UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
     
    OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    FOR THE TRANSITION PERIOD FROM                      TO

  

COMMISSION FILE NUMBER: 814-00802

 

HORIZON TECHNOLOGY FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 
   

 

HORIZON TECHNOLOGY FINANCE CORPORATION

 

FORM 10-Q

TABLE OF CONTENTS

 

      Page
PART I    
Item 1. Consolidated Financial Statements   3
       
  Consolidated Statements of Assets and Liabilities as of June 30, 2015 and December 31, 2014 (unaudited)   3
  Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014 (unaudited)   4
  Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2015 and 2014 (unaudited)   5
  Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)   6
  Consolidated Schedules of Investments as of June 30, 2015 and December 31, 2014 (unaudited)   7
  Notes to the Consolidated Financial Statements (unaudited)   17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   36
Item 3. Quantitative And Qualitative Disclosures About Market Risk   49
Item 4. Controls and Procedures   50
       
PART II    
Item 1. Legal Proceedings   50
Item 1A. Risk Factors   50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   50
Item 3. Defaults Upon Senior Securities   51
Item 4. Mine Safety Disclosures   51
Item 5. Other Information   51
Item 6. Exhibits   51
  Signatures   52
EX-31.1      
EX-31.2      
EX-32.1      
EX-32.2      

 

2
 

 

PART I: FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Assets and Liabilities (Unaudited)

(In thousands, except share and per share data)

 

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

 

See Notes to Consolidated Financial Statements

 

3
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)

 

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

 

See Notes to Consolidated Financial Statements

 

4
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Changes in Net Assets (Unaudited)

(In thousands, except share data)

 

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

 

See Notes to Consolidated Financial Statements

 

5
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

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

 

See Notes to Consolidated Financial Statements

 

6
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2015

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(10)(11)  Amount   Investments (6)   Value 
Debt Investments — 142.8% (9)                       
Debt Investments — Life Science — 26.4% (9)                       
Argos Therapeutics, Inc. (2)(5)  Biotechnology  Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;  $5,000   $4,883   $4,883 
      Ceiling 10.75%), 5.00% ETP, Due 10/1/18)               
New Haven Pharmaceuticals, Inc. (2)  Biotechnology  Term Loan (11.50% cash (Libor + 11.00%; Floor   1,301    1,294    1,294 
      11.50%), 6.50% ETP, Due 11/1/17)               
      Term Loan (11.50% cash (Libor + 11.00%; Floor   434    431    431 
      11.50%), 6.50% ETP, Due 11/1/17)               
      Term Loan (10.50% cash (Libor + 10.00%; Floor   2,000    1,971    1,971 
      10.50%), 4.00% ETP, Due 7/1/18)               
Palatin Technologies, Inc. (2)(5)  Biotechnology  Term Loan (9.00% cash (Libor + 8.50%; Floor   5,000    4,929    4,929 
      9.00%), 5.00% ETP, Due 1/1/19)               
Sample6, Inc. (2)  Biotechnology  Term Loan (9.50% cash (Libor + 9.00%; Floor   1,555    1,549    1,549 
      9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)               
      Term Loan (9.50% cash (Libor + 9.00%; Floor   945    939    939 
      9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)               
      Term Loan (9.50% cash (Libor + 9.00%; Floor   2,500    2,477    2,477 
      9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)               
Sunesis Pharmaceuticals, Inc. (2)(5)  Biotechnology  Term Loan (8.95% cash, 4.65% ETP, Due 10/1/16)   545    543    543 
      Term Loan (9.00% cash, 4.65% ETP, Due 10/1/16)   818    812    812 
IntegenX Inc. (2)  Medical Device  Term Loan (10.75% cash (Libor + 10.25%; Floor   3,750    3,694    3,694 
      10.75%; Ceiling 12.75%), 3.50% ETP, Due 7/1/18)               
Lantos Technologies, Inc. (2)  Medical Device  Term Loan (10.50% cash (Libor + 10.00%; Floor   3,500    3,458    3,267 
      10.50%; Ceiling 12.00%), 3.00% ETP, Due 2/1/18)               
Mederi Therapeutics, Inc. (2)  Medical Device  Term Loan (10.75% cash (Libor + 10.25%; Floor   3,000    2,975    2,975 
      10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)               
      Term Loan (10.75% cash (Libor + 10.25%; Floor   3,000    2,975    2,975 
      10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)               
NinePoint Medical, Inc. (2)  Medical Device  Term Loan (9.25% cash (Libor + 8.75%; Floor   5,000    4,922    4,922 
      9.25%), 4.50% ETP, Due 3/1/19)               
Tryton Medical, Inc. (2)  Medical Device  Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,   2,438    2,421    2,421 
      Due 9/1/16)               
ZetrOZ, Inc. (2)  Medical Device  Term Loan (11.00% cash (Libor + 10.50%; Floor   1,500    1,458    1,458 
      11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)               
      Term Loan (11.00% cash (Libor + 10.50%; Floor   1,500    1,474    1,474 
      11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)               
Total Debt Investments — Life Science                43,205    43,014 
Debt Investments — Technology — 86.5% (9)                       
Ekahau, Inc. (2)  Communications  Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)   1,048    1,040    1,040 
      Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)   349    346    346 
mBlox, Inc. (2)  Communications  Term Loan (11.50% cash (Libor + 11.00%; Floor   5,000    4,972    4,972 
      11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)               
      Term Loan (11.50% cash (Libor + 11.00%; Floor   5,000    4,972    4,972 
      11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)               
      Term Loan (12.00% cash, 100.0% ETP, Due 7/1/16)   1,000    1,000    1,000 
      Term Loan (12.00% cash, 100.0% ETP, Due 7/1/16)   1,000    1,000    1,000 
Overture Networks, Inc. (2)  Communications  Term Loan (10.75% cash, (Libor + 10.25%; Floor   4,104    4,085    4,085 
      10.75%), 5.75% ETP, Due 12/1/17)               
      Term Loan (10.75% cash (Libor + 10.25%; Floor   2,052    2,041    2,041 
      10.75%), 5.75% ETP, Due 12/1/17)               
      Term Loan (10.75% cash (Libor + 10.25%; Floor   1,000    991    991 
      10.75%), 5.00% ETP, Due 11/1/18)               
Additech, Inc. (2)  Consumer-related Technologies  Term Loan (11.75% cash (Libor + 11.25%; Floor   2,500    2,464    2,464 
      11.75%; Ceiling 13.25%), 4.00% ETP, Due 7/1/18)               
      Term Loan (11.75% cash (Libor + 11.25%; Floor   2,500    2,458    2,458 
      11.75%; Ceiling 13.25%), 4.00% ETP, Due 1/1/19)               
Gwynnie Bee, Inc. (2)  Consumer-related Technologies  Term Loan (11.00% cash (Libor + 10.50%; Floor   1,867    1,839    1,839 
      11.00%; Ceiling 12.50%), 2.0% ETP, Due 11/1/17)               
      Term Loan (11.00% cash (Libor + 10.50%; Floor   1,000    978    978 
      11.00%; Ceiling 12.50%), 2.0% ETP, Due 2/1/18)               
      Term Loan (11.00% cash (Libor + 10.50%; Floor   1,000    983    983 
      11.00%; Ceiling 12.50%), 2.0% ETP, Due 4/1/18)               
SavingStar, Inc.  Consumer-related Technologies  Term Loan (10.90% cash (Libor + 10.40%; Floor   3,000    2,903    2,903 
      10.90%), 3.0% ETP, Due 6/1/19)               

 

See Notes to Consolidated Financial Statements

 

7
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2015

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(10)(11)  Amount   Investments (6)   Value 
The NanoSteel Company, Inc.  Materials  Term Loan (10.00% cash (Libor + 9.50%; Floor   5,000    4,855    4,855 
      10.00%), 5.0% ETP, Due 7/1/19)               
      Term Loan (10.00% cash (Libor + 9.50%; Floor   2,500    2,452    2,452 
      10.00%), 5.0% ETP, Due 7/1/19)               
Nanocomp Technologies, Inc. (2)  Networking  Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)   868    855    855 
Powerhouse Dynamics, Inc.  Power Management  Term Loan (11.20% cash (Libor + 10.70%; Floor   2,500    2,449    2,449 
      11.20%), 3.0% ETP, Due 3/1/19)               
Avalanche Technology, Inc. (2)  Semiconductors  Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;   1,983    1,976    1,976 
      Ceiling 11.75%), 2.40% ETP, Due 4/1/17)               
      Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;   2,246    2,239    2,239 
      Ceiling 11.75%) ,2.40% ETP, Due 10/1/18)               
      Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;   2,500    2,447    2,447 
      Ceiling 11.75%), 2.00% ETP, Due 2/1/19)               
eASIC Corporation (2)  Semiconductors  Term Loan (11.00% cash, 2.50% ETP, Due 10/1/17)   2,000    1,987    1,987 
      Term Loan (10.75% cash, 2.50% ETP, Due 4/1/18)   2,000    1,987    1,987 
InVisage Technologies, Inc. (2)  Semiconductors  Term Loan (12.00% cash (Libor + 11.50%; Floor   2,550    2,492    2,492 
      12.00%; Ceiling 14.00%), 2.0% ETP, Due 4/1/18)               
      Term Loan (12.00% cash (Libor + 11.50%; Floor   850    832    832 
      12.00%; Ceiling 14.00%), 2.0% ETP, Due 10/1/18)               
Luxtera, Inc. (2)  Semiconductors  Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;   2,193    2,162    2,162 
      Ceiling 12.25%), 13.00% ETP, Due 7/1/17)               
      Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;   1,224    1,219    1,219 
      Ceiling 12.25%), 13.00% ETP, Due 7/1/17)               
      Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%),   833    823    823 
      4.50% ETP, Due 12/1/18)               
NexPlanar Corporation (2)  Semiconductors  Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)   1,796    1,786    1,786 
      Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)   1,197    1,188    1,188 
Xtera Communications, Inc. (2)  Semiconductors  Term Loan (12.50% cash, 15.65% ETP, Due 12/31/16)   5,301    5,214    5,214 
      Term Loan (12.50% cash, 21.75% ETP, Due 12/31/16)   1,473    1,447    1,447 
Bridge2 Solutions, Inc.  Software  Term Loan (11.50% cash (Libor + 11.00%; Floor   4,000    3,975    3,975 
      11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19)               
Crowdstar, Inc. (2)  Software  Term Loan (10.75% cash (Libor + 10.25%; Floor   2,000    1,961    1,961 
      10.75%), 3.00% ETP, Due 9/1/18)               
Decisyon, Inc. (2)  Software  Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)   2,145    2,134    2,134 
      Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)   971    961    961 
Education Elements, Inc. (2)  Software  Term Loan (10.50% cash (Libor + 10.00%; Floor   2,000    1,962    1,962 
      10.50%), 4.00% ETP, Due 1/1/19)               
Lotame Solutions, Inc. (2)  Software  Term Loan (11.50% cash (Libor + 11.00%; Floor   3,410    3,394    3,394 
      11.50%), 5.25% ETP, Due 9/1/17)               
      Term Loan (11.50% cash (Libor + 11.00%; Floor   1,500    1,493    1,493 
      11.50%), 5.25% ETP, Due 9/1/17)               
      Term Loan (11.50% cash (Libor + 11.00%; Floor   2,100    2,075    2,075 
      11.50%), 3.00% ETP, Due 4/1/18)               
Netuitive, Inc. (2)  Software  Term Loan (12.75% cash, Due 7/1/16)   1,459    1,454    1,454 
Raydiance, Inc. (2)(8)  Software  Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)   2,995    2,995    2,158 
      Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)   596    596    429 
      Term Loan (11.50% cash (Libor + 11.00%; Floor   2,961    2,961    2,134 
      11.50%; Ceiling 13.50%), 2.75% ETP, Due 2/1/18)               
Razorsight Corporation (2)  Software  Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)   903    898    898 
      Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)   755    750    750 
      Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)   853    845    845 
ScoreBig, Inc. (2)  Software  Term Loan (10.50% cash (Libor + 10.00%; Floor   3,500    3,442    3,442 
      10.50%), 4.00% ETP, Due 4/1/19)               
      Term Loan (10.50% cash (Libor + 10.00%; Floor   3,500    3,442    3,442 
      10.50%), 4.00% ETP, Due 4/1/19)               
SIGNiX, Inc. (2)  Software  Term Loan (11.50% cash (Libor + 11.00%; Floor   3,000    2,911    2,911 
      11.50%), Due 7/1/18)               
SilkRoad Technology, Inc.  Software  Term Loan (10.85% cash (Libor + 10.35%; Floor   7,500    7,427    7,427 
      10.85%; Ceiling 12.85%), 3.00% ETP, Due 6/1/19)               
Social Intelligence Corp. (2)  Software  Term Loan (11.00% cash (Libor + 10.50%; Floor   1,364    1,345    1,345 
      11.00%; Ceiling 13.00%), 3.50% ETP, Due 12/1/17)               
SpringCM, Inc. (2)  Software  Term Loan (11.50% cash (Libor + 11.00%; Floor   4,500    4,438    4,438 
      11.50%; Ceiling 13.00%), 2.00% ETP, Due 1/1/18)               
Sys-Tech Solutions, Inc. (2)  Software  Term Loan (11.65% cash (Libor + 11.15%; Floor   6,000    5,961    5,961 
      11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)               
      Term Loan (11.65% cash (Libor + 11.15%; Floor   5,000    4,960    4,960 
      11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)               

 

See Notes to Consolidated Financial Statements

 

8
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2015

(In thousands)

 

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

 

See Notes to Consolidated Financial Statements

 

9
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2015

(In thousands)

 

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

 

See Notes to Consolidated Financial Statements

 

10
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

June 30, 2015

(In thousands)

 

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

 

 

 

(1)   All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States.
     
(2)   Has been pledged as collateral under the Key Facility or the 2013-1 Securitization.
     
(3)   All investments are less than 5% ownership of the class and ownership of the portfolio company.
     
(4)   All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include end-of-term payments (“ETPs”) and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the debt investment, unless otherwise indicated. Debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of June 30, 2015 is provided.
     
(5)   Portfolio company is a public company.
     
(6)   For debt investments, represents principal balance less unearned income.
     
(7)   Preferred and common stock warrants, equity interests and other investments are non-income producing.
     
(8)   Debt investment is on non-accrual status at June 30, 2015.
     
(9)   Value as a percent of net assets.
     
(10)   The Company did not have any non-qualifying assets under Section 55(a) of the 1940 Act. Under the Investment Company Act of 1940, as amended (the “1940 Act”), the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
     
(11)   ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee the Company may pay its Advisor will be based on income that the Company has not yet received in cash.

 

See Notes to Consolidated Financial Statements

 

11
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(10)(11)  Amount   Investments (6)   Value 
Debt Investments — 144.1% (9)                 
Debt Investments — Life Science — 31.4% (9)                 
Argos Therapeutics, Inc. (2)(5)  Biotechnology  Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;  $5,000   $4,872   $4,872 
      Ceiling 10.75%), 5.00% ETP, Due 10/1/18)               
Inotek Pharmaceuticals Corporation (2)  Biotechnology  Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)   2,795    2,777    2,777 
New Haven Pharmaceuticals, Inc. (2)  Biotechnology  Term Loan (11.50% cash (Libor + 11.00%; Floor   1,301    1,292    1,292 
      11.50%), 6.50% ETP, Due 11/1/17)               
      Term Loan (11.50% cash (Libor + 11.00%; Floor   434    431    431 
      11.50%), 6.50% ETP, Due 11/1/17)               
      Term Loan (10.50% cash (Libor + 10.00%; Floor   2,000    1,967    1,967 
      10.50%), 4.00% ETP, Due 7/1/18)               
Palatin Technologies, Inc. (2)(5)  Biotechnology  Term Loan (9.00% cash (Libor + 8.50%; Floor   5,000    4,919    4,919 
      9.00%), 5.00% ETP, Due 1/1/19)               
Sample6, Inc. (2)  Biotechnology  Term Loan (9.50% cash (Libor + 9.00%; Floor   1,555    1,548    1,548 
      9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)               
      Term Loan (9.50% cash (Libor + 9.00%; Floor   945    912    912 
      9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)               
Sunesis Pharmaceuticals, Inc. (2)(5)  Biotechnology  Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)   677    675    675 
      Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)   1,016    1,008    1,008 
Xcovery Holding Company, LLC (2)  Biotechnology  Term Loan (12.50% cash, Due 8/1/15)   292    292    292 
      Term Loan (12.50% cash, Due 8/1/15)   459    459    459 
      Term Loan (12.50% cash, Due 10/1/15)   101    101    101 
AccuVein Inc. (2)  Medical Device  Term Loan (10.40% cash (Libor + 9.90%; Floor   4,000    3,956    3,956 
      10.40%; Ceiling 11.90%), 5.00% ETP, Due 2/1/18)               
      Term Loan (10.00% cash (Libor + 9.50%; Floor   1,000    981    981 
      10.00%; Ceiling 12.50%), 4.00% ETP, Due 7/1/18)               
IntegenX Inc. (2)  Medical Device  Term Loan (10.75% cash (Libor + 10.25%; Floor   3,750    3,685    3,685 
      10.75%; Ceiling 12.75%), 3.50% ETP, Due 7/1/18)               
Lantos Technologies, Inc. (2)  Medical Device  Term Loan (10.50% cash (Libor + 10.00%; Floor   3,500    3,449    3,449 
      10.50%; Ceiling 12.00%), 3.00% ETP, Due 2/1/18)               
Mederi Therapeutics, Inc. (2)  Medical Device  Term Loan (10.75% cash (Libor + 10.25%; Floor   3,000    2,969    2,969 
      10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)               
      Term Loan (10.75% cash (Libor + 10.25%; Floor   3,000    2,969    2,969 
      10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)               
Tryton Medical, Inc. (2)  Medical Device  Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,   2,813    2,789    2,789 
      Due 9/1/16)               
ZetrOZ, Inc. (2)  Medical Device  Term Loan (11.00% cash (Libor + 10.50%; Floor   1,500    1,427    1,427 
      11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)               
Total Debt Investments — Life Science          43,478    43,478 
Debt Investments — Technology — 78.9% (9)                 
Ekahau, Inc. (2)  Communications  Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)   1,279    1,267    1,267 
      Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)   426    422    422 
mBlox, Inc. (2)  Communications  Term Loan (11.50% cash (Libor + 11.00%; Floor   5,000    4,967    4,967 
      11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)               
      Term Loan (11.50% cash (Libor + 11.00%; Floor   5,000    4,967    4,967 
      11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)               
Overture Networks, Inc. (2)  Communications  Term Loan (10.75% cash, (Libor + 10.25%; Floor   4,104    4,071    4,071 
      10.75%), 5.75% ETP, Due 12/1/17)               
      Term Loan (10.75% cash (Libor + 10.25%; Floor   2,052    2,038    2,038 
      10.75%), 5.75% ETP, Due 12/1/17)               
Additech, Inc. (2)  Consumer-related Technologies  Term Loan (11.75% cash (Libor + 11.25%; Floor   2,500    2,417    2,417 
      11.75%; Ceiling 13.25%), 4.00% ETP, Due 7/1/18)               
Gwynnie Bee, Inc. (2)  Consumer-related Technologies  Term Loan (11.00% cash (Libor + 10.50%; Floor   2,000    1,966    1,966 
      11.00%; Ceiling 12.50%), 2.0% ETP, Due 11/1/17)               
      Term Loan (11.00% cash (Libor + 10.50%; Floor   1,000    974    974 
      11.00%; Ceiling 12.50%), 2.0% ETP, Due 2/1/18)               
      Term Loan (11.00% cash (Libor + 10.50%; Floor   1,000    980    980 
      11.00%; Ceiling 12.50%), 2.0% ETP, Due 4/1/18)               
Nanocomp Technologies, Inc. (2)  Networking  Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)   1,000    981    981 
Avalanche Technology, Inc. (2)  Semiconductors  Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;   1,983    1,972    1,972 
      Ceiling 11.75%), 2.40% ETP, Due 4/1/17)               
      Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;   2,246    2,179    2,179 
      Ceiling 11.75%) ,2.40% ETP, Due 10/1/18)               

 

See Notes to Consolidated Financial Statements

 

12
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(10)(11)  Amount   Investments (6)   Value 
eASIC Corporation (2)  Semiconductors  Term Loan (11.00% cash, 2.50% ETP, Due 4/1/17)   2,000    1,982    1,982 
      Term Loan (10.75% cash, 2.50% ETP, Due 4/1/18)   2,000    1,983    1,983 
InVisage Technologies, Inc. (2)  Semiconductors  Term Loan (12.00% cash (Libor + 11.50%; Floor   2,550    2,469    2,469 
      12.00%; Ceiling 14.00%), 2.0% ETP, Due 4/1/18)               
Kaminario, Inc. (2)  Semiconductors  Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)   2,275    2,255    2,255 
      Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)   2,275    2,255    2,255 
Luxtera, Inc. (2)  Semiconductors  Term Loan (10.25% cash, 13.00% ETP, Due 7/1/17)   2,632    2,590    2,590 
      Term Loan (10.25% cash, 13.00% ETP, Due 7/1/17)   1,469    1,462    1,462 
NexPlanar Corporation (2)  Semiconductors  Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)   2,368    2,352    2,352 
      Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)   1,579    1,564    1,564 
Xtera Communications, Inc. (2)  Semiconductors  Term Loan (11.50% cash, 15.65% ETP, Due 1/1/17)   5,846    5,708    5,708 
      Term Loan (11.50% cash, 21.75% ETP, Due 1/1/17)   1,624    1,584    1,584 
Courion Corporation (2)  Software  Term Loan (11.45% cash, Due 10/1/15)   1,279    1,277    1,277 
      Term Loan (11.45% cash, Due 10/1/15)   1,279    1,277    1,277 
Crowdstar, Inc. (2)  Software  Term Loan (10.75% cash (Libor + 10.25%; Floor   2,000    1,956    1,956 
      10.75%), 3.00% ETP, Due 9/1/18)               
Decisyon, Inc. (2)  Software  Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)   2,919    2,899    2,899 
      Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)   1,000    986    986 
Lotame Solutions, Inc. (2)  Software  Term Loan (11.50% cash (Libor + 11.00%; Floor   3,410    3,390    3,390 
      11.50%), 5.25% ETP, Due 9/1/17)               
      Term Loan (11.50% cash (Libor + 11.00%; Floor   1,500    1,491    1,491 
      11.50%), 5.25% ETP, Due 9/1/17)               
      Term Loan (11.50% cash (Libor + 11.00%; Floor   2,100    2,070    2,070 
      11.50%), 3.00% ETP, Due 4/1/18)               
Netuitive, Inc. (2)  Software  Term Loan (12.75% cash, Due 7/1/16)   1,717    1,707    1,707 
Raydiance, Inc. (2)  Software  Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)   3,490    3,468    3,468 
      Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)   698    688    688 
      Term Loan (11.50% cash (Libor + 11.00%; Floor   3,000    2,955    2,955 
      11.50%; Ceiling 13.50%), 2.75% ETP, Due 2/1/18)               
Razorsight Corporation (2)  Software  Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)   1,142    1,132    1,132 
      Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)   1,000    990    990 
      Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)   1,000    988    988 
SIGNiX, Inc. (2)  Software  Term Loan (11.50% cash (Libor + 11.00%; Floor   3,000    2,902    2,902 
      11.50%), Due 7/1/18)               
Social Intelligence Corp. (2)  Software  Term Loan (11.00% cash (Libor + 10.50%; Floor   1,500    1,477    1,477 
      11.00%; Ceiling 13.00%), 3.50% ETP, Due 12/1/17)               
SpringCM, Inc. (2)  Software  Term Loan (11.50% cash (Libor + 11.00%; Floor   4,500    4,412    4,412 
      11.50%; Ceiling 13.00%), 2.00% ETP, Due 1/1/18)               
Sys-Tech Solutions, Inc. (2)  Software  Term Loan (11.65% cash (Libor + 11.15%; Floor   6,000    5,954    5,954 
      11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)               
      Term Loan (11.65% cash (Libor + 11.15%; Floor   5,000    4,952    4,952 
      11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)               
VBrick Systems, Inc. (2)  Software  Term Loan (11.50% cash (Libor + 11.00%; Floor   3,000    2,979    2,979 
      11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)               
Vidsys, Inc. (2)  Software  Term Loan (11.00% cash, 7.58% ETP, Due 4/1/15)   3,000    2,993    2,993 
Visage Mobile, Inc. (2)  Software  Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)   645    640    640 
Total Debt Investments — Technology          108,988    108,988 
Debt Investments — Cleantech — 9.3% (9)                 
Renmatix, Inc. (2)  Alternative Energy  Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)   1,148    1,145    1,145 
      Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)   1,148    1,145    1,145 
      Term Loan (10.25% cash, Due 10/1/16)   3,488    3,469    3,469 
Semprius, Inc. (2)(8)  Alternative Energy  Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)   2,432    2,432    2,250 
Aurora Algae, Inc. (2)  Consumer-related Technologies  Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)   397    396    396 
Rypos, Inc. (2)  Energy Efficiency  Term Loan (11.80% cash, Due 1/1/17)   2,670    2,643    2,643 
      Term Loan (11.80% cash, Due 9/1/17)   1,000    986    986 
Tigo Energy, Inc. (2)  Energy Efficiency  Term Loan (13.00% cash, 3.16% ETP, Due 6/1/15)   786    785    785 
Total Debt Investments — Cleantech          13,001    12,819 
Debt Investments — Healthcare information and services — 24.5% (9)              
Interleukin Genetics, Inc. (2)(5)  Diagnostics  Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%)   5,000    4,837    4,837 
      4.50% ETP, Due 10/1/18)               
LifePrint Group, Inc. (2)  Diagnostics  Term Loan (11.00% cash (Libor + 10.50%; Floor   3,000    2,949    2,747 
      11.00%; Ceiling 12.50%), 3.00% ETP, Due 1/1/18)               

 

See Notes to Consolidated Financial Statements

 

13
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(10)(11)  Amount   Investments (6)   Value 
Radisphere National Radiology Group, Inc. (2)  Diagnostics  Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)   10,092    10,053    10,053 
Watermark Medical, Inc. (2)  Other Healthcare  Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)   3,500    3,473    3,473 
      Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)   3,500    3,473    3,473 
Recondo Technology, Inc. (2)  Software  Term Loan (11.50% cash (Libor + 11.00%; Floor   1,384    1,379    1,379 
      11.50%), 6.60% ETP, Due 12/1/17)               
      Term Loan (11.00% cash (Libor + 10.50%; Floor   2,500    2,490    2,490 
      11.00%), 4.50% ETP, Due 12/1/17)               
      Term Loan (10.50% cash (Libor + 10.00%; Floor   2,500    2,490    2,490 
      10.50%), 2.75% ETP, Due 12/1/17)               
      Term Loan (10.50% cash (Libor + 10.00%; Floor   3,000    2,953    2,953 
      10.50%), 2.50% ETP, Due 1/1/19)               
Total Debt Investments — Healthcare information and services         34,097     33,895  
Total Debt Investments              199,564    199,180 
Warrant Investments — 3.4% (9)                 
Warrants — Life Science — 0.6% (9)                 
ACT Biotech Corporation  Biotechnology  1,521,820 Preferred Stock Warrants       83     
Argos Therapeutics, Inc. (2)(5)  Biotechnology  16,556 Common Stock Warrants       33    31 
Celsion Corporation (5)  Biotechnology  5,708 Common Stock Warrants       15     
Inotek Pharmaceuticals Corporation  Biotechnology  33,762 Preferred Stock Warrants       17    15 
N30 Pharmaceuticals, Inc.  Biotechnology  53,550 Common Stock Warrants       122     
New Haven Pharmaceuticals, Inc. (2)  Biotechnology  55,347 Preferred Stock Warrants       42    136 
Palatin Technologies, Inc. (2)(5)  Biotechnology  333,333 Common Stock Warrants       31    31 
Revance Therapeutics, Inc. (5)  Biotechnology  34,377 Common Stock Warrants       68    120 
Sample6, Inc. (2)  Biotechnology  351,018 Preferred Stock Warrants       45    39 
Supernus Pharmaceuticals, Inc. (2)(5)  Biotechnology  42,083 Common Stock Warrants       93    165 
Tranzyme, Inc. (2)(5)  Biotechnology  6,460 Common Stock Warrants       6     
AccuVein Inc. (2)  Medical Device  75,769 Preferred Stock Warrants       24    29 
Direct Flow Medical, Inc.  Medical Device  176,922 Preferred Stock Warrants       144    40 
EnteroMedics, Inc. (5)  Medical Device  141,026 Common Stock Warrants       347     
IntegenX, Inc. (2)  Medical Device  158,006 Preferred Stock Warrants       33    31 
Lantos Technologies, Inc. (2)  Medical Device  858,545 Preferred Stock Warrants       24    23 
Mederi Therapeutics, Inc. (2)  Medical Device  248,736 Preferred Stock Warrants       26    40 
Mitralign, Inc. (2)  Medical Device  641,909 Preferred Stock Warrants       52    37 
OraMetrix, Inc. (2)  Medical Device  812,348 Preferred Stock Warrants       78     
Tengion, Inc. (2)(5)  Medical Device  1,864,876 Common Stock Warrants       123     
Tryton Medical, Inc. (2)  Medical Device  122,362 Preferred Stock Warrants       15    13 
ViOptix, Inc.  Medical Device  375,763 Preferred Stock Warrants       13     
ZetrOZ, Inc. (2)  Medical Device  475,561 Preferred Stock Warrants       25    24 
Total Warrants — Life Science          1,459    774 
Warrants — Technology — 2.2% (9)                 
Ekahau, Inc. (2)  Communications  978,261 Preferred Stock Warrants       33    19 
OpenPeak, Inc.  Communications  18,997 Common Stock Warrants       89     
Overture Networks, Inc.  Communications  385,617 Preferred Stock Warrants       56     
Additech, Inc. (2)  Consumer-related Technologies  150,000 Preferred Stock Warrants       33    33 
Everyday Health, Inc. (5)  Consumer-related Technologies  43,783 Common Stock Warrants       69    179 
Gwynnie Bee, Inc. (2)  Consumer-related Technologies  268,591 Preferred Stock Warrants       68    312 
SnagAJob.com, Inc.  Consumer-related Technologies  365,396 Preferred Stock Warrants       23    305 
Tagged, Inc.  Consumer-related Technologies  190,868 Preferred Stock Warrants       26    62 
XIOtech, Inc.  Data Storage  2,217,979 Preferred Stock Warrants       22    18 
Cartera Commerce, Inc.  Internet and media  90,909 Preferred Stock Warrants       16    159 
SimpleTuition, Inc.  Internet and media  189,573 Preferred Stock Warrants       63    29 
IntelePeer, Inc.  Networking  141,549 Preferred Stock Warrants       39    33 
Nanocomp Technologies, Inc. (2)  Networking  272,728 Preferred Stock Warrants       25    24 
Aquion Energy, Inc.  Power Management  115,051 Preferred Stock Warrants       7    56 
Avalanche Technology, Inc. (2)  Semiconductors  352,828 Preferred Stock Warrants       101    98 
eASIC Corporation (2)  Semiconductors  40,445 Preferred Stock Warrants       25    28 
InVisage Technologies, Inc. (2)  Semiconductors  165,147 Preferred Stock Warrants       43    41 
Kaminario, Inc.  Semiconductors  1,087,203 Preferred Stock Warrants       59    64 
Luxtera, Inc.  Semiconductors  2,087,766 Preferred Stock Warrants       43    105 

 

See Notes to Consolidated Financial Statements

 

14
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

 

         Principal   Cost of   Fair 
Portfolio Company (1)  Sector  Type of Investment (3)(4)(7)(10)(11)  Amount   Investments (6)   Value 
NexPlanar Corporation  Semiconductors  216,001 Preferred Stock Warrants       36    56 
Soraa, Inc. (2)  Semiconductors  180,000 Preferred Stock Warrants       80    77 
Xtera Communications, Inc.  Semiconductors  983,607 Preferred Stock Warrants       206     
Bolt Solutions, Inc. (2)  Software  202,892 Preferred Stock Warrants       113    118 
Clarabridge, Inc.  Software  53,486 Preferred Stock Warrants       14    104 
Courion Corporation  Software  772,543 Preferred Stock Warrants       107     
Crowdstar, Inc. (2)  Software  75,428 Preferred Stock Warrants       14    14 
Decisyon, Inc. (2)  Software  457,876 Preferred Stock Warrants       46    28 
DriveCam, Inc.  Software  71,639 Preferred Stock Warrants       20    121 
Lotame Solutions, Inc. (2)  Software  288,115 Preferred Stock Warrants       23    160 
Netuitive, Inc.  Software  41,569 Preferred Stock Warrants       48     
Raydiance, Inc. (2)  Software  1,051,120 Preferred Stock Warrants       71    67 
Razorsight Corporation (2)  Software  259,404 Preferred Stock Warrants       43    44 
SIGNiX, Inc. (2)  Software  63,365 Preferred Stock Warrants       48    48 
Riv Data Corp. (2)  Software  237,361 Preferred Stock Warrants       13    12 
SpringCM, Inc. (2)  Software  2,385,686 Preferred Stock Warrants       55    53 
Sys-Tech Solutions, Inc.  Software  375,000 Preferred Stock Warrants       242    536 
Vidsys, Inc.  Software  37,346 Preferred Stock Warrants       23     
Visage Mobile, Inc.  Software  1,692,047 Preferred Stock Warrants       19    17 
Total Warrants — Technology              2,061    3,020 
Warrants — Cleantech — 0.1% (9)                 
Renmatix, Inc.  Alternative Energy  52,296 Preferred Stock Warrants       67    67 
Semprius, Inc.  Alternative Energy  519,981 Preferred Stock Warrants       25     
Rypos, Inc. (2)  Energy Efficiency  5,627 Preferred Stock Warrants       44    40 
Tigo Energy, Inc. (2)  Energy Efficiency  804,604 Preferred Stock Warrants       99    33 
Total Warrants — Cleantech          235    140 
Warrants — Healthcare information and services — 0.5% (9)                  
Accumetrics, Inc.  Diagnostics  100,928 Preferred Stock Warrants       107    63 
BioScale, Inc. (2)  Diagnostics  315,618 Preferred Stock Warrants       55     
LifePrint Group, Inc. (2)  Diagnostics  49,000 Preferred Stock Warrants       29    29 
Interleukin Genetics, Inc. (2)(5)  Diagnostics  2,492,523 Common Stock Warrants       112    112 
Helomics Corporation  Diagnostics  13,461 Preferred Stock Warrants       73     
Radisphere National Radiology Group, Inc. (2)  Diagnostics  519,992 Preferred Stock Warrants       378     
Singulex, Inc.  Other Healthcare  293,632 Preferred Stock Warrants       44    141 
Talyst, Inc.  Other Healthcare  300,360 Preferred Stock Warrants       100    52 
Watermark Medical, Inc.  Other Healthcare  12,216 Preferred Stock Warrants       67    62 
Recondo Technology, Inc. (2)  Software  556,796 Preferred Stock Warrants       95    210 
Total Warrants — Healthcare information and services         1,060     669  
Total Warrants              4,815    4,603 
                      
Other Investments — 0.2% (9)                 
Vette Technology, LLC  Data Storage  Royalty Agreement Due 4/18/2019       4,582    300 
Total Other Investments              4,582    300 
Equity — 0.7% (9)                     
Insmed Incorporated (5)  Biotechnology  33,208 Common Stock       239    514 
Revance Therapeutics, Inc.(5)  Biotechnology  4,861 Common Stock       73    82 
Sunesis Pharmaceuticals, Inc. (5)  Biotechnology  78,493 Common Stock       83    200 
Overture Networks Inc.  Communications  386,191 Common Stock       482    222 
Total Equity              877    1,018 
Total Portfolio Investment Assets — 148.4%  (9)         $209,838   $205,101 
                       
Short Term Investments — Money Market Funds — 0.0% (9)                  
US Bank Money Market Deposit Account         $27   $27 
Total Short Term Investments — Money Market Funds        $27   $ 27  
Short Term Investments — Restricted Investments— 2.1% (9)                    
US Bank Money Market Deposit Account (2)         $2,906   $2,906 
Total Short Term Investments — Restricted Investments         $2,906    $ 2,906  

 

See Notes to Consolidated Financial Statements

 

15
 

 

Horizon Technology Finance Corporation and Subsidiaries

 

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

 

 

(1)   All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States.
     
(2)   Has been pledged as collateral under the Key Facility or 2013-1 Securitization.
     
(3)   All investments are less than 5% ownership of the class and ownership of the portfolio company.
     
(4)   All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETP and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the debt investment, unless otherwise indicated. Debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2014 is provided.
     
(5)   Portfolio company is a public company.
     
(6)   For debt investments, represents principal balance less unearned income.
     
(7)   Preferred and common stock warrants, equity interests and other investments are non-income producing.
     
(8)   Debt investment is on non-accrual status at December 31, 2014, and interest payments received were recognized as income on a cash basis.
     
(9)   Value as a percent of net assets.
     
(10)   The Company did not have any non-qualifying assets under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
     
(11)   ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee the Company may pay its Advisor will be based on income that the Company has not yet received in cash.

 

See Notes to Consolidated Financial Statements

 

16
 

 

Note 1.  Organization

 

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

 

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

 

Horizon Credit I LLC (“Credit I”) was formed as a Delaware limited liability company on January 23, 2008, with CHF as its sole equity member. Credit I is a separate legal entity from the Company and CHF. There has been no activity at Credit I during the six months ended June 30, 2015.

 

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

 

Horizon Credit III LLC (“Credit III”) was formed as a Delaware limited liability company on May 30, 2012, with the Company as the sole equity member. Credit III is a separate legal entity from the Company. There has been no activity at Credit III during the six months ended June 30, 2015.

 

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

 

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

 

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

 

The Company’s investment strategy is to maximize the investment portfolio’s return by generating current income from the debt investments the Company makes and capital appreciation from the warrants the Company receives when making such debt investments. The Company has entered into an investment management agreement, which was amended and restated effective July 1, 2014 (the “Investment Management Agreement”), with Horizon Technology Finance Management LLC (the “Advisor”), under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.

 

17
 

 

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

 

Note 2.  Basis of presentation and significant accounting policies

 

The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X (“Regulation S-X”) under the Securities Act of 1933, as amended (the “Securities Act”). In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2014.

 

Principles of consolidation

 

As required under GAAP and Regulation S-X, the Company will generally consolidate its investment in a company that is an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s subsidiaries in its consolidated financial statements.

 

Use of estimates

 

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

 

Fair value

 

The Company records all of its investments at fair value in accordance with relevant GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. The Company has categorized its investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as more fully described in Note 5. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

 

The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3.

 

See Note 5 for additional information regarding fair value.

 

Segments

 

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

 

18
 

 

Investments

 

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

 

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. As of June 30, 2015, there were two investments on non-accrual status with a cost of $8.2 million and a fair value of $6.4 million. For the three and six months ended June 30, 2015, the Company recognized interest income payments of $0.05 million and $0.1 million, respectively, received from one portfolio company whose debt investment was on non-accrual status. As of December 31, 2014, there was one investment on non-accrual status with a cost of $2.4 million and a fair value of $2.3 million.

 

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

 

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

 

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

 

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

 

19
 

 

Debt issuance costs

 

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

 

Income taxes

 

As a BDC, the Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income distributed to stockholders, among other things, the Company is required to meet certain source of income and asset diversification requirements and to timely distribute dividends out of assets legally available for distributions to its stockholders of an amount generally at least 90% of investment company taxable income, as defined by the Code, for each tax year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from corporate-level U.S. federal income taxes. Accordingly, no provision for federal income tax has been recorded in the financial statements. Taxable income differs from net increase in net assets resulting from operations which can be temporary, meaning they will reverse in the future or be permanent. In accordance with Section 946-205-45-3 of the Financial Accounting Standards Board’s (“FASB’s), Accounting Standards Codification, as amended (“ASC”), permanent tax differences, such as non-deductible excise taxes paid, are reclassified from distributions in excess of net investment income and net realized loss on investments to paid-in-capital at the end of each year. These permanent book-to-tax differences are reclassified on the consolidated statements of changes in net assets to reflect their tax character but have no impact on total net assets. For the six months ended June 30, 2015 the Company reclassified $1.0 million to paid-in capital from distributions in excess of net investment income of $0.9 million and net realized loss on investments of $0.1 million, which related to excise taxes paid in prior years.

 

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the six months ended June 30, 2015 and 2014, $0.02 million and $0.1 million, respectively, was recorded for U.S. federal excise tax.

 

The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, as modified by ASC Topic 946. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no material uncertain tax positions at June 30, 2015 and December 31, 2014. The 2013, 2012 and 2011 tax years remain subject to examination by U.S. federal and state tax authorities.

 

Distributions

 

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

 

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

 

20
 

 

Transfers of financial assets

 

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

 

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

 

New accounting pronouncement

 

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

 

Note 3.  Related party transactions

 

Investment Management Agreement

 

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

 

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

 

The base management fee under the Investment Management Agreement through and including June 30, 2014 was calculated at an annual rate of 2.00% of the Company’s gross assets, payable monthly in arrears. As a result of an amendment and restatement of the Investment Management Agreement, the base management fee on and after July 1, 2014 is calculated at an annual rate of 2.00% of (i) the Company’s gross assets, less (ii) assets consisting of cash and cash equivalents, and is payable monthly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. In addition, the Advisor has agreed to waive its base management fee relating to the proceeds raised in the public offering of the Company’s common stock that closed on March 24, 2015, to the extent such fee is not otherwise waived and regardless of the application of the proceeds raised, until the earlier to occur of (i) March 31, 2016 or (ii) the last day of the second consecutive calendar quarter in which the Company’s net investment income exceeds distributions declared on its shares of common stock for the applicable quarter.

 

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

 

21
 

 

The incentive fee has two parts, as follows:

 

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

 

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

 

Commencing with the calendar quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee cap and deferral mechanism which is determined based upon a look-back period of up to three years and will be expensed when incurred. For this purpose, the look-back period for the incentive fee based on Pre-Incentive Fee Net Investment Income (the “Incentive Fee Look-back Period”) commenced on July 1, 2014 and will increase by one quarter in length at the end of each of the 12 succeeding calendar quarters, after which time, the Incentive Fee Look-back Period will include the relevant calendar quarter and the 11 preceding full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income is subject to a cap (the “Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such deferred incentive fees (collectively, the “Incentive Fee Cap and Deferral Mechanism”). The Incentive Fee Cap is equal to (a) 20.00% of Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to the Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or a negative value in any calendar quarter, the Company will not pay an incentive fee on Pre-Incentive Fee Net Investment Income to the Advisor in that quarter. To the extent that the payment of incentive fees on Pre-Incentive Fee Net Investment Income is limited by the Incentive Fee Cap, the payment of such fees will be deferred and paid in subsequent calendar quarters up to three years after their date of deferment, subject to certain limitations, which are set forth in the Investment Management Agreement. The Company only pays incentive fees on Pre-Incentive Fee Net Investment Income to the extent allowed by the Incentive Fee Cap and Deferral Mechanism. “Cumulative Pre-Incentive Fee Net Return” during any Incentive Fee Look-back Period means the sum of (a) Pre-Incentive Fee Net Investment Income and the base management fee for each calendar quarter during the Incentive Fee Look-back Period and (b) the sum of cumulative realized capital gains and losses, cumulative unrealized capital appreciation and cumulative unrealized capital depreciation during the applicable Incentive Fee Look-back Period. As of June 30, 2015 and December 31, 2014, the quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income was not limited by the Incentive Fee Cap and Deferral Mechanism.

 

22
 

 

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

 

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

 

Administration Agreement

 

The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief compliance officer and chief financial officer and their respective staffs. The administrative fee expense was $0.3 million for the three months ended June 30, 2015 and 2014. The administrative fee expense was $0.6 million and $0.5 million for the six months ended June 30, 2015 and 2014, respectively.

 

Note 4.  Investments

 

The following table shows the Company’s investments:

 

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

 

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

 

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

 

Note 5.  Fair value

 

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

 

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

 

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

 

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

 

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

 

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

 

24
 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

25
 

 

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

 

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

 

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

 

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

 

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

 

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of June 30, 2015 and December 31, 2014. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining its fair value measurements.

 

26
 

 

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

 

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

$3.30

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

25%

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

 

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

 

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

$3.81

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

25%

 
        Flow Model  Probability Weighting        100% 
                      
Equity investments   222   Market Comparable Companies  Price Per Share  $0.57   $0.57 
Total Level 3 investments  $203,668                 

  

Borrowings:  The carrying amount of borrowings under the Company’s revolving credit facility (the “Key Facility”) with Key Equipment Finance (“Key”) approximates fair value due to the variable interest rate of the Key Facility and is categorized as Level 2 within the fair value hierarchy described above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed rate 2019 Notes (as defined in Note 6) is based on the closing public share price on the date of measurement. On June 30, 2015, the closing price of the 2019 Notes on the New York Stock Exchange was $25.25 per note, or $33.3 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. Based on market quotations on or around June 30, 2015, the Asset-Backed Notes (as defined in Note 6) were trading at par value, or $24.6 million, and are categorized as Level 3 within the fair value hierarchy described above. These liabilities are not recorded at fair value on a recurring basis.

 

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

 

27
 

 

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 June 30, 2015 and December 31, 2014 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   June 30, 2015 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
Money market funds  $334   $   $334   $ 
Restricted investments in money market funds  $1,842   $   $1,842   $ 
Debt investments  $232,428   $   $   $232,428 
Warrant investments  $5,995   $   $1,439   $4,556 
Other investments  $300   $   $   $300 
Equity investments  $1,425   $1,203   $   $222 

 

   December 31, 2014 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
Money market funds  $27   $   $27   $ 
Restricted investments in money market funds  $2,906   $   $2,906   $ 
Debt investments  $199,180   $   $   $199,180 
Warrant investments  $4,603   $   $637   $3,966 
Other investments  $300   $   $   $300 
Equity investments  $1,018   $796   $   $222 

 

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended June 30, 2015:

 

   Three Months Ended June 30, 2015 
  

Debt

Investments

  

Warrant

Investments

  

Equity

Investments

  

Other

Investments

   Total 
   (In thousands) 
Level 3 assets, beginning of period  $197,610   $4,264   $222   $300   $202,396 
Purchase of investments   48,000                48,000 
Warrants and equity received and classified as Level 3       329            329 
Principal payments received on investments   (10,745)           (42)   (10,787)
Unrealized (depreciation) appreciation included in earnings   (1,856)   (37)       42    (1,851)
Other   (581)               (581)
Level 3 assets, end of period  $232,428   $4,556   $222   $300   $237,506 

 

The Company’s transfers between levels are recognized at the end of each reporting period. During the three months ended June 30, 2015, there were no transfers between Level 1 and Level 2.

 

28
 

 

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended June 30, 2014:

 

   Three Months Ended June 30, 2014 
  

Debt

Investments

  

Warrant

Investments

  

Equity

Investments

  

Other

Investments

   Total 
   (In thousands) 
Level 3 assets, beginning of period  $217,924   $3,890   $2,720   $400   $224,934 
Purchase of investments   26,052                26,052 
Warrants and equity received and classified as Level 3       154            154 
Principal payments received on investments   (35,682)           (34)   (35,716)
Proceeds from sale of investments       (209)           (209)
Net realized (loss) gain on investments   (714)   32            (682)
Unrealized appreciation (depreciation) included in earnings   1,439    (255)   (198)   34    1,020 
Other   178                178 
Level 3 assets, end of period  $209,197   $3,612   $2,522   $400   $215,731 

 

The Company’s transfers between levels are recognized at the end of the applicable reporting period. During the three months ended June 30, 2014, there were no transfers between Level 1 and Level 2.

 

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2015:

 

   Six Months Ended June 30, 2015 
  

Debt

Investments

  

Warrant

Investments

  

Equity

Investments

  

Other

Investments

   Total 
   (In thousands) 
Level 3 assets, beginning of period  $199,180   $3,966   $222   $300   $203,668 
Purchase of investments   71,933                71,933 
Warrants and equity received and classified as Level 3       480            480 
Principal payments received on investments   (36,465)           (112)   (36,577)
Net realized loss on investments       (230)           (230)
Unrealized (depreciation) appreciation included in earnings   (1,637)   355        112    (1,170)
Transfer out of Level 3       (15)           (15)
Other   (583)               (583)
Level 3 assets, end of period  $232,428   $4,556   $222   $300   $237,506 

 

The Company’s transfers between levels are recognized at the end of each reporting period. During the six months ended June 30, 2015, there were no transfers between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in two portfolio companies, with an aggregate fair value of $0.02 million, that were transferred into Level 2 upon the portfolio companies becoming public companies during the period.

 

The change