc.   Biotechnology   103,982 Preferred Stock Warrants     88        
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       4  
Revance Therapeutics, Inc. (5)   Biotechnology   34,377 Common Stock Warrants     68       241  
Sample6, Inc. (2)   Biotechnology   494,988 Preferred Stock Warrants     45       16  
Strongbridge U.S. Inc. (5)   Biotechnology   160,714 Common Stock Warrants     72       72  
vTv Therapeutics Inc. (2)(5)   Biotechnology   76,290 Common Stock Warrants     23       23  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology   2,050 Common Stock Warrants     5        
AccuVein Inc. (2)   Medical Device   75,769 Preferred Stock Warrants     24       27  
EnteroMedics, Inc. (5)   Medical Device   134 Common Stock Warrants     347        
IntegenX, Inc. (2)   Medical Device   170,646 Preferred Stock Warrants     35       31  
Lantos Technologies, Inc. (2)   Medical Device   66,665,256 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       44  
NinePoint Medical, Inc. (2)   Medical Device   566,038 Preferred Stock Warrants     33       39  
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        
Total Warrants — Life Science             1,289       612  
Warrants — Technology — 3.3% (8)                
Ekahau, Inc. (2)   Communications   978,261 Preferred Stock Warrants     32       23  
Additech, Inc. (2)   Consumer-related Technologies   150,000 Preferred Stock Warrants     33       31  
Gwynnie Bee, Inc. (2)   Consumer-related Technologies   268,591 Preferred Stock Warrants     68       698  
If(we), Inc.    Consumer-related Technologies   190,868 Preferred Stock Warrants     27       47  
Le Tote, Inc. (2)   Consumer-related Technologies   202,974 Preferred Stock Warrants     63       411  
Rhapsody International Inc. (2)   Consumer-related Technologies   852,273 Common Stock Warrants     164       150  
SavingStar, Inc. (2)   Consumer-related Technologies   98,860 Preferred Stock Warrants     60       70  
XIOtech, Inc.    Data Storage   2,217,979 Preferred Stock Warrants     22        
The NanoSteel Company, Inc. (2)   Materials   299,211 Preferred Stock Warrants     92       348  
IntelePeer, Inc.    Networking   141,549 Common Stock Warrants     39       31  
Nanocomp Technologies, Inc. (2)   Networking   707,387 Preferred Stock Warrants     67       72  
Aquion Energy, Inc.   Power Management   115,051 Preferred Stock Warrants     7       72  
Powerhouse Dynamics, Inc. (2)   Power Management   290,698 Preferred Stock Warrants     28       26  
Avalanche Technology, Inc. (2)   Semiconductors   202,602 Preferred Stock Warrants     101       40  
eASIC Corporation (2)   Semiconductors   40,445 Preferred Stock Warrants     25       28  
InVisage Technologies, Inc. (2)   Semiconductors   395,009 Preferred Stock Warrants     48       45  
Kaminario, Inc.   Semiconductors   1,087,203 Preferred Stock Warrants     59       45  
Luxtera, Inc.(2)   Semiconductors   2,508,671 Preferred Stock Warrants     49       193  
Soraa, Inc. (2)   Semiconductors   203,616 Preferred Stock Warrants     80       432  
Xtera Communications, Inc. (5)   Semiconductors   37,831 Common Stock Warrants     206        
Bolt Solutions Inc. (2)   Software   202,892 Preferred Stock Warrants     113       135  
Bridge2 Solutions, Inc.   Software   75,458 Common Stock Warrants     18       341  
Clarabridge, Inc.    Software   53,486 Preferred Stock Warrants     14       81  
ControlScan, Inc. (2)   Software   2,295,918 Preferred Stock Warrants     19       30  
Decisyon, Inc.   Software   82,967 Common Stock Warrants     46        
Digital Signal Corporation   Software   125,116 Common Stock Warrants     32        
Education Elements, Inc. (2)   Software   238,122 Preferred Stock Warrants     28       28  
Lotame Solutions, Inc. (2)   Software   288,115 Preferred Stock Warrants     22       276  
Netuitive, Inc.    Software   41,569 Common Stock Warrants     48        
Riv Data Corp. (2)   Software   237,361 Preferred Stock Warrants     12       12  
ScoreBig, Inc. (2)   Software   879,014 Preferred Stock Warrants     88        
ShopKeep.com, Inc. (2)   Software   165,779 Preferred Stock Warrants     98       118  
SIGNiX, Inc.   Software   89,767 Preferred Stock Warrants     168       167  

 

See Notes to Consolidated Financial Statements

 

  15  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2016

(Dollars in thousands)

 

            Cost of     Fair  
Portfolio Company (1)   Sector   Type of Investment (3)(4)(7)(9)(10)   Investments (6)     Value  
Skyword, Inc.     Software   301,056 Preferred Stock Warrants     48       56  
SpringCM, Inc. (2)     Software   2,385,686 Preferred Stock Warrants     55       131  
Sys-Tech Solutions, Inc.     Software   375,000 Preferred Stock Warrants     242       389  
Vidsys, Inc.     Software   85,399 Preferred Stock Warrants     23       12  
Visage Mobile, Inc.     Software   1,692,047 Preferred Stock Warrants     19        
xTech Holdings, Inc. (2)     Software   158,730 Preferred Stock Warrants     43       52  
Total Warrants — Technology             2,406       4,590  
Warrants — Cleantech — 0.1% (8)                
Renmatix, Inc.     Alternative Energy   53,022 Preferred Stock Warrants     68        
Semprius, Inc.     Alternative Energy   519,981 Preferred Stock Warrants     25        
Rypos, Inc. (2)     Energy Efficiency   5,627 Preferred Stock Warrants     44       25  
Tigo Energy, Inc. (2)     Energy Efficiency   804,604 Preferred Stock Warrants     100       115  
Lehigh Technologies, Inc. (2)     Waste Recycling   272,727 Preferred Stock Warrants     33       39  
Total Warrants — Cleantech             270       179  
Warrants — Healthcare information and services — 0.7% (8)                
Accumetrics, Inc.   Diagnostics     100,928 Preferred Stock Warrants     107       180  
Candescent Health, Inc. (2)    Diagnostics     519,991 Preferred Stock Warrants     378        
Interleukin Genetics, Inc. (2)(5)   Diagnostics     7,662,100 Common Stock Warrants     168       142  
LifePrint Group, Inc. (2)   Diagnostics     49,000 Preferred Stock Warrants     29       2  
ProterixBio, Inc. (2)   Diagnostics     3,156 Common Stock Warrants     54        
Singulex, Inc.    Other Healthcare     294,231 Preferred Stock Warrants     44       51  
Verity Solutions Group, Inc.    Other Healthcare     300,360 Preferred Stock Warrants     100       42  
Watermark Medical, Inc. (2)   Other Healthcare     27,373 Preferred Stock Warrants     74       76  
MedAvante, Inc. (2)   Software     114,285 Preferred Stock Warrants     66       79  
Medsphere Systems Corporation (2)   Software     7,097,791 Preferred Stock Warrants     60       205  
Recondo Technology, Inc. (2)    Software     556,796 Preferred Stock Warrants     95       204  
Total Warrants — Healthcare information and services             1,175       981  
Total Warrants             5,140       6,362  
                         
Other Investments — 0.4% (8)                        
ZetrOZ, Inc.   Medical Device     Royalty Agreement     365       500  
Vette Technology, LLC   Data Storage     Royalty Agreement Due 4/18/2019     4,318       100  
Total Other Investments             4,683       600  
Equity — 0.6% (8)                        
Insmed Incorporated (5)   Biotechnology     33,208 Common Stock     238       439  
Revance Therapeutics, Inc.(5)   Biotechnology     4,861 Common Stock     73       101  
Sunesis Pharmaceuticals, Inc. (5)   Biotechnology     13,082 Common Stock     83       47  
SnagAJob.com, Inc.    Consumer-related Technologies     82,974 Common Stock     9       83  
Decisyon, Inc.   Software     4,200,934 Common Stock     185       185  
Total Equity             588       855  
Total Portfolio Investment Assets — 139.4% (8)   $ 211,627     $ 194,003  

 

 

 

 

(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.
   
(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 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, 2016 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.

 

See Notes to Consolidated Financial Statements

 

  16  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2016

(Dollars in thousands)

 

(9) The Company did not have any non-qualifying assets under Section 55(a) of the 1940 Act as of December 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 December 31, 2016.
   
(12)

ScoreBig made an assignment for the benefit of its creditors whereby ScoreBig assigned all of its assets to SBABC, established under California law to effectuate the Assignment for the Benefit of Creditors of ScoreBig. SBABC subsequently entered into a License Agreement with a Licensee, whereby SBABC granted a license of certain of SBABC’s intellectual property and general intangibles to Licensee in exchange for certain royalty payments on the future net profits, if any, of Licensee. SBABC, in consideration for the Company’s consent to the License Agreement, agreed to pay all payments due under the License Agreement, if any, to the Company until the payment in full in cash of the Company’s debt investments in ScoreBig. 

   
(13) DSC made an assignment for the benefit of its creditors whereby DSC assigned all of its assets to DSC (assignment for the benefit of creditors), LLC, a Delaware limited liability company, established under Delaware law to effectuate the Assignment for the Benefit of Creditors of DSC.

 

See Notes to Consolidated Financial Statements

 

  17  

 

 

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.

 

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 the 2013-1 LLC, the “2013-1 Entities”) as a Delaware trust on June 18, 2013. The 2013-1 Entities were special purpose bankruptcy remote entities and were 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 2013-1 Entities were dissolved as of September 30, 2016.

 

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.

 

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. 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, 2016.

 

  18  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

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 wholly-owned 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.

 

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, 2017, there were two debt investments on non-accrual status with a cost of $11.9 million and a fair value of $6.2 million. As of December 31, 2016, there were four investments on non-accrual status with a cost of $26.2 million and a fair value of $11.5 million. For the three months ended March 31, 2017 and 2016, the Company did not recognize any interest income from debt investments on non-accrual status.

 

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Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

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, 2017 and 2016 was 7.5% and 20.5%, 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 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, 2017 and December 31, 2016 was $1.4 million and $1.6 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, 2017 and December 31, 2016 were $4.6 million and $4.4 million, respectively. The amortization expense for the three months ended March 31, 2017 and 2016 was $0.1 million and $0.2 million, respectively.

 

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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 the imposition of corporate-level 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 and determined without regard to any deduction for dividends paid, 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 Topic 946, Financial Services Investment Companies , of the Financial Accounting Standards Board’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 year ended December 31, 2016, the Company reclassified $0.1 million to paid-in capital from distributions in excess of net investment income, which related to excise taxes refunded in 2016.

 

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 incur 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, 2017 and 2016, there was no U.S. federal excise tax accrual recorded.

 

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, Income Taxes , 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, 2017 and December 31, 2016. The Company’s income tax returns for the 2015, 2014 and 2013 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 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 or the Company may purchase shares in the open market to fulfill its obligations under the plan.

 

Stock Repurchase Program

 

On April 27, 2017, the Board extended a previously authorized 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 June 30, 2018 or the repurchase of $5.0 million of the Company’s common stock. During the three months ended March 31, 2017 and 2016, the Company did not make any repurchases of its common stock. From the inception of the stock repurchase program through March 31, 2017, the Company repurchased 161,542 shares of its common stock at an average price of $11.27 on the open market at a total cost of $1.8 million.

 

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Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Transfers of financial assets

 

Assets related to transactions that do not meet the requirements under ASC Topic 860, Transfers and Servicing 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.

 

Note 3.  Related party transactions

 

Investment Management Agreement

 

The Investment Management Agreement was reapproved by the Board on July 29, 2016. Under the terms of the Investment Management Agreement, the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.

 

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

 

The base management fee under the Investment Management Agreement 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, 2017 and December 31, 2016 was $0.3 million. The base management fee expense was $1.0 million and $1.3 million, respectively, for the three months ended March 31, 2017 and 2016.

 

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 hurdle rate of 1.75% (which is 7.00% annualized) of the Company’s net assets at the end of the immediately preceding calendar quarter, subject to 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% quarterly (which is 8.75% annualized). 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.

 

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Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

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

 

Commencing with the calendar quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee cap and deferral mechanism which is determined based upon a look-back period of up to three years and 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.

 

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

 

The performance based incentive fee expense was $0.4 million and $1.1 million for the three months ended March 31, 2017 and 2016, respectively. The incentive fee on Pre-Incentive Fee Net Investment Income was subject to the Incentive Fee Cap and Deferral Mechanism for the three months ended March 31, 2017, which resulted in $0.3 million of reduced expense and additional net investment income. The performance based incentive fee payable as of March 31, 2017 was $0.4 million. The entire incentive fee payable as of March 31, 2017 represented part one of the incentive fee. There was no performance based incentive fee payable as of December 31, 2016.

 

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Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

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 $0.2 million and $0.3 million for the three months ended March 31, 2017 and 2016, respectively.

 

Note 4.  Investments

 

The following table shows the Company’s investments as of March 31, 2017 and December 31, 2016:

 

    March 31, 2017     December 31, 2016  
    Cost     Fair Value     Cost     Fair Value  
          (In thousands)        
Non-affiliate investments                                
Debt   $ 172,522     $ 166,066     $ 201,216     $ 186,186  
Warrants     5,374       7,138       5,140       6,362  
Other     9,962       5,900       4,683       600  
Equity     588       1,010       588       855  
Total non-affiliate investments   $ 188,446     $ 180,114     $ 211,627     $ 194,003  

 

The following table shows the Company’s non-affiliate investments by industry sector as of March 31, 2017 and December 31, 2016:

 

    March 31, 2017     December 31, 2016  
    Cost     Fair Value     Cost     Fair Value  
          (In thousands)        
Life Science                                
Biotechnology   $ 34,449     $ 34,999     $ 46,703     $ 41,578  
Medical Device     11,324       10,929       14,164       13,736  
Technology                                
Communications     32       23       108       99  
Consumer-Related     20,391       21,297       21,055       22,121  
Data Storage     4,330       100       4,340       100  
Internet and Media     23,779       23,779       7,933       7,933  
Materials     9,979       10,235       9,966       10,222  
Networking     3,321       3,262       3,412       3,409  
Power Management     2,001       1,999       2,255       2,318  
Semiconductors     4,938       5,360       12,076       8,311  
Software     58,508       53,139       60,516       55,362  
Cleantech                                
Alternative Energy     68             93        
Energy Efficiency     144       162       2,086       2,082  
Waste Recycling     5,966       5,966       5,997       6,003  
Healthcare Information and Services                                
Diagnostics     4,155       3,614       4,817       4,405  
Other     4,906       4,840       5,988       5,939  
Software     155       410       10,118       10,385  
Total non-affiliate investments   $ 188,446     $ 180,114     $ 211,627     $ 194,003  

 

  24  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Note 5.  Fair value

 

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

 

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

 

The Company’s fair value measurements are classified into a fair value hierarchy in accordance with ASC Topic 820, Fair Value Measurement , 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 at least 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.

 

  25  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

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, 2017 and December 31, 2016, the hypothetical market yields 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.

 

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.

 

  26  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

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 contractual agreement. The Company currently values these contractual agreements 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 these other investments as Level 3 within the fair value hierarchy described above. These other investments are recorded at fair value on a recurring basis.

 

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of March 31, 2017 and December 31, 2016. 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, 2017:

 

March 31, 2017
    Fair     Valuation Techniques/   Unobservable       Weighted
Investment Type   Value     Methodologies   Input   Range   Average
(Dollars in thousands, except per share data)
Debt investments   $ 159,866     Discounted Expected Future Cash Flows   Hypothetical Market Yield   11% – 25%   13%
                         
      6,200     Liquidation Scenario   Probability Weighting   10% – 50%   33%
                         
Warrant investments     5,929     Black-Scholes Valuation Model   Price Per Share
Average Industry Volatility
  $0.00 – $63.98
21%
  $4.03
21%
                Marketability Discount   20%   20%
                Estimated Time to Exit   1 to 5 years   3 years
                         
      321     Expected Settlement   Price Per Share   $0.13 – $0.18   $0.13
                         
Other investments     5,900     Multiple Probability Weighted Cash Flow Model   Discount Rate
Probability Weighting
  18% – 25%
25% – 100%
  19%
40%
                         
Equity investments     268     Last Equity Financing   Price Per Share   $0.04 – $1.00   $0.34
Total Level 3 investments   $ 178,484                  

 

  27  

 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

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, 2016:

 

December 31, 2016
    Fair     Valuation Techniques/   Unobservable       Weighted
Investment Type   Value     Methodologies   Input   Range   Average
(Dollars in thousands, except per share data)
Debt investments   $ 174,686     Discounted Expected Future Cash Flows   Hypothetical Market Yield   11% – 25%   13%
                         
      11,500     Liquidation Scenario   Probability Weighting   25% – 100%   40%
                         
Warrant investments     5,677     Black-Scholes Valuation Model   Price Per Share
Average Industry Volatility Volatility
  $0.00 – $63.98
21%
  $4.02
21%
                Marketability Discount   20%   20%
                Estimated Time to Exit   1 to 5 years   3 years
                         
      180     Expected Settlement   Price Per Share   $1.78   $1.78
                         
Other investments     600     Multiple Probability Weighted Cash Flow Model   Discount Rate
Probability Weighting
  25%
25% – 100%
  25%
43%
                         
Equity investments     268     Last Equity Financing   Price Per Share   $0.04 – $1.00   $0.34
Total Level 3 investments   $ 192,911                  

 

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, 2017, the closing price of the 2019 Notes on the New York Stock Exchange was $25.47 per note, or $33.6 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above.

 

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