UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013
     
OR
     
¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    FOR THE TRANSITION PERIOD FROM                      TO     

 

COMMISSION FILE NUMBER: 814-00802

 

HORIZON TECHNOLOGY FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of May 6, 2013, the Registrant had 9,578,312 shares of common stock, $0.001 par value, outstanding. 

 

 

 

 
 

 

HORIZON TECHNOLOGY FINANCE CORPORATION

 

FORM 10-Q

TABLE OF CONTENTS

 

      Page
  PART I    
Item 1. Consolidated Financial Statements   3
       
  Consolidated Statements of Assets and Liabilities as of March 31, 2013 and December 31, 2012 (unaudited)   3
  Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited)   4
  Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2013 and 2012 (unaudited)   5
  Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)   6
  Consolidated Schedules of Investments as of March 31, 2013 and December 31, 2012 (unaudited)   7
  Notes to the Consolidated Financial Statements (unaudited)   15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   30
Item 3. Quantitative And Qualitative Disclosures About Market Risk   40
Item 4. Controls and Procedures   41
       
  PART II    
Item 1. Legal Proceedings   42
Item 1A. Risk Factors   42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   42
Item 3. Defaults Upon Senior Securities   42
Item 4. Mine Safety Disclosures   42
Item 5. Other Information   42
Item 6. Exhibits   42
  Signatures   43
EX-31.1      
EX-31.2      
EX-32.1      
EX-32.2      

 

2
 

 

PART I: FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Assets and Liabilities (Unaudited)

(In thousands, except share data)

 

   March 31,   December 31, 
   2013   2012 
Assets          
Non-affiliate investments at fair value (cost of $258,133 and $239,385, respectively) (Note 4)  $247,781   $228,613 
Investment in money market funds   4,119    2,560 
Cash   478    1,048 
Interest receivable   3,513    2,811 
Other assets   4,244    4,626 
Total assets  $260,135   $239,658 
           
Liabilities          
Borrowings (Note 6)  $110,037   $89,020 
Dividends payable   3,303    3,301 
Base management fee payable (Note 3)   433    402 
Incentive fee payable (Note 3)   693    855 
Other accrued expenses   909    1,108 
Total liabilities   115,375    94,686 
           
Net assets          
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2013 and December 31, 2012        
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 9,574,445 and 9,567,225 shares outstanding as of March 31, 2013 and December 31, 2012, respectively   10    10 
Paid-in capital in excess of par   154,492    154,384 
Accumulated undistributed net investment income   898    1,428 
Net unrealized depreciation on investments   (10,352)   (10,772)
Net realized loss on investments   (288)   (78)
Total net assets   144,760    144,972 
Total liabilities and net assets  $260,135   $239,658 
Net asset value per common share  $15.12   $15.15 

 

See Notes to Consolidated Financial Statements

 

3
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Operations (Unaudited)

(In thousands, except share data)

 

   For the Three Months Ended 
   March 31, 
   2013   2012 
Investment income          
Interest income on non-affiliate investments  $7,346   $5,910 
Fee income on non-affiliate investments   22    715 
Total investment income   7,368    6,625 
Expenses          
Interest expense   1,773    675 
Base management fee (Note 3)   1,241    994 
Performance based incentive fee (Note 3)   693    838 
Administrative fee (Note 3)   285    256 
Professional fees   382    307 
General and administrative   221    203 
Total expenses   4,595    3,273 
Net investment income   2,773    3,352 
Net realized and unrealized gain (loss) on investments          
Net realized loss on investments   (210)    
Net unrealized appreciation (depreciation) on investments   420    (813)
Net realized and unrealized gain (loss) on investments   210    (813)
Net increase in net assets resulting from operations  $2,983   $2,539 
Net investment income per common share  $0.29   $0.44 
Net increase in net assets per common share  $0.31   $0.33 
Dividends declared per share  $0.345   $0.450 
Weighted average shares outstanding   9,570,789    7,636,609 

 

See Notes to Consolidated Financial Statements

 

4
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Changes in Net Assets (Unaudited)

(In thousands, except share data)

 

       Common   Paid-In
Capital in
Excess of
   Accumulated
Undistributed
Net
Investment
   Net Unrealized
Depreciation
on
   Net Realized
Gains
(Losses) on
   Total Net 
   Shares   Stock   Par   Income   Investments   Investments   Assets 
Balance at December 31, 2011   7,636,532   $8   $124,512   $4,965   $(2,659)  $3,058   $129,884 
Net increase in net assets resulting from operations               3,352    (813)       2,539 
Issuance of common stock under dividend reinvestment plan   3,517        58                58 
Dividends declared               (3,436)           (3,436)
Balance at March 31, 2012   7,640,049   $8   $124,570   $4,881   $(3,472)  $3,058   $129,045 
                                    
Balance at December 31, 2012   9,567,225   $10   $154,384   $1,428   $(10,772)  $(78)  $144,972 
Net increase in net assets resulting from operations               2,773    420    (210)   2,983 
Issuance of common stock under dividend reinvestment plan   7,220        108                108 
Dividends declared               (3,303)           (3,303)
Balance at March 31, 2013   9,574,445   $10   $154,492   $898   $(10,352)  $(288)  $144,760 

 

See Notes to Consolidated Financial Statements

 

5
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   For the Three Months Ended 
   March 31, 
   2013   2012 
Cash flows from operating activities:          
Net increase in net assets resulting from operations  $2,983   $2,539 
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:          
Amortization of debt issuance costs   183    51 
Net realized loss on investments   18     
Net unrealized (appreciation) depreciation on investments   (420)   813 
Purchase of investments   (28,500)   (12,961)
Principal payments received on investments   9,962    23,325 
Changes in assets and liabilities:          
Net increase in investments in money market funds   (1,559)   (9,426)
(Increase) decrease in interest receivable   (88)   712 
Increase in end-of-term payments   (614)   (229)
Decrease in unearned loan income   (228)   (460)
Increase in other assets   199    40 
Decrease in other accrued expenses   (199)   (577)
Increase in base management fee payable   31    265 
Decrease in incentive fee payable   (162)   (928)
Net cash (used in) provided by operating activities   (18,394)   3,164 
           
Cash flows from financing activities:          
Proceeds from issuance of senior notes       30,000 
Dividends paid   (3,193)   (3,378)
Net increase (decrease) in Credit Facilities   21,017    (24,335)
Debt issuance costs       (1,052)
Net cash provided by financing activities   17,824    1,235 
Net (decrease) increase in cash   (570)   4,399 
           
Cash:          
Beginning of period   1,048    1,298 
End of period  $478   $5,697 
Supplemental disclosure of cash flow information:          
Cash paid for interest  $1,517   $581 
Supplemental non-cash investing and financing activities:          
Warrant investments received & recorded as unearned loan income  $172   $185 
Dividends Payable  $3,303   $ 

 

See Notes to Consolidated Financial Statements

 

6
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2013

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)  Amount   Investments (6)   Value 
Debt Investments — 164.9% (9)                     
Debt Investments — Life Science — 41.4% (9)                     
ACT Biotech Corporation (8)  Biotechnology  Term Loan (13.10% cash, 8.00% ETP, Due 9/1/14)  $3,947   $3,905   $2,811 
Ambit Biosciences Corporation (2)  Biotechnology  Term Loan (12.25% cash, 3.00% ETP, Due 10/1/13)   1,568    1,564    1,564 
Anacor Pharmaceuticals, Inc. (2)(5)  Biotechnology  Term Loan (9.41% cash, 5.50% ETP, Due 4/1/15)   2,412    2,391    2,391 
      Term Loan (9.67% cash, 5.50% ETP, Due 4/1/15)   1,932    1,908    1,908 
      Term Loan (9.47% cash, 5.50% ETP, Due 4/1/15)   3,397    3,354    3,354 
Celsion Corporation (2)(5)  Biotechnology  Term Loan (11.75% cash, Due 10/1/15)   2,500    2,482    2,482 
N30 Pharmaceuticals, LLC (2)  Biotechnology  Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)   1,458    1,442    1,442 
      Term Loan (11.25% cash, 3.00% ETP, Due 7/1/15)   2,500    2,458    2,458 
Sample6 Technologies, Inc. (2)  Biotechnology  Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16)   2,500    2,460    2,460 
Sunesis Pharmaceuticals, Inc. (2)(5)  Biotechnology  Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)   1,944    1,931    1,931 
      Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)   2,917    2,842    2,842 
Supernus Pharmaceuticals, Inc. (2)(5)  Biotechnology  Term Loan (11.00% cash, 3.00% ETP, Due 8/1/14)   1,800    1,792    1,792 
      Term Loan (11.00% cash, 2.50% ETP, Due 1/1/15)   5,316    5,280    5,280 
Xcovery Holding Company, LLC (2)  Biotechnology  Term Loan (12.50% cash, Due 8/1/15)   918    915    915 
      Term Loan (12.50% cash, Due 8/1/15)   1,444    1,440    1,440 
      Term Loan (12.50% cash, Due 10/1/15)   250    249    249 
Direct Flow Medical, Inc. (2)  Medical Device  Term Loan (11.00% cash, 3.00% ETP, Due 7/1/16)   5,000    4,899    4,899 
      Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)   2,500    2,444    2,444 
Mitralign, Inc. (2)  Medical Device  Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15)   1,714    1,660    1,660 
      Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15)   1,143    1,123    1,123 
OraMetrix, Inc. (2)  Medical Device  Term Loan (11.50% cash, 3.00% ETP, Due 4/1/14)   2,003    1,990    1,990 
      Revolver (11.50% (Prime + 8.25%) cash, Due 12/1/15)   2,000    1,970    1,970 
PixelOptics, Inc. (2)  Medical Device  Term Loan (10.75% cash, 3.00% ETP, Due 11/1/14)   6,959    6,933    6,933 
Tengion, Inc. (2)(5)  Medical Device  Term Loan (13.00% cash, Due 5/1/14)   3,660    3,587    3,587 
Total Debt Investments — Life Science              61,019    59,925 
Debt Investments — Technology — 81.2% (9)                     
Avalanche Technology, Inc. (2)  Semiconductors  Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)   3,758    3,630    3,630 
Luxtera, Inc. (2)  Semiconductors  Term Loan (10.25% cash, 8.00% ETP, Due 12/1/15)   3,333    3,296    3,296 
      Term Loan (10.25% cash, 8.00% ETP, Due 3/1/16)   1,667    1,645    1,645 
Newport Media, Inc. (2)  Semiconductors  Term Loan (11.00% cash, 2.14% ETP, Due 1/1/16)   3,500    3,452    3,452 
      Term Loan (11.00% cash, 2.14% ETP, Due 1/1/16)   3,500    3,452    3,452 
Xtera Communications, Inc. (2)  Semiconductors  Term Loan (11.50% cash, Due 12/1/14)   7,294    7,228    7,228 
      Term Loan (11.50% cash, Due 7/1/15)   1,844    1,860    1,860 
Grab Networks, Inc. (2)  Internet and Media  Term Loan (12.00% cash, Due 1/1/16)   2,500    2,404    2,404 
Optaros, Inc. (2)  Internet and Media  Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)   2,000    1,979    1,979 
      Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)   500    495    495 
SimpleTuition, Inc. (2)  Internet and Media  Term Loan (11.75% cash, Due 3/1/16)   5,000    4,918    4,918 
Construction Software Technologies, Inc. (2)  Software  Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)   4,200    4,160    4,160 
      Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)   4,200    4,160    4,160 
Courion Corporation (2)  Software  Term Loan (11.45% cash, Due 10/1/15)   3,500    3,484    3,484 
      Term Loan (11.45% cash, Due 10/1/15)   3,500    3,484    3,484 
Decisyon, Inc. (2)  Software  Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)   4,000    3,907    3,907 
Fiberlink Communications Corporation (2)  Software  Term Loan (11.50% cash, 5.00% ETP, Due 7/1/16)   5,000    4,925    4,925 
Kontera Technologies, Inc. (2)  Software  Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)   4,000    3,925    3,925 
      Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)   4,000    3,925    3,925 
Lotame Solutions, Inc.  Software  Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)   4,000    3,941    3,941 
Netuitive, Inc. (2)  Software  Term Loan (11.75% cash, Due 1/1/16)   3,000    2,948    2,948 
Raydiance, Inc. (2)  Software  Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)   5,000    4,907    4,907 
Seapass Solutions, Inc. (2)  Software  Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)   5,000    4,940    4,940 
      Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)   5,000    4,940    4,940 
StreamBase Systems, Inc. (2)  Software  Term Loan (12.51% cash, Due 3/1/14)   1,164    1,095    1,095 
      Term Loan (12.50% cash, Due 10/1/14)   512    509    509 
      Term Loan (12.50% cash, Due 3/1/16)   1,490    1,470    1,470 
Sys-Tech Solutions, Inc. (2)  Software  Term Loan (11.65% cash, Due 6/1/16)   7,500    7,225    7,225 
Vidsys, Inc. (2)  Software  Term Loan (11.00% cash, 5.00% ETP, Due 6/1/16)   3,000    2,954    2,954 
Visage Mobile, Inc. (2)  Software  Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)   1,000    961    961 

 

See Notes to Consolidated Financial Statements

 

7
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2013

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)  Amount   Investments (6)   Value 
Aquion Energy, Inc. (2)  Power Management  Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)   3,333    3,315    3,315 
      Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)   3,333    3,315    3,315 
      Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16)   3,333    3,312    3,312 
Xtreme Power, Inc. (2)  Power Management  Term Loan (10.75% cash, 3.50% ETP, Due 5/1/16)   6,000    5,919    5,387 
Total Debt Investments — Technology              118,080    117,548 
Debt Investments — Cleantech — 19.2% (9)               
Renmatix, Inc. (2)  Alternative Energy  Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)   2,500    2,477    2,477 
      Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)   2,500    2,477    2,477 
      Term Loan (10.25% cash, Due 10/1/16)   5,000    4,933    4,933 
Semprius, Inc. (2)  Alternative Energy  Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)   3,750    3,717    3,717 
Cereplast, Inc. (5)(8)  Waste Recycling  Term Loan (12.00% cash, Due 8/1/14)   1,411    1,308    1,094 
      Term Loan (12.00% cash, Due 8/1/14)   1,514    1,495    1,250 
      Term Loan (15.00% cash, Due 8/1/13)   56    56    47 
      Term Loan (15.00% cash, Due 8/1/13)   94    94    78 
Aurora Algae, Inc. (2)  Energy Efficiency  Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)   1,883    1,873    1,873 
Satcon Technology Corporation (5)(8)  Energy Efficiency  Term Loan (12.58% cash, Due 1/1/14)   5,076    5,011     
Solarbridge Technologies, Inc. (2)  Energy Efficiency  Term Loan (11.65% cash, Due 4/1/16)   7,000    6,848    6,065 
Tigo Energy, Inc.  (2)  Energy Efficiency  Term Loan (11.00% cash, Due 8/1/14)   2,214    2,199    2,199 
      Revolver (10.75% (Prime + 7.50%) cash, Due 1/1/14)   1,698    1,675    1,675 
Total Debt Investments — Cleantech              34,163    27,885 
Debt Investments — Healthcare information and services — 23.1% (9)               
Accumetrics, Inc. (2)  Diagnostics  Term Loan (10.90% cash, 5.00% ETP, Due 6/1/16)   4,000    3,870    3,870 
BioScale, Inc. (2)  Diagnostics  Term Loan (11.51% cash, Due 1/1/14)   2,223    2,216    2,216 
Radisphere National Radiology Group, Inc. (2)  Diagnostics  Revolver (11.25% (Prime + 8.00%) cash, Due 10/1/15)   14,000    13,869    13,869 
Recondo Technology, Inc. (2)  Software  Term Loan (11.50% cash, 3.00% ETP, Due 4/1/15)   2,000    1,943    1,943 
      Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)   2,500    2,463    2,463 
Singulex, Inc.  Other Healthcare  Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14)   1,299    1,293    1,293 
      Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14)   866    863    863 
Watermark Medical, Inc.  Other Healthcare  Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)   3,500    3,437    3,437 
      Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)   3,500    3,437    3,437 
Total Debt Investments — Healthcare information and services        33,391    33,391 
Total Debt Investments              246,653    238,749 
Warrant Investments — 4.2% (9)                     
Warrants — Life Science — 1.2% (9)                     
ACT Biotech Corporation  Biotechnology  1,521,782 Preferred Stock Warrants       83     
Ambit Biosciences, Inc. (2)  Biotechnology  1,075,083 Preferred Stock Warrants       143    116 
Anacor Pharmaceuticals, Inc. (2)(5)  Biotechnology  84,583 Common Stock Warrants       93    95 
Celsion Corporation (2)(5)  Biotechnology  25,685 Common Stock Warrants       15     
N30 Pharmaceuticals, LLC (2)  Biotechnology  214,200 Preferred Stock Warrants       122    252 
Novalar Pharmaceuticals, Inc.  Biotechnology  84,845 Preferred Stock Warrants       69     
Revance Therapeutics, Inc.  Biotechnology  687,091 Preferred Stock Warrants       223    552 
Sample6 Technologies, Inc. (2)  Biotechnology  200,582 Preferred Stock Warrants       27    28 
Sunesis Pharmaceuticals, Inc. (2)(5)  Biotechnology  116,203 Common Stock Warrants       83    390 
Supernus Pharmaceuticals, Inc. (2)(5)  Biotechnology  42,083 Preferred Stock Warrants       94    61 
Tranzyme, Inc. (2)(5)  Biotechnology  77,902 Common Stock Warrants       6     
Direct Flow Medical, Inc. (2)  Medical Device  176,922 Preferred Stock Warrants       144    134 
EnteroMedics, Inc. (5)  Medical Device  141,026 Common Stock Warrants       347     
Mitralign, Inc. (2)  Medical Device  295,238 Common Stock Warrants       49    43 
OraMetrix, Inc. (2)  Medical Device  812,348 Preferred Stock Warrants       78     
PixelOptics, Inc. (2)  Medical Device  381,612 Preferred Stock Warrants       96    35 
Tengion, Inc. (2)(5)  Medical Device  1,708,273 Common Stock Warrants       124    79 
ViOptix, Inc.  Medical Device  375,763 Preferred Stock Warrants       13     
Total Warrants — Life Science              1,809    1,785 

 

See Notes to Consolidated Financial Statements

 

8
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2013

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)  Amount   Investments (6)   Value 
Warrants — Technology — 2.0% (9)                     
OpenPeak, Inc.  Communications  18,997 Preferred Stock Warrants       89     
Everyday Health, Inc.  Consumer-related Technologies  65,674 Preferred Stock Warrants       69    97 
SnagAJob.com, Inc.  Consumer-related Technologies  365,396 Preferred Stock Warrants       23    268 
Tagged, Inc.  Consumer-related Technologies  190,868 Preferred Stock Warrants       27    78 
Avalanche Technology, Inc. (2)  Semiconductors  201,835 Preferred Stock Warrants       45    39 
Impinj, Inc.  Semi-conductor  1 Preferred Stock Warrants       7     
Luxtera, Inc. (2)  Semiconductors  1,827,485 Preferred Stock Warrants       34    41 
Newport Media, Inc. (2)  Semiconductors  188,764 Preferred Stock Warrants       40    40 
Xtera Communications, Inc. (2)  Semiconductors  983,607 Preferred Stock Warrants       206    1 
XIOtech, Inc.  Data Storage  2,217,979 Preferred Stock Warrants       22    20 
Cartera Commerce, Inc.  Internet and media  90,909 Preferred Stock Warrants       16    162 
Grab Networks, Inc.  (2)  Internet and media  1,493,681 Preferred Stock Warrants       194    119 
Optaros, Inc. (2)  Internet and media  477,403 Preferred Stock Warrants       20    18 
SimpleTuition, Inc. (2)  Internet and media  189,573 Preferred Stock Warrants       63    56 
IntelePeer, Inc.  Networking  141,549 Preferred Stock Warrants       39    483 
Motion Computing, Inc.  Networking  260,707 Preferred Stock Warrants       7    293 
Clarabridge, Inc.  Software  104,503 Preferred Stock Warrants       28    25 
Construction Software Technologies, Inc. (2)  Software  386,415 Preferred Stock Warrants       69    50 
Courion Corporation (2)  Software  772,543 Preferred Stock Warrants       107    98 
Decisyon, Inc. (2)  Software  314,686 Preferred Stock Warrants       45    45 
DriveCam, Inc.  Software  71,639 Preferred Stock Warrants       20    121 
Kontera Technologies, Inc. (2)  Software  99,476 Preferred Stock Warrants       101    101 
Lotame Solutions, Inc.  Software  216,810 Preferred Stock Warrants       4    4 
Netuitive, Inc. (2)  Software  748,453 Preferred Stock Warrants       75    60 
Raydiance, Inc. (2)  Software  525,560 Preferred Stock Warrants       36    36 
Seapass Solutions, Inc. (2)  Software  202,892 Preferred Stock Warrants       113    105 
StreamBase Systems, Inc. (2)  Software  306,041 Preferred Stock Warrants       84    63 
Sys-Tech Solutions, Inc. (2)  Software  375,000 Preferred Stock Warrants       242    254 
Vidsys, Inc. (2)  Software  178,802 Preferred Stock Warrants       23    23 
Visage Mobile, Inc. (2)  Software  1,692,047 Preferred Stock Warrants       20    20 
Aquion Energy, Inc. (2)  Power Management  115,051 Preferred Stock Warrants       7    60 
Xtreme Power, Inc. (2)  Power Management  182,723 Preferred Stock Warrants       76    68 
Total Warrants — Technology              1,951    2,848 
Warrants — Cleantech — 0.3% (9)                     
Renmatix, Inc. (2)  Alternative Energy  52,296 Preferred Stock Warrants       70    70 
Semprius, Inc. (2)  Alternative Energy  519,981 Preferred Stock Warrants       25    23 
Cereplast, Inc. (5)  Waste Recycling  365,000 Common Stock Warrants       175    2 
Enphase Energy, Inc. (5)  Energy Efficiency  161,959 Common Stock Warrants       175    123 
Satcon Technology Corporation (5)  Energy Efficiency  493,097 Common Stock Warrants       285     
Solarbridge Technologies, Inc. (2)  Energy Efficiency  1,761,051 Preferred Stock Warrants       125    113 
Tigo Energy, Inc. (2)  Energy Efficiency  190,901 Preferred Stock Warrants       101    72 
Total Warrants — Cleantech              956    403 
Warrants — Healthcare information and services — 0.7% (9)               
Accumetrics, Inc. (2)  Diagnostics  1,028,571 Preferred Stock Warrants       107    138 
BioScale, Inc. (2)  Diagnostics  315,618 Preferred Stock Warrants       55    46 
Precision Therapeutics, Inc.  Diagnostics  561,409 Preferred Stock Warrants       73    142 
Radisphere National Radiology Group, Inc. (2)  Diagnostics  519,943 Preferred Stock Warrants       378    288 
Recondo Technology, Inc. (2)  Software  360,645 Preferred Stock Warrants       60    173 
Patientkeeper, Inc.  Other Healthcare  396,410 Preferred Stock Warrants       269    31 
Singulex, Inc.  Other Healthcare  293,632 Preferred Stock Warrants       44    71 
Talyst, Inc.  Other Healthcare  300,360 Preferred Stock Warrants       100    57 
Watermark Medical, Inc.  Other Healthcare  12,216 Preferred Stock Warrants       66    66 
Total Warrants — Healthcare information and services        1,152    1,012 
Total Warrants              5,868    6,048 
Other Investments — 1.5% (9)                     
Vette Technology, LLC  Data Storage  Royalty Agreement Due 4/18/2019       4,830    2,100 
Total Other Investments              4,830    2,100 

 

See Notes to Consolidated Financial Statements

 

9
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

March 31, 2013

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)  Amount   Investments (6)   Value 
Equity — 0.6% (9)                     
Insmed Incorporated (5)  Biotechnology  33,208 Common Stock       227    249 
Revance Therapeutics, Inc.  Biotechnology  72,925 Preferred Stock       73    109 
Overture Networks Inc.  Communications  386,191 Preferred Stock       482    526 
Total Equity              782    884 
Total Portfolio Investment Assets — 171.2% (9)       $258,133   $247,781 
Short Term Investments — Money Market Funds — 2.8% (9)               
Blackrock Liquid Fed Funds Institutional (Fund #30)       $2,997   $2,997 
Fidelity Prime Money Market (Class I Fund #690)        91    91 
US Bank Money Market        1,031    1,031 
Total Short Term Investments — Money Market Funds       $4,119   $4,119 

 

 

 

(1)All of the Company’s investments are in entities which are domiciled in the United States and/or have a principal place of business in the United States.
(2)Has been pledged as collateral under the Credit Facilities.
(3)All investments are less than 5% ownership of the class and ownership of the portfolio company.
(4)All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETP and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the loan, unless otherwise indicated. For each debt investment, we have provided the current interest rate in effect as of March 31, 2013.
(5)Portfolio company is a public company.
(6)For debt investments, represents principal balance less unearned income.
(7)Preferred and common stock warrants, equity interests and other investments are non-income producing.
(8)Debt is on non-accrual status at March 31, 2013 and is, therefore, considered non-income producing.
(9)Value as a percent of net assets.

 

See Notes to Consolidated Financial Statements

 

10
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2012

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)  Amount   Investments (6)   Value 
Debt Investments — 152.0% (9)                     
Debt Investments — Life Science — 42.4% (9)                     
ACT Biotech Corporation (8)  Biotechnology  Term Loan (13.10% cash, 8.00% ETP, Due 9/1/14)  $3,947   $3,906   $2,770 
Ambit Biosciences Corporation (2)  Biotechnology  Term Loan (12.25% cash, 3.00% ETP, Due 10/1/13)   2,206    2,197    2,197 
Anacor Pharmaceuticals, Inc. (2)(5)  Biotechnology  Term Loan (9.41% cash, 5.50% ETP, Due 4/1/15)   2,671    2,644    2,645 
      Term Loan (9.67% cash, 5.50% ETP, Due 4/1/15)   2,139    2,109    2,109 
      Term Loan (9.47% cash, 5.50% ETP, Due 4/1/15)   3,762    3,708    3,708 
Celsion Corporation (2)(5)  Biotechnology  Term Loan (11.75% cash, Due 10/1/15)   2,500    2,466    2,466 
N30 Pharmaceuticals, LLC (2)  Biotechnology  Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)   1,679    1,657    1,657 
      Term Loan (11.25% cash, 3.00% ETP, Due 7/1/15)   2,500    2,450    2,450 
Revance Therapeutics, Inc.  Biotechnology  Convertible Note (8.00% ETP, Due 2/10/13)   71    71    71 
Sample6 Technologies, Inc. (2)  Biotechnology  Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16)   2,500    2,454    2,454 
Sunesis Pharmaceuticals, Inc. (2)(5)  Biotechnology  Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)   2,000    1,984    1,984 
      Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)   3,000    2,911    2,911 
Supernus Pharmaceuticals, Inc. (2)(5)  Biotechnology  Term Loan (11.00% cash, 3.00% ETP, Due 8/1/14)   2,090    2,079    2,079 
      Term Loan (11.00% cash, 2.50% ETP, Due 1/1/15)   5,962    5,915    5,915 
Xcovery Holding Company, LLC (2)  Biotechnology  Term Loan (12.50% cash, Due 8/1/15)   918    915    915 
      Term Loan (12.50% cash, Due 8/1/15)   1,444    1,439    1,439 
      Term Loan (12.50% cash, Due 10/1/15)   250    249    249 
Direct Flow Medical, Inc. (2)  Medical Device  Term Loan (11.00% cash, 3.00% ETP, Due 7/1/16)   5,000    4,831    4,831 
Mitralign, Inc. (2)  Medical Device  Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15)   1,714    1,655    1,655 
      Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15)   1,143    1,119    1,119 
OraMetrix, Inc. (2)  Medical Device  Term Loan (11.50% cash, 3.00% ETP, Due 4/1/14)   2,468    1,966    1,966 
      Revolver (11.50% (Prime + 8.25%) cash, Due 12/1/15)   2,000    2,449    2,449 
PixelOptics, Inc. (2)  Medical Device  Term Loan (10.75% cash, 3.00% ETP, Due 11/1/14)   7,900    7,865    7,865 
Tengion, Inc. (2)(5)  Medical Device  Term Loan (13.00% cash, Due 5/1/14)   3,660    3,560    3,560 
Total Debt Investments — Life Science              62,599    61,464 
Debt Investments — Technology — 72.9% (9)                     
Avalanche Technology, Inc. (2)  Semiconductors  Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)   4,000    3,866    3,866 
Luxtera, Inc. (2)  Semiconductors  Term Loan (10.25% cash, 8.00% ETP, Due 12/1/15)   3,333    3,290    3,290 
      Term Loan (10.25% cash, 8.00% ETP, Due 3/1/16)   1,667    1,642    1,642 
Newport Media, Inc. (2)  Semiconductors  Term Loan (11.00% cash, 2.14% ETP, Due 1/1/16)   3,500    3,445    3,445 
      Term Loan (11.00% cash, 2.14% ETP, Due 1/1/16)   3,500    3,445    3,445 
Xtera Communications, Inc. (2)  Semiconductors  Term Loan (11.50% cash, Due 12/1/14)   8,222    8,136    8,136 
      Term Loan (11.50% cash, Due 7/1/15)   2,000    1,972    1,972 
Grab Networks, Inc. (2)  Internet and Media  Term Loan (12.00% cash, Due 1/1/16)   2,500    2,387    2,387 
Optaros, Inc. (2)  Internet and Media  Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)   2,000    1,976    1,976 
      Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)   500    495    495 
SimpleTuition, Inc. (2)  Internet and Media  Term Loan (11.75% cash, Due 3/1/16)   5,000    4,905    4,905 
Construction Software Technologies, Inc. (2)  Software  Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)   4,200    4,156    4,156 
      Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)   4,200    4,156    4,156 
Courion Corporation (2)  Software  Term Loan (11.45% cash, Due 10/1/15)   3,500    3,481    3,481 
      Term Loan (11.45% cash, Due 10/1/15)   3,500    3,481    3,481 
Fiberlink Communications Corporation (2)  Software  Term Loan (11.50% cash, 5.00% ETP, Due 7/1/16)   5,000    4,920    4,920 
Kontera Technologies, Inc. (2)  Software  Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)   4,000    3,917    3,917 
      Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)   4,000    3,917    3,917 
Netuitive, Inc. (2)  Software  Term Loan (11.75% cash, Due 1/1/16)   3,000    2,939    2,939 
Seapass Solutions, Inc. (2)  Software  Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)   5,000    4,933    4,933 
      Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)   5,000    4,933    4,933 
StreamBase Systems, Inc. (2)  Software  Term Loan (12.51% cash, Due 11/1/13)   1,360    1,353    1,353 
      Term Loan (12.50% cash, Due 6/1/14)   558    553    553 
      Term Loan (12.50% cash, Due 12/1/15)   1,500    1,477    1,477 
Sys-Tech Solutions, Inc. (2)  Software  Term Loan (11.65% cash, Due 6/1/16)   7,500    7,193    7,193 
Vidsys, Inc. (2)  Software  Term Loan (11.00% cash, 5.00% ETP, Due 6/1/16)   3,000    2,948    2,948 
Aquion Energy, Inc. (2)  Power Management  Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)   3,333    3,312    3,312 
      Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)   3,333    3,312    3,312 
      Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16)   3,333    3,309    3,309 
Xtreme Power, Inc. (2)  Power Management  Term Loan (10.75% cash, 3.50% ETP, Due 5/1/16)   6,000    5,859    5,859 
Total Debt Investments — Technology              105,708    105,708 

 

See Notes to Consolidated Financial Statements

 

11
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2012

(In thousands) 

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)  Amount   Investments (6)   Value 
Debt Investments — Cleantech — 16.4% (9)                     
Renmatix, Inc. (2)  Alternative Energy  Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)   2,500    2,402    2,402 
      Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)   2,500    2,473    2,473 
Semprius, Inc. (2)  Alternative Energy  Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)   3,750    3,712    3,712 
Cereplast, Inc. (5)(8)  Waste Recycling  Term Loan (12.00% cash, Due 8/1/14)   1,683    1,515    890 
      Term Loan (12.00% cash, Due 8/1/14)   1,806    1,787    1,116 
      Term Loan (15.00% cash, Due 4/4/13)   75    75    47 
      Term Loan (15.00% cash, Due 4/4/13)   125    125    78 
Aurora Algae, Inc. (2)  Energy Efficiency  Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)   2,075    2,062    2,062 
Satcon Technology Corporation (5)(8)  Energy Efficiency  Term Loan (12.58% cash, Due 1/1/14)   5,278    5,278     
Solarbridge Technologies, Inc. (2)  Energy Efficiency  Term Loan (11.65% cash, Due 4/1/16)   7,000    6,826    6,826 
Tigo Energy, Inc.  (2)  Energy Efficiency  Term Loan (11.00% cash, Due 8/1/14)   2,326    2,306    2,306 
      Revolver (10.75% (Prime + 7.50%) cash, Due 1/1/14)   1,859    1,821    1,821 
Total Debt Investments — Cleantech              30,382    23,733 
Debt Investments — Healthcare information and services — 20.3% (9)               
Accumetrics, Inc. (2)  Diagnostics  Term Loan (10.90% cash, 5.00% ETP, Due 6/1/16)   4,000    3,853    3,853 
BioScale, Inc. (2)  Diagnostics  Term Loan (11.51% cash, Due 1/1/14)   2,643    2,630    2,630 
Radisphere National Radiology Group, Inc. (2)  Diagnostics  Revolver (11.25% (Prime + 8.00%) cash, Due 10/1/15)   15,000    14,856    14,856 
Recondo Technology, Inc. (2)  Software  Term Loan (11.50% cash, 3.00% ETP, Due 4/1/15)   2,000    1,968    1,968 
      Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)   2,500    2,460    2,460 
      Revolver (10.50% (Prime + 7.25%) cash, Due  4/1/15)   1,000    968    968 
Singulex, Inc.  Other Healthcare  Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14)   1,602    1,593    1,593 
      Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14)   1,068    1,064    1,064 
Total Debt Investments — Healthcare information and services        29,392    29,392 
Total Debt Investments              228,081    220,297 
Warrant Investments — 3.8% (9)                     
Warrants — Life Science — 1.1% (9)                     
ACT Biotech Corporation  Biotechnology  1,390,910 Preferred Stock Warrants       83     
Ambit Biosciences, Inc. (2)  Biotechnology  1,075,083 Preferred Stock Warrants       143    101 
Anacor Pharmaceuticals, Inc. (2)(5)  Biotechnology  84,583 Common Stock Warrants       93    41 
Anesiva, Inc.  Biotechnology  198,898 Common Stock Warrants       18     
Celsion Corporation (2)(5)  Biotechnology  25,685 Common Stock Warrants       15    136 
N30 Pharmaceuticals, LLC (2)  Biotechnology  214,200 Preferred Stock Warrants       122    252 
Novalar Pharmaceuticals, Inc.  Biotechnology  84,845 Preferred Stock Warrants       69     
Revance Therapeutics, Inc.  Biotechnology  199,470 Preferred Stock Warrants       224    404 
Sample6 Technologies, Inc. (2)  Biotechnology  200,582 Preferred Stock Warrants       27    28 
Sunesis Pharmaceuticals, Inc. (2)(5)  Biotechnology  116,203 Common Stock Warrants       83    251 
Supernus Pharmaceuticals, Inc. (2)(5)  Biotechnology  42,083 Preferred Stock Warrants       94    117 
Tranzyme, Inc. (2)(5)  Biotechnology  77,902 Common Stock Warrants       6     
Direct Flow Medical, Inc. (2)  Medical Device  176,922 Preferred Stock Warrants       145    145 
EnteroMedics, Inc. (5)  Medical Device  141,026 Common Stock Warrants       347    2 
Mitralign, Inc. (2)  Medical Device  295,238 Common Stock Warrants       49    43 
OraMetrix, Inc. (2)  Medical Device  812,348 Preferred Stock Warrants       78     
PixelOptics, Inc. (2)  Medical Device  381,612 Preferred Stock Warrants       96    35 
Tengion, Inc. (2)(5)  Medical Device  1,716,339 Common Stock Warrants       124    62 
ViOptix, Inc.  Medical Device  375,763 Preferred Stock Warrants       13     
Total Warrants — Life Science              1,829    1,617 
Warrants — Technology — 1.9% (9)                     
OpenPeak, Inc.  Communications  18,997 Preferred Stock Warrants       89     
Everyday Health, Inc.  Consumer-related Technologies  65,674 Preferred Stock Warrants       69    97 
SnagAJob.com, Inc.  Consumer-related Technologies  365,396 Preferred Stock Warrants       23    269 
Tagged, Inc.  Consumer-related Technologies  190,868 Preferred Stock Warrants       27    80 
Avalanche Technology, Inc. (2)  Semiconductors  201,835 Preferred Stock Warrants       45    46 
Impinj, Inc.  Semi-conductor  1 Preferred Stock Warrants       7     
Luxtera, Inc. (2)  Semiconductors  1,827,485 Preferred Stock Warrants       34    30 
Newport Media, Inc. (2)  Semiconductors  188,764 Preferred Stock Warrants       40    40 
Xtera Communications, Inc. (2)  Semiconductors  983,607 Preferred Stock Warrants       206    1 

 

See Notes to Consolidated Financial Statements

 

12
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2012

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)  Amount   Investments (6)   Value 
XIOtech, Inc.  Data Storage  2,217,979 Preferred Stock Warrants       22    20 
Cartera Commerce, Inc.  Internet and media  90,909 Preferred Stock Warrants       16    162 
Grab Networks, Inc.  (2)  Internet and media  1,493,681 Preferred Stock Warrants       194    119 
Optaros, Inc. (2)  Internet and media  477,403 Preferred Stock Warrants       20    18 
SimpleTuition, Inc. (2)  Internet and media  189,573 Preferred Stock Warrants       63    56 
IntelePeer, Inc.  Networking  141,549 Preferred Stock Warrants       39    481 
Motion Computing, Inc.  Networking  260,707 Preferred Stock Warrants       7    293 
Clarabridge, Inc.  Software  104,503 Preferred Stock Warrants       28    17 
Construction Software Technologies, Inc. (2)  Software  386,415 Preferred Stock Warrants       69    49 
Courion Corporation (2)  Software  772,543 Preferred Stock Warrants       107    98 
DriveCam, Inc.  Software  71,639 Preferred Stock Warrants       19    120 
Kontera Technologies, Inc. (2)  Software  99,476 Preferred Stock Warrants       101    101 
Netuitive, Inc. (2)  Software  748,453 Preferred Stock Warrants       75    61 
Seapass Solutions, Inc. (2)  Software  202,892 Preferred Stock Warrants       113    105 
StreamBase Systems, Inc. (2)  Software  306,041 Preferred Stock Warrants       83    63 
Sys-Tech Solutions, Inc. (2)  Software  375,000 Preferred Stock Warrants       242    242 
Vidsys, Inc. (2)  Software  178,802 Preferred Stock Warrants       23    23 
Aquion Energy, Inc. (2)  Power Management  82,644 Preferred Stock Warrants       7    4 
Xtreme Power, Inc. (2)  Power Management  182,723 Preferred Stock Warrants       76    68 
Total Warrants — Technology              1,844    2,663 
Warrants — Cleantech — 0.2% (9)                     
Renmatix, Inc. (2)  Alternative Energy  52,296 Preferred Stock Warrants       69    70 
Semprius, Inc. (2)  Alternative Energy  519,981 Preferred Stock Warrants       25    27 
Cereplast, Inc. (5)  Waste Recycling  365,000 Common Stock Warrants       175    2 
Enphase Energy, Inc. (5)  Energy Efficiency  161,959 Common Stock Warrants       176    4 
Satcon Technology Corporation (5)  Energy Efficiency  493,097 Common Stock Warrants       285     
Solarbridge Technologies, Inc. (2)  Energy Efficiency  1,761,051 Preferred Stock Warrants       125    112 
Tigo Energy, Inc. (2)  Energy Efficiency  190,901 Preferred Stock Warrants       101    72 
Total Warrants — Cleantech              956    287 
Warrants — Healthcare information and services — 0.6% (9)               
Accumetrics, Inc. (2)  Diagnostics  1,028,57 Preferred Stock Warrants       107    107 
BioScale, Inc. (2)  Diagnostics  315,618 Preferred Stock Warrants       55    46 
Precision Therapeutics, Inc.  Diagnostics  561,409 Preferred Stock Warrants       73    142 
Radisphere National Radiology Group, Inc. (2)  Diagnostics  519,943 Preferred Stock Warrants       378    288 
Recondo Technology, Inc. (2)  Software  360,645 Preferred Stock Warrants       60    144 
Patientkeeper, Inc.  Other Healthcare  396,410 Preferred Stock Warrants       269    31 
Singulex, Inc.  Other Healthcare  293,632 Preferred Stock Warrants       44    71 
Talyst, Inc.  Other Healthcare  300,360 Preferred Stock Warrants       100    72 
Total Warrants — Healthcare information and services              1,086    901 
Total Warrants              5,715    5,468 
Other Investments — 1.4% (9)                     
Vette Technology, LLC  Data Storage  Royalty Agreement Due 4/18/2019        4,880    2,100 
Total Other Investments              4,880    2,100 
Equity — 0.5% (9)                     
Insmed Incorporated (5)  Biotechnology  33,208 Common Stock        227    222 
Overture Networks Inc.  Communications  386,191 Preferred Stock        482    526 
Total Equity              709    748 
Total Portfolio Investment Assets — 157.7% (9)             $239,385   $228,613 

 

See Notes to Consolidated Financial Statements

 

13
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2012

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)  Amount   Investments (6)   Value 
Short Term Investments — Money Market Funds — 1.8% (9)               
Blackrock Liquid Fed Funds Institutional (Fund #30)       $2,197   $2,197 
Fidelity Prime Money Market (Class I Fund #690)        91    91 
US Bank Money Market        272    272 
Total Short Term Investments — Money Market Funds       $2,560   $2,560 
                      

 

 

(1)All of the Company’s investments are in entities which are domiciled in the United States and/or have a principal place of business in the United States.
(2)Has been pledged as collateral under the Credit Facilities.
(3)All investments are less than 5% ownership of the class and ownership of the portfolio company.
(4)All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETP and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the loan, unless otherwise indicated. For each debt investment, we have provided the current interest rate in effect as of December 31, 2012.
(5)Portfolio company is a public company.
(6)For debt investments, represents principal balance less unearned income.
(7)Preferred and common stock warrants, equity interests and other investments are non-income producing.
(8)Debt is on non-accrual status at December 31, 2012 and is, therefore, considered non-income producing.
(9)Value as a percent of net assets.

 

See Notes to Consolidated Financial Statements

 

14
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Note 1.  Organization

 

Horizon Technology Finance Corporation (the “Company”) was organized as a Delaware corporation on March 16, 2010 and is an externally managed, non-diversified, closed-end investment company. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). In addition, for tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and capital gains the Company distributes to the stockholders. The Company primarily makes secured loans to development-stage companies in the technology, life science, healthcare information and services and cleantech industries. Substantially all of the Company’s debt investments consisting of loans are secured by all of, or a portion of, the applicable debtor company’s tangible and intangible assets.

 

On October 28, 2010, the Company completed an initial public offering (“IPO”) and its common stock trades on the NASDAQ Global Select Market under the symbol “HRZN.” The Company was formed to continue and expand the business of Compass Horizon Funding Company LLC (“CHF”), a Delaware limited liability company, which commenced operations in March 2008 and became the Company’s wholly owned subsidiary with the completion of the IPO.

 

Horizon Credit I LLC (“Credit I”) was formed as a Delaware limited liability company on January 23, 2008, with CHF as the sole equity member. Credit I is a special purpose bankruptcy remote entity and is a separate legal entity from the Company and CHF. There has been no activity in Credit I during the three months ended March 31, 2013.

 

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

 

Horizon Credit III LLC (“Credit III”) was formed as a Delaware limited liability company on May 30, 2012, with the Company as the sole equity member. Credit III is a special purpose bankruptcy remote entity and is a separate legal entity from the Company. Any assets conveyed to Credit III are not available to creditors of the Company or any other entity other than Credit III’s lenders.

 

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

 

The Company’s investment strategy is to maximize the investment portfolio’s return by generating current income from the debt investments made and the capital appreciation from the warrants received when making such debt investments. The Company has entered into an investment management agreement (the “Investment Management Agreement”) with Horizon Technology Finance Management LLC (“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

 

Basis of Financial Statement Presentation

 

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 or 10 of Regulation S-X. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2012.

 

15
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Principles of Consolidation

 

As permitted under Regulation S-X and the AICPA Audit and Accounting Guide for Investment Companies, the Company will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s subsidiaries in its consolidated financial statements.

 

Use of Estimates

 

In preparing the consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the balance sheet and income and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the valuation of investments.

 

Fair Value

 

The Company applies fair value to substantially all of its investments 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.

 

In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs, (ASU 2011-04). ASU 2011-04 converges the fair value measurement guidance in U.S. GAAP and IFRSs. Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in existing guidance. In addition, ASU 2011-04 requires additional fair value disclosures. The Company has adopted ASU 2011-04 and included additional disclosures in Note 5.

 

See Note 5 for additional information regarding fair value.

 

Segments

 

The Company has determined that it has a single reporting segment and operating unit structure. The Company lends to and invests in portfolio companies in various technology, life science, healthcare information and services and cleantech industries. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these loan and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment.

 

16
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Investments

 

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

 

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a loan becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the loan is placed on non-accrual status and the recognition of interest income is discontinued. Interest payments received on loans that are on non-accrual status are treated as reductions of principal until the principal is repaid. As of March 31, 2013, there were three investments on non-accrual status with an approximate cost of $11.9 million and approximate fair value of $5.3 million. As of December 31, 2012, there were three investments on non-accrual status with an approximate cost of $12.9 million and approximate fair value of $4.9 million.

 

The Company receives a variety of fees from borrowers in the ordinary course of conducting its business, including advisory fees, commitment fees, amendment fees, non-utilization fees and prepayment fees. In a limited number of cases, the Company may also receive a non-refundable deposit earned upon the termination of a transaction. Loan origination fees, net of certain direct origination costs, are deferred, and along with unearned income, are amortized as a level yield adjustment over the respective term of the loan. Fees for counterparty loan commitments with multiple loans are allocated to each loan based upon each loan’s relative fair value. When a loan is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the loan is returned to accrual status.

 

Certain loan agreements also require the borrower to make an end-of-term payment (“ETP”), which is accrued into interest income over the life of the loan to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay all principal and interest due.

 

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

 

Debt Issuance Costs

 

Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities. Debt issuance costs are recognized as assets and are amortized as interest expense over the term of the related credit facility. The unamortized balance of debt issuance costs as of March 31, 2013 and December 31, 2012, included in other assets, was $3.5 million and $3.7 million, respectively. The accumulated amortization balances as of March 31, 2013 and December 31, 2012 was $0.7 million and $0.6 million, respectively. The amortization expense for the three months ended March 31, 2013 and 2012 was $0.2 million and $0.1 million, respectively.

 

Income Taxes

 

The Company elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes.

 

17
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three months ended March 31, 2013 and 2012, no amount was recorded for U.S. federal excise tax.

 

The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. There were no material uncertain tax positions at March 31, 2013 and December 31, 2012. The 2011, 2010 and 2009 tax years remain subject to examination by U.S. federal and state tax authorities.

 

Dividends

 

Dividends to common stockholders are recorded on the declaration date. The amount to be paid out as a dividend is determined by the Board. Net realized long-term capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.

 

The Company has adopted a dividend reinvestment plan that provides for reinvestment of cash distributions and other distributions on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board authorizes, and the Company declares, a cash dividend, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividend. The Company may use newly issued shares to implement the plan (especially if the Company’s shares are trading at a premium to net asset value), or the Company may purchase shares in the open market in connection with the obligations under the plan.

 

Transfers of Financial Assets

 

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

 

On October 28, 2010, the Company entered into the Investment Management Agreement with the Advisor, under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company. Under the terms of the Investment Management Agreement, the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.

 

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

 

18
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

The base management fee under the Investment Management Agreement is calculated at an annual rate of 2.00% of the Company’s gross assets, payable monthly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. The management fee payable at both March 31, 2013 and December 31, 2012 was $0.4 million. The base management fee expense was $1.2 million and $1.0 million for the three months ended March 31, 2013 and 2012, respectively.

 

The incentive fee has two parts, as follows:

 

The first part is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. The incentive fee with respect to the pre-incentive fee net income is 20.00% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 1.75% (which is 7.00% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, the Advisor receives no incentive fee until the net investment income equals the hurdle rate of 1.75%, but then receives, as a “catch-up,” 100.00% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.1875% in any calendar quarter, the Advisor will receive 20.00% of the pre-incentive fee net investment income as if a hurdle rate did not apply.

 

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

 

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date), and equals 20.00% of the Company’s aggregate 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 through the end of such year, less all previous amounts paid in respect of the capital gain incentive fee.

 

The performance based incentive fee expense was $0.7 million and $0.8 million for the three months ended March 31, 2013 and 2012, respectively. The incentive fee payable as of March 31, 2012 and December 31, 2012 was $0.7 million and $0.9 million, respectively. The entire incentive fee payable as of March 31, 2013 and December 31, 2012 represents part one of the incentive fee.

 

19
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Administration Agreement

 

The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief compliance officer and chief financial officer and their respective staffs. For both the three months ended March 31, 2013 and 2012, $0.3 million was charged to operations under the Administration Agreement.

 

Note 4.  Investments

 

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

 

   March 31, 2013   December 31, 2012 
   Cost   Fair Value   Cost   Fair Value 
Money market funds  $4,119   $4,119   $2,560   $2,560 
Non-affiliate investments                    
Debt  $246,653   $238,749   $228,081   $220,297 
Warrants   5,868    6,048    5,715    5,468 
Other Investments   4,830    2,100    4,880    2,100 
Equity   782    884    709    748 
Total non-affiliate investments  $258,133   $247,781   $239,385   $228,613 

 

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

 

   March 31, 2013   December 31, 2012 
   Cost   Fair Value   Cost   Fair Value 
Life Science                    
Biotechnology  $37,671   $37,171   $40,358   $39,569 
Medical Device   25,457    24,897    24,296    23,733 
Technology                    
Consumer-Related Technologies   119    443    118    445 
Networking   46    776    46    774 
Software   68,827    68,865    55,220    55,237 
Data Storage   4,852    2,120    4,901    2,121 
Internet and Media   10,089    10,151    10,056    10,118 
Communications   571    526    571    526 
Semiconductors   24,895    24,684    26,128    25,913 
Power Management   15,944    15,457    15,875    15,864 
Cleantech                    
Energy Efficiency   18,292    12,120    18,914    13,138 
Waste Recycling   3,128    2,471    3,744    2,199 
Alternative Energy   13,699    13,697    8,680    8,683 
Healthcare Information and Services                    
Diagnostics   20,568    20,569    21,952    21,921 
Other Healthcare Related Services   9,509    9,255    3,067    2,829 
Software   4,466    4,579    5,459    5,543 
Total non-affiliate investments  $258,133   $247,781   $239,385   $228,613 

 

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.

 

20
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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

 

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

 

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

 

Level 2Observable 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 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

Investments are valued at fair value as determined in good faith by the Board, based on input of management, the audit committee and independent valuation firms that have been engaged at the direction of the Board to assist in the valuation of each portfolio investment without 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 approximately 25% (based on fair value) of the Company’s valuation of portfolio companies without readily available market quotations subject to review by an independent valuation firm.

 

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

 

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

 

Debt Investments:  For variable rate debt investments which re-price frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values. The fair value of fixed rate debt investments is estimated by discounting the expected future cash flows using the year end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the same remaining maturities. At both March 31, 2013 and December 31, 2012, the discount rates used ranged from 9% 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. 

 

21
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

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 guideline publicly traded companies within indices similar in nature to the underlying company issuing the warrant. A total of seven such indices were used. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value investment.

 

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

 

Other adjustments, including a marketability discount on private company warrants, are estimated based on management’s judgment about the general industry environment. Significant increases (decreases) in this unobservable input would result in significantly lower (higher) fair value measurement.

 

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

 

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

 

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

 

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

 

Other Investments: Other investments will be valued based on the facts and circumstances of the underlying agreement. The Company currently values one contractual agreement using a multiple probability weighted cash flow model as the contractual future cash flows contain elements of variability. Significant changes in the estimated cash flows and probability weightings would result in a significantly higher or lower fair value measurement. The Company has categorized this other investment as Level 3 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.

 

22
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of investments as of March 31, 2013 and December 31, 2012. 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 fair value measurements. The tables below are not intended to be all-inclusive, but rather provide information on the significant Level 3 inputs as they relate to the Company’s fair value measurements:

 

March 31, 2013
   Fair   Valuation Techniques/  Unobservable    
Investment Type  Value   Methodologies  Input  Range 
Debt investments  $238,749   Discounted Expected Future Cash Flows  Hypothetical Market Yield   9% - 25%
        Multiple Probability Weighted Cash  Discount Rate   25%
        Flow Model  Probability Weighting   10% - 60%
                 
Warrant investments   5,378   Black-Scholes Valuation Model  Price per share   $0.0 – 45.84 
           Average Industry Volatility   21%
           Marketability Discount   20%
           Estimated Time to Exit   1 to 10 years 
                 
Other investments   2,100   Multiple Probability Weighted Cash   Discount Rate   25%
        Flow Model  Probability Weighting   10% - 45%
                 
Equity investments   635   Market Comparable Companies  Revenue Multiple   1.5x – 2.0x 
Total Level 3 investments  $246,862            

 

December 31, 2012
   Fair   Valuation Techniques/  Unobservable    
Investment Type  Value   Methodologies  Input  Range 
Debt investments  $220,297   Discounted Expected Future Cash Flows  Hypothetical Market Yield   8% - 25%
        Multiple Probability Weighted Cash  Discount Rate   25%
        Flow Model  Probability Weighting   10% - 60%
                 
Warrant investments   4,914   Black-Scholes Valuation Model  Price per share   $0.0 - 9.56 
           Average Industry Volatility   21%
           Marketability Discount   20%
           Estimated Time to Exit   1 to 10 years 
                 
Other investments   2,100   Multiple Probability Weighted Cash   Discount Rate   25%
        Flow Model  Probability Weighting   10% - 45%
                 
Equity investments   526   Market Comparable Companies  Revenue Multiple   1.5x – 2.0x 
Total Level 3 investments  $227,837            

 

Borrowings:  The carrying amount of borrowings under the Credit Facilities approximates fair value due to the variable interest rate of the Credit Facilities and are categorized as Level 2 within the fair value hierarchy described above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed rate Senior Notes (See Note 6) is based on the closing public share price on the date of measurement. At March 31, 2013, the Senior Notes were trading on the New York Stock Exchange for $26.00 per note, or $34.3 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. These liabilities are not recorded at fair value on a recurring basis.

 

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

 

23
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

The following tables detail the assets and liabilities that are carried at fair value and measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   March 31, 2013 
   Total   Level 1   Level 2   Level 3 
Money market funds  $4,119   $   $4,119   $ 
Debt investments  $238,749   $   $   $238,749 
Warrant investments  $6,048   $   $670   $5,378 
Other investments  $2,100   $   $   $2,100 
Equity investments  $884   $249   $   $635 

 

   December 31, 2012 
   Total   Level 1   Level 2   Level 3 
Money market funds  $2,560   $   $2,560   $ 
Debt investments  $220,297   $   $   $220,297 
Warrant investments  $5,468   $   $554   $4,914 
Other investments  $2,100   $   $   $2,100 
Equity investments  $748   $222   $   $526 

 

The following tables show a reconciliation of the beginning and ending balances for Level 3 assets:

 

   Three Months Ended March 31, 2013 
   Debt
Investments
   Warrant
Investments
   Equity
Investments
   Other
Investments
   Total 
Level 3 assets, beginning of period  $220,297   $4,914   $526   $2,100   $227,837 
Purchase of investments   28,500                28,500 
Warrants and equity received and classified as Level 3       172            172 
Principal payments received on investments   (9,962)               (9,962)
Unrealized (depreciation) appreciation included in earnings   (70)   292    36        258 
Transfer from debt to equity investments   (73)       73         
Other   57                57 
Level 3 assets, end of period  $238,749   $5,378   $635   $2,100   $246,862 

 

The Company’s transfers between levels are recognized at the end of the reporting period. During the three months ended March 31, 2013, there were no transfers between levels.

 

24
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

   Three Months Ended March 31, 2012 
   Debt
Investments
   Warrant
Investments
   Equity
Investments
   Total 
Level 3 assets, beginning of period  $173,286   $4,048   $526   $177,860 
Purchase of investments   12,961            12,961 
Warrants and equity received and classified as Level 3       180        180 
Principal payments received on investments   (23,325)           (23,325)
Unrealized (depreciation) appreciation included in earnings   (1,186)   102        (1,084)
Transfer out of Level 3       (111)       (111)
Other   273            273 
Level 3 assets, end of period  $162,009   $4,219   $526   $166,754 

 

During the three months ended March 31, 2012, there were no transfers between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in one portfolio company, with a value of $0.1 million, that were transferred into Level 2 due to the portfolio company becoming a public company during the three months ended March 31, 2012. Because the fair value of the portfolio company’s warrants held are determined based on inputs that are readily available in public markets or can be derived from information available in public markets, the Company has categorized the warrants as Level 2 within the fair value hierarchy described above as of March 31, 2012.

 

The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at March 31, 2013 includes $0.1 million unrealized depreciation on loans, $0.3 million unrealized appreciation on warrants and $0.04 million unrealized appreciation on equity.

 

The Company discloses fair value information about financial instruments, whether or not recognized in the statement of assets and liabilities, for which it is practicable to estimate that value. Certain financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

 

The fair value amounts have been measured as of the reporting date, and have not been reevaluated or updated for purposes of these financial statements subsequent to that date. As such, the fair values of these financial instruments subsequent to the reporting date may be different than amounts reported.

 

As of March 31, 2013 and December 31, 2012, the recorded book balances equaled fair values of all the Company’s financial instruments, except for the Company’s Senior Notes, as previously described.

 

Off-balance-sheet instruments

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

25
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Note 6.  Borrowings

 

A summary of the Company’s borrowings as of March 31, 2013 and December 31, 2012 is as follows:

 

   March 31, 2013 
   Total
Commitment
   Balance
Outstanding
   Unused
Commitment
 
Wells Facility   $75,000   $67,037   $7,963 
Fortress Facility    75,000    10,000    65,000 
Senior Notes    33,000    33,000     
Total   $183,000   $110,037   $72,963 

 

   December 31, 2012 
   Total
Commitment
   Balance
Outstanding
   Unused
Commitment
 
Wells Facility   $75,000   $46,020   $28,980 
Fortress Facility    75,000    10,000    65,000 
Senior Notes    33,000    33,000     
Total   $183,000   $89,020   $93,980 

 

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that the asset coverage, as defined in the 1940 Act, is at least 200% after such borrowings. As of March 31, 2013, the asset coverage for borrowed amounts was 225%.

 

The Company entered into a revolving credit facility (the “Wells Facility”) with Wells Fargo Capital Finance, LLC (“Wells”) effective July 14, 2011. The Wells Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million from the current $75 million commitment provided by Wells. The Wells Facility is collateralized by all loans and warrants held by Credit II and permits an advance rate of up to 50% of eligible loans held by Credit II. The Wells Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the Wells Facility to certain criteria for qualified loans and includes portfolio company concentration limits as defined in the related loan agreement. The Wells Facility has a three-year revolving term followed by a three-year amortization period and matures on July 14, 2017. The interest rate is based upon the one-month LIBOR plus a spread of 4.00%, with a LIBOR floor of 1.00%. The rate at both March 31, 2013 and December 31, 2012 was 5.0%, and the average rate for the three months ended March 31, 2013 and 2012 was 5.0%. The average amounts of borrowings were approximately $49.7 million and $17.0 million for the three months ended March 31, 2013 and 2012, respectively.

 

On March 23, 2012, the Company issued and sold an aggregate principal amount of $30 million of 7.375% senior unsecured notes due in 2019, and, on April 18, 2012, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $3 million of such notes (collectively, the “Senior Notes”). The Senior Notes will mature on March 15, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after March 15, 2015 at a redemption price of $25 per security plus accrued and unpaid interest. The Senior Notes bear interest at a rate of 7.375% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year. The Senior Notes are the Company’s direct unsecured obligations and rank (i) pari passu with the Company’s future senior unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the Senior Notes; (iii) effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness and (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. As of March 31, 2013, the Company was in material compliance with the terms of the Senior Notes. The Senior Notes are listed on the New York Stock Exchange under the symbol “HTF.”

 

26
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

The Company entered into a term loan credit facility (the “Fortress Facility”) with Fortress Credit Co LLC (“Fortress”) effective August 23, 2012. The Fortress Facility is collateralized by all loans and warrants held by Credit III. The Fortress Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the Fortress Facility to certain criteria for qualified loans and includes portfolio company concentration limits as defined in the related loan agreement. The Fortress Facility, among other things, has a three-year term subject to two one-year extensions with a draw period of up to four years. The Fortress Facility requires the payment of an unused line fee of 1.00% annually beginning October 1, 2012 and has an effective advance rate of approximately 66% against eligible loans. The Fortress Facility generally bears interest based upon the one-month LIBOR plus a spread of 6.00%, with a LIBOR floor of 1.00%. The rate at both March 31, 2013 and December 31, 2012 was 7.00%, and the average rate for the three months ended March 31, 2013 was 7.00%. The average amount of borrowings was approximately $10.0 million for the three months ended March 31, 2013.

 

Note 7.  Financial Instruments with Off-Balance-Sheet Risk

 

In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its borrowers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statement of assets and liabilities. The Company attempts to limit its credit risk by conducting extensive due diligence and obtaining collateral where appropriate.

 

The balance of unfunded commitments to extend credit was approximately $12.6 million and $24.6 million as of March 31, 2013 and December 31, 2012, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving credit arrangements or similar transactions. Commitments may also include a financial or non-financial milestone that has to be achieved before the commitment can be drawn. Commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

Note 8.  Concentrations of Credit Risk

 

The Company’s debt investments consist primarily of loans to development-stage companies at various stages of development in the technology, life science, healthcare information and services and cleantech industries. Many of these companies may have relatively limited operating histories and also may experience variation in operating results. Many of these companies conduct business in regulated industries and could be affected by changes in government regulations. Most of the Company’s borrowers will need additional capital to satisfy their continuing working capital needs and other requirements, and in many instances, to service the interest and principal payments on the loans.

 

The largest loans may vary from year to year as new loans are recorded and repaid. The Company’s five largest loans represented approximately 21% and 23% of total loans outstanding as of March 31, 2013 and December 31, 2012, respectively. No single loan represents more than 10% of the total loans as of March 31, 2013 and December 31, 2012. Loan income, consisting of interest and fees, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately 23% and 29% of total interest income and fee income on investments for the three months ended March 31, 2013 and 2012, respectively.

 

27
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Note 9. Dividends and Distributions

 

The Company’s dividends and distributions are recorded on the record date. The following table summarizes the Company’s dividend declaration and distribution activity since inception:

 

Date 
Declared
  Record
Date
  Payment
Date
  Amount
Per Share
   Cash
Distribution
   DRIP
Shares
Issued
   DRIP
Share
Value
 
Three Months Ended March 31, 2013                    
3/8/13  5/20/13  6/16/13  $0.115   $       $ 
3/8/13  4/18/13  5/15/13  $0.115   $       $ 
3/8/13  3/20/13  4/15/13  $0.115   $1,046    3,867   $55 
         $0.345   $1,046    3,867   $55 
Year Ended December 31, 2012                    
11/27/12  2/21/13  3/15/13  $0.115   $1,050    3,392   $50 
11/27/12  1/18/13  2/15/13  $0.115   $1,087    898   $14 
11/27/12  12/20/12  1/15/13  $0.115   $1,056    2,930   $44 
11/2/12  11/16/12  11/30/12  $0.450   $4,243    4,269   $61 
8/7/12  8/17/12  8/31/12  $0.450   $4,105    11,608   $193 
5/3/12  5/17/12  5/31/12  $0.450   $3,402    2,299   $37 
3/12/12  3/23/12  3/30/12  $0.450   $3,378    3,517   $58 
         $2.145   $18,321    28,913   $457 
Year Ended December 31, 2011                    
11/8/11  11/23/11  11/30/11  $0.450   $3,281    9,814   $151 
8/9/11  8/23/11  8/30/11  $0.400   $2,836    13,193   $209 
5/10/11  5/19/11  5/26/11  $0.330   $2,190    20,104   $316 
         $1.180   $8,307    43,111   $676 
Year Ended December 31, 2010                    
12/15/10  12/28/10  12/31/10  $0.220   $1,097    38,297   $565 

 

On May 3, 2013, the Board declared monthly dividends payable as set forth in the table below.

 

Record Dates  Payment Date  Dividends
Declared
 
August 19, 2013  September 16, 2013  $0.115 
July 17, 2013  August 15, 2013  $0.115 
June 20, 2013  July 15, 2013  $0.115 

 

28
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

 

Note 10.  Financial Highlights

 

The financial highlights for the Company are as follows:

 

   Three Months
Ended
March 31, 2013
   Three Months
Ended
March 31, 2012
 
         
Per share data:          
Net asset value at beginning of period  $15.15   $17.01 
Net investment income   0.29    0.44 
Realized loss on investments   (0.02)    
Unrealized appreciation (depreciation) on investments   0.04    (0.11)
Net increase in net assets resulting from operations   0.31    0.33 
Dividends declared   (0.35)   (0.45)
Issuance of common stock under dividend reinvestment plan   0.01     
Net asset value at end of period  $15.12   $16.89 
Per share market value, end of period  $14.61   $16.61 
Total return based on a market value   0.2%(1)   4.5 %(1)
Shares outstanding at end of period   9,574,445    7,640,049 
Ratios to average net assets:          
Expenses without incentive fees   10.8 %(2)   7.5 %(2)
Incentive fees   1.9 %(2)   2.6 %(2)
Total expenses   12.7 %(2)   10.1 %(2)
Net investment income with incentive fees   9.6 %(2)   10.4 %(2)
Average net asset value  $144,866   $129,465 
Average debt per share   9.68    8.57 
Portfolio turnover ratio   12.38%   7.55%

____________

 

(1) The total return for the three months ended March 31, 2013 and 2012, equals the change in the ending market value over the beginning of period price per share plus dividends paid per share during the period, divided by the beginning price.
(2) Annualized.

 

29
 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

In this quarterly report on Form 10-Q, except where the context suggests otherwise, the terms “we,” “us,” “our” and “Horizon Technology Finance” refer to Horizon Technology Finance Corporation and its consolidated subsidiaries. The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Amounts are stated in thousands, except shares and per share data and where otherwise noted.

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to future events or our future performance or financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

 

our future operating results, including the performance of our existing loans and warrants;

 

the introduction, withdrawal, success and timing of business initiatives and strategies;

 

changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

 

the relative and absolute investment performance and operations of our investment advisor, Horizon Technology Management LLC, or the Advisor;

 

the impact of increased competition;

 

the impact of investments we intend to make and future acquisitions and divestitures;

 

the unfavorable resolution of legal proceedings;

 

our business prospects and the prospects of our portfolio companies;

 

the impact, extent and timing of technological changes and the adequacy of intellectual property protection;

 

our regulatory structure and tax status;

 

the adequacy of our cash resources and working capital;

 

the timing of cash flows, if any, from the operations of our portfolio companies;

 

the impact of interest rate volatility on our results, particularly if we use leverage as part of our investment strategy;

 

the ability of our portfolio companies to achieve their objective;

 

our ability to cause a subsidiary to become a licensed Small Business Investment Company (“SBIC”);

 

the impact of legislative and regulatory actions and reforms and regulatory supervisory or enforcement actions of government agencies relating to us or our Advisor;

 

our contractual arrangements and relationships with third parties;

 

our ability to access capital and any future financings by us;

 

the ability of our Advisor to attract and retain highly talented professionals; and

 

the impact of changes to tax legislation and, generally, our tax position.

 

We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks” and similar expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” in our annual report on Form 10-K, or Form 10-K, and elsewhere in this quarterly report on Form 10-Q.

 

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We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this quarterly report on Form 10-Q, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission, or the SEC, including, reports on Form 10-Q and current reports on Form 8-K and Form 10-K.

 

Overview

 

We are a specialty finance company that lends to and invests in development-stage companies in the technology, life science, healthcare information and services and cleantech industries, which we refer to as our “Target Industries.” Our investment objective is to generate current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured loans, which we refer to as “Venture Loans,” to companies backed by established venture capital and private equity firms in our Target Industries, which we refer to as “Venture Lending.” We also selectively lend to publicly traded companies in our Target Industries.

 

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for U.S. federal income tax purposes, we have elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on our assessment of market conditions and other factors at the time of any proposed borrowing.

 

Compass Horizon Funding Company LLC, or Compass Horizon, our predecessor company, commenced operations in March 2008. We were formed in March 2010 for the purpose of acquiring Compass Horizon and continuing its business as a public entity.

 

Our investment activities are managed by the Advisor and supervised by our board of directors, or the Board, of which a majority of the members are independent of us. Under an investment management agreement, or the Investment Management Agreement, we have agreed to pay the Advisor a base management fee and an incentive fee for its advisory services to us. We have also entered into an administration agreement, or the Administration Agreement, with the Advisor under which we have agreed to reimburse the Advisor for our allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement.

 

Portfolio Composition and Investment Activity

 

The following table shows our portfolio by asset class as of March 31, 2013 and December 31, 2012:

 

   March 31, 2013   December 31, 2012 
   # of
Investments
   Fair
Value
   Percentage
of Total
Portfolio
   # of
Investments
   Fair
Value
   Percentage
of Total
Portfolio
 
Term loans   46   $221,262    89.3%   41   $200,685    87.8%
Revolving loans   3    17,487    7.1%   4    19,612    8.6%
Total loans   49    238,749    96.4%   45    220,297    96.4%
Warrants   66    6,048    2.4%   62    5,468    2.4%
Other investments   1    2,100    0.8%   1    2,100    0.9%
Equity   3    884    0.4%   2    748    0.3%
Total       $247,781    100.0%       $228,613    100.0%

 

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Total portfolio investment activity as of and for the three months ended March 31, 2013 and 2012 was as follows:

 

   For the three months Ended
March 31,
 
   2013   2012 
Beginning portfolio  $228,613   $178,013 
New loan funding   28,500    31,700 
Less refinanced balances and participation       (18,739)
Net new loan funding   28,500    12,961 
Principal payments received on investments   (9,962)   (9,120)
Early pay-offs       (14,205)
Accretion of loan fees   548    642 
New loan fees   (320)   (182)
New equity   73     
Net realized loss on investments   (18)    
Net appreciation (depreciation) on investments   420    (813)
Other   (73)    
Ending Portfolio  $247,781   $167,296 

 

We receive payments in our loan portfolio based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our loans prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period.

 

The following table shows our loan portfolio by industry sector as of March 31, 2013 and December 31, 2012:

 

   March 31, 2013   December 31, 2012 
   Loans at
Fair
Value
   Percentage
of Total
Portfolio
   Loans at
Fair
Value
   Percentage
of Total
Portfolio
 
Life Science                    
Biotechnology  $35,319    14.8%  $38,018    17.3%
Medical Device   24,606    10.3%   23,446    10.6%
Technology                    
Software   67,860    28.4%   54,358    24.7%
Internet and Media   9,796    4.1%   9,763    4.4%
Semiconductors   24,563    10.3%   25,795    11.7%
Power Management   15,329    6.4%   15,792    7.2%
Cleantech                    
Energy Efficiency   11,812    5.0%   12,950    5.9%
Waste Recycling   2,469    1.0%   2,197    1.0%
Alternative Energy   13,604    5.7%   8,586    3.9%
Healthcare Information and Services                    
Diagnostics   19,955    8.4%   21,340    9.7%
Other Healthcare Related Services   9,030    3.8%   2,655    1.2%
Software   4,406    1.8%   5,397    2.4%
Total  $238,749    100.0%  $220,297    100.0%

 

The largest loans may vary from year to year as new loans are recorded and repaid. Our five largest loans represented approximately 21% and 23% of total loans outstanding as of March 31, 2013 and December 31, 2012, respectively. No single loan represented more than 10% of our total loans as of March 31, 2013 and December 31, 2012.

 

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Loan Portfolio Asset Quality

 

We use a credit rating system which rates each loan on a scale of 4 to 1, with 4 being the highest credit quality rating and 3 being the rating for a standard level of risk. A rating of 2 represents an increased level of risk and while no loss is currently anticipated for a 2 rated loan, there is potential for future loss of principal. A rating of 1 represents a deteriorating credit quality and increased risk. The following table shows the classification of our loan portfolio by credit rating as of March 31, 2013 and December 31, 2012:

 

   March 31, 2013   December 31, 2012 
   Loans at
Fair
Value
   Percentage
of Loan
Portfolio
   Loans at
Fair
Value
   Percentage
of Loan
Portfolio
 
                 
Credit Rating                    
4  $33,696    14.1%  $30,818    14.0%
3   180,859    75.8%   181,019    82.2%
2   18,914    7.9%   3,560    1.6%
1   5,280    2.2%   4,900    2.2%
Total  $238,749    100.0%  $220,297    100.0%

 

As of March 31, 2013 and December 31, 2012, our loan portfolio had a weighted average credit rating of 3.1 and 3.2, respectively. As of March 31, 2013, there were four investments with a credit rating of 2. As of December 31, 2012, there was one investment with a credit rating of 2. As of both March 31, 2013 and December 31, 2012, there were three investments with a credit rating of 1, all of which were on non-accrual status.

 

Consolidated Results of Operations

 

As a BDC and a RIC for U.S. federal income tax purposes, we are also subject to certain constraints on our operations, including limitations imposed by the 1940 Act and the Code. Also, the management fee that we pay to our Advisor under the Investment Management Agreement is determined by reference to a formula that differs materially from the management fee paid by Compass Horizon in prior periods. For these and other reasons, the results of operations described below may not be indicative of the results we report in future periods.

 

Consolidated operating results for the three months ended March 31, 2013 and 2012 are as follows:

 

   For the three Months Ended 
   March 31, 
   2013   2012 
Total investment income  $7,368   $6,625 
Total expenses   4,595    3,273 
Net investment income   2,773    3,352 
Net realized loss on investments   (210)    
Net unrealized appreciation (depreciation) on investments   420    (813)
Net increase in net assets resulting from operations  $2,983   $2,539 
Average investments, at fair value  $230,291   $171,592 
Average debt outstanding  $92,665   $65,469 

 

Net increase in net asset resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, quarterly comparisons of net income may not be meaningful.

 

Investment Income

 

Investment income increased by $0.7 million, or 11.2%, for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. For the three months ended March 31, 2013, total investment income consisted primarily of $7.3 million in interest income from investments, which included $1.2 million in income from the accretion of origination fees and ETPs. Interest income on investments and other investment income increased primarily due to the increased average size of the loan portfolio offset by lower fee income, as we had no prepayments in the quarter.

 

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For the three months ended March 31, 2012, total investment income consisted primarily of $5.9 million in interest income from investments, which included $1.1 million in income from the accretion of origination fees and ETPs. Fee income of $0.7 million was primarily earned from prepayment fees collected from our portfolio companies as we experienced early payoffs and refinances of approximately $27.6 million.

 

For the three months ended March 31, 2013 and 2012, our dollar-weighted average annualized yield on average debt investments was approximately 12.8% and 15.4%, respectively. We calculate the yield on dollar-weighted average debt investments for any period measured as (1) total investment income during the period divided by (2) the average of the fair value of debt investments outstanding on (a) the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar month during the period.

 

Investment income, consisting of interest income and fees on loans, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately 23% and 29% of investment income for the three months ended March 31, 2013, and 2012, respectively.

 

As of March 31, 2013 and December 31, 2012, interest receivable was $3.5 million and $2.8 million, respectively, which represents accreted ETPs and one month of accrued interest income on substantially all of our loans.

 

Expenses

 

Total expenses increased by $1.3 million, or 40.4%, to $4.6 million for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. Total operating expenses for each period consisted principally of management fees, incentive and administrative fees, interest expense and, to a lesser degree, professional fees and general and administrative expenses.

 

Interest expense the for three months ended March 31, 2013, which includes the amortization of debt issuance costs, increased primarily due to an increase in our average debt outstanding, as well as an increase borrowing cost associated with our Fortress Facility and our Senior Notes.

 

Management fee expense for the three months ended March 31, 2013 increased compared to the three months ended March 31, 2012 as a result of an increase in average gross assets.

 

Performance based incentive fees for the three months ended March 31, 2013 decreased compared to the three months ended March 31, 2012 due to lower pre-incentive fee net investment income in the three months ended March 31, 2013. The incentive fees for the three months ended March 31, 2013 and 2012 were approximately $0.7 million and $0.8 million, respectively, and consisted entirely of incentive fees payable on pre-incentive fee net investment income.

 

Administrative fee expense for the three months ended March 31, 2013 remained flat compared to the three months ended March 31, 2012.

 

Professional fees and general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses for the three months ended March 31, 2013 remained flat compared to the three months ended March 31, 2012.

 

Net Realized Gains and Net Unrealized Appreciation and Depreciation

 

Realized gains or losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of our investments without regard to unrealized appreciation or depreciation previously recognized and includes investments charged off during the period, net of recoveries. The net change in unrealized appreciation or depreciation on investments primarily reflects the change in portfolio investment fair values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

 

During the three months ended March 31, 2013, we recognized realized losses totaling approximately $0.2 million primarily in connection with the disposal of a portfolio company’s warrants. During the three months ended March 31, 2012, no realized gains were recognized.

 

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During the three months ended March 31, 2013, net unrealized appreciation on investments totaled approximately $0.4 million which was primarily due to the change in fair values of our investment portfolio during the period. During the three months ended March 31, 2012, net unrealized depreciation on investments totaled approximately $0.8 million which was primarily due to $1.2 million of net unrealized depreciation on six debt investments partially offset by unrealized appreciation on our warrant and equity investments.

 

Liquidity and Capital Resources

 

As of March 31, 2013 and December 31, 2012, we had cash and investments in money market funds of $4.6 million and $3.6 million, respectively. These amounts are available to fund new investments, reduce borrowings under a revolving credit facility with Wells Fargo Capital Finance, LLC, or the Wells Facility, and a term loan credit facility with Fortress Credit Co LLC, or the Fortress Facility, pay operating expenses and pay dividends. In this quarterly report on Form 10-Q, we refer to the Wells Facility and the Fortress Facility, collectively, as the “Credit Facilities.” Our primary sources of capital have been from our private and public common stock offerings, use of our Credit Facilities and issuance of our 7.375% senior unsecured notes due in 2019, or the Senior Notes.

 

As of March 31, 2013, the outstanding principal balance under the Wells Facility was $67.0 million. As of March 31, 2013, we had available borrowing capacity of approximately $8.0 million under our Wells Facility, subject to existing terms and advance rates.

 

As of March 31, 2013, the outstanding principal balance under the Fortress Facility was $10.0 million. As of March 31, 2013, we had available borrowing capacity of approximately $65.0 million under our Fortress Facility, subject to existing terms and advance rates.

 

Our operating activities used cash of $18.4 million for the three months ended March 31, 2013, and our financing activities provided cash of $17.8 million for the same period. Our operating activities used cash primarily for investing in portfolio companies, net of principal payments received. Our financing activities provided cash primarily from advances on our Wells Facility offset by our dividends paid in the first quarter.

 

Our operating activities provided cash of $3.2 million for the three months ended March 31, 2012 and our financing activities provided cash of $1.2 million for the same period. Our operating activities provided cash primarily from normal amortization and prepayments of our debt investments. Our financing activity provided cash primarily from our issuance of our Senior Notes offset by payments made on our Credit Facilities and our dividends paid in the first quarter.

 

Our primary use of available funds is to make investments in portfolio companies and for general corporate purposes. We expect to raise additional equity and debt capital opportunistically as needed, and subject to market conditions, to support our future growth through future equity offerings, issuances of senior securities and/or future borrowings, to the extent permitted by the 1940 Act.

 

In order to satisfy the Code requirements applicable to a RIC, we distribute to our stockholders all or substantially all of our income except for certain net capital gains. In addition, as a BDC, we are required to meet a coverage ratio of 200%. This requirement limits the amount that we may borrow.

 

We believe that our current cash and investments in money market funds, cash generated from operations, and funds available from our Credit Facilities will be sufficient to meet our working capital and capital expenditure commitments for at least the next 12 months.

 

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Current Borrowings

 

A summary of our borrowings as of March 31, 2013 and December 31, 2012 is as follows:

 

   March 31, 2013 
   Total
Commitment
   Balance
Outstanding
   Unused
Commitment
 
Wells Facility  $75,000   $67,037   $7,963 
Fortress Facility   75,000    10,000    65,000 
Senior Notes   33,000    33,000     
Total  $183,000   $110,037   $72,963 

 

   December 31, 2012 
   Total
Commitment
   Balance
Outstanding
   Unused
Commitment
 
Wells Facility  $75,000   $46,020   $28,980 
Fortress Facility   75,000    10,000    65,000 
Senior Notes   33,000    33,000     
Total  $183,000   $89,020   $93,980 

 

We, through our wholly owned subsidiary, Horizon Credit II LLC, or Credit II, entered into the Wells Facility on July 14, 2011. The interest rate is based upon the one-month LIBOR plus a spread of 4.00%, with a LIBOR floor of 1.00%. The interest rate was 5.00% as of March 31, 2013 and December 31, 2012.

 

We may request advances under the Wells Facility through July 14, 2014, or the Revolving Period. After the Revolving Period, we may not request new advances, and we must repay the outstanding advances under the Wells Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Wells Facility, particularly the condition that the principal balance of the Wells Facility does not exceed fifty percent (50%) of the aggregate principal balance of our eligible loans to our portfolio companies. All outstanding advances under the Wells Facility are due and payable on July 14, 2017.

 

The Wells Facility is collateralized by loans held by Credit II and permits an advance rate of up to 50% of eligible loans held by Credit II. The Wells Facility contains covenants that, among other things, require us to maintain a minimum net worth, to restrict the loans securing the Wells Facility to certain criteria for qualified loans and to comply with portfolio company concentration limits as defined in the related loan agreement. 

 

On March 23, 2012, we issued and sold $30 million aggregate principal amount of Senior Notes, and on April 18, 2012, pursuant to the underwriters’ 30 day option to purchase additional notes, we sold an additional $3 million of such notes. The Senior Notes will mature on March 15, 2019 and may be redeemed in whole or in part at our option at any time or from time to time on or after March 15, 2015 at a redemption price of $25 per security plus accrued and unpaid interest. The Senior Notes bear interest at a rate of 7.375% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year. The Senior Notes are our direct, unsecured obligations and rank (1) equally in right of payment with our future senior unsecured indebtedness; (2) senior in right of payment to any of our future indebtedness that expressly provides it is subordinated to the Senior Notes; (3) effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness and (4) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. As of March 31, 2013, we were in material compliance with the terms of the Senior Notes. The Senior Notes are listed on the New York Stock Exchange under the symbol “HTF”.

 

We, through our wholly owned subsidiary Horizon Credit III LLC, or Credit III, entered into the Fortress Facility on August 23, 2012. The interest rate on the Fortress Facility is based upon the one-month LIBOR plus a spread of 6.00%, with a LIBOR floor of 1.00%. The interest rate was 7.00% as of March 31, 2013 and December 31, 2012.

 

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We may request advances under the Fortress Facility through August 23, 2016, or the Draw Period. After the Draw Period, we may not request new advances and we must repay the outstanding advances under the Fortress Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Fortress Facility, particularly the condition that the principal balance of the Fortress Facility does not exceed approximately sixty-six percent (66%) of the aggregate principal balance of our eligible loans to our portfolio companies. All outstanding advances under the Fortress Facility are due and payable on August 23, 2017.

 

The Fortress Facility is collateralized by loans held by Credit III and permits an advance rate of up to approximately 66% of eligible loans held by Credit III. The Fortress Facility contains covenants that, among other things, require us to maintain a minimum net worth, to restrict the loans securing the Fortress Facility to certain criteria for qualified loans and to comply with portfolio company concentration limits as defined in the related loan agreement.

 

As of March 31, 2013 and December 31, 2012, other assets were $4.2 million and $4.6 million, respectively, which were primarily, comprised of debt issuance costs.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

A summary of our significant contractual payment obligations and off-balance sheet arrangements as of March 31, 2013 is as follows:

 

   Payments due by period 
   Total   Less than
1 year
   1 – 3
Years
   3-5
Years
   After 5
years
 
Borrowings  $110,037   $20,425   $56,612   $   $33,000 
Unfunded commitments   12,643    10,643    2,000         
Total  $122,680   $31,068   $58,612   $   $33,000 

 

In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our unfunded commitments may be significant from time to time. As of March 31, 2013, we had unfunded commitments of approximately $12.6 million. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

 

In addition to the Wells Facility and Fortress Facility, we have certain commitments pursuant to our Investment Management Agreement entered into with our Advisor. We have agreed to pay a fee for investment advisory and management services consisting of two components — a base management fee and an incentive fee. Payments under the Investment Management Agreement are equal to (1) a base management fee equal to a percentage of the value of our average gross assets and (2) a two-part incentive fee. We have also entered into a contract with our Advisor to serve as our administrator. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of our Advisor’s overhead in performing its obligation under the agreement, including rent, fees and other expenses inclusive of our allocable portion of the compensation of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. See Note 3 to our Consolidated Financial Statements for additional information regarding our Investment Management Agreement and our Administration Agreement.

 

Distributions

 

In order to qualify as a RIC and to avoid corporate level tax on the income we distribute to our stockholders, we are required under the Code to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Additionally, we must distribute at least 98% of our ordinary income and 98.2% of our capital gain net income on an annual basis and any net ordinary income and net capital gains for preceding years that were not distributed during such years and on which we previously paid no U.S. federal income tax to avoid a U.S. federal excise tax. We intend to distribute monthly dividends to our stockholders as determined by our Board.

 

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including the possible loss of our qualification as a RIC. We cannot assure stockholders that they will receive any distributions.

 

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To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that the source of any distribution is our ordinary income or gains.

 

We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our dividend reinvestment plan. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our dividend reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.

 

Related Party Transactions

 

We have entered into a number of business relationships with affiliated or related parties, including the following:

 

We entered into the Investment Management Agreement with our Advisor. Mr. Robert D. Pomeroy Jr., Chairman of the Board and our Chief Executive Officer, is a manager of the Advisor, and Mr. Gerald A. Michaud, President and Director is a manager of our Advisor.

 

Our Advisor provides us with the office facilities and administrative services necessary to conduct day-to day operations pursuant to our Administration Agreement.

 

We have entered into a license agreement with the predecessor of the Advisor, pursuant to which it has granted us a non-exclusive, royalty-free license to use the name “Horizon Technology Finance.”

 

Our Advisor may manage other investment vehicles with the same investment strategy as us, which we refer to in this report as “Advisor Funds.” Our Advisor may provide us an opportunity to co-invest with the Advisor Funds. Under the 1940 Act, absent receipt of exemptive relief from the SEC, we and our affiliates may be precluded from co-investing in such investments. Accordingly, we may apply for exemptive relief which would permit us to co-invest subject to certain conditions, including approval of such investments by both a majority of our directors who have no financial interest in such transaction and a majority of directors who are not interested directors as defined in the 1940 Act.

 

Critical Accounting Policies

 

The discussion of our financial condition and results of operation is based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.” The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we describe our significant accounting policies in the notes to our consolidated financial statements.

 

We have identified the following items as critical accounting policies.

 

Valuation of Investments

 

Investments are recorded at fair value. Our Board determines the fair value of our portfolio investments. We apply fair value to substantially all of our investments in accordance with relevant GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. We have categorized our investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy. 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, our own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

 

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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. The three categories within the hierarchy are as follows:

 

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

 

Level 2Observable 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 3Unobservable 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.

 

Our Board determines the fair value of investments in good faith, based on the input of management, the audit committee and independent valuation firms that have been engaged at the direction of our Board to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing twelve-month period under our valuation policy and a consistently applied valuation process. The Board conducts this valuation process at the end of each fiscal quarter, with approximately 25% (based on fair value) of our valuation of portfolio companies that do not have a readily available market quotations subject to review by an independent valuation firm.

 

Income Recognition

 

Interest on loan 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. When a loan becomes 90 days or more past due, or if we otherwise do not expect to receive interest and principal repayments, the loan is placed on non-accrual status and the recognition of interest income is discontinued. Interest payments received on loans that are on non-accrual status are treated as reductions of principal until the principal is repaid.

 

We receive a variety of fees from borrowers in the ordinary course of conducting our business, including advisory fees, commitment fees, amendment fees, non-utilization fees and prepayment fees. In a limited number of cases, we may also receive a non-refundable deposit earned upon the termination of a transaction. Loan origination fees, net of certain direct origination costs, are deferred and, along with unearned income, are amortized as a level yield adjustment over the respective term of the loan. Fees for counterparty loan commitments with multiple loans are allocated to each loan based upon each loan’s relative fair value. When a loan is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the loan is returned to accrual status.

 

Certain loan agreements also require the borrower to make an ETP that is accrued into income over the life of the loan to the extent such amounts are expected to be collected. We will generally cease accruing the income if there is insufficient value to support the accrual or if we do not expect the borrower to be able to pay all principal and interest due.

 

In connection with substantially all of our lending arrangements, we receive warrants to purchase shares of stock from the borrower. We record the warrants as assets at estimated fair value on the grant date using the Black-Scholes valuation model. We consider the warrants loan fees and also record as unearned loan income on the grant date. The unearned income is recognized as interest income over the contractual life of the related loan in accordance with our income recognition policy. Subsequent to loan origination, we also measure the warrants at fair value using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss on warrants. Gains from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains on warrants.

 

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Income taxes

 

We have elected to be treated as a RIC under subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, we are required to meet certain source of income and asset diversification requirements and we must timely distribute to our stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. We, among other things, have made and intend to continue to make the requisite distributions to our stockholders, which will generally relieve us from U.S. federal income taxes.

 

Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions, we will accrue excise tax, if any, on estimated excess taxable income as taxable income is earned.

 

We evaluate tax positions taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, are recorded as a tax expense in the current year. It is our policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. We had no material uncertain tax positions at March 31, 2013 and December 31, 2012.

 

Recently Issued Accounting Standards

 

In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRs, (ASU 2011-04). ASU 2011-04 converges the fair value measurement guidance in U.S. GAAP and International Financial Reporting Standards (IFRSs). Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in existing guidance. In addition, ASU 2011-04 requires additional fair value disclosures. We adopted ASU 2011-04 in the quarter ended March 31, 2012.

 

Item 3.  Quantitative And Qualitative Disclosures About Market Risk

 

We are subject to financial market risks, including changes in interest rates. During the periods covered by our financial statements, the interest rates on the loans within our portfolio were mostly at fixed rates and we expect that our loans in the future will also have primarily fixed interest rates. The initial commitments to lend to our portfolio companies are usually based on a floating LIBOR index and typically have interest rates that are fixed at the time of the loan funding and remain fixed for the term of the loan.

 

Assuming that the consolidated statement of assets and liabilities as of March 31, 2013 was to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% change in interest rates may affect net income by more than 1% over a one-year horizon. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the consolidated statement of assets and liabilities and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement above.

 

While our Senior Notes bear interest at a fixed rate, our Credit Facilities have a floating interest rate provision based on a LIBOR index which resets daily, and we expect that any other credit facilities into which we enter in the future may have floating interest rate provisions. We have used hedging instruments in the past to protect us against interest rate fluctuations and we may use them in the future. Such instruments may include swaps, futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.

 

40
 

 

Because we currently fund, and will continue to fund, our investments with borrowings, our net income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income.

 

Item 4.  Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

As of March 31, 2013, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

 

(b) Changes in Internal Controls Over Financial Reporting.

 

There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

41
 

 

PART II

 

Item 1: Legal Proceedings.

 

Neither we nor our Advisor are currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or against our Advisor.

 

Item 1A: Risk Factors.

 

In addition to other information set forth in this report, you should carefully consider the “Risk Factors” discussed in our annual report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results. There have been no material changes during the three months ended March 31, 2013 to the risk factors set forth in “Item 1A. Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2012.

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3: Defaults Upon Senior Securities.

 

None.

 

Item 4: Mine Safety Disclosures.

 

Not applicable

 

Item 5: Other Information.

 

None.

 

Item 6: Exhibits.

 

EXHIBIT INDEX

 

Exhibit
No.
  Description
31.1*   Certifications by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*   Certifications by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

____________

 

* Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Horizon Technology Finance Corporation
       
Date: May 7, 2013 By: /s/  Robert D. Pomeroy, Jr.
    Name:   Robert D. Pomeroy, Jr.
    Title: Chief Executive Officer and Chairman of the Board
       
Date: May 7, 2013 By: /s/  Christopher M. Mathieu
    Name:   Christopher M. Mathieu
    Title: Chief Financial Officer

 

43

 

EXHIBIT 31.1

 

CERTIFICATION PURSUANT TO EXCHANGE ACT
RULES 13a-14 AND 15d-14, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

CHIEF EXECUTIVE OFFICER CERTIFICATION

 

I, Robert D. Pomeroy, Jr., as Chairman of the Board and Chief Executive Officer of Horizon Technology Finance Corporation and Subsidiaries, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Horizon Technology Finance Corporation and Subsidiaries;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 

 c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 7, 2013

 

By:   /s/ Robert D. Pomeroy, Jr.      
  Chief Executive Officer and      
  Chairman of the Board      

 

 

 

EXHIBIT 31.2

 

CERTIFICATION PURSUANT TO EXCHANGE ACT
RULES 13a-14 AND 15d-14, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

CHIEF FINANCIAL OFFICER CERTIFICATION

 

I, Christopher M. Mathieu, Chief Financial Officer of Horizon Technology Finance Corporation and Subsidiaries, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Horizon Technology Finance Corporation and Subsidiaries;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 7, 2013

 

By:   /s/ Christopher M. Mathieu      
  Christopher M. Mathieu      
  Chief Financial Officer      

 

 

 

EXHIBIT 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

 

In connection with the Quarterly Report on Form 10-Q of Horizon Technology Finance Corporation and Subsidiaries (the “Company”) for the quarterly period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert D. Pomeroy, Jr., as Chief Executive Officer and Chairman, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002, that to our knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

 

/s/ Robert D. Pomeroy, Jr.      
Name:   Robert D. Pomeroy, Jr.      
Title:   Chief Executive Officer and
Chairman of the Board  
   

 

Date: May 7, 2013

 

 

 

EXHIBIT 32.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

 

In connection with the Quarterly Report on Form 10-Q of Horizon Technology Finance Corporation and Subsidiaries (the “Company”) for the quarterly period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher M. Mathieu, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002, that to our knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company as of the dates and for the periods expressed in the Report.

 

/s/ Christopher M. Mathieu      
Name:   Christopher M. Mathieu      
Title:   Chief Financial Officer      

 

Date: May 7, 2013