UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
OR
COMMISSION FILE NUMBER: 814-00802
HORIZON TECHNOLOGY FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
312 Farmington Avenue,
Farmington, CT
(Address of principal executive offices)
27-2114934
(I.R.S. Employer
Identification No.)
06032
(Zip Code)
Registrant’s telephone number, including area code (860) 676-8654
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.001 per share
Name of Each Exchange on Which Registered
The Nasdaq Stock Market LLC
6.25% Notes due 2022
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No þ.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No þ.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No ☐.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ☐ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an
emerging growth company. See the definitions of “accelerated filer,” “large accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Emerging Growth Company ☐
Accelerated filer þ
Non-accelerated filer ☐
Smaller Reporting Company ☐
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ.
The aggregate market value of common stock held by non-affiliates of the Registrant on June 30, 2017 based on the closing price on that date of $11.33 on
the Nasdaq Global Select Market was $128.7 million. For the purposes of calculating this amount only, all directors and executive officers of the Registrant
have been treated as affiliates. There were 11,522,710 shares of the Registrant’s common stock outstanding as of March 1, 2018.
Documents Incorporated by Reference: Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2018 Annual Meeting of Stockholders to
be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated by reference into Part III of this
Annual Report on Form 10-K.
HORIZON TECHNOLOGY FINANCE CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART III
Exhibits, Financial Statement Schedules
Signatures
PART IV
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25
52
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54
58
59
72
73
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114
114
114
114
114
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In this annual report on Form 10-K, except where the context suggests otherwise, the terms:
PART I
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“we,” “us,” “our” “the Company” and “Horizon Technology Finance” refer to Horizon Technology Finance Corporation, a Delaware
corporation, and its consolidated subsidiaries;
The “Advisor” and the “Administrator” refer to Horizon Technology Finance Management LLC, a Delaware limited liability company;
“Credit II” refers to Horizon Credit II LLC, a Delaware limited liability company, which is a special purpose bankruptcy remote entity and our
direct subsidiary;
“Key” refers to KeyBank National Association and “Key Facility” refers to the revolving credit facility with Key;
“2022 Notes” refers to the $37.4 million aggregate principal amount of our 6.25% unsecured notes due 2022, which were issued in September
and October 2017;
“2019 Notes” refers to the $33.0 million aggregate principal amount of our 7.375% senior unsecured notes due 2019, which were redeemed in
full in October 2017;
“2013-1 Securitization” refers to the $189.3 million securitization of secured loans we completed on June 28, 2013;
“Asset-Backed Notes” refers to the $90.0 million aggregate principal amount of fixed-rate asset-backed notes that were issued in conjunction
with the 2013-1 Securitization, which were paid off in June 2016; and
The “2013-1 Trust” refers to Horizon Funding Trust 2013-1, a Delaware trust.
Some of the statements in this annual report on Form 10-K constitute forward-looking statements which apply to both us and our consolidated subsidiaries
and relate to future events, future performance or financial condition. The forward-looking statements involve risks and uncertainties for both us and our
consolidated subsidiaries and actual results could differ materially from those projected in the forward-looking statements for any reason, including those
factors described in “Item 1A.—Risk Factors” and elsewhere in this annual report on Form 10-K.
Item 1. Business
General
We are a specialty finance company that lends to and invests in development-stage companies in the technology, life science, healthcare information and
services and cleantech industries, which we refer to collectively as our “Target Industries.” Our investment objective is to maximize our investment
portfolio’s total return by generating current income from the debt investments we make and capital appreciation from the warrants we receive when making
such debt investments. We are focused on making secured debt investments, which we refer to as “Venture Loans,” to venture capital backed companies in
our Target Industries, which we refer to as “Venture Lending.” We also selectively provide Venture Loans to publicly traded companies in our Target
Industries. Our debt investments are typically secured by first liens or first liens behind a secured revolving line of credit, or “Senior Term Loans.” Venture
Lending is typically characterized by (1) the making of a secured debt investment after a venture capital or equity investment in the portfolio company has
been made, which investment provides a source of cash to fund the portfolio company’s debt service obligations under the Venture Loan, (2) the senior
priority of the Venture Loan which requires repayment of the Venture Loan prior to the equity investors realizing a return on their capital, (3) the relatively
rapid amortization of the Venture Loan and (4) the lender’s receipt of warrants or other success fees with the making of the Venture Loan.
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We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development
company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for U.S. federal income tax purposes, we have
elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As a
BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance a portion
of our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the
1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on our assessment of market conditions and other
factors at the time of any proposed borrowing. As a RIC, we generally do not have to pay corporate-level federal income taxes on our investment company
taxable income and our net capital gain that we distribute to our stockholders as long as we meet certain source-of-income, distribution, asset diversification
and other requirements.
Compass Horizon Funding Company LLC, or Compass Horizon, our predecessor company, commenced operations in March 2008. We were formed in
March 2010 for the purpose of acquiring Compass Horizon and continuing its business as a public entity.
From the commencement of operations of our predecessor on March 4, 2008 through December 31, 2017, we funded 158 portfolio companies and
invested $975.0 million in debt investments. As of December 31, 2017, our debt investment portfolio consisted of 33 debt investments with an aggregate fair
value of $203.8 million. As of December 31, 2017, 99.4%, or $202.6 million, of our debt investment portfolio at fair value consisted of Senior Term Loans.
As of December 31, 2017, our net assets were $135.1 million, and all of our debt investments were secured by all or a portion of the tangible and intangible
assets of the applicable portfolio company. The debt investments in our portfolio are generally not rated by any rating agency. If the individual debt
investments in our portfolio were rated, they would be rated below “investment grade”. Debt investments that are unrated or rated below investment grade are
sometimes referred to as “junk bonds” and have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay
principal.
For the year ended December 31, 2017, our debt investment portfolio had a dollar-weighted yield of 15.1% (excluding any yield from warrants, equity
and other investments). We calculate the yield on dollar-weighted average debt investments for any period as (1) total investment income during the period
divided by (2) the average of the fair value of debt investments outstanding on (a) the last day of the calendar month immediately preceding the first day of
the period and (b) the last day of each calendar month during the period. The dollar-weighted yield on average debt investments is higher than what investors
will realize because it does not reflect our expenses or any sales load paid by investors.
For the year ended December 31, 2017, our investment portfolio (including any yield from warrants, equity and other investments) had a dollar-
weighted yield of 14.0%. We calculate the yield on dollar-weighted average investments for any period as (1) total investment income during the period
divided by (2) the average of the fair value of all investments outstanding on (a) the last day of the calendar month immediately preceding the first day of the
period and (b) the last day of each calendar month during the period. The dollar-weighted yield on average investments is higher than what investors will
realize because it does not reflect our expenses or any sales load paid by investors.
As of December 31, 2017, our debt investments had a dollar-weighted average term of 47 months from inception and a dollar-weighted average
remaining term of 38 months. As of December 31, 2017, substantially all of our debt investments had an original committed principal amount of between
$3 million and $20 million, repayment terms of between 21 and 60 months and bore current pay interest at annual interest rates of between 9% and 14%.
For the year ended December 31, 2017, our total return based on market value was 17.9%. Total return based on market value is calculated as (x) the
sum of (i) the closing sales price of our common stock on the last day of the period plus (ii) the aggregate amount of distributions paid per share during the
period, less (iii) the closing sales price of our common stock on the first day of the period, divided by (y) the closing sales price of our common stock on the
first day of the period.
In addition to our debt investments, as of December 31, 2017, we held warrants to purchase stock, predominantly preferred stock, in 72 portfolio
companies, equity positions in six portfolio companies and success fee arrangements in 10 portfolio companies.
Our investment activities, and our day-to-day operations, are managed by our Advisor and supervised by our board of directors, or the Board, of which a
majority of the members are independent of us. Under an amended and restated investment management agreement, or the Investment Management
Agreement, we have agreed to pay our Advisor a base management fee and an incentive fee for its advisory services to us. We have also entered into an
administration agreement, or the Administration Agreement, with our Advisor under which we have agreed to reimburse our Advisor for our allocable portion
of overhead and other expenses incurred by our Advisor in performing its obligations under the Administration Agreement.
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Our common stock began trading October 29, 2010 and is currently traded on the Nasdaq Global Select Market, or Nasdaq, under the symbol “HRZN”.
Information available
Our principal executive office is located at 312 Farmington Avenue, Farmington, Connecticut 06032, our telephone number is (860) 676-8654, and our
internet address is www.horizontechfinance.com. We make available, free of charge, on our website our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the U.S. Securities and Exchange Commission, or the SEC. Information contained on our website is not incorporated by reference into this
annual report on Form 10-K and you should not consider information contained on our website to be part of this annual report on Form 10-K or any other
report we file with the SEC.
Our advisor
Our investment activities are managed by our Advisor, and we expect to continue to benefit from our Advisor’s ability to identify attractive investment
opportunities, conduct diligence on and value prospective investments, negotiate investments and manage our portfolio of investments. In addition to the
experience gained from the years that they have worked together both at our Advisor and prior to the formation of our Advisor, the members of our
investment team have broad lending backgrounds, with substantial experience at a variety of commercial finance companies, technology banks and private
debt funds, and have developed a broad network of contacts within the venture capital and private equity community. This network of contacts provides a
principal source of investment opportunities.
Our Advisor is led by five senior managers including Robert D. Pomeroy, Jr., our Chief Executive Officer, Gerald A. Michaud, our President, Daniel R.
Trolio, our Senior Vice President and Chief Financial Officer, John C. Bombara, our Senior Vice President, General Counsel and Chief Compliance Officer,
and Daniel S. Devorsetz, our Senior Vice President and Chief Investment Officer.
Our strategy
Our investment objective is to maximize our investment portfolio’s total return by generating current income from the loans we make and capital
appreciation from the warrants we receive when making such loans. To further implement our business strategy, we expect our Advisor to continue to employ
the following core strategies:
• Structured investments in the venture capital and private and public equity markets. We make loans to development-stage companies within our
Target Industries typically in the form of secured loans. The secured debt structure provides a lower risk strategy, as compared to equity or unsecured
debt investments, to participate in the emerging technology markets because the debt structures we typically utilize provide collateral against the
downside risk of loss, provide return of capital in a much shorter timeframe through current-pay interest and amortization of principal and have a
senior position to equity and unsecured debt in the borrower’s capital structure in the case of insolvency, wind down or bankruptcy. Unlike venture
capital and private equity investments, our investment returns and return of our capital do not require equity investment exits such as mergers and
acquisitions or initial public offerings. Instead, we receive returns on our debt investments primarily through regularly scheduled payments of
principal and interest and, if necessary, liquidation of the collateral supporting the debt investment upon a default. Only the potential gains from
warrants depend upon equity investment exits.
• “Enterprise value” lending. We and our Advisor take an enterprise value approach to structuring and underwriting loans. Enterprise value includes
the implied valuation based upon recent equity capital invested as well as the intrinsic value of the applicable portfolio company’s particular
technology, service or customer base. We secure our lien position against the enterprise value of each portfolio company.
• Creative products with attractive risk-adjusted pricing. Each of our existing and prospective portfolio companies has its own unique funding needs
for the capital provided from the proceeds of our Venture Loans. These funding needs include funds for additional development “runways,” funds to
hire or retain sales staff or funds to invest in research and development in order to reach important technical milestones in advance of raising
additional equity. Our loans include current-pay interest, commitment fees, end-of-term payments, or ETPs, pre-payment fees, success fees and non-
utilization fees. We believe we have developed pricing tools, structuring techniques and valuation metrics that satisfy our portfolio companies’
financing requirements while mitigating risk and maximizing returns on our investments.
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• Opportunity for enhanced returns. To enhance our debt investment portfolio returns, in addition to interest and fees, we frequently obtain warrants to
purchase the equity of our portfolio companies as additional consideration for making debt investments. The warrants we obtain generally include a
“cashless exercise” provision to allow us to exercise these rights without requiring us to make any additional cash investment. Obtaining warrants in
our portfolio companies has allowed us to participate in the equity appreciation of our portfolio companies, which we expect will enable us to
generate higher returns for our investors.
• Direct origination. We originate transactions directly with technology, life science, healthcare information and services and cleantech companies.
These transactions are referred to our Advisor from a number of sources, including referrals from, or direct solicitation of, venture capital and private
equity firms, portfolio company management teams, legal firms, accounting firms, investment banks and other lenders that represent companies
within our Target Industries. Our Advisor has been the sole or lead originator in substantially all transactions in which the funds it manages have
invested.
• Disciplined and balanced underwriting and portfolio management. We use a disciplined underwriting process that includes obtaining information
validation from multiple sources, extensive knowledge of our Target Industries, comparable industry valuation metrics and sophisticated financial
analysis related to development-stage companies. Our Advisor’s due diligence on investment prospects includes obtaining and evaluating information
on the prospective portfolio company’s technology, market opportunity, management team, fund raising history, investor support, valuation
considerations, financial condition and projections. We seek to balance our investment portfolio to reduce the risk of down market cycles associated
with any particular industry or sector, development-stage or geographic area by quarterly reviewing each criteria and, in the event there is an
overconcentration, seeking investment opportunities to reduce such overconcentration. Our Advisor employs a “hands on” approach to portfolio
management, requiring private portfolio companies to provide monthly financial information and to participate in regular updates on performance and
future plans. For public companies, our Advisor typically relies on publicly reported quarterly financials.
• Use of leverage. We use leverage to increase returns on equity through our Key Facility and our 2022 Notes. See “Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and capital resources” for additional information about our
use of leverage. In addition, we may issue additional debt securities or preferred stock in one or more series in the future.
Market opportunity
We focus our investments primarily in four key industries of the emerging technology market: technology, life science, healthcare information and
services and cleantech. The technology sectors we focus on include communications, networking, data storage, software, cloud computing, semiconductor,
internet and media and consumer-related technologies. The life science sectors we focus on include biotechnology, drug discovery, drug delivery,
bioinformatics and medical devices. The healthcare information and services sectors we focus on include diagnostics, electronic medical record services and
software and other healthcare related services and technologies that improve efficiency and quality of administered healthcare. The cleantech sectors we focus
on include alternative energy, power management, energy efficiency, green building materials and waste recycling. We refer to all of these companies as
“technology-related” companies because the companies are developing or offering goods and services to businesses and consumers which utilize scientific
knowledge, including techniques, skills, methods, devices and processes, to solve problems. We intend, under normal market conditions, to invest at least
80% of the value of our total assets in such companies.
We believe that Venture Lending has the potential to achieve enhanced returns that are attractive notwithstanding the high degree of risk associated with
lending to development-stage companies. Potential benefits include:
• interest rates that typically exceed rates that would be available to portfolio companies if they could borrow in traditional commercial financing
transactions;
• the debt investment support provided by cash proceeds from equity capital invested by venture capital and private equity firms or access to public
equity markets to access capital;
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• relatively rapid amortization of principal;
• senior ranking to equity and collateralization of debt investments to minimize potential loss of capital; and
• potential equity appreciation through warrants.
We believe that Venture Lending also provides an attractive financing source for portfolio companies, their management teams and their equity capital
investors, as it:
• is typically less dilutive to the equity holders than additional equity financing;
• extends the time period during which a portfolio company can operate before seeking additional equity capital or pursuing a sale transaction or other
liquidity event; and
• allows portfolio companies to better match cash sources with uses.
Competitive strengths
We believe that we, together with our Advisor, possess significant competitive strengths, which include the following:
Consistently execute commitments and close transactions. Our Advisor and its senior management and investment professionals have an extensive
track record of originating, underwriting and managing Venture Loans. Our Advisor and its predecessor have directly originated, underwritten and
managed Venture Loans with an aggregate original principal amount over $1.4 billion to more than 225 companies since operations commenced in
2004.
Robust direct origination capabilities. Our Advisor has significant experience originating Venture Loans in our Target Industries. This experience
has given our Advisor a deep knowledge of our Target Industries and an extensive base of transaction sources and references.
Highly experienced and cohesive management team. Our Advisor’s senior management team of experienced professionals has been together since
our inception. This consistency allows companies, their management teams and their investors to rely on consistent and predictable service, loan
products and terms and underwriting standards.
Relationships with venture capital and private equity investors. Our Advisor has developed strong relationships with venture capital and private
equity firms and their partners.
Well-known brand name. Our Advisor has originated Venture Loans to more than 225 companies in our Target Industries under the “Horizon
Technology Finance” brand.
Competition
We compete to provide financing to development-stage companies in our Target Industries with a number of investment funds and other BDCs, as well
as traditional financial services companies such as commercial banks and other financing sources. Some of our competitors are larger and have greater
financial and other resources than we do. We believe we compete effectively with these entities primarily on the basis of the experience, industry knowledge
and contacts of our Advisor’s investment professionals, our Advisor’s responsiveness, efficient investment analysis and decision-making processes, its
creative financing products and its customized investment terms. We do not intend to compete primarily on the interest rates we offer and believe that some
competitors make loans with rates that are comparable to or lower than our rates. For additional information concerning our competitive position and
competitive risks, see “Item 1A — Risk Factors — Risks related to our business and structure — We operate in a highly competitive market for investment
opportunities, and if we are not able to compete effectively, our business, results of operations and financial condition may be adversely affected and the value
of your investment in us could decline.”
Investment criteria
We seek to invest in companies that vary by their stage of development, their Target Industries and sectors of Target Industries and their geographical
location, as well as by the venture capital and private equity sponsors that support our portfolio companies. While we invest in companies at various stages of
development, we require that prospective portfolio companies be beyond the seed stage of development and have received at least their first round of venture
capital or private equity financing before we will consider making an investment. We expect a prospective portfolio company to demonstrate its ability to
advance technology and increase its value over time.
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We have identified several criteria that we believe have proven, and will prove, important in achieving our investment objective. These criteria provide
general guidelines for our investment decisions. However, we caution you that not all of these criteria are met by each portfolio company in which we choose
to invest.
Management. Our portfolio companies are generally led by experienced management that has in-market expertise in the Target Industry in which
the company operates, as well as extensive experience with development-stage companies. The adequacy and completeness of the management team is
assessed relative to the stage of development and the challenges facing the potential portfolio company.
Continuing support from one or more venture capital and private equity investors. We typically invest in companies in which one or more
established venture capital and private equity investors have previously invested and continue to make a contribution to the management of the business.
We believe that established venture capital and private equity investors can serve as committed partners and will assist their portfolio companies and
their management teams in creating value. We take into consideration the total amount raised by the company, the valuation history, investor reserves for
future investment and the expected timing and milestones to the next equity round financing.
Operating plan and cash resources. We generally require that a prospective portfolio company, in addition to having sufficient access to capital to
support leverage, demonstrate an operating plan capable of generating cash flows or the ability to raise the additional capital necessary to cover its
operating expenses and service its debt. Our review of the operating plan will take into consideration existing cash, cash burn, cash runway and the
milestones necessary for the company to achieve cash flow positive operations or to access additional equity from its investors.
Enterprise and technology value. We expect that the enterprise value of a prospective portfolio company should substantially exceed the principal
balance of debt borrowed by the company. Enterprise value includes the implied valuation based upon recent equity capital invested as well as the
intrinsic value of the company’s particular technology, service or customer base.
Market opportunity and exit strategy. We seek portfolio companies that are addressing market opportunities that capitalize on their competitive
advantages. Competitive advantages may include unique technology, protected intellectual property, superior clinical results or significant market
traction. As part of our investment analysis, we typically also consider potential realization of our warrants through merger, acquisition or initial public
offering based upon comparable exits in the company’s Target Industry.
Investment process
Our Board has delegated authority for all investment decisions to our Advisor. Our Advisor, in turn, has created an integrated approach to the loan
origination, underwriting, approval and documentation process that we believe effectively combines the skills of our Advisor’s professionals. This process
allows our Advisor to achieve an efficient and timely closing of an investment from the initial contact with a prospective portfolio company through the
investment decision, close of documentation and funding of the investment, while ensuring that our Advisor’s rigorous underwriting standards are
consistently maintained. We believe that the high level of involvement by our Advisor’s staff in the various phases of the investment process allows us to
minimize the credit risk while delivering superior service to our portfolio companies.
Origination. Our Advisor’s loan origination process begins with its industry-focused regional managing directors who are responsible for
identifying, contacting and screening prospects. These managing directors meet with key decision makers and deal referral sources such as venture
capital and private equity firms and management teams, legal firms, accounting firms, investment banks and other lenders to source prospective
portfolio companies. We believe our brand name and management team are well known within the Venture Lending community, as well as by many
repeat entrepreneurs and board members of prospective portfolio companies. These broad relationships, which reach across the Venture Lending
industry, give rise to a significant portion of our Advisor’s deal origination.
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The responsible managing director of our Advisor obtains materials from the prospective portfolio company and from those materials, as well as
other available information, determines whether it is appropriate for our Advisor to issue a non-binding term sheet. The managing director bases this
decision to proceed on his or her experience, the competitive environment and the prospective portfolio company’s needs and also seeks the counsel of
our Advisor’s senior management and investment team.
Term sheet. If the managing director determines, after review and consultation with senior management, that the potential transaction meets our
Advisor’s initial credit standards, our Advisor will issue a non-binding term sheet to the prospective portfolio company.
The terms of the transaction are tailored to a prospective portfolio company’s specific funding needs while taking into consideration market
dynamics, the quality of the management team, the venture capital and private equity investors involved and applicable credit criteria, which may
include the prospective portfolio company’s existing cash resources, the development of its technology and the anticipated timing for the next round of
equity financing.
Underwriting. Once the term sheet has been negotiated and executed and the prospective portfolio company has remitted a good faith deposit, we
request additional due diligence materials from the prospective portfolio company and arrange for a due diligence visit.
Due diligence. The due diligence process includes a formal visit to the prospective portfolio company’s location and interviews with the
prospective portfolio company’s senior management team. The process includes obtaining and analyzing publicly available information from
independent third parties that have knowledge of the prospective portfolio company’s business, including, to the extent available analysts that follow the
technology market, thought leaders in our Target Industries and important customers or partners, if any. Outside sources of information are reviewed,
including industry publications, scientific and market articles, internet publications, publicly available information on competitors or competing
technologies and information known to our Advisor’s investment team from their experience in the technology markets.
A primary element of the due diligence process is interviewing key existing investors of the prospective portfolio company, who are often also
members of the prospective portfolio company’s board of directors. While these board members and/or investors are not independent sources of
information, their support for management and willingness to support the prospective portfolio company’s further development are critical elements of
our decision making process.
Investment memorandum. Upon completion of the due diligence process and review and analysis of all of the information provided by the
prospective portfolio company and obtained externally, our Advisor’s assigned credit officer prepares an investment memorandum for review and
approval. The investment memorandum is reviewed by our Advisor’s Chief Investment Officer and then submitted to our Advisor’s investment
committee for approval.
Investment committee. Our Advisor’s investment committee is responsible for overall credit policy, portfolio management, approval of all
investments, portfolio monitoring and reporting and managing of problem accounts. The committee interacts with the entire staff of our Advisor to
review potential transactions and deal flow. This interaction of cross-functional members of our Advisor’s staff assures efficient transaction sourcing,
negotiating and underwriting throughout the transaction process. Portfolio performance and current market conditions are reviewed and discussed by the
investment committee on a regular basis to assure that transaction structures and terms are consistent and current.
Loan closing and funding. Approved investments are documented and closed by our Advisor’s in-house legal and loan administration staff. Loan
documentation is based upon standard templates created by our Advisor and is customized for each transaction to reflect the specific deal terms. The
transaction documents typically include a loan and security agreement, warrant agreement and applicable perfection documents, including applicable
Uniform Commercial Code financing statements and, as applicable, may also include a landlord agreement, patent and trademark security grants, a
subordination agreement, an intercreditor agreement and other standard agreements for commercial loans in the Venture Lending industry. Funding
requires final approval by our Advisor’s General Counsel, Chief Executive Officer or President, Chief Financial Officer and Chief Investment Officer.
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Portfolio management and reporting. Our Advisor maintains a “hands on” approach to maintain communication with our portfolio companies. At
least quarterly, our Advisor contacts our portfolio companies for operational and financial updates by phone and performs reviews. Our Advisor may
contact portfolio companies deemed to have greater credit risk on a monthly or more frequent basis. Our Advisor requires all private companies to
provide financial statements, typically monthly. For public companies, our Advisor typically relies on publicly reported quarterly financials. This allows
our Advisor to identify any unexpected developments in the financial performance or condition of our portfolio company.
Our Advisor has developed a proprietary internal credit rating system to analyze the quality of our debt investments. Using this system, our Advisor
analyzes and then rates the credit risk within the portfolio on a quarterly basis. Each portfolio company is rated on a 1 through 4 scale, with 3
representing the rating for a standard level of risk. A rating of 4 represents an improved and better credit quality than existed at the time of its original
underwriting. A rating of 2 or 1 represents a deteriorating credit quality and an increased risk of loss of principal. Newly funded investments are
typically assigned a rating of 3, unless extraordinary circumstances require otherwise. These investment ratings are generated internally by our Advisor,
and we cannot guarantee that others would assign the same ratings to our portfolio investments or similar portfolio investments.
Our Advisor closely monitors portfolio companies rated a 1 or 2 for adverse developments. In addition, our Advisor maintains regular contact with
the management, board of directors and major equity holders of these portfolio companies in order to discuss strategic initiatives to correct the
deterioration of the portfolio company.
The following table describes each rating level:
Rating
4
3
2
1
The portfolio company has performed in excess of our expectations as demonstrated by exceeding revenue milestones, clinical
milestones or other operating metrics or as a result of raising capital well in excess of our underwriting assumptions. Generally the
portfolio company displays one or more of the following: its enterprise value greatly exceeds our loan balance; it has achieved
cash flow positive operations or has sufficient cash resources to cover the remaining balance of the loan; there is strong potential
for warrant gains from our warrants; and there is a high likelihood that the borrower will receive favorable future financing to
support operations. Loans rated 4 are the lowest risk profile in our portfolio and have no expected risk of principal loss.
The portfolio company has performed to our expectations as demonstrated by meeting revenue milestones, clinical milestones or
other operating metrics. It has raised, or is expected to raise, capital consistent with our underwriting assumptions. Generally the
portfolio company displays one or more of the following: its enterprise value comfortably exceeds our loan balance; it has
sufficient cash resources to operate according to its plan; it is expected to raise additional capital as needed; and there continues to
be potential for warrant gains from our warrants. New loans are typically rated 3 when approved and thereafter 3-rated loans
represent a standard risk profile, with no principal loss currently expected.
The portfolio company has performed below our expectations as demonstrated by missing revenue milestones, delayed clinical
progress or otherwise failing to meet projected operating metrics. It may have raised capital in support of the poorer performance
but generally on less favorable terms than originally contemplated at the time of underwriting. Generally the portfolio company
displays one or more of the following: its enterprise value exceeds our loan balance but at a lower multiple than originally
expected; it has sufficient cash to operate according to its plan but liquidity may be tight; and it is planning to raise additional
capital but there is uncertainty and the potential for warrant gains from our warrants are possible, but unlikely. Loans rated 2
represent an increased level of risk of loss of principal. While no loss is currently anticipated for a 2-rated loan, there is potential
for future loss of principal.
The portfolio company has performed well below plan as demonstrated by materially missing revenue milestones, delayed or
failed clinical progress or otherwise failing to meet operating metrics. The portfolio company has not raised sufficient capital to
operate effectively or retire its debt obligation to us. Generally the portfolio company displays one or more of the following: its
enterprise value may not exceed our loan balance; it has insufficient cash to operate according to its plan and liquidity may be
tight; and there are uncertain plans to raise additional capital or the portfolio company is being sold under distressed conditions.
There is no potential for warrant gains from our warrants. Loans rated 1 are generally put on non-accrual status and represent a
high degree of risk of loss of principal.
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For a discussion of the ratings of our existing portfolio, see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Debt investment asset quality.”
Managerial assistance
As a BDC, we offer, through our Advisor, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance
may involve monitoring the operations of the portfolio companies, participating in board of directors and management meetings, consulting with and advising
officers of portfolio companies and providing other organizational and financial guidance.
Although we may receive fees for these services, pursuant to the Administration Agreement, we will reimburse our Advisor for its expenses related to
providing such services on our behalf.
Employees
We do not have any employees. Each of our executive officers is an employee of our Advisor. Our day-to-day investment operations are managed by
our Advisor. We reimburse our Advisor for our allocable portion of expenses incurred by it in performing its obligations under the Administration Agreement,
as our Administrator, including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.
Investment Management Agreement
Under the terms of the Investment Management Agreement, our Advisor:
•
•
•
determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio
companies); and
closes, monitors and administers the investments we make, including the exercise of any voting or consent rights.
Our Advisor’s services under the Investment Management Agreement are not exclusive, and it is free to furnish similar services to other entities so long
as its services to us are not impaired.
Investment advisory fees
Pursuant to our Investment Management Agreement, we pay our Advisor a fee for investment advisory and management services consisting of a base
management fee and an incentive fee.
Base management fee. The base management fee, payable monthly in arrears, is calculated at an annual rate of 2.00% of (i) our gross assets less (ii)
cash and cash equivalents. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of
leverage.
The Advisor agreed to waive the base management fee relating to the proceeds raised in a public offering of our common stock that closed on
March 24, 2015, or the 2015 Offering, 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 our net investment income exceeds distributions
declared on shares of our common stock for the applicable quarter. As of December 31, 2015, condition (ii) above was met, as our net investment income
exceeded distributions declared for the quarters ended September 30, 2015 and December 31, 2015, and our Advisor is not obligated to waive the base
management fee with respect to proceeds from the 2015 Offering for any future quarter.
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Incentive fee. 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 our 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, 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 we have not yet received in cash. The incentive fee with respect to the Pre-Incentive Fee Net Investment Income is 20.00% of the amount, if
any, by which the Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter exceeds a hurdle rate of 1.75% (which is 7.00%
annualized) of our net assets at the end of the immediately preceding calendar quarter, subject to a “catch-up” provision measured as of the end of each
calendar quarter. Under this provision, in any calendar quarter, the Advisor receives no incentive fee until the Pre-Incentive Fee Net Investment Income
equals the hurdle rate of 1.75%, but then receives, as a “catch-up,” 100.00% of the Pre-Incentive Fee Net Investment Income with respect to that portion of
such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.1875% quarterly (which is 8.75% annualized). The effect
of this “catch-up” provision is that, if Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter, the Advisor will receive 20.00% of
the Pre-Incentive Fee Net Investment Income as if the hurdle rate did not apply.
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 we may pay an incentive fee in a quarter in which we incur a loss. For example, if
we receive Pre-Incentive Fee Net Investment Income in excess of the quarterly minimum hurdle rate, we will pay the applicable incentive fee up to the
Incentive Fee Cap, defined below, even if we have incurred a loss in that quarter due to realized and unrealized capital losses. Our net investment income used
to calculate this part of the incentive fee is also included in the amount of our 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 applicable
quarter.
Commencing with the calendar quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee cap and
deferral mechanism which is determined based upon a look-back period of up to three years and is expensed when incurred. For this purpose, the look-back
period for the incentive fee based on Pre-Incentive Fee Net Investment Income (the “Incentive Fee Look-back Period”) commenced on July 1, 2014 and
increases by one quarter in length at the end of each calendar quarter until June 30, 2017, after which time, the Incentive Fee Look-back Period will include
the relevant calendar quarter and the 11 preceding full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income is
subject to a cap (the “Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such deferred incentive fees
(collectively, the “Incentive Fee Cap and Deferral Mechanism”). The Incentive Fee Cap is equal to (a) 20.00% of Cumulative Pre-Incentive Fee Net Return
(as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to the Advisor during the Incentive Fee
Look-back Period. To the extent the Incentive Fee Cap is zero or a negative value in any calendar quarter, we 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. We only pay incentive fees on Pre-Incentive Fee Net
Investment Income to the extent allowed by the Incentive Fee Cap and Deferral Mechanism. “Cumulative Pre-Incentive Fee Net Return” during any Incentive
Fee Look-back Period means the sum of (a) Pre-Incentive Fee Net Investment Income and the base management fee for each calendar quarter during the
Incentive Fee Look-back Period and (b) the sum of cumulative realized capital gains and losses, cumulative unrealized capital appreciation and cumulative
unrealized capital depreciation during the applicable Incentive Fee Look-back Period.
The following is a graphical representation of the calculation of the income-related portion of the incentive fee:
Quarterly incentive fee based on Net Investment Income
Pre-Incentive Fee Net Investment Income (expressed as a percentage of the value of net assets)
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Percentage of Pre-Incentive Fee Net Investment Income allocated to first part of incentive fee
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 our realized capital gains, if any, on a cumulative basis from the date of our
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.
Examples of incentive fee calculation
Example 1: Income related portion of incentive fee before total return requirement calculation for each fiscal quarter
Alternative 1
Assumptions:
Investment income (including interest, distributions, fees, etc.) = 1.25%
Hurdle rate(1) = 1.75%
Management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Net Investment Income (investment income - (management fee + other expenses)) = 0.55%
Pre-Incentive Fee Net Investment Income does not exceed hurdle rate; therefore, there is no income-related incentive fee.
Alternative 2
Assumptions:
Investment income (including interest, distributions, fees, etc.) = 2.80%
Hurdle rate(1) = 1.75%
Management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Net Investment Income (investment income - (management fee + other expenses)) = 2.10%
Incentive fee = 100.00% × Pre-Incentive Fee Net Investment Income (subject to “catch-up”)(4)
= 100.00% × (2.10% - 1.75%)
= 0.35%
Pre-Incentive Fee Net Investment Income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision; therefore, the income related
portion of the incentive fee is 0.35%.
Alternative 3
Assumptions:
Investment income (including interest, distributions, fees, etc.) = 3.00%
Hurdle rate(1) = 1.75%
Management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Net Investment Income (investment income - (management fee + other expenses)) = 2.30%
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Incentive fee = 100.00% × Pre-Incentive Fee Net Investment Income (subject to “catch-up”)(4)
Incentive fee = 100.00% × “catch-up” + (20.00% × (Pre-Incentive Fee Net Investment Income - 2.1875%))
Catch up = 2.1875% - 1.75%
= 0.4375%
Incentive fee = (100.00% × 0.4375%) + (20.00% × (2.30% - 2.1875%))
= 0.4375% + (20.00% × 0.1125%)
= 0.4375% + 0.0225%
= 0.46%
Pre-Incentive Fee Net Investment Income exceeds the hurdle rate and fully satisfies the “catch-up” provision; therefore, the income related portion of
the incentive fee is 0.46%.
(1) Represents 7.00% annualized hurdle rate.
(2) Represents 2.00% annualized base management fee.
(3) Excludes organizational and offering expenses.
(4) The “catch-up” provision is intended to provide our Advisor with an incentive fee of 20.00% on all Pre-Incentive Fee Net Investment Income as if a
hurdle rate did not apply when our Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any fiscal quarter.
Example 2: Income related portion of incentive fee after total return requirement calculation for each fiscal quarter
Alternative 1
Assumptions:
Investment income (including interest, distributions, fees, etc.) = 2.80%
Hurdle rate(1) = 1.75%
Management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Net Investment Income (investment income - (management fee + other expenses)) = 2.10%
Incentive fee = 100.00% × Pre-Incentive Fee Net Investment Income (subject to ‘‘catch-up’’)(4)
=100.00% × (2.10% - 1.75%)
= 0.35%
Cumulative incentive compensation accrued and/or paid since July 1, 2014 = $9,000,000
20.0% of cumulative net increase in net assets resulting from operations since July 1, 2014 = $8,000,000
Although our Pre-Incentive Fee Net Investment Income exceeds the hurdle rate of 1.75%, no incentive fee is payable because 20.0% of the cumulative
net increase in net assets resulting from operations since July 1, 2014 did not exceed the cumulative income and capital gains incentive fees accrued
and/or paid since July 1, 2014.
Alternative 2
Assumptions:
Investment income (including interest, distributions, fees, etc.) = 2.80%
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Hurdle rate(1) = 1.75%
Management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Net Investment Income (investment income - (management fee + other expenses)) = 2.10%
Incentive fee = 100.00% × Pre-Incentive Fee Net Investment Income (subject to ‘‘catch-up’’)(4)
=100.00% × (2.10% - 1.75%)
= 0.35%
Pre-Incentive Fee Net Investment Income exceeds the hurdle rate, but does not fully satisfy the ‘‘catch-up’’ provision; therefore, the income related
portion of the incentive fee is 0.35%.
Cumulative incentive compensation accrued and/or paid since July 1, 2014 = $9,000,000
20.0% of cumulative net increase in net assets resulting from operations since July 1, 2014 = $10,000,000
Because our Pre-Incentive Fee Net Investment Income exceeds the hurdle rate of 1.75% and because 20.0% of the cumulative net increase in net assets
resulting from operations since July 1, 2014 exceeds the cumulative income and capital gains incentive fees accrued and/or paid since July 1, 2014, an
incentive fee would be payable, as shown in Alternative 3 of Example 1 above.
(1) Represents 7.00% annualized hurdle rate.
(2) Represents 2.00% annualized base management fee.
(3) Excludes organizational and offering expenses.
(4) The “catch-up” provision is intended to provide our Advisor with an incentive fee of 20.00% on all Pre-Incentive Fee Net Investment Income as if a
hurdle rate did not apply when our Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any fiscal quarter.
Example 3: Capital gains portion of incentive fee
Alternative 1
Assumptions:
Year 1: $20 million investment made in Company A (“Investment A”), and $30 million investment made in Company B (“Investment B”)
Year 2: Investment A sold for $50 million and fair market value (“FMV”) of Investment B determined to be $32 million
Year 3: FMV of Investment B determined to be $25 million
Year 4: Investment B sold for $31 million
The capital gains portion of the incentive fee, if any, would be:
Year 1: None (No sales transaction)
Year 2: Capital gains incentive fee of $6 million ($30 million realized capital gains on sale of Investment A multiplied by 20%)
Year 3: None; $5 million ((20% multiplied by ($30 million cumulative capital gains less $5 million cumulative capital depreciation)) less $6 million
(previous capital gains fee paid in Year 2))
Year 4: Capital gains incentive fee of $200,000; $6.2 million (($31 million cumulative realized capital gains multiplied by 20%) less $6 million (capital
gains incentive fee taken in Year 2))
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Alternative 2
Assumptions:
Year 1: $20 million investment made in Company A (“Investment A”), $30 million investment made in Company B (“Investment B”) and $25 million
investment made in Company C (“Investment C”)
Year 2: Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25 million
Year 3: FMV of Investment B determined to be $27 million and Investment C sold for $30 million
Year 4: FMV of Investment B determined to be $35 million
Year 5: Investment B sold for $20 million
The capital gains incentive fee, if any, would be:
Year 1: None (no sales transaction)
Year 2: $5 million capital gains incentive fee (20% multiplied by $25 million ($30 million realized capital gains on Investment A less unrealized capital
depreciation on Investment B))
Year 3: $1.4 million capital gains incentive fee(1) ($6.4 million (20% multiplied by $32 million ($35 million cumulative realized capital gains less
$3 million unrealized capital depreciation)) less $5 million capital gains incentive fee received in Year 2
Year 4: None (no sales transaction)
Year 5: None ($5 million (20% multiplied by $25 million (cumulative realized capital gains of $35 million less realized capital losses of $10 million))
less $6.4 million cumulative capital gains incentive fee paid in Year 2 and Year 3(2)
The hypothetical amounts of returns shown are based on a percentage of our total net assets and assume no leverage. There is no guarantee that positive
returns will be realized and actual returns may vary from those shown in this example.
(1) As illustrated in Year 3 of Alternative 1 above, if the Investment Management Agreement were terminated on a date other than our fiscal year end
of any year, we may have paid aggregate capital gains incentive fees that are more than the amount of such fees that would be payable if the
Investment Management Agreement were terminated on the fiscal year end of such year.
(2) As noted above, it is possible that the cumulative aggregate capital gains fee received by the Advisor ($6.4 million) is effectively greater than
$5 million (20.00% of cumulative aggregate realized capital gains less net realized capital losses or net unrealized depreciation ($25 million)).
Payment of our expenses
All investment professionals and staff of our Advisor, when and to the extent engaged in providing investment advisory and management services, and
the compensation and routine overhead expenses of its personnel allocable to such services, are provided and paid for by our Advisor. We bear all other costs
and expenses of our operations and transactions, including those relating to:
• our organization;
• calculating our net asset value (including the cost and expenses of any independent valuation firms);
• expenses, including travel expense, incurred by our Advisor or payable to third parties performing due diligence on prospective portfolio companies,
monitoring our investments and, if necessary, enforcing our rights;
• interest payable on debt, if any, incurred to finance our investments;
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• the costs of all future offerings and repurchases of our common stock and other securities, if any;
• the base management fee and any incentive fee;
• distributions on our shares;
• administration fees payable under the Administration Agreement;
• the allocated costs incurred by our Advisor as our Administrator in providing managerial assistance to those portfolio companies that request it;
• amounts payable to third parties relating to, or associated with, making investments;
• transfer agent and custodial fees;
• registration fees;
• listing fees;
• fees and expenses associated with marketing efforts;
• taxes;
• independent director fees and expenses;
• brokerage commissions;
• costs of preparing and filing reports or other documents with the SEC;
• the costs of any reports, proxy statements or other notices to our stockholders, including printing costs;
• the fidelity bond;
• directors and officers/errors and omissions liability insurance, and any other insurance premiums;
• indemnification payments;
• direct costs and expenses of administration, including audit and legal costs; and
• all other expenses incurred by us or the Administrator in connection with administering our business, such as the allocable portion of overhead under
the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and our allocable portion of the
costs of compensation and related expenses of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.
From time to time, our advisor may pay amounts owed by us to third party providers of goods or services. We subsequently reimburse our advisor for
such amounts paid on our behalf. Generally, our expenses are expensed as incurred in accordance with U.S. generally accepted accounting principles, or
GAAP. To the extent we incur costs that should be capitalized and amortized into expense we also do so in accordance with GAAP, which may include
amortizing such amount on a straight line basis over the life of the asset or the life of the services or product being performed or provided.
Limitation of liability and indemnification
The Investment Management Agreement provides that our Advisor and its officers, managers, partners, agents, employees, controlling persons and any
other person or entity affiliated with our Advisor are not liable to us for any act or omission by it in the supervision or management of our investment
activities or for any loss sustained by us except for acts or omissions constituting willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations under the Investment Management Agreement. The Investment Management Agreement also provides, subject to certain conditions, for
indemnification by us of our Advisor and its officers, managers, partners, agents, employees, controlling persons and any other person or entity affiliated with
our Advisor for liabilities incurred by them in connection with their services to us (including any liabilities associated with an action or suit by or in the right
of us or our stockholders), but excluding liabilities for acts or omissions constituting willful misfeasance, bad faith or gross negligence or reckless disregard
of their duties under the Investment Management Agreement.
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Board approval of the Investment Management Agreement
Our Board held an in-person meeting on July 28, 2017 at which it considered and reapproved our Investment Management Agreement for an additional
one-year period. In its consideration of the Investment Management Agreement, our Board focused on information it had received relating to (a) the nature,
quality and extent of the advisory and other services to be provided to us by our Advisor; (b) comparative data with respect to advisory fees or similar
expenses paid by other BDCs with similar investment objectives; (c) our projected expenses and expense ratio compared to BDCs with similar investment
objectives; (d) any existing and potential sources of indirect income to our Advisor or the Administrator from their relationships with us and the profitability
of those relationships; (e) information about the services to be performed and the personnel performing such services under the Investment Management
Agreement; (f) the organizational capability and financial condition of our Advisor and its affiliates; (g) our Advisor’s practices regarding the selection and
compensation of brokers that may execute our portfolio transactions and the brokers’ provision of brokerage and research services to our Advisor; and (h) the
possibility of obtaining similar services from other third party service providers or through an internally managed structure.
Based on the information reviewed and its discussions related thereto, our Board, including a majority of the directors who are not interested persons of
us, concluded that the investment management fee rates were reasonable in relation to the services to be provided.
Duration and termination
The Investment Management Agreement was reapproved by our Board, and by a majority of our independent directors, on July 28, 2017. Unless
terminated earlier as described below, it will continue in effect from year to year thereafter if approved annually by our Board including a majority of our
directors who are not interested persons or by the affirmative vote of the holders of a majority of our outstanding voting securities and a majority of our
directors who are not interested persons. The Investment Management Agreement will automatically terminate in the event of its assignment. The Investment
Management Agreement may be terminated by either party without penalty by delivering notice of termination upon not more than 60 days’ written notice to
the other party. See “Item 1A — Risk Factors — Risks related to our business and structure — Our Advisor can resign on 60 days’ notice, and we may not be
able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our business, results of operations or
financial condition.”
Administration Agreement
The Administration Agreement was considered and reapproved by our Board, and by a majority of our independent directors, on July 28, 2017. Under
the Administration Agreement, the Administrator furnishes us with office facilities and equipment, provides us clerical, bookkeeping and record keeping
services at such facilities and provides us with other administrative services necessary to conduct our day-to-day operations. We reimburse the Administrator
for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement,
including rent, the fees and expenses associated with performing compliance functions and our allocable portion of the costs of compensation and related
expenses of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. The Board reviews the allocation of expenses shared with
the Advisor or other clients of the Advisor, if any, on a periodic basis to confirm that the allocations are reasonable and appropriate in light of the provisions
of the Investment Management Agreement and Administration Agreement and then-current circumstances.
License agreement
We have entered into a license agreement with Horizon Technology Finance, LLC pursuant to which we were granted a non-exclusive, royalty-free right
and license to use the service mark “Horizon Technology Finance.” Under this agreement, we have a right to use the “Horizon Technology Finance” service
mark for so long as the Investment Management Agreement with our Advisor is in effect. Other than with respect to this limited license, we have no legal
right to the “Horizon Technology Finance” service mark.
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Regulation
We have elected to be regulated as a BDC under the 1940 Act and elected to be treated as a RIC under Subchapter M of the Code. As with other
companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. The 1940 Act contains prohibitions and restrictions
relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those
affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In
addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved
by “a majority of our outstanding voting securities” as defined in the 1940 Act. A majority of the outstanding voting securities of a company is defined under
the 1940 Act as the lesser of: (1) 67% or more of such company’s shares present at a meeting if more than 50% of the outstanding shares of such company are
present or represented by proxy or (2) more than 50% of the outstanding shares of such company. Our bylaws provide for the calling of a special meeting of
stockholders at which such action could be considered upon written notice of not less than ten or more than sixty days before the date of such meeting.
We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities,
we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act of 1933, as amended, or the Securities Act.
We do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, except for
registered money market funds, we generally cannot acquire more than 3% of the voting stock of any investment company, invest more than 5% of the value
of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of more than one
investment company. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such
investments might subject our stockholders to additional expenses. None of our investment policies are fundamental and any may be changed without
stockholder approval.
We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our
directors who are not interested persons and, in some cases, prior approval by the SEC. For example, under the 1940 Act, absent receipt of exemptive relief
from the SEC, we and our affiliates may be precluded from co-investing in transactions for which terms other than price are negotiated by our affiliates. As a
result of one or more of these situations, we may not be able to invest as much as we otherwise would in certain investments or may not be able to liquidate a
position as quickly. On November 27, 2017, the SEC granted us, our Advisor and certain of our affiliates an exemptive relief order permitting us to co-invest
with certain affiliated funds in negotiated investments, subject to the terms and conditions of the order.
We expect to be periodically examined by the SEC for compliance with the 1940 Act.
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement.
Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.
We and our Advisor have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities
laws and review these policies and procedures annually for their adequacy and the effectiveness of their implementation. We and our Advisor have designated
a chief compliance officer to be responsible for administering the policies and procedures.
Qualifying assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in section 55(a) of the 1940 Act, which are referred to as
qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of
qualifying assets relevant to our proposed business are the following:
• Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited
exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an
eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined
in the 1940 Act as any issuer which:
• is organized under the laws of, and has its principal place of business in, the United States;
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• is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an
investment company but for certain exclusions under the 1940 Act; and
• satisfies any of the following:
•
•
has a market capitalization of less than $250 million or does not have any class of securities listed on a national securities exchange;
is controlled by a BDC or a group of companies including a BDC, the BDC actually exercises a controlling influence over the management or
policies of the eligible portfolio company, and, as a result thereof, the BDC has an affiliated person who is a director of the eligible portfolio
company; or
•
is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million.
• Securities of any eligible portfolio company which we control.
• Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in
transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its
securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
• Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we
already own 60% of the outstanding equity of the eligible portfolio company.
• Securities received in exchange for or distributed on or with respect to securities described above, or pursuant to the exercise of warrants or rights
relating to such securities.
• Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment.
The regulations defining qualifying assets may change over time. We may adjust our investment focus as needed to comply with and/or take advantage
of any regulatory, legislative, administrative or judicial actions in this area.
Managerial assistance to portfolio companies
A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making
investments in the types of securities described in “— Qualifying assets.” However, in order to count portfolio securities as qualifying assets for the purpose
of the 70% test, the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and
solvent companies described above) significant managerial assistance. Where the BDC purchases such securities in conjunction with one or more other
persons acting together, the BDC will satisfy this test if one of the other persons in the group makes available such managerial assistance. Making available
managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if
accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio
company.
Issuance of additional shares
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, issue and sell our common
stock at a price below the current net asset value of the common stock, or issue and sell warrants, options or rights to acquire such common stock, at a price
below the current net asset value of the common stock if our Board determines that such sale is in our best interest and in the best interests of our
stockholders, and our stockholders have approved our policy and practice of making such sales within the preceding 12 months. In any such case, the price at
which our securities are to be issued and sold may not be less than a price which, in the determination of our Board, closely approximates the market value of
such securities. We may seek approval from our stockholders to offer shares of our common stock below its net asset value in the future.
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Temporary investments
Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. Government
securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments,
so that 70% of our assets are qualifying assets. Typically, we invest in highly rated commercial paper, U.S. Government agency notes, U.S. Treasury bills or
in repurchase agreements relating to such securities that are fully collateralized by cash or securities issued by the U.S. Government or its agencies. A
repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at
an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no
percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, subject to certain exceptions, if more
than 25% of our total assets constitute repurchase agreements from a single counterparty, we generally would not meet the diversification tests in order to
qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit.
Our Advisor monitors the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Senior securities; derivative securities
We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset
coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities are outstanding,
we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset
coverage requirements at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary
purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Item 1A — Risk Factors — Risks related to our
business and structure — We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.”
The 1940 Act also limits the amount of warrants, options and rights to common stock that we may issue and the terms of such securities.
Code of ethics
We and our Advisor have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Investment Advisers Act
of 1940, as amended, or the Advisers Act, respectively, that establishes procedures for personal investments and restricts certain personal securities
transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held
by us, so long as such investments are made in accordance with the relevant code of ethics’ requirements. You may read and copy each code of ethics at the
SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202)
551-8090. In addition, each code of ethics is attached as Exhibit 14.1 to our Annual Report on Form10-K for the fiscal year ended December 31, 2016 filed
on March 7, 2017 and is available on the SEC’s Internet site at www.sec.gov. You may also obtain copies of the code of ethics, after paying a duplicating fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.
Proxy voting policies and procedures
We have delegated our proxy voting responsibility to our Advisor. The proxy voting policies and procedures of our Advisor are set forth below. The
guidelines are reviewed periodically by our Advisor and our independent directors and, accordingly, are subject to change.
Introduction
Our Advisor is registered with the SEC as an investment adviser under the Advisers Act. As an investment adviser registered under the Advisers Act,
our Advisor has fiduciary duties to us. As part of this duty, our Advisor recognizes that it must vote client securities in a timely manner free of conflicts of
interest and in our best interests and the best interests of our stockholders. Our Advisor’s proxy voting policies and procedures have been formulated to ensure
decision-making is consistent with these fiduciary duties.
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These policies and procedures for voting proxies are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
Proxy policies
Our Advisor votes proxies relating to our portfolio securities in what our Advisor perceives to be the best interest of our stockholders. Our Advisor
reviews on a case-by-case basis each proposal submitted to a stockholder vote to determine its effect on the portfolio securities held by us. Although our
Advisor generally votes against proposals that may have a negative effect on our portfolio securities, our Advisor may vote for such a proposal if there exist
compelling long-term reasons to do so.
Our Advisor’s proxy voting decisions are made by those senior officers who are responsible for monitoring each of our investments. To ensure that a
vote is not the product of a conflict of interest, our Advisor requires that (1) anyone involved in the decision-making process disclose to our Chief
Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote
and (2) employees involved in the decision-making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order
to reduce any attempted influence from interested parties.
Proxy voting records
You may obtain information about how we voted proxies by making a written request for proxy voting information to: Chief Compliance Officer,
Horizon Technology Finance Corporation, 312 Farmington Avenue, Farmington, Connecticut 06032 or by calling (860) 676-8654.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, imposes a wide variety of regulatory requirements on publicly held
companies and their insiders. Many of these requirements affect us. For example:
•
•
•
•
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, our principal executive officer and
principal financial officer must certify the accuracy of the financial statements contained in our periodic reports;
pursuant to Item 307 of Regulation S-K under the Securities Act, our periodic reports must disclose our conclusions about the effectiveness of our
disclosure controls and procedures;
pursuant to Rule 13a-15 under the Exchange Act, our management must prepare an annual report regarding its assessment of our internal control
over financial reporting, which must be audited by our independent registered public accounting firm; and
pursuant to Item 308 of Regulation S-K under the Securities Act and Rule 13a-15 under the Exchange Act, our periodic reports must disclose
whether there were significant changes in our internal controls over financial reporting or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.
The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and
the regulations promulgated thereunder. We will continue to monitor our compliance with all regulations under the Sarbanes-Oxley Act and intend to take
actions necessary to ensure that we are in compliance therewith.
Nasdaq corporate governance regulations
Nasdaq has adopted corporate governance regulations with which listed companies must comply. We intend to be in compliance with these corporate
governance listing standards. We intend to monitor our compliance with all future listing standards and to take all necessary actions to ensure that we are in
compliance therewith.
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Privacy principles
We are committed to maintaining the privacy of stockholders and to safeguarding our non-public personal information. The following information is
provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information
with select other parties.
Generally, we do not receive any nonpublic personal information relating to our stockholders, although certain nonpublic personal information of our
stockholders may become available to us. We do not disclose any nonpublic personal information about our stockholders or former stockholders, except as
permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third party administrator).
We restrict access to nonpublic personal information about our stockholders to our Advisor’s employees with a legitimate business need for the
information. We maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our stockholders.
Election to be taxed as a RIC
We have elected to be subject to tax, and intend to qualify annually to maintain our election to be subject to tax, as a RIC under Subchapter M of the
Code. To maintain our RIC status, we must, among other requirements, meet certain source-of-income and quarterly asset diversification requirements (as
described below). We also must distribute dividends each tax year of an amount generally at least equal to 90% of the sum of our ordinary income and our
realized net short-term capital gains (i.e., net short-term capital gains in excess of net long term losses), or investment company taxable income, if any, out of
the assets legally available for distribution, which we refer to as the “Annual Distribution Requirement.” Although not required for us to maintain our RIC tax
status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we are required to distribute dividends in respect of
each calendar year of an amount generally at least equal to the sum of (1) 98% of our ordinary income (taking into account certain deferrals and elections) for
the calendar year, (2) 98.2% of the excess of our capital gains over our capital losses, or capital gain net income (adjusted for certain ordinary losses) for the
one-year period ending on October 31 of the calendar year and (3) any ordinary income or net capital gains for preceding years that was not distributed during
such years and on which we previously did not incur any U.S. federal corporate income tax, or the Excise Tax Avoidance Requirement. In addition, although
we may distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually out of the assets
legally available for such distributions, we may decide to retain such net capital gains or ordinary income to provide us with additional liquidity. In order to
qualify as a RIC, we must:
• maintain an election to be treated as a BDC under the 1940 Act at all times during each tax year;
• meet any applicable securities law requirements, including capital structure requirements;
•
•
derive in each tax year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the
sale of stock or other securities, net income from certain qualified publicly traded partnerships or other income derived with respect to our business
of investing in such stock or securities, or the Qualifying Income Test; and
diversify our holdings so that at the end of each quarter of the tax year:
•
•
at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other
securities if such other securities of any one issuer neither represents more than 5% of the value of our assets nor more than 10% of the
outstanding voting securities of the issuer; and
no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of
one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or
similar or related trades or businesses or in certain qualified publicly traded partnerships, or the Diversification Tests.
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Taxation as a RIC
If we qualify as a RIC, and satisfy the Annual Distribution Requirement, then we will not be subject to entity-level income taxes on the portion of our
investment company taxable income as well as any net capital gain (i.e., realized net long-term capital gains in excess of realized net short-term capital losses)
we distribute as dividends to stockholders. We may retain for investment all or a portion of our net capital gain. However, if we retain any investment
company taxable income or net capital gains, and satisfy the Annual Distribution Requirement, we will be subject to entity-level taxation at regular corporate
rates on any amounts retained. If we fail to qualify as a RIC for a period greater than two consecutive tax years, to qualify as a RIC in a subsequent tax year,
we may be subject to regular corporate rates on any net built-in gains with respect to certain of our assets (that is, the excess of the aggregate gains, including
items of income, over aggregate losses that would have been realized with respect to such assets if we had sold the property at fair market value at the end of
the tax year) that we elect to recognize on requalification or when recognized over the next five tax years.
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt securities that are
treated under applicable tax rules as having original issue discount (such as debt instruments with payment in kind interest or, in certain cases, increasing
interest rates or issued with warrants), we must include in income each tax year a portion of the original issue discount that accrues over the life of the debt
security, regardless of whether cash representing such income is received by us in the same tax year. Because any original issue discount accrued will be
included in our investment company taxable income for the tax year of accrual, we may be required to make a distribution to our stockholders in order to
satisfy the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash
amount.
Gain or loss realized by us from warrants acquired by us, as well as any loss attributable to the lapse of such warrants, generally will be treated as capital
gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant.
Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements.
However, under the 1940 Act, we are generally not permitted to make distributions to our stockholders while our debt obligations and other senior securities
are outstanding unless certain “asset coverage” tests are met. Moreover, our ability to dispose of assets to meet our distribution requirements may be limited
by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of
assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an
investment standpoint, are not advantageous.
Failure to qualify as a RIC
If we fail to satisfy the Annual Distribution Requirement or fail to qualify as a RIC in any tax year, assuming we do not qualify for or take advantage of
certain remedial provisions, we will be subject to tax in that year on all of our taxable income, regardless of whether we make any distributions to our
stockholders. In that case, all of our income will be subject to corporate-level federal income tax, reducing the amount available to be distributed to our
stockholders. In contrast, assuming we qualify as a RIC, our corporate-level federal income tax liability should be substantially reduced or eliminated. See
“—Election to be taxed as a RIC” above.
If we are unable to maintain our status as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able
to deduct distributions to stockholders, nor would they be required to be made. Distributions would generally be taxable to our stockholders as ordinary
distribution income eligible for the 15% or 20% maximum rate to the extent of our current and accumulated earnings and profits. Subject to certain limitations
under the Code, dividends paid by us to certain corporate stockholders would be eligible for the dividends received deduction. Distributions in excess of our
current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis in our common stock, and
any remaining distributions would be treated as a capital gain.
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Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. In addition to the other information contained in this annual report on Form 10-K, you should
consider carefully the following information before making an investment in our securities. The risks set out below are not the only risks we face. If any of the
following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, our net asset
value, or NAV, per share and the trading price of our common stock could decline, and you may lose part or all of your investment.
Risks related to our business and structure
We are dependent upon key personnel of our Advisor and our Advisor’s ability to hire and retain qualified personnel.
We do not have any employees and are dependent upon the members of our Advisor’s senior management, as well as other key personnel for the
identification, evaluation, final selection, structuring, closing and monitoring of our investments. These employees have critical industry experience and
relationships that we rely on to implement our business plan to originate Venture Loans in our Target Industries. Our future success depends on the continued
service of the senior members of our Advisor’s management team. If our Advisor were to lose the services of any of the senior members of our Advisor’s
management team, we may not be able to operate our business as we expect, and our ability to compete could be harmed, either of which could cause our
business, results of operations or financial condition to suffer.
In addition, if either of Mr. Pomeroy, our Chief Executive Officer, or Mr. Michaud, our President, ceases to be actively involved with us or our Advisor,
and is not replaced by an individual satisfactory to Key within 90 days, Key could, absent a waiver or cure, demand repayment of any outstanding obligations
under the Key Facility. In such an event, if we do not have sufficient cash to repay our outstanding obligations, we may be required to sell investments which,
due to their illiquidity, may be difficult to sell on favorable terms or at all. We may also be unable to make new investments, cover our existing obligations to
extend credit or meet other obligations as they come due, which could adversely impact our results of operations.
Our future success also depends, in part, on our Advisor’s ability to identify, attract and retain sufficient numbers of highly skilled employees. If our
Advisor is not successful in identifying, attracting and retaining such employees, we may not be able to operate our business as we expect. In addition, our
Advisor may in the future manage investment funds with investment objectives similar to ours thereby diverting the time and attention of its investment
professionals that we rely on to implement our business plan.
Our Advisor may change or be restructured.
We cannot assure you that the Advisor will remain our investment adviser or that we will continue to have access to our Advisor’s investment
professionals or its relationships. We would be required to obtain shareholder approval for a new investment management agreement in the event that (1) the
Advisor resigns as our investment adviser or (2) a change of control or deemed change of control of the Advisor occurs. We cannot provide assurance that a
new investment management agreement or new investment adviser would provide the same or equivalent services on the same or on as favorable of terms as
the Investment Management Agreement or the Advisor.
We operate in a highly competitive market for investment opportunities, and if we are not able to compete effectively, our business, results of operations
and financial condition may be adversely affected and the value of your investment in us could decline.
We compete for investments with a number of investment funds and other BDCs, as well as traditional financial services companies such as commercial
banks and other financing sources. Some of our competitors are larger and have greater financial, technical, marketing and other resources than we have. For
example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. This may enable these competitors to
make commercial loans with interest rates that are comparable to, or lower than, the rates we typically offer. We may lose prospective portfolio companies if
we do not match our competitors’ pricing, terms and structure. If we do match our competitors’ pricing, terms or structure, we may experience decreased net
interest income and increased risk of credit losses. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments, establish more relationships than us and build their market shares. Furthermore, many of our
competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or that the Code imposes on us as a RIC. If we are not able
to compete effectively, we may not be able to identify and take advantage of attractive investment opportunities that we identify and may not be able to fully
invest our available capital. If this occurs, our business, financial condition and results of operations could be materially adversely affected.
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We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.
Leverage is generally considered a speculative investment technique, and we intend to continue to borrow money as part of our business plan. The use
of leverage magnifies the potential for gain or loss on amounts invested and, therefore, increases the risks associated with investing in us. See “Item 7 —
Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidity and capital resources.” Lenders of senior debt securities
have fixed dollar claims on our assets that are superior to the claims of our common stockholders. If the value of our assets increases, then leveraging would
cause the NAV attributable to our common stock to increase more sharply than it would have had we not leveraged. However, any decrease in our income
would cause net income to decline more sharply than it would have had we not leveraged. This decline could adversely affect our ability to make common
stock distribution payments. In addition, because our investments may be illiquid, we may be unable to dispose of them or unable to do so at a favorable price
in the event we need to do so, if we are unable to refinance any indebtedness upon maturity, and, as a result, we may suffer losses.
Our ability to service any debt that we incur depends largely on our financial performance and is subject to prevailing economic conditions and
competitive pressures. Moreover, as our Advisor’s management fee is payable to our Advisor based on our gross assets less cash and cash equivalents,
including those assets acquired through the use of leverage, our Advisor may have a financial incentive to incur leverage which may not be consistent with
our stockholders’ interests. In addition, holders of our common stock bear the burden of any increase in our expenses, as a result of leverage, including any
increase in the management fee payable to our Advisor.
In addition to the leverage described above, in the past, we have securitized a large portion of our debt investments to generate cash for funding new
investments and may seek to securitize additional debt investments in the future. To securitize additional debt investments in the future, we may create a
wholly-owned subsidiary and sell and/or contribute a pool of debt investments to such subsidiary. This could include the sale of interests in the subsidiary on
a non-recourse basis to purchasers, who we would expect to be willing to accept a lower interest rate to invest in investment grade loan pools. We would
retain all or a portion of the equity in any such securitized pool of loans. An inability to securitize part of our debt investments in the future could limit our
ability to grow our business, fully execute our business strategy and increase our earnings. Moreover, certain types of securitization transactions may expose
us to greater risk of loss than would other types of financing.
Illustration: The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns,
net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below:
Assumed Return on Portfolio
(Net of Expenses)
0%
-5%
5%
-10%
10%
Corresponding return to common stockholder(1)
-21.16%
-12.50%
-3.83%
4.84%
13.50%
(1) Assumes $234 million in total assets, $95 million in outstanding debt, $135 million in net assets, and an average cost of borrowed funds of 5.44% at
December 31, 2017.
Based on our outstanding indebtedness of $95 million as of December 31, 2017 and the average cost of borrowed funds of 5.44% as of that date, our
investment portfolio would have been required to experience an annual return of at least 2.54% to cover annual interest payments on the outstanding debt.
Actual interest payments may be different.
If we are unable to comply with the covenants or restrictions in the Key Facility or make payments when due thereunder, our business could be materially
adversely affected.
Our Key Facility is secured by a lien on the assets of our wholly owned subsidiary, Credit II. The breach of certain of the covenants or restrictions or our
failure to make payments when due under the Key Facility, unless cured within the applicable grace period, would result in a default under the Key Facility
that would permit the lender thereunder to declare all amounts outstanding to be due and payable. In such an event, we may not have sufficient assets to repay
such indebtedness and the lender may exercise rights available to them, including to the extent permitted under applicable law, the seizure of such assets
without adjudication.
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The Key Facility also requires Credit II and our Advisor to comply with various financial covenants, including maintenance by our Advisor of a
minimum tangible net worth and limitations on the value of, and modifications to, the loan collateral that secures the Key Facility. Complying with these
restrictions may prevent us from taking actions that we believe would help us to grow our business or are otherwise consistent with our investment objective.
These restrictions could also limit our ability to plan for or react to market conditions, meet extraordinary capital needs or otherwise restrict corporate
activities, and could result in our failing to qualify as a RIC resulting in our becoming subject to corporate-level income tax. See “Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and capital resources” for additional information regarding our credit
arrangements.
An event of default or acceleration under the Key Facility could also cause a cross-default or cross-acceleration of other debt instruments or contractual
obligations, which would adversely impact our liquidity. We may not be granted waivers or amendments to the Key Facility, if for any reason we are unable
to comply with the terms of the Key Facility and we may not be able to refinance the Key Facility on terms acceptable to us, or at all.
If we are unable to obtain additional debt financing, our business could be materially adversely affected.
We may want to obtain additional debt financing, or need to do so upon maturity of the Key Facility or 2022 Notes, in order to obtain funds which may
be made available for investments. We may borrow under the Key Facility until August 12, 2018. After such date, we must repay the outstanding advances
under the Key Facility in accordance with its terms and conditions. All outstanding advances under the Key Facility are due and payable on August 12, 2020,
unless such date is extended in accordance with its terms. All outstanding amounts on our 2022 Notes are due and payable on September 15, 2022 unless
redeemed prior to that date. If we are unable to increase, renew or replace the Key Facility or enter into other new debt financings on commercially
reasonable terms, our liquidity may be reduced significantly. In addition, if we are unable to repay amounts outstanding under any such debt financings and
are declared in default or are unable to renew or refinance these debt financings, we may not be able to make new investments or operate our business in the
normal course. These situations may arise due to circumstances that we may be unable to control, such as lack of access to the credit markets, a severe decline
in the value of the U.S. dollar, an economic downturn or an operational problem that affects third parties or us, and could materially damage our business.
Because we distribute all or substantially all of our investment company taxable income to our stockholders, we will need additional capital to finance our
growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired.
To satisfy the requirements applicable to a RIC, to avoid incurring excise taxes and to minimize or to avoid incurring corporate-level federal income
taxes, we intend to distribute to our stockholders all or substantially all of our investment company taxable income and net capital gains. However, we may
retain all or a portion of our net capital gains, incur any applicable income taxes with respect thereto, and elect to treat such retained net capital gains as
deemed distributions to our stockholders. As a BDC, we generally are required to maintain coverage of total assets to total senior securities, which includes
all of our borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. Because
we continue to need capital to grow our debt investment portfolio, this limitation may prevent us from incurring debt and require us to raise additional equity
at a time when it may be disadvantageous to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, or at all,
and debt financings may be restricted by the terms of any of our outstanding borrowings. In addition, as a BDC, we are limited in our ability to issue equity
securities at a price below the then-current NAV per share. If additional funds are not available to us, we could be forced to curtail or cease new lending and
investment activities, and our NAV could decline.
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As a BDC, we generally are not able to issue our common stock at a price below the then-current NAV per share without first obtaining the approval of
our stockholders and our independent directors. If our common stock trades at a price below NAV per share and we do not receive such approval, our
business could be materially adversely affected.
As a BDC, we generally are not able to issue our common stock at a price below the then-current NAV per share without first obtaining the approval of
our stockholders and our independent directors. Stockholder approval to offer our common stock at a price below NAV per share expired in January 2016, but
we may seek such approval again in the future. If our common stock trades at a price below NAV per share and we do not receive approval from our
stockholders and our independent directors to issue common stock at a price below NAV per share, we cannot raise capital through the issuance of common
stock. This may limit our ability: to grow and make new investments; to attract and retain top investment professionals; to maintain deal flow and relations
with top companies in our Target Industries and related entities such as venture capital and private equity sponsors; and to sustain a minimum efficient scale
for a public company.
We are subject to risks associated with a rising interest rate environment that may affect our cost of capital and net investment income.
Since the economic downturn that began in mid-2007, interest rates have remained low. Due to several factors, including longer-term inflationary
pressure that may result from the U.S. government’s fiscal policies, the end of the Federal Reserve quantitative easing program and recent increases in the
Federal Funds rate, we expect to experience rising interest rates, rather than falling rates in the future.
Because we currently incur indebtedness to fund our investments, a portion of our income depends upon the difference between the interest rate at
which we borrow funds and the interest rate at which we invest these funds. To the extent our investments have fixed interest rates or have interest rate floors
that are higher than the floor on, or interest rates that “reset” less frequently than, the Key Facility, increases in interest rates can lead to interest rate
compression and have a material adverse effect on our net investment income. In addition to increasing the cost of borrowed funds, which may materially
reduce our net investment income, rising interest rates may also adversely affect our ability to obtain additional debt financing on terms as favorable as under
our current debt financings, or at all. See “—If we are unable to obtain additional debt financing, our business could be materially adversely affected.”
If general interest rates rise, there is a risk that the portfolio companies in which we hold floating rate securities will be unable to pay escalating interest
amounts, which could result in a default under their loan documents with us. Rising interests rates could also cause portfolio companies to shift cash from
other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to
increased defaults on our investments in such portfolio companies. In addition, increasing payment obligations under floating rate loans may cause borrowers
to refinance or otherwise repay our loans earlier than they otherwise would, requiring us to incur management time and expense to re-deploy such proceeds,
including on terms that may not be as favorable as our existing loans. In addition, rising interest rates may increase pressure on us to provide fixed rate loans
to our portfolio companies, which could adversely affect our net investment income, as increases in our cost of borrowed funds would not be accompanied by
increased interest income from such fixed-rate investments.
We may hedge against interest rate fluctuations by using hedging instruments such as caps, swaps, futures, options and forward contracts, subject to
applicable legal requirements, including all necessary registrations (or exemptions from registration) with the Commodity Futures Trading Commission.
These activities may limit our ability to benefit from lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes
in interest rates or hedging transactions or any adverse developments from our use of hedging instruments could have a material adverse effect on our
business, financial condition and results of operations. In addition, we may be unable to enter into appropriate hedging transactions when desired and any
hedging transactions we enter into may not be effective.
As a rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments, an increase in interest
rates would make it easier for us to meet or exceed the hurdle rate applicable to the incentive fee and may result in a substantial increase in the amount of
incentive fees payable to the Advisor with respect to Pre-Incentive Fee Net Investment Income.
Also, an increase in interest rates on investments available to investors could make investment in our common stock less attractive if we are not able to
increase our distributions, which could materially reduce the value of our common stock.
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On July 27, 2017, the head of the United Kingdom Financial Conduct Authority announced that it will no longer persuade or compel banks to submit
rates for the calculation of the LIBOR rates after 2021 (the “FCA Announcement”). Furthermore, in the United States, efforts to identify a set of alternative
U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the Federal Reserve Board and the Federal Reserve
Bank of New York. On August 24, 2017, the Federal Reserve Board requested public comment on a proposal by the Federal Reserve Bank of New York, in
cooperation with the Office of Financial Research, to produce three new reference rates intended to serve as alternatives to LIBOR. These alternative rates are
based on overnight repurchase agreement transactions secured by U.S. Treasury Securities. On December 12, 2017, following consideration of public
comments, the Federal Reserve Board concluded that the public would benefit if the Federal Reserve Bank of New York published the three proposed
reference rates as alternatives to LIBOR (the “Federal Reserve Board Notice”). The Federal Reserve Bank of New York said that the publication of these
alternative rates is targeted to commence by mid-2018.
At this time, it is not possible to predict the effect of the FCA Announcement, the Federal Reserve Board Notice, or other regulatory changes or
announcements, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom, the United States
or elsewhere. As such, the potential effect of any such event on our net investment income cannot yet be determined.
Because many of our investments are not and typically will not be in publicly traded securities, the value of our investments may not be readily
determinable, which could adversely affect the determination of our NAV.
Our investments consist, and we expect our future investments to consist, primarily of debt investments or securities issued by privately held companies.
As these investments are not publicly traded, their fair value may not be readily determinable. In addition, we are not permitted to maintain a general reserve
for anticipated debt investment losses. Instead, we are required by the 1940 Act to specifically value each investment and record an unrealized gain or loss for
any asset that we believe has increased or decreased in value. We value these investments on a quarterly basis, or more frequently as circumstances require, in
accordance with our valuation policy and consistent with GAAP. Our Board employs independent third-party valuation firms to assist it in arriving at the fair
value of our investments. Our Board discusses valuations and determines the fair value in good faith based on the input of our Advisor and the third-party
valuation firms. The factors that may be considered in fair value pricing our investments include the nature and realizable value of any collateral, the portfolio
company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparisons to publicly
traded companies, discounted cash flow and other relevant factors. Because such valuations are inherently uncertain and may be based on estimates, our
determinations of fair value may differ materially from the values that would be assessed if a ready market for these securities existed. Our NAV could be
adversely affected if our determinations regarding the fair value of our investments are materially higher than the values that we ultimately realize upon the
disposal of these investments.
Regulations governing our operation as a BDC affect our ability to, and the way in which, we raise additional capital, which may expose us to additional
risks.
Our business plans contemplate a need for a substantial amount of capital in addition to our current amount of capital. We may obtain additional capital
through the issuance of debt securities or preferred stock, and we may borrow money from banks or other financial institutions, which we refer to collectively
as “senior securities,” up to the maximum amount permitted by the 1940 Act. If we issue senior securities, we would be exposed to typical risks associated
with leverage, including an increased risk of loss. In addition, if we issue preferred stock, it would rank senior to common stock in our capital structure and
preferred stockholders would have separate voting rights and may have rights, preferences or privileges more favorable than those of holders of our common
stock.
The 1940 Act permits us to issue senior securities in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each
issuance of senior securities. If our asset coverage is not at least 200%, we are not permitted to pay distributions or issue additional senior securities. As a
result, we may have difficulty meeting the Annual Distribution Requirement necessary to maintain RIC tax treatment. Moreover, if the value of our assets
declines, we may be unable to satisfy this asset coverage test. If that happens, we may be required to liquidate a portion of our investments and repay a
portion of our indebtedness at a time when we may be unable to do so or unable to do so on favorable terms.
As a BDC, we generally are not able to issue our common stock at a price below NAV per share without first obtaining the approval of our stockholders
and our independent directors. Our stockholder approval expired in January 2016, but we may seek such approval again in the future. If our common stock
trades at a price below NAV per share and we do not receive approval from our stockholders and our independent directors to issue common stock at a price
below NAV per share, we cannot raise capital through the issuance of equity securities. This may limit our ability: to grow and make new investments; to
attract and retain top investment professionals; to maintain deal flow and relations with top companies in our Target Industries and related entities such as
venture capital and private equity sponsors; and to sustain a minimum efficient scale for a public company. The stockholder approval requirement does not
apply to stock issued upon the exercise of options, warrants or rights that we may issue from time to time. If we raise additional funds by issuing more
common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would
decrease, and you may experience dilution.
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Pending legislation may allow us to incur additional leverage.
As a BDC, under the 1940 Act we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage
for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Legislation introduced in the U.S. House of
Representatives, if eventually passed, would modify this section of the 1940 Act and, subject to stockholder approval, increase the amount of debt that BDCs
may incur by decreasing the required asset coverage from 200% to 150%. As a result, we may be able to incur additional indebtedness in the future, and
therefore the risk of an investment in us may increase.
If we are unable to satisfy the requirements under the Code for qualification as a RIC, we will be subject to corporate-level income taxes.
To qualify as a RIC under the Code, we must meet certain source-of-income and asset diversification requirements contained in Subchapter M of the
Code, as well as maintain our election to be regulated as a BDC under the 1940 Act. We must also meet the Annual Distribution Requirement in order to
avoid the imposition of corporate-level income taxes on all of our taxable income, regardless of whether we make any distributions to our stockholders.
The Qualifying Income Test is satisfied if we derive in each tax year at least 90% of our gross income from dividends, interest (including tax-exempt
interest), payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, other income
(including but not limited to gain from options, futures or forward contracts) derived with respect to our business of investing in stock, securities or
currencies, or net income derived from interests in “qualified publicly traded partnerships.” The status of certain forms of income we receive could be subject
to different interpretations under the Code and might be characterized as non-qualifying income that could cause us to fail to qualify as a RIC, assuming we
do not qualify for or take advantage of certain remedial provisions, and, thus, may cause us to be subject to corporate-level federal income taxes.
To qualify as a RIC, we must also meet the Diversification Tests at the end of each quarter of our tax year. Failure to meet these tests may result in our
having to (1) dispose of certain investments quickly; (2) raise additional capital to prevent the loss of RIC status; or (3) engage in certain remedial actions that
may entail the disposition of certain investments at disadvantageous prices that could result in substantial losses, and the payment of penalties, if we qualify to
take such actions. Because most of our investments are and will be in development-stage companies within our Target Industries, any such dispositions could
be made at disadvantageous prices and may result in substantial losses. If we raise additional capital to satisfy the asset diversification requirements, it could
take a longer time to invest such capital. During this period, we will invest in temporary investments, such as money market funds, which we expect will earn
yields substantially lower than the interest income that we anticipate receiving in respect of our investments in secured and amortizing debt investments.
The Annual Distribution Requirement is satisfied if we distribute dividends to our stockholders in each tax year of an amount generally equal to at least
90% of our investment company taxable income, determined without regard to any deductions for dividends paid. If we borrow money, we may be subject to
certain asset coverage requirements under the 1940 Act and loan covenants that could, under certain circumstances, restrict us from making distributions
necessary to qualify as a RIC. If we are unable to obtain cash from other sources, we may fail to be eligible to be subject to taxation as a RIC, assuming we do
not qualify for or take advantage of certain remedial provisions, and, thus, may be subject to corporate-level income taxes.
If we were to fail to qualify as a RIC for any reason and become subject to a corporate-level income taxes, the resulting taxes could substantially reduce
our net assets, the amount of income available for distribution to our stockholders, and the actual amount of our distributions. Such a failure would have a
material adverse effect on us, the NAV of our common stock and the total return, if any, obtainable from your investment in our common stock. In addition,
we could be required to recognize unrealized gains, incur substantial taxes and interest and make substantial distributions before requalifying as a RIC. See
“Item 1. Business—Regulation.”
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Impact of Recently Enacted Federal Tax Legislation
Significant U.S. federal tax reform legislation was recently enacted that, among many other changes, permanently reduces the maximum federal
corporate income tax rate, reduces the maximum individual income tax rate (effective for taxable years 2018 through 2025), restricts the deductibility of
business interest expense, changes the rules regarding the use of net operating losses, and under certain circumstances requires accrual method taxpayers to
recognize income for U.S. federal income tax purposes no later than the income is taken into account as revenue in an applicable financial statement. The
impact of this new legislation on us and our portfolio companies is uncertain. Prospective investors are urged to consult their tax advisors regarding the
effects of the new legislation.
We may have difficulty paying our required distributions if we recognize taxable income before or without receiving cash.
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt instruments that are
treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind interest or, in certain cases, increasing
interest rates or issued with warrants), we must include in taxable income each tax year a portion of the original issue discount that accrues over the life of the
debt instrument, regardless of whether cash representing such income is received by us in the same tax year. We do not have a policy limiting our ability to
invest in original issue discount instruments, including payment-in-kind debt investments. Because in certain cases we may recognize taxable income before
or without receiving cash representing such income, we may have difficulty meeting the Annual Distribution Requirement.
Accordingly, we may need to sell some of our assets at times that we would not consider advantageous, raise additional debt or equity capital or forego
new investment opportunities or otherwise take actions that are disadvantageous to our business (or be unable to take actions that we believe are necessary or
advantageous to our business) in order to satisfy the Annual Distribution Requirement. If we are unable to obtain cash from other sources to satisfy the
Annual Distribution Requirement, we may become subject to a corporate-level income taxes on all of our income. The proportion of our income, consisting
of interest and fee income that resulted from the portion of original issue discount classified as such in accordance with GAAP not received in cash for the
years ended December 31, 2017, 2016 and 2015 was 9.5%, 12.6% and 8.9%, respectively.
If we make loans to borrowers or acquire loans that contain deferred payment features, such as loans providing for the payment of portions of principal
and/or interest at maturity, this could increase the risk of default by our borrowers.
Our investments with deferred payment features, such as debt investments providing for ETPs, may represent a higher credit risk than debt investments
requiring payments of all principal and accrued interest at regular intervals over the life of the debt investment. For example, even if the accounting
conditions for income accrual were met during the period when the obligation was outstanding, the borrower could still default when our actual collection is
scheduled to occur upon maturity of the obligation. The amount of ETPs due under our investments having such a feature currently represents a small portion
of the applicable borrowers’ total repayment obligations under such investments. However, deferred payment arrangements increase the incremental risk that
we will not receive a portion of the amount due at maturity. Additionally, because investments with a deferred payment feature may have the effect of
deferring a portion of the borrower’s payment obligation until maturity of the debt investment, it may be difficult for us to identify and address developing
problems with borrowers in terms of their ability to repay us. Any such developments may increase the risk of default on our debt investments by borrowers.
In addition, debt investments providing for ETPs are subject to the risks associated with debt investments having original issue discount (such as debt
instruments with payment-in-kind interest or, in certain cases, increasing interest rates or issued with warrants). See “—We may have difficulty paying our
required distributions if we recognize taxable income before or without receiving cash.”
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The borrowing needs of our portfolio companies are unpredictable, especially during a challenging economic environment. We may not be able to meet
our unfunded commitments to extend credit, which could have a material adverse effect on our reputation in the market and our ability to generate
incremental lending activity and may subject us to lender liability claims.
A commitment to extend credit is an agreement to lend funds to our portfolio companies as long as there is no violation of any condition established
under the agreement. Because of the credit profile of our portfolio companies, we typically have a substantial amount of total unfunded credit commitments,
which amount is not reflected on our balance sheet. The actual borrowing needs of our portfolio companies may exceed our expected funding requirements,
especially during a challenging economic environment when our portfolio companies may be more dependent on our credit commitments due to the lack of
available credit elsewhere, an increasing cost of credit or the limited availability of equity financing from venture capital firms or otherwise. In addition,
limited partner investors of some of our portfolio companies may fail to meet their underlying investment commitments due to liquidity or other financing
issues, which may increase our portfolio companies’ borrowing needs. Any failure to meet our unfunded credit commitments in accordance with the actual
borrowing needs of our portfolio companies may have a material adverse effect on our reputation in the market and our ability to generate incremental
lending activity and may subject us to lender liability claims.
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our
current business strategy.
As a BDC, we are prohibited from acquiring any assets other than qualifying assets (as defined under the 1940 Act) unless, at the time of and after
giving effect to such acquisition, at least 70% of our total assets are qualifying assets. Subject to certain exceptions for follow-on investments and distressed
companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as a qualifying asset only if such
issuer has a market capitalization that is less than $250 million at the time of such investment and meets the other specified requirements. As of December 31,
2017 and 2016, 100% of our assets were qualifying assets. We may decide to make other investments that are not qualifying assets to the extent permitted by
the 1940 Act.
If we acquire debt or equity securities from an issuer that has outstanding marginable securities at the time we make an investment, these acquired assets
may not be treated as qualifying assets. This result is dictated by the definition of “eligible portfolio company” under the 1940 Act, which in part looks to
whether a company has outstanding marginable securities. See Item 1 above, “Regulation — Qualifying assets.”
If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a BDC. If we do not maintain our status as a BDC,
we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment company, we
would be subject to substantially more regulatory restrictions under the 1940 Act, which would significantly decrease our operating flexibility.
New or modified laws or regulations governing our operations may adversely affect our business.
We and our portfolio companies are subject to regulation at the U.S. local, state and federal level. We are also subject to federal, state and local laws and
are subject to judicial and administrative decisions that affect our operations, including maximum interest rates, fees and other charges, disclosures to
portfolio companies, the terms of secured transactions, collection and foreclosure proceedings and other trade practices. If these laws, regulations or decisions
change, or if we expand our business into additional jurisdictions, we may have to incur significant expenses in order to comply or we might have to restrict
our operations. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of
investments we or our portfolio companies are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect. In
particular, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and any amendments thereto that may be
enacted, on us and our portfolio companies is subject to continuing uncertainty. The Dodd-Frank Act, including future rules implementing its provisions and
the interpretation of those rules, along with other legislative and regulatory proposals directed at the financial services industry or affecting taxation that are
proposed or pending in the U.S. Congress, may negatively impact the operations, cash flows or financial condition of us or our portfolio companies, impose
additional costs on us or our portfolio companies, intensify the regulatory supervision of us or our portfolio companies or otherwise adversely affect our
business or the business of our portfolio companies. President Trump and certain members of Congress have indicated they will seek to amend or repeal
portion of the Dodd-Frank Act, among other federal laws. We cannot predict the ultimate effect on us or our portfolio companies that changes in the laws and
regulations would have as a result of the Dodd-Frank Act, or whether and the extent to which the Dodd-Frank Act may remain in its current form. In addition,
uncertainty regarding legislation and regulations affecting the financial services industry or taxation could also adversely impact our business or the business
of our portfolio companies. If we do not comply with applicable laws and regulations, we could lose any licenses that we then hold for the conduct of our
business and may be subject to civil fines and criminal penalties.
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Additionally, changes to or repeal of the laws and regulations governing our operations related to permitted investments may cause us to alter our
investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to our strategies and plans
and may shift our investment focus from the areas of expertise of our Advisor to other types of investments in which our Advisor may have little or no
expertise or experience. Any such changes, if they occur could have a material adverse effect on our results of operations and the value of your investment.
Our Advisor has significant potential conflicts of interest with us and our stockholders.
As a result of our arrangements with our Advisor, there may be times when our Advisor has interests that differ from those of our stockholders, giving
rise to a potential conflict of interest. Our executive officers and directors, as well as the current and future executives and employees of our Advisor, serve or
may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do. Accordingly, they may have obligations
to investors in those entities, the fulfillment of which might not be in the best interests of our stockholders. In addition, obligations to these other entities may
cause our executive officers and directors and those of our Advisor to divert their time and attention away from us or otherwise cause them not to dedicate a
significant portion of their time to our businesses which could slow our rate of investment.
In addition, our Advisor manages other funds, and may manage additional funds in the future, that have investment objectives that are similar, in whole
or in part, to ours. Our Advisor may determine that an investment is appropriate for us and for one or more of those other funds. In such an event, depending
on the availability of the investment and other appropriate factors, our Advisor will endeavor to allocate investment opportunities in a fair and equitable
manner and act in accordance with its written allocation policy to address and, if necessary, resolve any conflict of interests. It is also possible that we may
not be given the opportunity to participate in these other investment opportunities.
We pay management and incentive fees to our Advisor and reimburse our Advisor for certain expenses it incurs. As a result, investors in our common
stock invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in a lower rate of return than an investor might achieve
through direct investments. Also, the incentive fee payable by us to our Advisor may create an incentive for our Advisor to pursue investments on our behalf
that are riskier or more speculative than would be the case in the absence of such compensation arrangements. In addition, if any of the other funds managed
by our Advisor have a different fee structure than we do, our Advisor may, in certain circumstances, have an incentive to devote more time and resources,
and/or recommend the allocation of investment opportunities, to such fund. For example, to the extent our Advisor’s incentive compensation is not subject to
a total return requirement with respect to another fund, it may have an incentive to devote time and resources to such fund.
We have entered into a license agreement with Horizon Technology Finance, LLC, pursuant to which it has agreed to grant us a non-exclusive, royalty-
free right and license to use the service mark “Horizon Technology Finance.” Under this agreement, we have a right to use the “Horizon Technology Finance”
service mark for so long as the Investment Management Agreement is in effect between us and our Advisor. In addition, we pay our Advisor, our allocable
portion of overhead and other expenses incurred by our Advisor in performing its obligations under the Administration Agreement, including rent, the fees
and expenses associated with performing compliance functions, and our allocable portion of the compensation of our Chief Financial Officer and Chief
Compliance Officer and their respective staffs. Any potential conflict of interest arising as a result of our arrangements with our Advisor could have a
material adverse effect on our business, results of operations and financial condition.
Our incentive fee may impact our Advisor’s structuring of our investments, including by causing our Advisor to pursue speculative investments.
The incentive fee payable by us to our Advisor may create an incentive for our Advisor to pursue investments on our behalf that are riskier or more
speculative than would be the case in the absence of such compensation arrangement. The incentive fee payable to our Advisor is calculated based on a
percentage of our return on invested capital. This may encourage our Advisor to use leverage to increase the return on our investments. Under certain
circumstances, the use of leverage may increase the likelihood of default, which would impair the value of our common stock. In addition, our Advisor
receives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of the incentive fee based on income, there is
no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, our Advisor may have an incentive to invest more capital in
investments that are likely to result in capital gains as compared to income-producing securities. Such a practice could result in our investing in more
speculative investments than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns. In
addition, the incentive fee may encourage our Advisor to pursue different types of investments or structure investments in ways that are more likely to result
in warrant gains or gains on equity investments, including upon exercise of equity participation rights, which are inconsistent with our investment strategy
and disciplined underwriting process.
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The incentive fee payable by us to our Advisor may also induce our Advisor to pursue investments on our behalf that have a deferred interest feature,
even if such deferred payments would not provide cash necessary to enable us to pay current distributions to our stockholders. Under these investments, we
would accrue interest over the life of the investment but would not receive the cash income from the investment until the end of the term. Our net investment
income used to calculate the income portion of our investment fee, however, includes accrued interest. Thus, a portion of this incentive fee would be based on
income that we have not yet received in cash. In addition, the “catch-up” portion of the incentive fee may encourage our Advisor to accelerate or defer
interest payable by portfolio companies from one calendar quarter to another, potentially resulting in fluctuations in the timing and amounts of distributions.
Our governing documents do not limit the number of debt investments we may make with deferred interest features or the proportion of our income we derive
from such debt investments.
Our ability to enter into transactions with our affiliates is restricted, which may limit the scope of investments available to us.
We are prohibited under the 1940 Act from participating in certain transactions with our affiliates without the prior approval of our independent
directors and, in some cases, of the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for
purposes of the 1940 Act, and we are generally prohibited from buying or selling any security from or to, or entering into certain “joint” transactions (which
could include investments in the same portfolio company) with, such affiliates, absent the prior approval of our independent directors or, in certain cases, the
SEC.
Our Advisor is considered to be our affiliate under the 1940 Act, as is any person that controls, or is under common control with us or our Advisor. We
are generally prohibited from buying or selling any security from or to, or entering into “joint” transactions with, such affiliates without prior approval of our
independent directors and, in some cases, exemptive relief from the SEC.
We may, however, invest alongside other clients of our Advisor in certain circumstances where doing so is consistent with applicable law, SEC staff
interpretations and/or exemptive relief issued by the SEC. For example, we may invest alongside such accounts consistent with guidance promulgated by the
staff of the SEC permitting us and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are
met, including that our Advisor, acting on our behalf and on behalf of other clients, negotiates no term other than price. We may also invest alongside our
Advisor’s other clients as otherwise permissible under regulatory guidance and applicable regulations. Such investments will be allocated in accordance with
our Advisor’s allocation policy, and this allocation policy is periodically approved by our Advisor and reviewed by our independent directors. We expect that
allocation determinations will be made similarly for other accounts sponsored or managed by our Advisor. If sufficient securities or loan amounts are
available to satisfy our and each such account’s proposed demand, we expect that the opportunity will be allocated in accordance with our Advisor’s pre-
transaction determination; however, if insufficient securities or loan amounts are available, the opportunity will generally be allocated pro rata based on each
affiliate’s available initial allocation in the asset class being allocated. We cannot assure you that investment opportunities will be allocated to us fairly or
equitably in the short-term or over time.
On November 27, 2017, we were granted exemptive relief from the SEC that permits greater flexibility to negotiate the terms of co-investments if our
Board determines in advance that it would be advantageous for us to co-invest with other accounts sponsored or managed by our Advisor in a manner
consistent with our investment objective, positions, policies, strategies and restrictions, as well as regulatory requirements and other relevant factors. We
cannot assure you, however, that we will develop opportunities that comply with such limitations.
In situations where co-investment with other accounts managed by our Advisor is not permitted or appropriate, our Advisor will need to decide which
client will proceed with the investment. Our Advisor’s allocation policy provides, in such circumstances, for investments to be allocated on a random or
rotational basis to assure that all clients have fair and equitable access to such investment opportunities over time. Moreover, except in certain circumstances,
we will be unable to invest in any issuer in which a fund managed by our Advisor has previously invested. Similar restrictions limit our ability to transact
business with our officers or directors or their affiliates. These restrictions may limit the scope of investment opportunities that would otherwise be available
to us.
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The valuation process for certain of our portfolio holdings creates a conflict of interest.
The majority of our portfolio investments are expected to be made in the form of securities that are not publicly traded. As a result, the Board will
determine the fair value of these securities in good faith as described above in “— Because many of our investments typically are not and will not be in
publicly traded securities, the value of our investments may not be readily determinable, which could adversely affect the determination of our NAV.” In
connection with that determination, investment professionals from the Advisor may provide the Board with portfolio company valuations based upon the
most recent portfolio company financial statements available and projected financial results of each portfolio company. The participation of the Advisor’s
investment professionals in our valuation process could result in a conflict of interest as the Advisor’s management fee is based, in part, on our gross assets
less cash and cash equivalents and our incentive fees will be based, in part, on unrealized appreciation and depreciation on our investments.
Our Advisor’s liability is limited, and we have agreed to indemnify our Advisor against certain liabilities, which may lead our Advisor to act in a riskier
manner on our behalf than it would when acting for its own account.
Under the Investment Management Agreement, our Advisor does not assume any responsibility to us other than to render the services called for under
that agreement, and it is not responsible for any action of our Board in following or declining to follow our Advisor’s advice or recommendations. Under the
terms of the Investment Management Agreement, our Advisor, its officers, members, personnel and any person controlling or controlled by our Advisor are
not liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in
accordance with and pursuant to the Investment Management Agreement, except those resulting from acts constituting gross negligence, willful misconduct,
bad faith or reckless disregard of our Advisor’s duties under the Investment Management Agreement. In addition, we have agreed to indemnify our Advisor
and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other
expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to
authority granted by the Investment Management Agreement, except where attributable to gross negligence, willful misconduct, bad faith or reckless
disregard of such person’s duties under the Investment Management Agreement. These protections may lead our Advisor to act in a riskier manner when
acting on our behalf than it would when acting for its own account.
If we are unable to manage our future growth effectively, we may be unable to achieve our investment objective, which could adversely affect our
business, results of operations and financial condition and cause the value of your investment in us to decline.
Our ability to achieve our investment objective depends on our ability to achieve and sustain growth, which depends, in turn, on our Advisor’s direct
origination capabilities and disciplined underwriting process in identifying, evaluating, financing, investing in and monitoring suitable companies that meet
our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our Advisor’s marketing capabilities, management of the
investment process, ability to provide efficient services and access to financing sources on acceptable terms. In addition to monitoring the performance of our
existing investments, our Advisor may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time may
distract them or slow the rate of investment. If we fail to manage our future growth effectively, our business, results of operations and financial condition
could be materially adversely affected and the value of your investment in us could decrease.
Our Board may change our operating policies and strategies, including our investment objective, without prior notice or stockholder approval, the effects
of which may adversely affect our business.
Our Board may modify or waive our current operating policies and strategies, including our investment objectives, without prior notice and without
stockholder approval (provided that no such modification or waiver may change the nature of our business so as to cease to be, or withdraw our election as a
BDC as provided by the 1940 Act without stockholder approval at a special meeting called upon written notice of not less than ten or more than sixty days
before the date of such meeting). We cannot predict the effect any changes to our current operating policies and strategies would have on our business, results
of operations or financial condition or on the value of our stock. However, the effects of any changes might adversely affect our business, any or all of which
could negatively impact our ability to pay distributions or cause you to lose all or part of your investment in us.
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Our quarterly and annual operating results may fluctuate due to the nature of our business.
We could experience fluctuations in our quarterly and annual operating results due to a number of factors, some of which are beyond our control,
including: our ability to make investments in companies that meet our investment criteria, the interest rate payable on our debt investments, the default rate on
these investments, the level of our expenses, variations in, and the timing of, the recognition of realized and unrealized gains or losses, the degree to which we
encounter competition in our markets and general economic conditions. For example, we have historically experienced greater investment activity during the
second and fourth quarters relative to other periods. As a result of these factors, you should not rely on the results for any prior period as being indicative of
our performance in future periods.
Our business plan and growth strategy depend to a significant extent upon our Advisor’s referral relationships. If our Advisor is unable to develop new or
maintain existing relationships, or if these relationships fail to generate investment opportunities, our business could be materially adversely affected.
We have historically depended on our Advisor’s referral relationships to generate investment opportunities. For us to achieve our future business
objectives, members of our Advisor need to maintain these relationships with venture capital and private equity firms and management teams and legal firms,
accounting firms, investment banks and other lenders, and we rely to a significant extent upon these relationships to provide us with investment opportunities.
If they fail to maintain their existing relationships or develop new relationships with other firms or sources of investment opportunities, we may not be able to
grow our investment portfolio. In addition, persons with whom our Advisor has relationships are not obligated to provide us with investment opportunities,
and, therefore, there is no assurance that such relationships will lead to the origination of debt or other investments.
Our Advisor can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our
operations that could adversely affect our business, results of operations or financial condition.
Under our Investment Management Agreement and our Administration Agreement, our Advisor has the right to resign at any time, upon not more than
60 days’ written notice, whether we have found a replacement or not. If our Advisor resigns, we may not be able to find a new investment adviser or
administrator or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or
at all. If we are unable to do so, our operations are likely to be disrupted, our business, results of operations and financial condition and our ability to pay
distributions may be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and
investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise
possessed by our Advisor and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of new
management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business,
results of operations or financial condition.
We incur significant costs as a result of being a publicly traded company.
As a publicly traded company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements
applicable to a company whose securities are registered under the Exchange Act as well as additional corporate governance requirements, including
requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC.
Compliance with Section 404 of the Sarbanes-Oxley Act involves significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley
Act would adversely affect us and the market price of our common stock.
Under current SEC rules, we are required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act
and related rules and regulations of the SEC. As a result, we incur additional expenses that negatively impact our financial performance and our ability to
make distributions. This process also results in a diversion of management’s time and attention. We cannot be certain as to the timing of completion of our
annual re-evaluation, testing and remediation actions or the impact of the same on our operations, and we cannot assure you that our internal control over
financial reporting is or will be effective. In the event that we are unable to maintain compliance with Section 404 of the Sarbanes-Oxley Act and related
rules, we and the market price of our securities may be adversely affected.
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We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the
market price of our common stock and our ability to pay distributions.
Our business is highly dependent on the Advisor and its affiliates’ communications and information systems. Any failure or interruption of those
systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities.
Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a
result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:
• sudden electrical or telecommunications outages;
• natural disasters such as earthquakes, floods, tornadoes and hurricanes;
• disease pandemics; and
• events arising from local or larger scale political or social matters, including terrorist acts.
Any of these events, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our
ability to pay distributions to our stockholders.
In addition, these communications and information systems are subject to potential attacks, including through adverse events that threaten the
confidentiality, integrity or availability of our information resources. These attacks, which may include cyber incidents, may involve a third party gaining
unauthorized access to our communications or information systems for purposes of misappropriating assets, stealing confidential information, corrupting data
or causing operational disruption. Any such attack could result in disruption to our business, misstated or unreliable financial data, liability for stolen assets
or information, increased cybersecurity protection and insurance costs, litigation and damage to our business relationships, any of which could have a material
adverse effect on our business, financial condition and results of operations.
Risks related to our investments
Our stockholders are not able to evaluate our future investments.
Our future investments will be selected by our Advisor, subject to the approval of its investment committee. Our stockholders do not have input into our
Advisor’s investment decisions. As a result, our stockholders are unable to evaluate any of our future portfolio company investments. These factors increase
the uncertainty, and thus the risk, of investing in our securities.
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we generally are not limited with respect to the
proportion of our assets that may be invested in securities of a single issuer.
We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act
with respect to the proportion of our assets that we may invest in securities of a single issuer, excluding limitations on stake holdings in investment
companies. Beyond our income tax diversification requirements, we do not have fixed guidelines for diversification, and our investments could be focused on
relatively few portfolio companies.
To the extent that we assume large positions in the securities of a small number of issuers, our NAV may fluctuate to a greater extent than that of a
diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. If a significant investment in one or
more portfolio companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more
significant than if we had made smaller investments in more portfolio companies. We may also be more susceptible to any single economic or regulatory
occurrence than a diversified investment company.
Our portfolio may be focused on a limited number of industries, which will subject us to a risk of significant loss if there is a downturn in a particular
industry.
Our portfolio may be focused on a limited number of industries. As a result, a downturn in any particular industry in which we are invested could also
significantly impact the aggregate returns we realize. Our Target Industries are susceptible to changes in government policy and economic assistance, which
could adversely affect the returns we receive.
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If our investments do not meet our performance expectations, you may not receive distributions.
We intend to make distributions of income on a monthly basis to our stockholders. We may not be able to achieve operating results that will allow us to
make distributions at a specific level or increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us
as a BDC, we may be limited in our ability to make distributions. Also, restrictions and provisions in any existing or future credit facilities may limit our
ability to make distributions. If we do not distribute a certain percentage of our income each tax year as dividends to stockholders, we will suffer adverse tax
consequences, including the possible loss of our ability to be subject to tax as a RIC.
Most of our portfolio companies will need additional capital, which may not be readily available.
Our portfolio companies typically require substantial additional financing to satisfy their continuing working capital and other capital requirements and
service the interest and principal payments on our investments. We cannot predict the circumstances or market conditions under which our portfolio
companies will seek additional capital. Each round of institutional equity financing is typically intended to provide a company with only enough capital to
reach the next stage of development. It is possible that one or more of our portfolio companies will not be able to raise additional financing or may be able to
do so only at a price or on terms that are unfavorable to the portfolio company, either of which would negatively impact our investment returns. Some of these
companies may be unable to obtain sufficient financing from private investors, public capital markets or lenders, thereby requiring these companies to cease
or curtail business operations. Accordingly, investing in these types of companies generally entails a higher risk of loss than investing in companies that do
not have significant incremental capital raising requirements.
Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.
Following an initial investment in a portfolio company, we may have opportunities to make additional investments in that portfolio company as “follow-
on” investments, in seeking to:
• increase or maintain in whole or in part our position as a creditor or equity ownership percentage in a portfolio company;
• exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or
• preserve or enhance the value of our investment.
We have discretion to make follow-on investments, subject to the availability of capital resources. Failure on our part to make follow-on investments
may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us
to increase our participation in a successful portfolio company. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to
make a follow-on investment because we may not want to increase our level of risk, because we prefer other opportunities or because of regulatory or other
considerations. Our ability to make follow-on investments may also be limited by our Advisors’ allocation policy.
Economic recessions or downturns could adversely affect our business and that of our portfolio companies which may have an adverse effect on our
business, results of operations and financial condition.
General economic conditions may affect our activities and the operation and value of our portfolio companies. Economic slowdowns or recessions may
result in a decrease of institutional equity investment, which would limit our lending opportunities. Furthermore, many of our portfolio companies are
susceptible to economic or industry centric slowdowns or recessions and may be unable to repay our debt investments during these periods. Therefore, our
non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions may also
decrease the value of collateral securing some of our debt investments and the value of our equity investments. Economic slowdowns or recessions could lead
to financial losses in our portfolio and a material decrease in revenues, net income and assets. Unfavorable economic conditions could also increase our
funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us.
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A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially,
termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio
company’s ability to meet its obligations under the loans that we hold. We may incur expenses to the extent necessary to recover our investment upon default
or to negotiate new terms with a defaulting portfolio company. These events could harm our financial condition and operating results.
From late 2007 until early 2009, global credit and other financial markets suffered substantial stress and disruption, significantly diminishing overall
confidence in the debt and equity markets. While financial conditions have since recovered, any new period of market disruption may have a material adverse
effect on our business, financial condition, results of operations and cash flows. In addition, unfavorable economic conditions, including rising interest rates,
may also increase our funding costs, limit our access to capital markets or negatively impact our ability to obtain financing, particularly from the debt
markets.
Our investment strategy focuses on investments in development-stage companies in our Target Industries, which are subject to many risks, including
volatility, intense competition, shortened product life cycles and periodic downturns, and would be rated below “investment grade.”
We intend to invest, under normal circumstances, most of the value of our total assets (including the amount of any borrowings for investment purposes)
in development-stage companies, which may have relatively limited operating histories, in our Target Industries. Many of these companies may have narrow
product lines and small market shares, compared to larger established, publicly owned firms, which tend to render them more vulnerable to competitors’
actions and market conditions, as well as general economic downturns. The revenues, income (or losses) and valuations of development-stage companies in
our Target Industries can and often do fluctuate suddenly and dramatically. For these reasons, investments in our portfolio companies, if rated by one or more
ratings agency, would typically be rated below “investment grade,” which refers to securities rated by ratings agencies below the four highest rating
categories. These companies may also have more limited access to capital and higher funding costs. In addition, development-stage technology markets are
generally characterized by abrupt business cycles and intense competition, and the competitive environment can change abruptly due to rapidly evolving
technology. Therefore, our portfolio companies may face considerably more risk than companies in other industry sectors. Accordingly, these factors could
impair their cash flow or result in other events, such as bankruptcy, which could limit their ability to repay their obligations to us and may materially
adversely affect the return on, or the recovery of, our investments in these businesses.
Because of rapid technological change, the average selling prices of products and some services provided by development-stage companies in our Target
Industries have historically decreased over their productive lives. These decreases could adversely affect their operating results and cash flow, their ability to
meet obligations under their debt securities and the value of their equity securities. This could, in turn, materially adversely affect our business, financial
condition and results of operations.
Any unrealized depreciation we experience on our debt investments may be an indication of future realized losses, which could reduce our income
available for distribution.
As a BDC, we are required to carry our investments at fair value, which is the market value of our investments or, if no market value is ascertainable, at
the fair value as determined in good faith pursuant to procedures approved by our Board in accordance with our valuation policy. We are not permitted to
maintain a reserve for debt investment losses. Decreases in the fair values of our investments, which can occur rapidly based upon developments affecting our
portfolio companies, are recorded as unrealized depreciation. Any unrealized depreciation in our debt investments could be an indication of a portfolio
company’s inability to meet its repayment obligations to us with respect to the affected debt investments. This could result in realized losses in the future and
ultimately reduces our income available for distribution in future periods.
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If the assets securing the debt investments we make decrease in value, we may not have sufficient collateral to cover losses and may experience losses
upon foreclosure.
We believe our portfolio companies generally are and will be able to repay our debt investments from their available capital, from future capital-raising
transactions or from cash flow from operations. However, to mitigate our credit risks, we typically take a security interest in all or a portion of the assets of
our portfolio companies. There is a risk that the collateral securing our debt investments may decrease in value over time, may be difficult to appraise or sell
in a timely manner and may fluctuate in value based upon the business and market conditions, including as a result of an inability of the portfolio company to
raise additional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration of a portfolio
company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration of the value of the
collateral for the debt investment. Consequently, although such debt investment is secured, we may not receive principal and interest payments according to
the debt investment’s terms and the value of the collateral may not be sufficient to recover our investment should we be forced to enforce our remedies.
In addition, because we invest in development-stage companies in our Target Industries, a substantial portion of the assets securing our investment may
be in the form of intellectual property, if any, inventory, equipment, cash and accounts receivables. Intellectual property, if any, which secures a debt
investment could lose value if the company’s rights to the intellectual property are challenged or if the company’s license to the intellectual property is
revoked or expires. In addition, in lieu of a security interest in a portfolio company’s intellectual property we may sometimes obtain a security interest in all
assets of the portfolio company other than intellectual property and also obtain a commitment by the portfolio company not to grant liens to any other creditor
on the company’s intellectual property. In these cases, we may have additional difficulty recovering our principal in the event of a foreclosure. Similarly, any
equipment securing our debt investments may not provide us with the anticipated security if there are changes in technology or advances in new equipment
that render the particular equipment obsolete or of limited value or if the company fails to adequately maintain or repair the equipment. Any one or more of
the preceding factors could materially impair our ability to recover principal in a foreclosure, which may adversely affect our ability to pay distributions in the
future.
We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of our
investment in these companies.
We structure the debt investments in our portfolio companies to include business and financial covenants placing affirmative and negative obligations on
the operation of such companies’ business and financial condition. However, from time to time we may elect to waive breaches of these covenants, including
our right to payment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure on collateral, depending upon the financial
condition and prospects of the particular portfolio company. These actions may reduce the likelihood of our receiving the full amount of future payments of
interest or principal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may have limited financial
resources, may be unable to meet future obligations and may go bankrupt. These events could harm our financial condition and operating results.
The lack of liquidity in our investments may adversely affect our business, and if we need to sell any of our investments, we may not be able to do so at a
favorable price. As a result, we may suffer losses.
We plan to generally invest in debt investments with terms of up to four years and hold such investments until maturity, unless earlier prepaid, and we
do not expect that our related holdings of equity securities will provide us with liquidity opportunities in the near-term. We expect to primarily invest in
companies whose securities are not publicly-traded, and whose securities are subject to legal and other restrictions on resale or are otherwise less liquid than
publicly traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. We may also face other
restrictions on our ability to liquidate an investment in a public portfolio company to the extent that we possess material non-public information regarding the
portfolio company. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at
which we had previously recorded these investments. As a result, we do not expect to dispose of our investments in the near term. However, we may be
required to do so in order to maintain our qualification as a BDC and as a RIC if we do not satisfy one or more of the applicable criteria under the respective
regulatory frameworks. Because most of our investments are illiquid, we may be unable to dispose of them, in which case we could fail to qualify as a RIC
and/or BDC, or we may not be able to dispose of them at favorable prices, and as a result, we may suffer losses.
The disposition of our debt investments may result in contingent liabilities.
In connection with the disposition of a debt investment, we may be required to make representations about the business and financial affairs of the
portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such debt
investment to the extent that any such representations turn out to be inaccurate or with respect to potential liabilities. These arrangements may result in
contingent liabilities that ultimately result in funding obligations that we must satisfy through our return of distributions previously made to us.
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Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We plan to invest primarily in debt investments issued by our portfolio companies. Some of our portfolio companies are permitted to have other debt
that ranks equally with, or senior to, our debt investments in the portfolio company. By their terms, these debt instruments may provide that the holders
thereof are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of our debt
investments. These debt instruments may prohibit the portfolio companies from paying interest on or repaying our investments in the event of, and during, the
continuance of a default under the debt instruments. In addition, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a
portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in
full before we receive any payment in respect of our investment. After repaying senior creditors, a portfolio company may not have any remaining assets to
use for repaying its obligation to us. In the case of debt ranking equally with our debt investments, we would have to share on a pro rata basis any
distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy.
There may be circumstances where our debt investments could be subordinated to claims of other creditors, or we could be subject to lender liability
claims.
Even though certain of our investments are structured as senior debt investments, if one of our portfolio companies were to go bankrupt, depending on
the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might
recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors or an out-of-court restructuring might enable other
lenders to become effectively senior to our claims. We may also be subject to lender liability claims for actions taken by us with respect to a portfolio
company’s business, including in rendering significant managerial assistance, or instances where we exercise control over the portfolio company.
An investment strategy that primarily includes investments in privately held companies presents certain challenges, including a lack of available
information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to
economic downturns.
We currently invest, and plan to invest, in privately held companies. Generally, very little public information exists about these companies, and we are
required to rely on the ability of our Advisor to obtain adequate information to evaluate the potential returns from investing in these companies. If we are
unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our
investments. Also, privately held companies frequently have less diverse product lines and a smaller market presence than larger competitors. Thus, they are
generally more vulnerable to economic downturns and may experience substantial variations in operating results. These factors could affect our investment
returns.
In addition, our success depends, in large part, upon the abilities of the key management personnel of our portfolio companies, who are responsible for
the day-to-day operations of our portfolio companies. Competition for qualified personnel is intense at any stage of a company’s development. The loss of one
or more key managers can hinder or delay a company’s implementation of its business plan and harm its financial condition. Our portfolio companies may not
be able to attract and retain qualified managers and personnel. Any inability to do so may negatively affect our investment returns.
Our Advisor may, from time to time, possess material non-public information regarding our portfolio companies, limiting our investment discretion.
Officers and employees of our Advisor may serve as directors of, or in a similar capacity with, our portfolio companies, the securities of which are
purchased or sold on our behalf. If we obtain material non-public information with respect to such portfolio companies, or we become subject to trading
restrictions under the internal trading policies of those portfolio companies or as a result of applicable law or regulations, we could be prohibited for a period
of time from purchasing or disposing of the securities of such portfolio companies, and this prohibition may have an adverse effect on us.
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We may hold the debt securities of leveraged companies that may, due to the significant volatility of such companies, experience bankruptcy or similar
financial distress.
Leveraged companies may experience bankruptcy, receivership or similar financial distress. The debt investments of distressed companies may not
produce income, may require us to bear certain expenses or to make additional advances in order to protect our investment and may subject us to uncertainty
as to when, in what manner (e.g., through liquidation, reorganization, receivership or bankruptcy) and for what value such distressed debt will eventually be
satisfied. Proceeds received from such proceedings may not be income that satisfies the Qualifying Income Test for RICs and may not be in an amount
sufficient to repay such expenses or advances. In the event that a plan of reorganization is adopted or a receivership is established, in exchange for the debt
investment we currently hold, we may receive non-cash proceeds, including equity securities or license or royalty agreements with contingent payments,
which may require significantly more of our management’s time and attention.
If a portfolio company enters a bankruptcy process, we will be subject to a number of significant inherent risks. Many events in a bankruptcy proceeding
are the product of contested matters and adversarial proceedings and are beyond the control of the creditors. A bankruptcy filing by an issuer may adversely
and permanently affect the issuer. If the proceeding is converted to a liquidation, the value of the issuer may not equal the liquidation value that was believed
to exist at the time of the investment. The duration of a bankruptcy proceeding is also difficult to predict, and a creditor’s return on investment can be
adversely affected by delays until the plan of reorganization or liquidation ultimately becomes effective. The administrative costs of a bankruptcy proceeding
are frequently high and would be paid out of the debtor’s estate prior to any return to creditors. Because the standards for classification of claims under
bankruptcy law are vague, our influence with respect to the class of securities or other obligations we own may be lost by increases in the number and amount
of claims in the same class or by different classification and treatment. In the early stages of the bankruptcy process, it is often difficult to estimate the extent
of, or even to identify, any contingent claims that might be made. In addition, certain claims that have priority by law (for example, claims for taxes) may be
substantial.
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. For example, most of our debt
investments have historically been repaid prior to maturity by our portfolio companies. At the time of a liquidity event, such as a sale of the business,
refinancing or public offering, many of our portfolio companies have availed themselves of the opportunity to repay our debt investments prior to maturity.
Our investments generally allow for repayment at any time subject to certain penalties. When this occurs, we generally reinvest these proceeds in temporary
investments, pending their future investment in new portfolio companies. These temporary investments have substantially lower yields than the debt being
prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower
yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies
elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market
price of our common stock.
Our business and growth strategy could be adversely affected if government regulations, priorities and resources impacting the industries in which our
portfolio companies operate change.
Some of our portfolio companies operate in industries that are highly regulated by federal, state and/or local agencies. Changes in existing laws, rules or
regulations, or judicial or administrative interpretations thereof, or uncertainty regarding such changes or new laws, rules or regulations could have an adverse
impact on the business and industries of our portfolio companies. In addition, changes in government priorities or limitations on government resources could
also adversely impact our portfolio companies. We are unable to predict whether any such changes in laws, rules or regulations will occur and, if they do
occur, the impact of these changes on our portfolio companies and our investment returns.
Our portfolio companies operating in the technology industry are subject to risks particular to that industry.
As part of our investment strategy, we have invested, and plan to invest in the future, in companies in the technology industry. Such portfolio companies
face intense competition as their businesses are rapidly evolving and intensely competitive, and are subject to changing technology, shifting user needs, and
frequent introductions of new products and services. The growth of certain technology sectors in which we focus (such as communications, networking, data
storage, software, cloud computing, and internet and media) into a variety of new fields implicates new regulatory issues and may result in our portfolio
companies in such sectors being subject to new regulations.
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Portfolio companies in the technology industry may also have a limited number of suppliers of necessary components or a limited number of
manufacturers for their products, and therefore face a risk of disruption to their manufacturing process if they are unable to find alternative suppliers when
needed. In addition, litigation regarding intellectual property rights is common in the sectors of the technology industry in which we focus. See “–If our
portfolio companies are unable to protect their intellectual property rights, our business and prospects could be harmed, and if portfolio companies are
required to devote significant resources to protecting their intellectual property rights, the value of our investment could be reduced.” Any of these factors
could materially and adversely affect the operations of a portfolio company in this industry and, in turn, impair our ability to timely collect principal and
interest payments owed to us.
Our portfolio companies operating in the life science industry are subject to extensive government regulation and certain other risks particular to that
industry.
As part of our investment strategy, we have invested, and plan to invest in the future, in companies in the life science industry.
Such portfolio companies are subject to extensive regulation by the Food and Drug Administration and to a lesser extent, other federal and state
agencies. If any of these portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could
materially and adversely affect their operations. In addition, new laws, regulations or judicial interpretations of existing laws and regulations might adversely
affect a portfolio company in this industry.
The successful and timely implementation of the business model of life science companies depends on their ability to adapt to changing technologies
and introduce new products. The success of new product offerings will depend, in turn, on many factors, including the ability to properly anticipate and
satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture products in an economic and timely manner, obtain or
maintain advantageous positions with respect to intellectual property, and differentiate products from those of competitors.
Further, the development of products (including medical devices or drugs) by life science companies requires significant research and development,
clinical trials and regulatory approvals. The results of product development efforts may be affected by a number of factors, including the ability to innovate,
develop and manufacture new products, complete clinical trials, obtain regulatory approvals and reimbursement by insurers in the United States (including
Medicare and Medicaid) and abroad, or gain and maintain market approval of products. In addition, patents attained by others can preclude or delay the
commercialization of a product. There can be no assurance that any products now in development will achieve technological feasibility, obtain regulatory
approval, or gain market acceptance. Failure can occur at any point in the development process, including after significant funds have been invested. Products
may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, failure to achieve positive clinical
outcomes, inability to obtain necessary regulatory approvals, failure to achieve market adoption, limited scope of approved uses, excessive costs to
manufacture, failure to establish or maintain intellectual property rights, infringement by others of a company’s intellectual property rights, or infringement by
a company of intellectual property rights of others.
Portfolio companies in the life science industry may also have a limited number of suppliers of necessary components or a limited number of
manufacturers for their products, and therefore face a risk of disruption to their manufacturing process if they are unable to find alternative suppliers when
needed. Any of these factors could materially and adversely affect the operations of a portfolio company in this industry and, in turn, impair our ability to
timely collect principal and interest payments owed to us.
Our portfolio companies operating in the healthcare information and services industry are subject to extensive government regulation and certain other
risks particular to that industry.
As part of our investment strategy, we have invested, and plan to invest in the future, in companies in the healthcare information and services industry.
Such portfolio companies provide technology to companies that are subject to extensive regulation, including Medicare and Medicaid payment rules and
regulation, the False Claims Act and federal and state laws regarding the collection, use and disclosure of patient health information and the storage, handling
and administration of pharmaceuticals. If any of our portfolio companies or the companies to which they provide such technology fail to comply with
applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect their operations. Portfolio
companies in the healthcare information or services industry are also subject to the risk that changes in applicable regulations will render their technology
obsolete or less desirable in the marketplace.
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Portfolio companies in the healthcare information and services industry may also have a limited number of suppliers of necessary components or a
limited number of manufacturers for their products, and therefore face a risk of disruption to their manufacturing process if they are unable to find alternative
suppliers when needed. Any of these factors could materially and adversely affect the operations of a portfolio company in this industry and, in turn, impair
our ability to timely collect principal and interest payments owed to us.
Our investments in the clean technology industry are subject to many risks, including volatility, intense competition, unproven technologies, periodic
downturns and potential litigation.
Our investments in clean technology, or cleantech, companies are subject to substantial operational risks, such as underestimated cost projections,
unanticipated operation and maintenance expenses, loss of government subsidies, and inability to deliver cost-effective alternative energy solutions compared
to traditional energy products. In addition, energy companies employ a variety of means of increasing cash flow, including increasing utilization of existing
facilities, expanding operations through new construction or acquisitions, or securing additional long-term contracts. Thus, some energy companies may be
subject to construction risk, acquisition risk or other risks arising from their specific business strategies. Furthermore, production levels for solar, wind and
other renewable energies may be dependent upon adequate sunlight, wind, or biogas production, which can vary from market to market and period to period,
resulting in volatility in production levels and profitability. In addition, our cleantech companies may have narrow product lines and small market shares,
which tend to render them more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns. The revenues, income
(or losses) and valuations of clean technology companies can and often do fluctuate suddenly and dramatically and the markets in which clean technology
companies operate are generally characterized by abrupt business cycles and intense competition. Demand for cleantech and renewable energy is also
influenced by the available supply and prices for other energy products, such as coal, oil and natural gas. A decrease in prices in these energy products could
reduce demand for alternative energy. Cleantech companies face potential litigation, including significant warranty and product liability claims, as well as
class action and government claims. Such litigation could adversely affect the business and results of operations of our cleantech portfolio companies.
Cleantech companies are subject to extensive government regulation and certain other risks particular to the sectors in which they operate and our
business and growth strategy could be adversely affected if government regulations, priorities and resources impacting such sectors change or if our
portfolio companies fail to comply with such regulations.
As part of our investment strategy we invest in portfolio companies in cleantech sectors that may be subject to extensive regulation by foreign, U.S.
federal, state and/or local agencies. Changes in existing laws, rules or regulations, or judicial or administrative interpretations thereof, uncertainty regarding
such changes or new laws, rules or regulations could have an adverse impact on the business and industries of our portfolio companies. In addition, changes
in government priorities or limitations on government resources could also adversely impact our portfolio companies. We are unable to predict whether any
such changes in laws, rules or regulations will occur and, if they do occur, the impact of these changes on our portfolio companies and our investment returns.
Furthermore, if any of our portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could
materially and adversely affect their operations. Our portfolio companies may be subject to the expense, delay and uncertainty of the regulatory approval
process for their products and, even if approved, these products may not be accepted in the marketplace.
In particular, there is considerable uncertainty about whether foreign, U.S., state and/or local governmental entities will enact or maintain legislation or
regulatory programs that mandate reductions in greenhouse gas emissions or provide incentives for cleantech companies. Without such regulatory policies,
investments in cleantech companies may not be economical and financing for cleantech companies may become unavailable, which could materially
adversely affect the ability of our portfolio companies to repay the debt they owe to us. Any of these factors could materially and adversely affect the
operations and financial condition of a portfolio company and, in turn, the ability of the portfolio company to repay the debt they owe to us.
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If our portfolio companies are unable to commercialize their technologies, products, business concepts or services, the returns on our investments could
be adversely affected.
The value of our investments in our portfolio companies may decline if our portfolio companies are not able to commercialize their technology,
products, business concepts or services. Additionally, although some of our portfolio companies may already have a commercially successful product or
product line at the time of our investment, technology-related products and services often have a more limited market or life span than products in other
industries. Thus, the ultimate success of these companies often depends on their ability to innovate continually in increasingly competitive markets. If they are
unable to do so, our investment returns could be adversely affected and their ability to service their debt obligations to us over the life of a loan could be
impaired. Our portfolio companies may be unable to acquire or develop successful new technologies and the intellectual property they currently hold may not
remain viable. Even if our portfolio companies are able to develop commercially viable products, the market for new products and services is highly
competitive and rapidly changing. Neither our portfolio companies nor we have any control over the pace of technology development. Commercial success is
difficult to predict, and the marketing efforts of our portfolio companies may not be successful.
Our portfolio companies may rely upon licenses for all or part of their intellectual property.
A portfolio company may license all or part of its intellectual property from another unrelated party. While the portfolio company may continue
development on that licensed intellectual property, it can be difficult to ascertain who has title to the intellectual property. We may also rely upon the portfolio
company’s management team’s representations as to the nature of the licensing agreement. There are implications in workouts and in bankruptcy where
intellectual property is not wholly owned by a portfolio company. Further, the licensor may have an actual or contingent claim on the intellectual property (for
instance, a payment due upon change in control) that would supersede other claims in that asset in certain situations.
If our portfolio companies are unable to protect their intellectual property rights, our business and prospects could be harmed, and if portfolio companies
are required to devote significant resources to protecting their intellectual property rights, the value of our investment could be reduced.
Our future success and competitive position depends in part upon the ability of our portfolio companies to obtain, maintain and protect proprietary
technology used in their products and services. The intellectual property held by our portfolio companies often represents a substantial portion of the
collateral securing our investments and/or constitutes a significant portion of the portfolio companies’ value that may be available in a downside scenario to
repay our debt investments. Our portfolio companies rely, in part, on patent, trade secret and trademark law to protect that technology, but competitors may
misappropriate their intellectual property, and disputes as to ownership of intellectual property may arise. Portfolio companies may, from time to time, be
required to institute litigation to enforce their patents, copyrights or other intellectual property rights, protect their trade secrets, determine the validity and
scope of the proprietary rights of others or defend against claims of infringement.
Such litigation could result in substantial costs and diversion of resources. Similarly, if a portfolio company is found to infringe or misappropriate a third
party’s patent or other proprietary rights, it could be required to pay damages to the third party, alter its products or processes, obtain a license from the third
party and/or cease activities utilizing the proprietary rights, including making or selling products utilizing the proprietary rights. Any of the foregoing events
could negatively affect both the portfolio company’s ability to service our debt investment and the value of any related debt and equity securities that we own,
as well as the value of any collateral securing our investment.
In some cases, we collateralize our debt investments with a secured collateral position in a portfolio company's assets, which may include a negative
pledge or, to a lesser extent, no security interest on their intellectual property. In the event of a default on a debt investment, the intellectual property of the
portfolio company would most likely be liquidated to provide proceeds to pay the creditors of the portfolio company. There can be no assurance that our
security interest, if any, in the proceeds of the intellectual property will be enforceable in a court of law or bankruptcy court or that there will not be others
with senior or pari passu credit interests.
We do not expect to control any of our portfolio companies.
We do not control, or expect to control in the future, any of our portfolio companies, even though our debt agreements may contain certain restrictive
covenants that limit the business and operations of our portfolio companies. We also do not maintain, or intend to maintain in the future, a control position to
the extent we own equity interests in any portfolio company. As a result, we are subject to the risk that a portfolio company in which we invest may make
business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or
otherwise act in ways that do not serve our interests as debt investors. Due to the lack of liquidity of the investments that we typically hold in our portfolio
companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company and we may therefore, suffer a
decrease in the value of our investments.
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We may invest in foreign portfolio companies or secure our investments with the assets of our portfolio companies’ foreign subsidiaries.
We may invest in securities of foreign companies. Additionally, certain debt investments consisting of secured loans to portfolio companies with
headquarters and primary operations located within the United States may be secured by the assets of a portfolio company’s foreign subsidiary. Investments
involving foreign companies may involve greater risks. These risks include: (i) less publicly available information; (ii) varying levels of governmental
regulation and supervision; and (iii) the difficulty of enforcing legal rights in a foreign jurisdiction and uncertainties as to the status, interpretation and
application of laws. Moreover, foreign companies are generally not subject to uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States companies. Debt investments secured by the assets of a portfolio company’s foreign subsidiary
may be subject to various laws enacted in their home countries for the protection of debtors or creditors, which could adversely affect our ability to recover
amounts owed. These insolvency considerations will differ depending on the country in which each foreign subsidiary is located and may differ depending on
whether the foreign subsidiary is a non-sovereign or a sovereign entity. The economies of individual non-U.S. countries may also differ from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation, volatility of currency exchange rates, depreciation, capital reinvestment,
resources self-sufficiency and balance of payments position. Accordingly, debt investments secured by the assets of a portfolio company’s foreign subsidiary
could face risks which would not pertain to debt investments solely in U.S. portfolio companies.
We may not realize expected returns on warrants received in connection with our debt investments.
As discussed above, we generally receive warrants in connection with our debt investments. If we do not receive the returns that are anticipated on the
warrants, our investment returns on our portfolio companies, and the value of your investment in us, may be lower than expected.
We currently invest a portion of our capital in high-quality short-term investments, which generate lower rates of return than those expected from
investments made in accordance with our investment objective.
We currently invest a portion of our capital in cash, cash equivalents, U.S. government securities, money market funds and other high-quality short-term
investments. These securities may earn yields substantially lower than the income that we anticipate receiving once these proceeds are fully invested in
accordance with our investment objective.
Risks related to our securities
There is a risk that investors in our equity securities may not receive distributions, that our distributions may not grow over time or that a portion of
distributions paid to you may be a return of capital.
We intend to make distributions on a monthly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will
achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay
distributions might be adversely affected by the impact of one or more risk factors described in this report. In addition, due to the asset coverage test
applicable to us as a BDC, we may be limited in our ability to make distributions. All distributions will be paid at the discretion of our Board and will depend
on our earnings, our financial condition, maintenance of our ability to be subject to tax as a RIC, compliance with BDC regulation and such other factors as
our Board may deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders in the future. Further, if we invest a
greater amount of assets in equity securities that do not pay current dividends, the amount available for distribution could be reduced.
On an annual basis, we must determine the extent to which any distributions we made were paid out of current or accumulated earnings, recognized
capital gains or capital. Distributions that represent a return of capital (which is the return of your original investment in us, after subtracting sales load, fees
and expenses directly or indirectly paid by you) rather than a distribution from earnings or profits, reduce your basis in our stock for U.S. federal income tax
purposes, which may result in higher tax liability when the shares are sold, even if they have not increased in value or have lost value.
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Our common stock price may be volatile and may decrease substantially.
The trading price of our common stock may fluctuate substantially and the liquidity of our common stock may be limited, in each case depending on
many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include the following:
• actual or anticipated changes in our earnings or fluctuations in our operating results;
• changes in the value of our portfolio of investments;
• price and volume fluctuations in the overall stock market or in the market for BDCs from time to time;
• investor demand for our shares of common stock;
• significant volatility in the market price and trading volume of securities of registered closed-end management investment companies, BDCs or other
financial services companies;
• our inability to raise capital, borrow money or deploy or invest our capital;
• fluctuations in interest rates;
• any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
• operating performance of companies comparable to us;
• changes in regulatory policies or tax guidelines with respect to RICs or BDCs;
• losing RIC status;
• general economic conditions, trends and other external factors;
• departures of key personnel; or
• loss of a major source of funding.
We and our Advisor could be the target of litigation.
We or our Advisor could become the target of securities class action litigation or other similar claims if our stock price fluctuates significantly or for
other reasons. The outcome of any such proceedings could materially adversely affect our business, financial condition and/or operating results and could
continue without resolution for long periods of time. Any litigation or other similar claims could consume substantial amounts of our management’s time and
attention, and that time and attention and the devotion of associated resources could, at times, be disproportionate to the amounts at stake. Litigation and other
claims are subject to inherent uncertainties, and a material adverse impact on our financial statements could occur for the period in which the effect of an
unfavorable final outcome in litigation or other similar claims becomes probable and reasonably estimable. In addition, we could incur expenses associated
with defending ourselves against litigation and other similar claims, and these expenses could be material to our earnings in future periods.
Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their NAV, which is separate and distinct from the risk that
our NAV per share may decline.
We cannot predict the price at which our common stock will trade. Shares of closed-end investment companies, including BDCs, frequently trade at a
discount to their NAV and our stock may also be discounted in the market. This characteristic of closed-end investment companies is separate and distinct
from the risk that our NAV per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our NAV. In addition,
if our common stock trades below its NAV, we will generally not be able to issue additional shares of our common stock at its market price without first
obtaining the approval of our stockholders and our independent directors.
Investing in shares of our common stock may involve an above average degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk, volatility or loss of principal than
alternative investment options. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our
common stock may not be suitable for investors with lower risk tolerance.
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Anti-takeover provisions in our charter documents and other agreements and certain provisions of the Delaware General Corporation Law, or DGCL,
could deter takeover attempts and have an adverse impact on the price of our common stock.
The DGCL, our certificate of incorporation and our bylaws contain provisions that may have the effect of discouraging a third party from making an
acquisition proposal for us. Among other things, our certificate of incorporation and bylaws:
• provide for a classified board of directors, which may delay the ability of our stockholders to change the membership of a majority of our Board;
• authorize the issuance of “blank check” preferred stock that could be issued by our Board to thwart a takeover attempt;
• do not provide for cumulative voting;
• provide that vacancies on the Board, including newly created directorships, may be filled only by a majority vote of directors then in office;
• limit the calling of special meetings of stockholders;
• provide that our directors may be removed only for cause;
• require supermajority voting to effect certain amendments to our certificate of incorporation and our bylaws; and
• require stockholders to provide advance notice of new business proposals and director nominations under specific procedures.
These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to
realize a premium over the market price of our common stock. It is a default under our Key Facility if (i) a person or group of persons (within the meaning of
the Exchange Act) acquires beneficial ownership of 20% or more of our issued and outstanding common stock or (ii) during any twelve-month period,
individuals who at the beginning of such period constituted our Board cease for any reason, other than death or disability, to constitute a majority of the
directors in office. If either event were to occur, Key could accelerate our repayment obligations under, and/or terminate, our Key Facility.
If we elect to issue preferred stock, holders of any such preferred stock will have the right to elect members of our Board and have class voting rights on
certain matters.
The 1940 Act requires that holders of shares of preferred stock must be entitled as a class to elect two directors at all times and to elect a majority of the
directors if distributions on such preferred stock are in arrears by two years or more, until such arrearage is eliminated. In addition, certain matters under the
1940 Act require the separate vote of the holders of any issued and outstanding preferred stock, including changes in fundamental investment restrictions and
conversion to open-end status and, accordingly, preferred stockholders could veto any such changes. Restrictions imposed on the declarations and payment of
distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, might impair our
ability to maintain our ability to be subject to tax as a RIC.
Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less
than our NAV per share, then you will experience an immediate dilution of the aggregate NAV of your shares.
In the event we issue subscription rights, stockholders who do not fully exercise their rights should expect that they will, at the completion of a rights
offering, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. Such dilution is not currently
determinable because it is not known what proportion of the shares will be purchased as a result of such rights offering. Any such dilution will
disproportionately affect nonexercising stockholders. If the subscription price per share is substantially less than the current NAV per share, this dilution could
be substantial.
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In addition, if the subscription price is less than our NAV per share, our stockholders would experience an immediate dilution of the aggregate NAV of
their shares as a result of such rights offering. The amount of any decrease in NAV is not predictable because it is not known at this time what the subscription
price and NAV per share will be on the expiration date of the rights offering or what proportion of the shares will be purchased as a result of such rights
offering. Such dilution could be substantial.
Investors in offerings of our common stock may incur immediate dilution upon the closing of an offering.
If the public offering price for any offering of shares of our common stock is higher than the book value per share of our outstanding common stock,
investors purchasing shares of common stock in any offering will pay a price per share that exceeds the tangible book value per share after such offering.
If we sell common stock at a discount to our NAV per share, stockholders who do not participate in such sale will experience immediate dilution in an
amount that may be material.
The issuance or sale by us of shares of our common stock at a discount to NAV poses a risk of dilution to our current stockholders. In particular,
stockholders who do not purchase additional shares at or below the discounted price in proportion to their current ownership will experience an immediate
decrease in NAV per share (as well as in the aggregate NAV of their shares if they do not participate at all). These stockholders will also experience a
disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we experience in our assets,
potential earning power and voting interests from such issuance or sale. In addition, such sales may adversely affect the price at which our common stock
trades.
Stockholders experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan.
All distributions payable to stockholders that are participants in our dividend reinvestment plan, or DRIP, are automatically reinvested in shares of our
common stock. As a result, stockholders that do not participate in the DRIP will experience dilution in their ownership interest over time.
Stockholders may receive shares of our common stock as dividends, which could result in adverse tax consequences to them.
In order to satisfy the Annual Distribution Requirement, we have the ability to declare a large portion of a dividend in shares of our common stock
instead of in cash. As long as a portion of such dividend is paid in cash (which portion may be as low as 20% of such dividend) and certain requirements are
met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, a stockholder generally would be subject to tax on
100% of the fair market value of the dividend on the date the dividend is received by the stockholder in the same manner as a cash dividend, even though
most of the dividend was paid in shares of our common stock. We currently do not intend to pay dividends in shares of our common stock.
The trading market or market value of our publicly issued debt securities that we may issue may fluctuate.
Upon issuance, any publicly issued debt securities that we may issue will not have an established trading market. We cannot assure you that a trading
market for our publicly issued debt securities will ever develop or, if developed, will be maintained. In addition to our creditworthiness, many factors may
materially adversely affect the trading market for, and market value of, our publicly issued debt securities. These factors include:
• the time remaining to the maturity of these debt securities;
• the outstanding principal amount of debt securities with terms identical to these debt securities;
• the supply of debt securities trading in the secondary market, if any;
• the redemption or repayment features, if any, of these debt securities;
• the level, direction and volatility of market interest rates generally; and
• market rate of interest higher or lower than the rate borne by the debt securities.
You should also be aware that there may be a limited number of buyers when you decide to sell your debt securities. This too may materially adversely
affect the market value of the debt securities or the trading market for the debt securities.
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Terms relating to redemption may materially adversely affect your return on the debt securities that we may issue.
If we issue debt securities that are redeemable at our option, we may choose to redeem the debt securities at times when prevailing interest rates are
lower than the interest rate paid on the debt securities. In addition, if such debt securities are subject to mandatory redemption, we may be required to redeem
the debt securities at times when prevailing interest rates are lower than the interest rate paid on the debt securities. In this circumstance, you may not be able
to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as your debt securities being redeemed.
Credit ratings provided by third party credit rating agencies may not reflect all risks of an investment in debt securities that we may issue.
Credit ratings provided by third party credit rating agencies are an assessment by third parties of our ability to pay our obligations. Consequently, real or
anticipated changes in our credit ratings will generally affect the market value of debt securities that we may issue. Credit ratings provided by third party
credit rating agencies, however, may not reflect the potential impact of risks related to market conditions generally or other factors discussed above on the
market value of or trading market for any publicly issued debt securities that we may issue.
Sales in the public market of substantial amounts of our common stock may have an adverse effect on the market price of our common stock, and the
registration of a substantial amount of insider shares, whether or not actually sold, may have a negative impact on the market price of our common stock.
Sales of substantial amounts of our common stock, or the availability of such common stock for sale, whether or not actually sold, could adversely
affect the prevailing market price of our common stock. If this occurs and continues, it could impair our ability to raise additional capital through the sale of
equity securities should we desire to do so.
Our 2022 Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the
future.
Our 2022 Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the 2022 Notes are effectively subordinated to
any secured indebtedness we or our subsidiaries have currently incurred and may incur in the future (or any indebtedness that is initially unsecured to which
we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar
proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the
assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including
the holders of the 2022 Notes.
Our 2022 Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
Our 2022 Notes are obligations exclusively of Horizon Technology Finance Corporation, and not of any of our subsidiaries. None of our subsidiaries is
a guarantor of the 2022 Notes and the 2022 Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. The assets of
such subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the 2022 Notes.
Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including trade creditors) and holders of
preferred stock, if any, of our subsidiaries have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including
holders of the 2022 Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our
claims are effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such
subsidiary senior to our claims. Consequently, the 2022 Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables)
of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise.
In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the 2022 Notes.
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The indenture under which our 2022 Notes were issued contains limited protection for holders of our 2022 Notes.
The indenture under which the 2022 Notes were issued offers limited protection to holders of the 2022 Notes. The terms of the indenture and the 2022
Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events
that could have a material adverse impact on investments in the 2022 Notes. In particular, the terms of the indenture and the 2022 Notes do not place any
restrictions on our or our subsidiaries’ ability to:
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·
·
·
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issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be
equal in right of payment to the 2022 Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior
in right of payment to the 2022 Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by
one or more of our subsidiaries and which therefore is structurally senior to the 2022 Notes and (4) securities, indebtedness or obligations issued
or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the 2022
Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a
violation of Section 18(a)(1)(A) of the 1940 Act as modified by Section 61(a)(l) of the 1940 Act or any successor provisions, whether or not we
continue to be subject to such provisions of the 1940 Act, (these provisions generally prohibit us from making additional borrowings, including
through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at
least 200% after such borrowings);
pay dividends on, or purchase or redeem or make any payments in respect of capital stock or other securities ranking junior in right of payment to
the 2022 Notes, including subordinated indebtedness, in each case other than dividends, purchases, redemptions or payments that would cause a
violation of Section 18(a)(1)(B) of the 1940 Act as modified by Section 61(a)(l) of the 1940 Act or any successor provisions giving effect to any
exemptive relief granted to us by the SEC (these provisions generally prohibit us from declaring any cash dividend or distribution upon any class
of our capital stock, or purchasing any such capital stock unless our asset coverage, as defined in the 1940 Act, equals at least 200% at the time of
the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase);
sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);
enter into transactions with affiliates;
create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;
· make investments; or
·
create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
In addition, the indenture does not require us to offer to purchase the 2022 Notes in connection with a change of control or any other event.
Furthermore, the terms of the indenture and the 2022 Notes do not protect holders of the 2022 Notes in the event that we experience changes (including
significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any
financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.
Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the 2022 Notes may have
important consequences for holders of the 2022 Notes, including making it more difficult for us to satisfy our obligations with respect to the 2022 Notes or
negatively affecting the trading value of the 2022 Notes.
Certain of our current debt instruments include more protections for their holders than the indenture and the 2022 Notes. In addition, other debt we issue
or incur in the future could contain more protections for its holders than the indenture and the 2022 Notes, including additional covenants and events of
default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the 2022 Notes.
51
An active trading market for our 2022 Notes may not exist, which could limit holders’ ability to sell our 2022 Notes or affect the market price of the 2022
Notes.
The 2022 Notes are listed on the New York Stock Exchange, or NYSE, under the symbol “HTFA”. However, we cannot provide any assurances that an
active trading market for the 2022 Notes will exist in the future or that you will be able to sell your 2022 Notes. Even if an active trading market does exist,
the 2022 Notes may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit
ratings, if any, general economic conditions, our financial condition, performance and prospects and other factors. To the extent an active trading market does
not exist, the liquidity and trading price for the 2022 Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in
the 2022 Notes for an indefinite period of time.
The optional redemption provision may materially adversely affect the return on the 2022 Notes.
The 2022 Notes are redeemable in whole or in part at any time or from time to time on or after September 15, 2019 at our sole option. We may choose
to redeem the 2022 Notes at times when prevailing interest rates are lower than the interest rate paid on the 2022 Notes. In this circumstance, the holders of
the 2022 Notes may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the 2022 Notes being
redeemed.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on our 2022 Notes.
Any default under the agreements governing our indebtedness, including a default under the Key Facility or other indebtedness to which we may be a
party that is not waived by the required lenders or holders thereunder, and the remedies sought by the holders of such indebtedness could make us unable to
pay principal, premium, if any, and interest on the 2022 Notes and substantially decrease the market value of the 2022 Notes. If we are unable to generate
sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our
indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our
indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such
indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lender under the
Key Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure
proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to
seek to obtain waivers from the required lender under the Key Facility or other debt that we may incur in the future to avoid being in default. If we breach our
covenants under the Key Facility or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders. If this occurs,
we would be in default and our lenders or debt holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation.
If we are unable to repay debt, lenders having secured obligations, including the lender under the Key Facility, could proceed against the collateral securing
the debt. Because the Key Facility has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness thereunder or
under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.
FATCA withholding may apply to payments to certain foreign entities.
Payments made under the 2022 Notes to a foreign financial institution, or “FFI,” or non-financial foreign entity, or “NFFE” (including such an
institution or entity acting as an intermediary), may be subject to a U.S. withholding tax of 30% under U.S. Foreign Account Tax Compliance Act provisions
of the Code (commonly referred to as “FATCA”). This withholding tax may apply to payments of interest on the 2022 Notes as well as, after December 31,
2018, to payments made upon maturity, redemption, or sale of the 2022 Notes, unless the FFI or NFFE complies with certain information reporting,
withholding, identification, certification and related requirements imposed by FATCA. Depending upon the status of a holder and the status of an
intermediary through which any Notes are held, the holder could be subject to this 30% withholding tax in respect of any interest paid on the 2022 Notes as
well as any proceeds from the sale or other disposition of the 2022 Notes. Holders of the 2022 Notes should consult their own tax advisors regarding FATCA
and how it may affect their investment in the 2022 Notes.
Item 1B. Unresolved Staff Comments
None
52
Item 2. Properties
We do not own any real estate or other physical properties materially important to our operation. Our headquarters and our Advisor’s headquarters are
currently located at 312 Farmington Avenue, Farmington, Connecticut 06032. We believe that our office facilities are suitable and adequate to our business.
Item 3. Legal Proceedings
Neither we nor our Advisor is currently subject to any material legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable
53
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price range of common stock and distributions
PART II
Our common stock is traded on Nasdaq, under the symbol “HRZN.” The following table sets forth, for each fiscal quarter since January 1, 2016, the
range of high and low closing sales price of our common stock, the premium or discount of the closing sales price to our NAV and the distributions declared
per share by us.
Period
Year ended December 31, 2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year ended December 31, 2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
NAV(1)
Closing Sales Price
Low
High
Premium/
Discount of
High Sales
Price to
NAV(2)
Premium/
Discount of
Low Sales
Price to
NAV(2)
Distributions
Declared
Per
Share (3)
$
$
$
$
$
$
$
$
11.72 $
11.81 $
11.87 $
12.11 $
12.09 $
12.44 $
13.27 $
13.62 $
11.50 $
11.71 $
11.72 $
11.67 $
13.74 $
13.86 $
12.20 $
12.02 $
10.55
10.09
11.00
10.03
9.83
12.43
11.23
9.42
(2)%
(1)%
(1)%
(4)%
14%
11%
(8)%
(12)%
(10)% $
(15)% $
(7)% $
(17)% $
(19)% $
—% $
(15)% $
(31)% $
0.30(4)
0.30
0.30
0.30
0.30
0.345
0.345
0.345
(1) NAV per share determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales
prices. The NAVs shown are based on outstanding shares at the end of each period.
(2) Calculated as of the respective high or low closing sales price divided by the quarter end NAV.
(3) We have adopted an “opt out” DRIP for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions are
automatically reinvested in additional shares of our common stock, unless they specifically opt out of the DRIP so as to receive cash distributions.
(4)
$0.10 of which is payable on March 15, 2018.
The last reported price for our common stock on March 1, 2018 was $10.56 per share, which represented a 10% discount to NAV per share. As of
March 1, 2018 we had 12 stockholders of record, which did not include stockholders for whom shares are held in nominee or “street” name.
Shares of BDCs may trade at a market price that is less than the NAV that is attributable to those shares. The possibility that our shares of common stock
will trade at a discount from NAV or at a premium that is unsustainable over the long term is separate and distinct from the risk that our NAV will decrease. It
is not possible to predict whether our shares will trade at, above or below NAV in the future.
Sales of unregistered securities
We did not engage in any sales of unregistered equity securities during the years ended December 31, 2017, 2016 and 2015.
54
Issuer Purchases of Equity Securities
On April 27, 2017, our Board extended a previously authorized stock repurchase plan which allows us to repurchase up to $5.0 million of our
outstanding common stock. Unless extended by our Board, the repurchase program will expire on the earlier of June 30, 2018 and the repurchase of $5.0
million of common stock. During the quarter ended December 31, 2017, we did not purchase any common stock. During the year ended December 31, 2017,
we repurchased 5,923 shares of our common stock at an average price of $9.97 on the open market at a total cost of $0.1 million. During the year ended
December 31, 2016, we repurchased 48,160 shares of our common stock at an average price of $10.66 on the open market for a total cost of $0.5 million.
During the year ended December 31, 2015, we repurchased 113,382 shares of our common stock at an average price of $11.53 on the open market for a total
cost of $1.3 million. From the inception of the stock repurchase program through December 31, 2017, we repurchased 167,465 shares of our common stock at
an average price of $11.22 on the open market at a total cost of $1.9 million.
Any shares repurchased by us may have the effect of maintaining the market price of our common stock or retarding a decline in the market price of the
common stock, and, as a result, the price of our common stock may be higher than the price that otherwise might exist in the open market. In addition, as any
shares repurchased pursuant to the stock repurchase plan will be purchased at a price below the net asset value per share as reported in our most recent
financial statements, share repurchases may have the effect of increasing our net asset value per share.
Distributions
We intend to continue making monthly distributions to our stockholders. The timing and amount of our monthly distributions, if any, is determined by
our Board. Any distributions to our stockholders are declared out of assets legally available for distribution. We monitor available net investment income to
determine if a tax return of capital may occur for the fiscal year. To the extent our taxable earnings fall below the total amount of our distributions for any
given fiscal year, a portion of those distributions may be considered a return of capital to our common stockholders for U.S. federal income tax purposes.
Thus, the source of distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders
should read any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary
income or gains.
In order to qualify to be subject to tax as a RIC, we must meet certain source-of-income, asset diversification and annual distribution requirements.
Generally, in order to qualify as a RIC, we must derive at least 90% of our gross income during each tax year from dividends, interest, payments with respect
to certain securities, loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income derived with respect to our
business of investing in stock or other securities. We must also meet certain asset diversification requirements at the end of each quarter of each tax year.
Failure to meet these diversification requirements on the last day of a quarter may result in us having to dispose of certain investments quickly in order to
prevent the loss of RIC status. Any such dispositions could be made at disadvantageous prices or times, and may cause us to incur substantial losses.
In addition, in order to be eligible for the special tax treatment accorded to RICs and to avoid the imposition of corporate level tax on the income and
gains we distribute to our stockholders, each tax year we are required under the Code to distribute as dividends of an amount generally at least 90% of our
investment company taxable income, determined without regard to any deduction for dividends paid to our stockholders. We refer to such amount as the
Annual Distribution Requirement in this annual report on Form 10-K. Additionally, we must distribute, in respect of each calendar year, dividends of an
amount generally at least equal to the sum of 98% of our calendar year net ordinary income (taking into account certain deferrals and elections); 98.2% of our
capital gain net income (adjusted for certain ordinary losses) for the one year period ending on October 31 of such calendar year; and any net ordinary income
or capital gain net income for preceding years that was not distributed during such years and on which we previously did not incur any U.S. federal income
tax in order to avoid the imposition of a 4% U.S. federal excise tax. If we fail to qualify as a RIC for any reason and become subject to corporate income tax,
the resulting corporate income taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our
distributions. Such a failure would have a material adverse effect on us and our stockholders. In addition, we could be required to recognize unrealized gains,
incur substantial taxes and interest and make substantial distributions in order to re-qualify as a RIC. We cannot assure stockholders that they will receive any
distributions.
55
Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions
into the next tax year and pay a 4% U.S. federal excise tax on such undistributed income. Distributions of any such carryover taxable income must be made
through a distribution declared as of the earlier of the filing date of the corporate income tax return related to the tax year in which such taxable income was
generated or the 15th day of the ninth month following the end of such tax year, in order to count towards the satisfaction of the Annual Distribution
Requirement for the tax year in which such taxable income was generated. We can offer no assurance that we will achieve results that will permit the payment
of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset
coverage stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See “Item 1. Business — Regulation — Taxation as
a RIC.”
We have adopted an “opt out” DRIP for our common stockholders. As a result, if we make a distribution, then stockholders’ cash distributions are
automatically reinvested in additional shares of our common stock, unless they specifically opt out of the DRIP. If a stockholder opts out, that stockholder
receives cash distributions. Although distributions paid in the form of additional shares of common stock are generally subject to U.S. federal, state and local
taxes, stockholders participating in our DRIP do not receive any corresponding cash distributions with which to pay any such applicable taxes. We may use
newly issued shares to implement the DRIP, or we may purchase shares in the open market in connection with our obligations under the DRIP.
The following table reflects the monthly cash distributions, including dividends and returns of capital per share that our Board has declared since
January 1, 2016, including shares issued under our DRIP, on our common stock:
Record
Dates
Payment Date
Distributions
Declared
Year ended December 31, 2017
February 21, 2018
January 22, 2018
December 20, 2017
November 20, 2017
October 19, 2017
September 20, 2017
August 18, 2017
July 20, 2017
June 20, 2017
May 19, 2017
April 21, 2017
March 20, 2017
Total
Year ended December 31, 2016
February 22, 2017
January 19, 2017
December 20, 2016
November 18, 2016
October 20, 2016
September 20, 2016
August 19, 2016
July 20, 2016
June 20, 2016
May 19, 2016
April 20, 2016
March 18, 2016
Total
March 15, 2018
February 15, 2018
January 17, 2018
December 15, 2017
November 15, 2017
October 16, 2017
September 15, 2017
August 15, 2017
July 14, 2017
June 15, 2017
May 16, 2017
April 18, 2017
March 15, 2017
February 15, 2017
January 13, 2017
December 15, 2016
November 15, 2016
October 17, 2016
September 15, 2016
August 15, 2016
July 15, 2016
June 15, 2016
May 16, 2016
April 15, 2016
$
$
$
$
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
1.20
0.10
0.10
0.10
0.115
0.115
0.115
0.115
0.115
0.115
0.115
0.115
0.115
1.335
On March 1, 2018, our Board declared distributions as set forth in the following table:
Ex-Dividend Date
May 16, 2018
April 18, 2018
March 16, 2018
Record Date
Payment Date
Distributions Declared
May 17, 2018
April 19, 2018
March 19, 2018
June 15, 2018
May 15, 2018
April 17, 2018
$
$
$
0.10
0.10
0.10
56
Stock performance graph
The following graph compares the return on our common stock with that of the Standard & Poor’s 500 Stock Index and the Wells Fargo BDC Index, for
the period from December 30, 2012 through December 31, 2017. The graph assumes that, on December 31, 2012, a person invested $100 in each of our
common stock, the S&P 500 Index and the Wells Fargo BDC Index. The graph measures total stockholder return, which takes into account both changes in
stock price and distributions. It assumes that distributions paid are invested in like securities. The graph and other information furnished under this Part II
Item 5 of Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of
Section 18 of the Exchange Act. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
57
Item 6. Selected Financial Data
The following selected consolidated financial data of the Company as of December 31, 2017, 2016, 2015, 2014 and 2013, and for the years ended
December 31, 2017, 2016, 2015, 2014 and 2013 are derived from the consolidated financial statements that have been audited by RSM US LLP, an
independent registered public accounting firm. These selected financial data should be read in conjunction with our financial statements and related notes
thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(Dollars in thousands, except per share data and portfolio
company counts)
Statement of Operations Data:
Total investment income
Base management fee
Performance based incentive fee
All other expenses
Base management and performance based incentive fees waived
Net investment income before excise tax
Provision (credit) for excise tax
Net investment income
Net realized loss on investments
Net unrealized appreciation (depreciation) on investments
Net increase (decrease) in net assets resulting from operations
Dollar amount of distributions declared
Per Share Data:
Net asset value
Net investment income
Net realized loss on investments
Net change in unrealized appreciation (depreciation) on investments
Net increase (decrease) in net assets resulting from operations
Per share distributions declared
Statement of Assets and Liabilities Data:
Investments, at fair value
Other assets
Total assets
Borrowings
Total liabilities
Total net assets
Other data:
Weighted yield on debt investments at fair value
Weighted yield on all portfolio investments at fair value
Number of portfolio companies at period end:
Debt investments
Warrants investments
Equity investments
Other investments
$
$
$
$
$
$
As of and for the years ended December 31,
2017
2016
2015
2014
2013
$
25,777
3,786
1,714
8,034
(79)
12,322
25
12,297
(21,191)
18,485
9,591
13,823
$
$
$
11.72
1.07
(1.84)
1.60
0.83
1.20
$
32,984
4,727
2,126
9,119
—
17,012
(87)
17,099
(7,776)
(14,236)
(4,913) $
$
15,403
$
12.09
1.48
(0.67)
(1.24)
(0.43)
1.335
$
31,110
4,747
3,501
9,212
(346)
13,996
—
13,996
(1,650)
(490)
$
$
11,856
15,793
$
13.85
1.25
(0.15)
(0.04)
1.06
1.38
$
31,254
4,648
2,112
13,962
(345)
10,877
160
10,717
(3,576)
8,289
15,430
13,282
$
$
$
14.36
1.11
(0.37)
0.86
1.60
1.38
33,643
5,353
3,318
11,605
(144)
13,511
240
13,271
(7,509)
(2,254)
3,508
13,236
14.14
1.38
(0.78)
(0.23)
0.37
1.38
222,099
12,047
234,146
94,075
99,071
135,075
$
$
194,003
45,249
239,252
95,597
100,060
139,192
$
$
250,267
30,629
280,896
114,954
121,145
159,751
$
$
205,101
20,095
225,196
81,753
86,948
138,248
$
$
221,284
42,453
263,737
122,343
127,902
135,835
15.1%
14.0%
14.9%
14.4%
14.2%
13.7%
15.3%
14.8%
14.4%
14.1%
44
78
5
2
52
83
6
1
50
75
4
1
49
73
4
1
33
72
6
4
58
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing
elsewhere in this annual report on Form 10-K.
Forward-looking statements
This annual report on Form 10-K, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains
statements that constitute forward-looking statements, which relate to future events or our future performance or financial condition. These forward-looking
statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions.
The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties, including statements as to:
• our future operating results, including the performance of our existing debt investments, warrants and other investments;
• the introduction, withdrawal, success and timing of business initiatives and strategies;
• changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in
the value of our assets;
• the relative and absolute investment performance and operations of our Advisor;
• the impact of increased competition;
• the impact of investments we intend to make and future acquisitions and divestitures;
• the unfavorable resolution of legal proceedings;
• our business prospects and the prospects of our portfolio companies;
• the impact, extent and timing of technological changes and the adequacy of intellectual property protection;
• our regulatory structure and tax status;
• our ability to qualify and maintain qualification as a RIC and as a BDC;
• the adequacy of our cash resources and working capital;
• the timing of cash flows, if any, from the operations of our portfolio companies;
• the impact of interest rate volatility on our results, particularly if we use leverage as part of our investment strategy;
• the ability of our portfolio companies to achieve their objective;
• the impact of legislative and regulatory actions and reforms and regulatory supervisory or enforcement actions of government agencies relating to us
or our Advisor;
• our contractual arrangements and relationships with third parties;
• our ability to access capital and any future financings by us;
• the ability of our Advisor to attract and retain highly talented professionals; and
• the impact of changes to tax legislation and, generally, our tax position.
We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks” and similar expressions to identify forward-looking statements. Undue
influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking
statements for any reason, including the factors in “Item 1A – Risk Factors” and elsewhere in our annual report on Form 10-K.
We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no
obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this
annual report on Form 10-K, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we
may make directly to you or through reports that we in the future may file with the SEC, including quarterly reports on Form 10-Q and current reports on
Form 8-K.
You should understand that under Sections 27A(b)(2)(B) and (D) of the Securities Act and Sections 21E(b)(2)(B) and (D) of the Exchange Act, the
“safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in connection with this annual report on
Form 10-K or any periodic reports we file under the Exchange Act.
59
Overview
We are a specialty finance company that lends to and invests in development-stage companies in our Target Industries. Our investment objective is to
maximize our investment portfolio’s total return by generating current income from the debt investments we make and capital appreciation from the warrants
we receive when making such debt investments. We are focused on making Venture Loans to venture capital backed companies in our Target Industries,
which we refer to as “Venture Lending.” We also selectively provide Venture Loans to publicly traded companies in our Target Industries. Our debt
investments are typically secured by first liens or first liens behind a secured revolving line of credit, or Senior Term Loans. As of December 31, 2017,
99.4%, or $202.6 million, of our debt investment portfolio at fair value consisted of Senior Term Loans. Venture Lending is typically characterized by (1) the
making of a secured debt investment after a venture capital or equity investment in the portfolio company has been made, which investment provides a source
of cash to fund the portfolio company’s debt service obligations under the Venture Loan, (2) the senior priority of the Venture Loan which requires repayment
of the Venture Loan prior to the equity investors realizing a return on their capital, (3) the relatively rapid amortization of the Venture Loan and (4) the
lender’s receipt of warrants or other success fees with the making of the Venture Loan.
We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940
Act. In addition, for U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. As a BDC, we are required to
comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance our investments through
borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least
200% after such borrowing. The amount of leverage that we employ depends on our assessment of market conditions and other factors at the time of any
proposed borrowing. As a RIC, we generally are not subject to corporate-level income taxes on our investment company taxable income, determined without
regard to any deductions for dividends paid, and our net capital gain that we distribute as dividends for U.S. federal income tax purposes to our stockholders
as long as we meet certain source-of-income, distribution, asset diversification and other requirements.
Compass Horizon, our predecessor company, commenced operations in March 2008. We were formed in March 2010 for the purpose of acquiring
Compass Horizon and continuing its business as a public entity.
Our investment activities, and our day-to-day operations, are managed by our Advisor and supervised by our Board, of which a majority of the members
are independent of us. Under the Investment Management Agreement, we have agreed to pay our Advisor a base management fee and an incentive fee for its
advisory services to us. We have also entered into the Administration Agreement with our Advisor under which we have agreed to reimburse our Advisor for
our allocable portion of overhead and other expenses incurred by our Advisor in performing its obligations under the Administration Agreement.
Portfolio composition and investment activity
The following table shows our portfolio by type of investment as of December 31, 2017 and 2016:
Debt investments
Warrants
Other investments
Equity
Total
December 31, 2017
December 31, 2016
Number of
Investments
Fair
Value
Percentage
of Total
Portfolio
Number of
Investments
Fair
Value
(Dollars in thousands)
Percentage
of Total
Portfolio
33 $
72
4
6
$
203,793
9,090
7,700
1,516
222,099
91.8%
4.0
3.5
0.7
100.0%
44 $
78
2
5
$
186,186
6,362
600
855
194,003
96.0%
3.3
0.3
0.4
100.0%
60
The following table shows total portfolio investment activity as of and for the years ended December 31, 2017 and 2016:
Beginning portfolio
New debt investments
Less refinanced debt investments
Net new debt investments
Principal payments received on investments
Early pay-offs
Accretion of debt investment fees
New debt investment fees
New equity
Proceeds from sale of investments
Net realized loss on investments
Net appreciation (depreciation) on investments
Ending portfolio
December 31,
2017
2016
(In thousands)
194,003 $
139,256
(3,700)
135,556
(30,477)
(72,613)
1,881
(1,705)
—
(1,840)
(21,191)
18,485
222,099 $
250,267
59,858
—
59,858
(49,403)
(46,357)
1,562
(931)
84
(984)
(7,696)
(12,397)
194,003
$
$
We receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some
of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to
period.
The following table shows our debt investments by industry sector as of December 31, 2017 and 2016:
Life Science
Biotechnology
Drug Delivery
Medical Device
Technology
Communications
Consumer-Related
Internet and Media
Materials
Networking
Power Management
Semiconductors
Software
Cleantech
Energy Efficiency
Waste Recycling
Healthcare Information and Services
Diagnostics
Other
Software
Total
December 31, 2017
December 31, 2016
Debt
Investments at
Fair Value
Percentage
of Total
Portfolio
Debt
Investments at
Fair Value
Percentage
of Total
Portfolio
(Dollars in thousands)
15,015
6,830
36,173
19,549
10,918
38,899
9,324
—
1,234
3,345
53,994
—
—
—
—
8,512
203,793
$
$
61
7.4% $
3.4
17.7
9.6
5.3
19.1
4.6
—
0.6
1.6
26.5
—
—
40,612
—
13,003
76
20,631
7,933
9,874
3,306
2,220
7,528
53,349
1,942
5,964
—
—
4.2
100.0% $
4,081
5,770
9,897
186,186
21.8%
—
7.0
0.1
11.1
4.2
5.3
1.8
1.2
4.0
28.7
1.0
3.2
2.2
3.1
5.3
100.0%
The largest debt investments in our portfolio may vary from year to year as new debt investments are originated and existing debt investments are
repaid. Our five largest debt investments represented 29% and 24% of total debt investments outstanding as of December 31, 2017 and 2016, respectively. No
single debt investment represented more than 10% of our total debt investments as of December 31, 2017 or 2016.
Debt investment asset quality
We use an internal credit rating system which rates each debt investment on a scale of 4 to 1, with 4 being the highest credit quality rating and 3 being
the rating for a standard level of risk. A rating of 2 represents an increased level of risk and, while no loss is currently anticipated for a 2-rated debt
investment, there is potential for future loss of principal. A rating of 1 represents a deteriorating credit quality and a high degree of risk of loss of principal.
Our internal credit rating system is not a national credit rating system. See “Item 1 – Business” for a more detailed description of the internal credit rating
system. As of December 31, 2017 and 2016, our debt investments had a weighted average credit rating of 3.0. The following table shows the classification of
our debt investment portfolio by credit rating as of December 31, 2017 and December 31, 2016:
December 31, 2017
Debt
Investments
at Fair Value
Percentage
of Debt
Investments
Number of
Investments
December 31, 2016
Debt
Investments
at Fair Value
Percentage
of Debt
Investments
Number of
Investments
(Dollars in thousands)
4
25
3
1
33
$
$
18,701
176,560
5,632
2,900
203,793
9.2%
86.6
2.8
1.4
100.0%
6
28
6
4
44
$
$
29,721
131,605
13,360
11,500
186,186
16.0%
70.6
7.2
6.2
100.0%
Credit Rating
4
3
2
1
Total
As of December 31, 2017, there was one debt investment with an internal credit rating of 1, with a cost of $3.0 million and a fair value of $2.9 million.
As of December 31, 2016, there were four debt investments with an internal credit rating of 1, with a cost of $26.2 million and a fair value of $11.5 million.
Consolidated results of operations
The consolidated results of operations described below may not be indicative of the results we report in future periods.
The following table shows consolidated results of operations for the years ended December 31, 2017, 2016 and 2015:
Total investment income
Total expenses
Management and performance based incentive fees waived
Net expenses
Net investment income before excise tax
Provision (credit) for excise tax
Net investment income
Net realized loss on investments
Net unrealized appreciation (depreciation) on investments
Net increase (decrease) in net assets resulting from operations
Average debt investments, at fair value
Average borrowings outstanding
2017
2016
(In thousands)
2015
25,777 $
13,534
(79)
13,455
12,322
25
12,297
(21,191)
18,485
9,591 $
170,685 $
75,960 $
32,984 $
15,972
—
15,972
17,012
(87)
17,099
(7,776)
(14,236)
(4,913) $
221,257 $
102,875 $
31,110
17,460
(346)
17,114
13,996
—
13,996
(1,650)
(490)
11,856
219,848
87,976
$
$
$
$
Net increase (decrease) in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition
of realized gains and losses and unrealized appreciation and depreciation on investments. As a result, annual comparisons of net increase in net assets
resulting from operations may not be meaningful.
62
Investment income
Total investment income decreased by $7.2 million, or 21.8%, to $25.8 million for the year ended December 31, 2017 as compared to the year ended
December 31, 2016. For the year ended December 31, 2017, total investment income consisted primarily of $23.8 million in interest income from
investments, which included $5.8 million in income from the accretion of origination fees and ETPs and $2.0 million in fee income. Interest income on
investments decreased by $7.6 million, or 24.3%, to $23.8 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016.
Interest income on investments decreased primarily due to a decrease of $50.6 million, or 22.9%, in the average size of our investment portfolio for the year
ended December 31, 2017 as compared to the year ended December 31, 2016. Fee income, which includes success fee and prepayment fee income on debt
investments, increased by $0.4 million, or 26.9%, primarily due to fees earned on higher principal prepayments received during the year ended December 31,
2017 compared to the year ended December 31, 2016.
Total investment income increased by $1.9 million, or 6.0%, to $33.0 million for the year ended December 31, 2016 as compared to the year ended
December 31, 2015. For the year ended December 31, 2016, total investment income consisted primarily of $31.4 million in interest income from
investments, which included $8.3 million in income from the accretion of origination fees and ETPs and $1.6 million in fee income. Interest income on
investments increased by $2.7 million, or 9.6%, to $31.4 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015.
Interest income on investments increased primarily due to the larger amount of ETPs earned during the year ended December 31, 2016 compared to the year
ended December 31, 2015. Fee income, which includes success fee and prepayment fee income on debt investments, decreased by $0.9 million, or 35.5%,
primarily due to a lower average prepayment fee rate earned during the year ended December 31, 2016 compared to the year ended December 31, 2015, along
with a lower amount of success fees earned during the year ended December 31, 2016 compared to the year ended December 31, 2015.
For the years ended December 31, 2017, 2016 and 2015, our dollar-weighted yield on average debt investments (excluding any yield from warrants,
equity and other investments) was 15.1%, 14.9% and 14.2%, respectively. We calculate the yield on dollar-weighted average debt investments for any period
as (1) total investment income during the period divided by (2) the average of the fair value of debt investments outstanding on (a) the last day of the calendar
month immediately preceding the first day of the period and (b) the last day of each calendar month during the period. The dollar-weighted yield on average
debt investments is higher than what investors will realize because it does not reflect our expenses or any sales load paid by investors.
For the years ended December 31, 2017, 2016 and 2015, our investment portfolio (including any yield from warrants, equity and other investments) had
an overall total return of 14.0%, 14.4% and 13.7%, respectively. We calculate the yield on dollar-weighted average investments for any period as (1) total
investment income during the period divided by (2) the average of the fair value of investments outstanding on (a) the last day of the calendar month
immediately preceding the first day of the period and (b) the last day of each calendar month during the period. The dollar-weighted yield on average
investments is higher than what investors will realize because it does not reflect our expenses or any sales load paid by investors.
Investment income, consisting of interest income and fees on debt investments, can fluctuate significantly upon repayment of large debt investments.
Interest income from the five largest debt investments in the aggregate accounted for 14%, 17% and 14% of investment income for the years ended December
31, 2017, 2016 and 2015, respectively.
Expenses
Total net expenses decreased by $2.5 million, or 15.8%, to $13.5 million for the year ended December 31, 2017 as compared to the year ended
December 31, 2016. Total net expenses decreased by $1.1 million, or 6.7%, to $16.0 million for the year ended December 31, 2016 as compared to the year
ended December 31, 2015. Total expenses for each period consisted of interest expense, base management fee, incentive and administrative fees, professional
fees and general and administrative expenses.
63
Interest expense decreased by $0.7 million, or 12.1%, to $5.2 million for the year ended December 31, 2017 as compared to the year ended
December 31, 2016. Interest expense, which includes the amortization of debt issuance costs, decreased primarily due to a decrease in average borrowings of
$26.9 million, or 26.2%, which was partially offset by the acceleration of $0.2 million of unamortized debt issuance costs related to the redemption of the
2019 Notes and an increase in our effective cost of debt for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Interest
expense increased by $0.1 million, or 2.1%, to $5.9 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015. Interest
expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $14.9 million, or 16.9%,
which was partially offset by a decrease in our effective cost of debt for the year ended December 31, 2016 as compared to the year ended December 31,
2015.
Base management fee expense decreased by $0.9 million, or 19.9%, to $3.8 million for the year ended December 31, 2017 as compared to the year
ended December 31, 2016. Base management fee expense decreased primarily due to a decrease of $50.6 million, or 22.9%, in the average size of our
investment portfolio for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Base management fee expense increased by
$0.3 million, or 7.4%, to $4.7 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015, after giving effect to waivers
of $0.3 million in base management fees for the year ended December 31, 2015. Base management fee increased for the year ended December 31, 2016
compared to December 31, 2015 primarily due to the waiver of base management fees of $0.3 million in 2015 in connection with the 2015 Offering.
As noted above, our Advisor agreed to waive its base management fee relating to the proceeds raised in the 2015 Offering, to the extent such fee was
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 our net investment income exceeded distributions declared on shares of our common stock for the applicable quarter.
During the year ended December 31, 2015, our Advisor waived $0.3 million of base management fees. As of December 31, 2015, condition (ii) above had
been met, as our net investment income exceeded distributions declared for the quarters ended September 30, 2015 and December 31, 2015.
Performance based incentive fee expense, net of waivers, decreased by $0.5 million, or 23.1%, to $1.6 million for the year ended December 31, 2017 as
compared to the year ended December 31, 2016. Performance based incentive fee expense decreased due to a decrease of $5.3 million, or 27.5%, to $13.9
million in Pre-Incentive Fee Net Investment Income for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The Incentive
Fee Cap and Deferral Mechanism resulted in $1.1 million of reduced incentive fee expense and thus increased net investment income for the year ended
December 31, 2017. The incentive fee on Pre-Incentive Fee Net Investment Income was subject to the Incentive Fee Cap and Deferral Mechanism during the
year ended December 31, 2017 due to the cumulative incentive fees paid to the Advisor exceeding the Cumulative Pre-Incentive Fee Net Return during the
Incentive Fee Look-Back Period. (See Item 1 above, “Investment Management Agreement.”) Performance based incentive fee expense decreased by
$1.4 million, or 39.3%, to $2.1 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015. Performance based
incentive fee expense decreased because the incentive fee expense for the three months ended September 30, 2016 and December 31, 2016 was limited by the
incentive fee cap and deferral mechanism under our Investment Management Agreement. This resulted in $1.7 million of reduced expense and additional net
investment income for the year ended December 31, 2016. The incentive fee on pre-incentive fee net investment income was subject to the incentive fee cap
and deferral mechanism due to net realized and unrealized losses in the portfolio during the year ended December 31, 2016 totaling $22.0 million.
Administrative fee expense decreased by $0.2 million, or 19.6%, to $0.7 million for the year ended December 31, 2017 as compared to the year ended
December 31, 2016. Administrative fee expense decreased primarily due to a decrease in our allocated costs of compensation incurred by the Advisor on our
behalf for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Administrative fee expense decreased by $0.3 million, or
22.7%, to $0.9 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015. Administrative fee expense decreased
primarily due to a decrease in our allocated costs of compensation incurred by the Advisor on our behalf for the year ended December 31, 2016 as compared
to the year ended December 31, 2015.
In 2017 and 2016, we elected 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. For the years ended December 31, 2017 and 2016, we elected to carry forward taxable income in excess of current year distributions of $1.0
million and $1.8 million, respectively. At December 31, 2017 and 2016, excise tax payable of $0.03 million and $0.1 million, respectively, was recorded.
64
Professional fees and general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses were $2.2
million, $2.3 million and $2.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Net realized gains and losses and net unrealized appreciation and depreciation
Realized gains or losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of our
investments without regard to unrealized appreciation or depreciation previously recognized. Realized gains or losses on investments include investments
charged off during the period, net of recoveries. The net change in unrealized appreciation or depreciation on investments primarily reflects the change in
portfolio investment fair values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains
or losses are realized.
During the year ended December 31, 2017, we realized net losses totaling $21.2 million primarily due to the resolution of four debt investments partially
offset by realized gains on the sale of equity received upon the exercise of warrants. One debt investment was settled, which resulted in a realized loss of $5.8
million and unrealized appreciation of $5.8 million. One debt investment was settled for net cash proceeds of $1.3 million, which resulted in a realized loss of
$3.0 million and unrealized appreciation of $2.8 million. Two debt investments were settled for a royalty and sale agreements collectively fair valued at $7.5
million, which resulted in a realized loss of $12.4 million and unrealized appreciation of $11.8 million. During the year ended December 31, 2016, we
realized net losses totaling $7.8 million primarily due to the resolution of three debt investments. One debt investment was settled for net cash proceeds of
$3.6 million, which resulted in a realized loss of $4.5 million and unrealized appreciation of $4.6 million. One debt investment was settled for net cash
proceeds of $0.2 million and a royalty and sale agreement fair valued at $0.4 million, which resulted in a realized loss of $2.2 million and unrealized
appreciation of $2.2 million. One debt investment was settled for cash proceeds which resulted in a realized loss of $0.9 million and unrealized appreciation
of $0.7 million. During the year ended December 31, 2015, we realized net losses totaling $1.7 million primarily due to the resolution of one debt investment
partially offset by realized gains on the sale of equity received upon the exercise of warrants. The debt investment was settled for a net cash payment of $4.9
million, which resulted in a realized loss of $1.8 million and unrealized appreciation of $1.8 million.
During the year ended December 31, 2017, net unrealized appreciation on investments totaled $18.5 million which was primarily due to the reversal of
previously recorded unrealized depreciation on four debt investments that were settled during the period. During the year ended December 31, 2016, net
unrealized depreciation on investments totaled $14.2 million which was primarily due to the unrealized depreciation on three debt investments offset by the
reversal of previously recorded unrealized depreciation on one debt investment. During the year ended December 31, 2015, net unrealized depreciation on
investments totaled $0.5 million which was primarily due to the unrealized depreciation on one debt investment offset by the reversal of previously recorded
unrealized depreciation on one debt investment that was settled during the period, described above.
Liquidity and capital resources
As of December 31, 2017 and 2016, we had cash of $6.6 million and $37.1 million, respectively. Cash is available to fund new investments, reduce
borrowings, pay expenses, repurchase common stock and pay distributions. Our primary sources of capital have been from our public and private equity
offerings, use of our revolving credit facilities, issuance of our 2019 Notes and issuance of our 2022 Notes.
On April 27, 2017, our Board extended a previously authorized stock repurchase program which allows us to repurchase up to $5.0 million of our
common stock at prices below our net asset value per share as reported in our most recent consolidated financial statements. Under the repurchase program,
we may, but are not obligated to, repurchase shares of our outstanding common stock in the open market or in privately negotiated transactions from time to
time. Any repurchases by us will comply with the requirements of Rule 10b-18 under the Exchange Act and any applicable requirements of the 1940 Act.
Unless extended by our Board, the repurchase program will terminate on the earlier of June 30, 2018 or the repurchase of $5.0 million of our common stock.
During the year ended December 31, 2017, we repurchased 5,923 shares of our common stock at an average price of $9.97 on the open market at a total cost
of $0.1 million. During the year ended December 31, 2016, we repurchased 48,160 shares of our common stock at an average price of $10.66 on the open
market for a total cost of $0.5 million. During the year ended December 31, 2015, we repurchased 113,382 shares of our common stock at an average price of
$11.53 on the open market for a total cost of $1.3 million. From the inception of the stock repurchase program through December 31, 2017, we repurchased
167,465 shares of our common stock at an average price of $11.22 on the open market at a total cost of $1.9 million.
65
At December 31, 2017 and 2016, the outstanding principal balance under the Key Facility was $58.0 million and $63.0 million, respectively. As of
December 31, 2017 and 2016, we had borrowing capacity under the Key Facility of $37.0 million and $32.0 million, respectively. At December 31, 2017 and
2016, $23.6 million and $4.6 million, respectively, was available, subject to existing terms and advance rates.
Our operating activities used cash of $14.8 million for the year ended December 31, 2017, and our financing activities used cash of $15.7 million for the
same period. Our operating activities used cash primarily for investments made in portfolio companies, partially offset by principal payments received on our
debt investments. Our financing activities used cash primarily to redeem the 2019 Notes, pay down the Key Facility and pay distributions to our stockholders,
partially offset by the issuance of the 2022 Notes.
Our operating activities provided cash of $52.3 million for the year ended December 31, 2016, and our financing activities used cash of $35.9 million
for the same period. Our operating activities provided cash primarily from principal payments received on our debt investments, partially offset by
investments made in portfolio companies. Our financing activities used cash primarily to pay off our Asset-Backed Notes and pay distributions to our
stockholders.
Our operating activities used cash of $31.3 million for the year ended December 31, 2015, and our financing activities provided cash of $43.7 million
for the same period. Our operating activities used cash primarily for investments made in portfolio companies, partially offset by principal payments received
on our debt investments. Our financing activities provided cash primarily from the 2015 Offering and advances on our Key Facility of $58.0 million, which
was partially offset by cash used to pay down our Asset-Backed Notes, pay distributions to our stockholders and repurchase common stock under the stock
repurchase program.
Our primary use of available funds is to make debt investments in portfolio companies and for general corporate purposes. We expect to raise additional
equity and debt capital opportunistically as needed, and subject to market conditions, to support our future growth to the extent permitted by the 1940 Act.
In order to remain subject to taxation as a RIC, we intend to distribute to our stockholders all or substantially all of our investment company taxable
income. In addition, as a BDC, we are required to maintain asset coverage of at least 200%. This requirement limits the amount that we may borrow.
We believe that our current cash, cash generated from operations, and funds available from our Key Facility will be sufficient to meet our working
capital and capital expenditure commitments for at least the next 12 months.
Current borrowings
The following table shows our borrowings as of December 31, 2017 and 2016:
Total
Commitment
December 31, 2017
Balance
Outstanding
Unused
Commitment
Total
December 31, 2016
Balance
Commitment
Outstanding
Unused
Commitment
$
Key Facility
2022 Notes
2019 Notes
Total before debt issuance costs
Unamortized debt issuance costs
attributable to term borrowings
Total borrowings outstanding, net $
95,000 $
37,375
—
132,375
—
132,375 $
58,000 $
37,375
—
95,375
(1,300)
94,075 $
(In thousands)
37,000 $
—
—
37,000
—
37,000 $
95,000 $
—
33,000
128,000
—
128,000 $
63,000 $
—
33,000
96,000
(403)
95,597 $
32,000
—
—
32,000
—
32,000
We entered into the Key Facility effective November 4, 2013. The interest rate on the Key Facility is based upon the one-month London Interbank
Offered Rate, or LIBOR, plus a spread of 3.25%, with a LIBOR floor of 0.75%. The LIBOR rate was 1.56% and 0.77% as of December 31, 2017 and 2016,
respectively. The interest rate in effect was 4.61% and 4.00%, respectively, as of December 31, 2017 and 2016. The Key Facility requires the payment of an
unused line fee in an amount equal to 0.50% of any unborrowed amount available under the facility annually.
66
The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million. The Key Facility is collateralized
by debt investments held by Credit II and permits an advance rate of up to fifty percent (50%) of eligible debt investments held by Credit II. The Key Facility
contains covenants that, among other things, require us to maintain a minimum net worth, to restrict the debt investments securing the Key Facility to certain
criteria for qualified debt investments and to comply with portfolio company concentration limits as defined in the related loan agreement. We may request
advances under the Key Facility through August 12, 2018, or the Revolving Period. After the Revolving Period, we may not request new advances, and we
must repay the outstanding advances under the Key Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with
the terms and conditions of the Key Facility, particularly the condition that the principal balance of the Key Facility not exceed fifty percent (50%) of the
aggregate principal balance of our eligible debt investments to our portfolio companies. All outstanding advances under the Key Facility are due and payable
on August 12, 2020.
On March 23, 2012, we issued and sold an aggregate principal amount of $30.0 million 2019 Notes, and on April 18, 2012, pursuant to the
underwriters’ 30-day option to purchase additional notes, we sold an additional $3.0 million of the 2019 Notes. The 2019 Notes had a stated maturity of
March 15, 2019 and were redeemable in whole or in part at our option at any time or from time to time at a redemption price of $25 per security plus accrued
and unpaid interest. The 2019 Notes bore interest at a rate of 7.375% per year payable quarterly on March 15, June 15, September 15 and December 15 of
each year. The 2019 Notes were our direct, unsecured obligations and (1) ranked equally in right of payment with our future unsecured indebtedness; (2) were
senior in right of payment to any of our future indebtedness that expressly provided it was subordinated to the 2019 Notes; (3) were effectively subordinated
to all of our existing and future secured indebtedness (including indebtedness that was initially unsecured to which we subsequently granted security), to the
extent of the value of the assets securing such indebtedness and (4) were structurally subordinated to all existing and future indebtedness and other obligations
of any of our subsidiaries. On October 30, 2017, or the Redemption Date, we redeemed all of the issued and outstanding 2019 Notes in an aggregate principal
amount of $33.0 million and paid accrued interest of $0.3 million. The 2019 Notes were delisted effective on the Redemption Date.
On September 29, 2017, we issued and sold an aggregate principal amount of $32.5 million 2022 Notes, and on October 11, 2017, pursuant to the
underwriters’ 30-day option to purchase additional notes, we sold an additional $4.9 million of the 2022 Notes. The 2022 Notes have a stated maturity of
September 15, 2022 and may be redeemed in whole or in part at our option at any time or from time to time on or after September 15, 2019 at a redemption
price of $25 per security plus accrued and unpaid interest. The 2022 Notes bear interest at a rate of 6.25% per year payable quarterly on March 15, June 15,
September 15 and December 15 of each year. The 2022 Notes are our direct, unsecured obligations and (1) rank equally in right of payment with our current
and future unsecured indebtedness; (2) are senior in right of payment to any of our future indebtedness that expressly provides it is subordinated to the 2022
Notes; (3) are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we
subsequently grant security), to the extent of the value of the assets securing such indebtedness and (4) are structurally subordinated to all existing and future
indebtedness and other obligations of any of our subsidiaries. As of December, 31, 2017, we were in material compliance with the terms of the 2022 Notes.
The 2022 Notes are listed on the New York Stock Exchange under the symbol “HTFA”.
On June 28, 2013, we completed the 2013-1 Securitization. In connection with the 2013-1 Securitization, 2013-1 Trust, a wholly owned subsidiary of
ours, issued $90.0 million in the Asset-Backed Notes, which were rated A1(sf) by Moody’s Investors Service, Inc. The Asset-Backed Notes were issued by
2013-1 Trust and were backed by a pool of loans made to certain portfolio companies of ours and secured by certain assets of such portfolio companies. The
Asset-Backed Notes were secured obligations of 2013-1 Trust and non-recourse to us. In connection with the issuance and sale of the Asset-Backed Notes, we
made customary representations, warranties and covenants. The Asset-Backed Notes bore interest at a fixed rate of 3.00% per annum and had a stated
maturity of May 15, 2018. As of December 31, 2016, the Asset-Backed Notes were repaid in full.
Other assets
As of December 31, 2017 and 2016, other assets were $1.5 million and $2.1 million, respectively, which is primarily comprised of debt issuance costs
and prepaid expenses.
67
Contractual obligations and off-balance sheet arrangements
The following table shows our significant contractual payment obligations and off-balance sheet arrangements as of December 31, 2017:
Borrowings
Unfunded commitments
Total
Total
Less than
1 year
Payments due by period
1 – 3
Years
(In thousands)
3 – 5
Years
After 5
years
$
$
95,375 $
33,250
128,625 $
— $
28,250
28,250 $
39,915 $
5,000
44,915 $
55,460 $
—
55,460 $
—
—
—
In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded commitments to
extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are not reflected on our
balance sheet. Our unfunded commitments may be significant from time to time. As of December 31, 2017, we had unfunded commitments of $33.3 million.
These commitments are subject to the same underwriting and ongoing portfolio maintenance requirements as are the financial instruments that we hold on our
balance sheet. In addition, these commitments are often subject to financial or non-financial milestones and other conditions to borrowing that must be
achieved before the commitment can be drawn. Since these commitments may expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. We regularly monitor our unfunded commitments and anticipated refinancings, maturities and capital raising,
to ensure that we have sufficient liquidity to fund such unfunded commitments. As of December 31, 2017, we reasonably believed that our assets would
provide adequate financial resources to satisfy all of our unfunded commitments.
In addition to the Key Facility, we have certain commitments pursuant to our Investment Management Agreement entered into with our Advisor. We
have agreed to pay a fee for investment advisory and management services consisting of two components (1) a base management fee equal to a percentage of
the value of our gross assets less cash or cash equivalents, and (2) a two-part incentive fee. We have also entered into a contract with our Advisor to serve as
our administrator. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of our Advisor’s overhead in
performing its obligations under the agreement, including rent, fees and other expenses inclusive of our allocable portion of the compensation of our Chief
Financial Officer and Chief Compliance Officer and their respective staffs. See Note 3 to our consolidated financial statements for additional information
regarding our Investment Management Agreement and our Administration Agreement.
Distributions
In order to qualify and be subject to tax as a RIC, we must meet certain source-of-income, asset diversification and annual distribution requirements.
Generally, in order to qualify as a RIC, we must derive at least 90% of our gross income for each tax year from dividends, interest, payments with respect to
certain securities, loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income derived with respect to its business
of investing in stock or other securities. We must also meet certain asset diversification requirements at the end of each quarter of each tax year. Failure to
meet these diversification requirements on the last day of a quarter may result in us having to dispose of certain investments quickly in order to prevent the
loss of RIC status. Any such dispositions could be made at disadvantageous prices or times, and may cause us to incur substantial losses.
In addition, in order to be subject to tax as a RIC and to avoid the imposition of corporate-level tax on the income and gains we distribute to our
stockholders in respect of any tax year, we are required under the Code to distribute as dividends to our stockholders out of assets legally available for
distribution each tax year an amount generally at least equal to 90% of the sum of our net ordinary income and net short-term capital gains in excess of net
long-term capital losses, if any. Additionally, in order to avoid the imposition of a U.S. federal excise tax, we are required to distribute, in respect of each
calendar year, dividends to our stockholders of an amount at least equal to the sum of 98% of our calendar year net ordinary income (taking into account
certain deferrals and elections); 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the one year period ending on October 31 of
such calendar year; and any net ordinary income and capital gain net income for preceding calendar years that were not distributed during such calendar years
and on which we previously did not incur any U.S. federal income tax. If we fail to qualify as a RIC for any reason and become subject to corporate tax, the
resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a
failure would have a material adverse effect on us and our stockholders. In addition, we could be required to recognize unrealized gains, incur substantial
taxes and interest and make substantial distributions in order to re-qualify as a RIC. We cannot assure stockholders that they will receive any distributions.
68
To the extent our taxable earnings in a tax year fall below the total amount of our distributions made to stockholders in respect of such tax year, a
portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to
our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should review any written disclosure
accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary income or gains.
We have adopted an “opt out” DRIP for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be
automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our DRIP. If a stockholder opts out, that
stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to
U.S. federal, state and local taxes, stockholders participating in our DRIP will not receive any corresponding cash distributions with which to pay any such
applicable taxes. If our common stock is trading above net asset value, a stockholder receiving distributions in the form of additional shares of our common
stock will be treated as receiving a distribution of an amount equal to the fair market value of such shares of our common stock. We may use newly issued
shares to implement the DRIP, or we may purchase shares in the open market in connection with our obligations under the DRIP.
Related party transactions
We have entered into the Investment Management Agreement with the Advisor. The Advisor is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended. Our investment activities are managed by the Advisor and supervised by the Board, the majority of whom are independent
directors. Under the Investment Management Agreement, we have agreed to pay the Advisor a base management fee as well as an incentive fee. During the
years ended December 31, 2017, 2016 and 2015, we paid the Advisor $5.4 million, $6.9 million and $7.9 million, respectively, pursuant to the Investment
Management Agreement.
Our Advisor is 60% owned by HTF Holdings LLC, which is 100% owned by Horizon Technology Finance, LLC. By virtue of their ownership interest
in Horizon Technology Finance, LLC, our Chief Executive Officer, Robert D. Pomeroy, Jr. and our President, Gerald A. Michaud, may be deemed to control
our Advisor.
We have also entered into the Administration Agreement with the Advisor. Under the Administration Agreement, we have agreed to reimburse the
Advisor for our allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement,
including rent and our allocable portion of the costs of compensation and related expenses of our Chief Financial Officer and Chief Compliance Officer and
their respective staffs. In addition, pursuant to the terms of the Administration Agreement the Advisor provides us with the office facilities and administrative
services necessary to conduct our day-to-day operations. During the years ended December 31, 2017, 2016 and 2015, we paid the Advisor $0.7 million, $0.9
million and $1.1 million, respectively, pursuant to the Administration Agreement.
The predecessor of the Advisor has granted the Company a non-exclusive, royalty-free license to use the name “Horizon Technology Finance.”
We believe that we derive substantial benefits from our relationship with our Advisor. Our Advisor may manage other investment vehicles, or Advisor
Funds, with the same investment strategy as us. The Advisor may provide us an opportunity to co-invest with the Advisor Funds. Under the 1940 Act, absent
receipt of exemptive relief from the SEC, we and our affiliates are precluded from co-investing in negotiated investments. On November 27, 2017, we were
granted exemptive relief from the SEC which permits us to co-invest with Advisor Funds, subject to certain conditions.
Critical accounting policies
The discussion of our financial condition and results of operation is based upon our financial statements, which have been prepared in accordance with
GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such
estimates could cause actual results to differ. In addition to the discussion below, we describe our significant accounting policies in the notes to our
consolidated financial statements.
69
We have identified the following items as critical accounting policies.
Valuation of investments
Investments are recorded at fair value. Our Board determines the fair value of our portfolio investments. We apply fair value to substantially all of our
investments in accordance with Topic 820, Fair Value Measurement, of the Financial Accounting Standards Board’s, or FASB’s, Accounting Standards
Codification as amended, or ASC, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. We have
categorized our investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy. Fair value is a
market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure.
Therefore, when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants
would use in pricing the financial instrument at the measurement date.
The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example,
the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market
conditions. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value
requires more judgment. The three categories within the hierarchy are as follows:
Level 1
Quoted prices in active markets for identical assets and liabilities.
Level 2
Level 3
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.
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.
Our Board determines the fair value of investments in good faith, based on the input of management, the audit committee and independent valuation
firms that have been engaged at the direction of our Board to assist in the valuation of each portfolio investment without a readily available market quotation
at least once during a trailing twelve-month period under our valuation policy and a consistently applied valuation process. The Board conducts this valuation
process at the end of each fiscal quarter, with 25% (based on fair value) of our valuation of portfolio companies that do not have a readily available market
quotations subject to review by an independent valuation firm.
Income recognition
Interest on 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 we otherwise do 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. For the year ended December 31, 2017,
we recognized as interest income interest payments of $0.1 million received from one portfolio company whose debt investment was on non-accrual status.
For the year ended December 31, 2016, we did not recognize interest income from debt investments on non-accrual status. For the year ended December 31,
2015, we recognized as interest income interest payments of $0.2 million received from one portfolio company whose debt investment was on non-accrual
status.
70
We receive a variety of fees from borrowers in the ordinary course of conducting our business, including advisory fees, commitment fees, amendment
fees, non-utilization fees, success fees and prepayment fees. In a limited number of cases, we may also receive a non-refundable deposit earned upon the
termination of a transaction. 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 recorded into income 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 income over the life of the debt investment to the
extent such amounts are expected to be collected. We will generally cease accruing the income if there is insufficient value to support the accrual or if we do
not expect the borrower to be able to pay all principal and interest due.
In connection with substantially all lending arrangements, we receive warrants to purchase shares of stock from the borrower. We record the warrants as
assets at estimated fair value on the grant date using the Black-Scholes valuation model. We consider the warrants as loan fees and record them 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 our
income recognition policy. Subsequent to origination, the warrants are also measured at fair value using the Black-Scholes valuation model. Any adjustment
to fair value is recorded through earnings as net unrealized gain or loss on investments. Gains 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. We measure 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 our portfolio investments during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or
losses are realized.
Income taxes
We have elected to be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to
RICs. In order to qualify as a RIC and to avoid the imposition of corporate-level U.S. federal income tax on the amounts we distribute to our stockholders,
among other things, we are required to meet certain source of income and asset diversification requirements, and we must timely distribute dividends to our
stockholders out of assets legally available for distribution each tax year of an amount generally at least equal to 90% of our investment company taxable
income, as defined by the Code and determined without regard to any deduction for dividends paid. We, among other things, have made and intend to
continue to make the requisite distributions to our stockholders, which will generally relieve us from incurring any material liability for U.S. federal income
taxes.
Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions
into the next tax year and incur a 4% excise tax on such income, as required. To the extent that we determine that our estimated current year annual taxable
income will be in excess of estimated current year distributions, we will accrue excise tax, if any, on estimated excess taxable income as taxable income is
earned.
We evaluate tax positions taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” to be
sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes, as modified by ASC Topic 946, Financial Services – Investment
Companies. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, are recorded as a tax expense in the
current year. It is our policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. We had no material uncertain
tax positions at December 31, 2017 and 2016.
Recently issued accounting pronouncement
In April 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which
amends existing revenue recognition guidance to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim periods beginning on or after
December 15, 2017. We have evaluated ASU 2014-09 and determined it will not have a material impact on our consolidated financial statements and
disclosures.
71
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. During the periods covered by our financial statements, the interest rates on
the debt investments within our portfolio were primarily at floating rates. We expect that our debt investments in the future will primarily have floating
interest rates. As of December 31, 2017 and 2016, 99% and 96%, respectively, of the outstanding principal amount of our debt investments bore interest at
floating rates. The initial commitments to lend to our portfolio companies are usually based on a floating LIBOR index.
Based on our December 31, 2017 consolidated statement of assets and liabilities (without adjustment for potential changes in the credit market, credit
quality, size and composition of assets on the consolidated statement of assets and liabilities or other business developments that could affect net income), the
following table shows the annual impact on the change in net assets resulting from operations of changes in interest rates, which assumes no changes in our
investments and borrowings:
Change in basis points
Up 300 basis points
Up 200 basis points
Up 100 basis points
Down 300 basis points
Down 200 basis points
Down 100 basis points
Interest
Income
Interest
Expense
(In thousands)
Change in
Net Assets(1)
$
$
$
$
$
$
6,012 $
4,036 $
2,051 $
(1,107) $
(1,107) $
(1,012) $
1,764 $
1,176 $
588 $
(359) $
(359) $
(359) $
4,248
2,860
1,463
(748)
(748)
(653)
(1) Excludes the impact of incentive fees based on pre-incentive fee net investment income.
While our 2022 Notes bear interest at a fixed rate, our Key Facility has a floating interest rate provision, subject to a floor of 0.75% per annum, based on
a LIBOR index which resets monthly, and any other credit facilities into which we enter in the future may have floating interest rate provisions. We have used
hedging instruments in the past to protect us against interest rate fluctuations, and we may use them in the future. Such instruments may include caps, swaps,
futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to
participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.
Because we currently fund, and expect to continue to fund, our investments with borrowings, our net income is dependent upon the difference between
the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in
market interest rates will not have a material adverse effect on our net income. In periods of rising interest rates, our cost of funds could increase, which
would reduce our net investment income.
72
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Consolidated Statements of Assets and Liabilities as of December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Net Assets for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Schedules of Investments as of December 31, 2017 and 2016
Notes to the Consolidated Financial Statements
73
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75
76
77
78
79
80
81
92
Management’s Report on Internal Control over Financial Reporting
Management of Horizon Technology Finance Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control
over the Company’s financial reporting. The Company’s internal control system is a process designed to provide reasonable assurance to management and the
board of directors regarding the preparation and fair presentation of published financial statements.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions recorded necessary to permit the preparation of financial statements in accordance with U.S. generally
accepted accounting principles. The Company’s policies and procedures also provide reasonable assurance that receipts and expenditures are being made only
in accordance with authorizations of management and the directors of the Company, and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness as to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment,
we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework
issued in 2013. Based on the assessment, management believes that, as of December 31, 2017, the Company’s internal control over financial reporting is
effective based on those criteria.
The Company’s independent registered public accounting firm that audited the financial statements has issued an audit report on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2017, which appears in this annual report on Form 10-K.
74
To the Stockholders and the Board of Directors
Horizon Technology Finance Corporation
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, of Horizon
Technology Finance Corporation and Subsidiaries (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations,
changes in net assets and cash flows for each of the three years in the period ended December 31, 2017, and the related notes to the consolidated financial
statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 6, 2018, expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. Our procedures included confirmation of investments owned as of December 31, 2017 and 2016, by correspondence with the custodian or
borrower or by other appropriate auditing procedures where replies from the custodian or borrowers were not received. We believe that our audits provide a
reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company's auditor since 2008.
New York, New York
March 6, 2018
75
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
To the Stockholders and the Board of Directors
Horizon Technology Finance Corporation
Opinion on the Internal Control Over Financial Reporting
We have audited Horizon Technology Finance Corporation and Subsidiaries’ (the Company) internal control over financial reporting as of December 31,
2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
statements of assets and liabilities of the Company, including the consolidated schedules of investments, as of December 31, 2017 and 2016, and the related
consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2017, and our report
dated March 6, 2018 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ RSM US LLP
New York, New York
March 6, 2018
76
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Assets and Liabilities
(In thousands, except share and per share data)
Assets
Non-affiliate investments at fair value (cost of $219,303 and $211,627, respectively) (Note 4)
Affiliate investments at fair value (cost of $3,774)(Note 5)
Total investments at fair value (cost of $223,077 and $211,627, respectively)
Cash
Interest receivable
Other assets
Total assets
Liabilities
Borrowings (Note 7)
Distributions payable
Base management fee payable (Note 3)
Incentive fee payable (Note 3)
Other accrued expenses
Total liabilities
Commitments and Contingencies (Note 8 and 9)
Net assets
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of
December 31, 2017 and 2016
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 11,687,871 and 11,671,966 shares issued
and 11,520,406 and 11,510,424 shares outstanding as of December 31, 2017 and 2016, respectively
Paid-in capital in excess of par
Distributions in excess of net investment income
Net unrealized depreciation on investments
Net realized loss on investments
Total net assets
Total liabilities and net assets
Net asset value per common share
See Notes to Consolidated Financial Statements
77
December 31,
2017
2016
218,600 $
3,499
222,099
6,594
3,986
1,467
234,146 $
94,075 $
3,456
379
541
620
99,071
194,003
—
194,003
37,135
6,036
2,078
239,252
95,597
3,453
337
—
673
100,060
—
—
12
179,641
(1,898)
(978)
(41,702)
135,075
234,146 $
11.72 $
12
179,551
(397)
(19,463)
(20,511)
139,192
239,252
12.09
$
$
$
$
$
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share data)
Investment income
Interest income on non-affiliate investments
Interest income on affiliate investments
Total interest income on investments
Fee income
Prepayment fee income on non-affiliate investments
Fee income on non-affiliate investments
Fee income on affiliate investments
Total investment income
Expenses
Interest expense
Base management fee (Note 3)
Performance based incentive fee (Note 3)
Administrative fee (Note 3)
Professional fees
General and administrative
Total expenses
Management and performance based incentive fees waived (Note 3)
Net expenses
Net investment income before excise tax
Provision (credit) for excise tax (Note 8)
Net investment income
Net realized and unrealized loss on investments
Net realized loss on non-affiliate investments
Net realized loss on investments
Net unrealized appreciation (depreciation) on non-affiliate investments
Net unrealized depreciation on affiliate investments
Net unrealized appreciation (depreciation) on investments
Net realized and unrealized loss on investments
Net increase (decrease) in net assets resulting from operations
Net investment income per common share
Net increase (decrease) in net assets per common share
Distributions declared per share
Weighted average shares outstanding
Year Ended December 31,
2016
2017
2015
23,538 $
225
23,763
1,432
567
15
25,777
5,167
3,786
1,714
699
1,365
803
13,534
(79)
13,455
12,322
25
12,297
31,397 $
—
31,397
794
793
—
32,984
5,878
4,727
2,126
869
1,486
886
15,972
—
15,972
17,012
(87)
17,099
28,650
—
28,650
1,289
1,171
—
31,110
5,757
4,747
3,501
1,124
1,308
1,023
17,460
(346)
17,114
13,996
—
13,996
(21,191)
(21,191)
18,506
(21)
18,485
(2,706)
9,591 $
1.07 $
0.83 $
1.20 $
11,516,846
(7,776)
(7,776)
(14,236)
—
(14,236)
(22,012)
(4,913) $
1.48 $
(0.43) $
1.335 $
11,543,708
(1,650)
(1,650)
(490)
—
(490)
(2,140)
11,856
1.25
1.06
1.38
11,180,864
$
$
$
$
$
See Notes to Consolidated Financial Statements
78
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets
(In thousands, except share data)
Balance at December 31, 2014
Issuance of common stock, net of offering
costs
Net increase in net assets resulting from
operations, net of excise tax
Issuance of common stock under dividend
reinvestment plan
Repurchase of common stock
Distributions declared
Reclassification of permanent tax differences
(Note 2)
Balance at December 31, 2015
Net decrease in net assets resulting from
operations, net of excise tax
Issuance of common stock under dividend
reinvestment plan
Repurchase of common stock
Distributions declared
Reclassification of permanent tax differences
(Note 2)
Balance at December 31, 2016
Net increase in net assets resulting from
operations, net of excise tax
Issuance of common stock under dividend
reinvestment plan
Repurchase of common stock
Distributions declared
Reclassification of permanent tax differences
(Note 2)
Balance at December 31, 2017
Common Stock
Shares
Amount
Paid-In
Capital in
Excess of
Par
Accumulated
Undistributed
(Distributions in
Excess of) Net
Investment
Income
Net Unrealized
Depreciation on
Investments
Net Realized
Loss on
Investments
Total Net
Assets
9,628,124
$
10
$
155,240
$
(1,102) $
(4,737) $
(11,163) $
138,248
2,000,000
—
20,470
(113,382)
—
—
11,535,212
—
23,372
(48,160)
—
—
11,510,424
—
15,905
(5,923)
—
—
11,520,406
$
2
—
—
—
—
—
12
—
—
—
—
—
12
—
—
—
—
—
12
26,504
—
247
(1,313)
—
(971)
179,707
—
273
(516)
—
87
179,551
—
174
(59)
—
(25)
$
179,641
$
—
13,996
—
—
(15,793)
893
(2,006)
17,099
—
—
(15,403)
(87)
(397)
12,297
—
—
(13,823)
—
(490)
—
—
—
—
(5,227)
(14,236)
—
—
—
—
(19,463)
18,485
—
—
—
—
(1,650)
—
—
—
78
(12,735)
(7,776)
—
—
—
—
(20,511)
(21,191)
—
—
—
25
(1,898) $
—
(978) $
—
(41,702) $
26,506
11,856
247
(1,313)
(15,793)
—
159,751
(4,913)
273
(516)
(15,403)
—
139,192
9,591
174
(59)
(13,823)
—
135,075
See Notes to Consolidated Financial Statements
79
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Cash Flow
(In thousands)
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net
Year Ended December 31,
2016
2017
2015
$
9,591 $
(4,913) $
11,856
cash (used in) provided by operating activities:
Amortization of debt issuance costs
Net realized loss on investments
Net unrealized (appreciation) depreciation on investments
Purchase of investments
Principal payments received on investments
Proceeds from sale of investments
Changes in assets and liabilities:
Net decrease (increase) in investments in money market funds
Net decrease in restricted investments in money market funds
(Increase) decrease in interest receivable
Decrease (increase) in end-of-term payments
Decrease in unearned income
Decrease in other assets
Decrease in other accrued expenses
Increase (decrease) in base management fee payable
Increase (decrease) in incentive fee payable
Net cash (used in) provided by operating activities
Cash flows from financing activities:
Proceeds from issuance of 2022 Notes
Repayment of 2019 Notes
Proceeds from issuance of common stock, net of offering costs
Repayment of Asset-Backed Notes
Advances on credit facility
Repayment of credit facility
Distributions paid
Repurchase of common stock
Debt issuance costs
Net cash (used in) provided by financing activities
Net (decrease) increase in cash
Cash:
Beginning of period
End of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Supplemental non-cash investing and financing activities:
Warrant investments received and recorded as unearned income
Distributions payable
End of term payments receivable
795
21,191
(18,485)
(135,556)
103,790
1,840
—
—
(87)
1,437
(176)
289
(53)
42
541
(14,841)
37,375
(33,000)
—
—
92,000
(97,000)
(13,646)
(59)
(1,370)
(15,700)
(30,541)
562
7,776
14,236
(59,858)
95,710
984
285
1,091
211
(1,861)
(712)
—
(125)
(48)
(1,028)
52,310
—
—
—
(14,546)
10,000
(15,000)
(15,657)
(516)
(221)
(35,940)
16,370
$
$
$
$
$
37,135
6,594 $
20,765
37,135 $
4,397 $
5,305 $
2,463 $
3,456 $
2,936 $
554 $
3,453 $
5,074 $
911
1,650
490
(123,281)
74,640
1,669
(258)
1,815
(199)
(1,301)
(203)
634
(11)
29
229
(31,330)
—
—
26,506
(24,207)
58,000
—
(14,888)
(1,313)
(420)
43,678
12,348
8,417
20,765
4,733
870
3,980
5,086
See Notes to Consolidated Financial Statements
80
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2017
(In thousands)
Sector
Type of Investment (4)(7)(9)(10)
Principal
Amount
Cost of
Investments (6)
Fair
Value (14)
$
2,000
$
1,980
$
Term Loan (9.87% cash (Libor + 8.50%; Floor
9.00%), 5.00% ETP, Due 1/1/19)
Term Loan (9.87% cash (Libor + 8.50%; Floor
9.00%), 5.00% ETP, Due 8/1/19)
Term Loan (11.37% cash (Libor + 10.00%; Floor
10.50%), 6.00% ETP, Due 5/1/20)
Term Loan (11.37% cash (Libor + 10.00%; Floor
10.50%), 6.00% ETP, Due 10/1/20)
Term Loan (9.77% cash (Libor + 8.40%; Floor
9.50%), 5.00% ETP, Due 6/1/21)
Term Loan (9.77% cash (Libor + 8.40%; Floor
9.50%), 5.00% ETP, Due 6/1/21)
Term Loan (8.85% cash (Libor + 7.45%; Floor
8.75%), 4.00% ETP, Due 1/1/22)
Term Loan (8.85% cash (Libor + 7.45%; Floor
8.75%), 4.00% ETP, Due 1/1/22)
Term Loan (8.85% cash (Libor + 7.45%; Floor
8.75%), 4.00% ETP, Due 1/1/22)
Term Loan (9.49% cash (Libor + 8.00%; Floor
9.25%), 6.00% ETP, Due 6/1/21)
Term Loan (9.49% cash (Libor + 8.00%; Floor
9.25%), 6.00% ETP, Due 6/1/21)
Term Loan (9.49% cash (Libor + 8.00%; Floor
9.25%), 6.00% ETP, Due 6/1/21)
Term Loan (11.87% PIK (Libor + 10.50%; Floor
11.50%), 8.91% ETP, Due 5/1/19) (13)
Term Loan (13.01% cash (Libor + 11.82%; Floor
12.00%), 6.00% ETP, Due 12/1/17)
Term Loan (13.01% cash (Libor + 11.82%; Floor
12.00%), 6.00% ETP, Due 12/1/17)
Term Loan (10.12% cash (Libor + 8.75%; Floor
9.25%), 4.50% ETP, Due 3/1/19)
Term Loan (10.12% cash (Libor + 8.75%; Floor
9.25%), 4.50% ETP, Due 3/1/19)
Term Loan (9.33% cash (Libor + 8.00%; Floor
9.25%), 5.00% ETP, Due 1/1/22)
Term Loan (9.33% cash (Libor + 8.00%; Floor
9.25%), 5.00% ETP, Due 1/1/22)
Term Loan (11.39% cash (Libor + 9.95%; Floor
11.25%), 2.50% ETP, Due 7/1/21)
Term Loan (11.39% cash (Libor + 9.95%; Floor
11.25%), 2.50% ETP, Due 7/1/21)
Term Loan (11.39% cash (Libor + 9.95%; Floor
11.25%), 2.50% ETP, Due 7/1/21)
Term Loan (10.63% cash (Libor + 9.26%; Floor
10.25%), 4.00% ETP, Due 7/1/21)
Term Loan (10.63% cash (Libor + 9.26%; Floor
10.25%), 4.00% ETP, Due 7/1/21)
Term Loan (11.02% cash (Libor + 9.65%; Floor
10.15%), 5.00% ETP, Due 3/1/20)
Term Loan (11.02% cash (Libor + 9.65%; Floor
10.15%), 5.00% ETP, Due 3/1/20)
Term Loan (11.77% cash (Libor + 10.40%; Floor
10.90%), 4.25% ETP, Due 6/1/20)
Term Loan (11.77% cash (Libor + 10.40%; Floor
10.90%), 3.80% ETP, Due 11/1/20)
3,167
6,250
3,750
3,500
3,500
4,000
3,000
3,000
4,000
4,000
4,000
2,479
173
173
2,667
1,333
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
3,000
2,167
1,911
3,139
6,196
3,700
3,400
3,430
3,876
2,954
2,954
3,928
3,928
3,928
2,466
173
173
2,645
1,320
3,914
3,934
1,980
3,139
6,196
3,700
3,400
3,430
3,876
2,954
2,954
3,928
3,928
3,928
2,466
163
163
2,645
1,320
3,914
3,934
58,038
58,018
3,888
3,927
3,927
3,874
3,933
3,960
2,969
2,140
1,849
3,888
3,927
3,927
3,874
3,933
3,960
2,969
2,140
1,849
Portfolio Company (1)(3)
Non-Affiliate Investments — 161.8% (8)
Non-Affiliate Debt Investments — 148.4% (8)
Non-Affiliate Debt Investments — Life Science — 43.0% (8)
Palatin Technologies, Inc. (2)(5)
Biotechnology
vTv Therapeutics Inc. (2)(5)
Biotechnology
Titan Pharmaceuticals, Inc. (2)(5)
Drug Delivery
Aerin Medical, Inc. (2)
Medical Device
Conventus Orthopaedics, Inc. (2)
Medical Device
Lantos Technologies, Inc. (2)
Mederi Therapeutics, Inc. (2)
Medical Device
Medical Device
NinePoint Medical, Inc. (2)
Medical Device
VERO Biotech LLC (2)
Medical Device
Total Non-Affiliate Debt Investments — Life
Science
Non-Affiliate Debt Investments — Technology — 99.1% (8)
Intelepeer Holdings, Inc.
Communications
PebblePost, Inc. (2)
Communications
Le Tote, Inc. (2)
SavingStar, Inc. (2)
Consumer-related
Technologies
Consumer-related
Technologies
See Notes to Consolidated Financial Statements
81
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2017
(In thousands)
Portfolio Company (1)(3)
IgnitionOne, Inc. (2)
Sector
Internet and Media
Jump Ramp Games, Inc. (2)
Kixeye, Inc. (2)
MediaBrix, Inc. (2)
Rocket Lawyer Incorporated (2)
Internet and Media
Internet and Media
Internet and Media
Internet and Media
Zinio Holdings, LLC (2)
Internet and Media
The NanoSteel Company, Inc. (2)
Materials
Powerhouse Dynamics, Inc. (2)
Power Management
Luxtera, Inc.
Semiconductors
Bridge2 Solutions, LLC. (2)
Software
Digital Signal Corporation (11)(12)
Software
Education Elements, Inc. (2)
Software
Metricly, Inc.
ShopKeep.com, Inc. (2)
SIGNiX, Inc.
SilkRoad Technology, Inc. (2)
Weblinc Corporation (2)
Software
Software
Software
Software
Software
Type of Investment (4)(7)(9)(10)
Term Loan (11.60% cash (Libor + 10.23%; Floor
10.23%), 2.00% ETP, Due 4/1/22)
Term Loan (11.60% cash (Libor + 10.23%; Floor
10.23%), 2.00% ETP, Due 4/1/22)
Term Loan (11.60% cash (Libor + 10.23%; Floor
10.23%), 2.00% ETP, Due 4/1/22)
Term Loan (11.60% cash (Libor + 10.23%; Floor
10.23%), 2.00% ETP, Due 4/1/22)
Term Loan (11.10% cash (Libor + 9.73%),
3.00% ETP, Due 4/1/21)
Term Loan (10.97% cash (Libor + 9.60%; Floor
10.75%), 2.00% ETP, Due 9/1/21)
Term Loan (10.97% cash (Libor + 9.60%; Floor
10.75%), 2.00% ETP, Due 9/1/21)
Term Loan (12.37% cash (Libor + 11.00%; Floor
11.50%), 3.00% ETP, Due 1/1/20)
Term Loan (10.77% cash (Libor + 9.40%; Floor
10.50%), 3.00% ETP, Due 7/1/21)
Term Loan (10.77% cash (Libor + 9.40%; Floor
10.50%), 3.00% ETP, Due 7/1/21)
Term Loan (10.77% cash (Libor + 9.40%; Floor
10.50%), 3.00% ETP, Due 11/1/21)
Term Loan (12.62% cash (Libor + 11.25%; Floor
11.75%), 6.00% ETP, Due 2/1/20)
Term Loan (10.87% cash (Libor + 9.50%; Floor
10.00%), 7.20% ETP, Due 1/1/20)
Term Loan (10.87% cash (Libor + 9.50%; Floor
10.00%), 6.45% ETP, Due 1/1/20)
Term Loan (10.87% cash (Libor + 9.50%; Floor
10.00%), 5.85% ETP, Due 3/1/20)
Term Loan (12.07% cash (Libor + 10.70%; Floor
11.20%), 3.00% ETP, Due 3/1/19)
Term Loan (11.25% cash (Prime + 6.75%), Due
3/28/20)
Term Loan (11.25% cash (Prime + 6.75%), Due
3/28/20)
Term Loan (10.62% cash (Libor + 9.25%; Floor
10.50%), 2.00% ETP, Due 11/1/21)
Term Loan (10.62% cash (Libor + 9.25%; Floor
10.50%), 2.00% ETP, Due 11/1/21)
Term Loan (11.62% cash (Libor + 10.25%; Floor
10.43%), 5.00% ETP, Due 7/1/19)
Term Loan (11.62% cash (Libor + 10.25%; Floor
10.43%), 5.00% ETP, Due 7/1/19)
Term Loan (10.00% cash, Due 12/31/17)
Term Loan (11.37% cash (Libor + 10.00%; Floor
10.50%), 4.00% ETP, Due 1/1/19)
Term Loan (11.37% cash (Libor + 10.00%; Floor
10.50%), 4.00% ETP, Due 8/1/19)
Term Loan (13.62% cash (Libor + 12.25%; Floor
12.50%), 3.33% ETP, Due 9/1/18)
Term Loan (11.32% cash (Libor + 9.95%; Floor
10.45%), 4.08% ETP, Due 10/1/20)
Term Loan (11.32% cash (Libor + 9.95%; Floor
10.45%), 3.55% ETP, Due 2/1/21)
Term Loan (12.37% cash (Libor + 11.00%; Floor
11.50%), 5.33% ETP, Due 2/1/20)
Term Loan (11.72% cash (Libor + 10.35%; Floor
10.85%; Ceiling 12.85%), 5.00% ETP, Due
6/1/20)
Term Loan (11.62% cash (Libor + 10.25%; Floor
11.25%), 3.00% ETP, Due 3/1/21)
See Notes to Consolidated Financial Statements
82
Principal
Amount
Cost of
Investments (6)
Fair
Value (14)
3,000
3,000
3,000
3,000
4,000
3,000
3,000
4,000
4,000
4,000
2,000
4,000
4,653
2,327
2,500
1,250
2,000
1,500
5,000
5,000
1,290
1,290
501
800
950
184
6,000
4,000
2,180
7,000
3,000
2,832
2,832
2,832
2,832
3,942
2,900
2,945
3,977
3,933
3,933
1,963
3,978
4,578
2,289
2,457
1,234
1,902
1,443
4,777
4,777
1,256
1,256
501
789
937
184
5,897
3,924
2,073
6,904
2,913
2,832
2,832
2,832
2,832
3,942
2,900
2,945
3,977
3,933
3,933
1,963
3,978
4,578
2,289
2,457
1,234
1,902
1,443
4,777
4,777
1,210
1,210
483
789
937
184
5,897
3,924
1,930
6,904
2,913
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2017
(In thousands)
Portfolio Company (1)(3)
xAd, Inc. (2)
Sector
Software
Type of Investment (4)(7)(9)(10)
Term Loan (10.07% cash (Libor + 8.70%; Floor
10.00%), 4.75% ETP, Due 11/1/21)
Term Loan (10.07% cash (Libor + 8.70%; Floor
10.00%), 4.75% ETP, Due 11/1/21)
Term Loan (10.07% cash (Libor + 8.70%; Floor
10.00%), 4.75% ETP, Due 11/1/21)
Term Loan (10.07% cash (Libor + 8.70%; Floor
10.00%), 4.75% ETP, Due 11/1/21)
Total Non-Affiliate Debt Investments — Technology
Non-Affiliate Debt Investments — Healthcare information and services — 6.3% (8)
HealthEdge Software, Inc. (2)
Software
Term Loan (9.62% cash (Libor + 8.25%; Floor
9.25%), 3.00% ETP, Due 7/1/22)
Term Loan (9.68% cash (Libor + 8.25%; Floor
9.25%), 3.00% ETP, Due 1/1/23)
Total Non-Affiliate Debt Investments — Healthcare
information and services
Total Non- Affiliate Debt Investments
Non-Affiliate Warrant Investments — 6.7% (8)
Non-Affiliate Warrants — Life Science — 1.6% (8)
ACT Biotech Corporation
Alpine Immune Sciences, Inc. (5)
Argos Therapeutics, Inc. (2)(5)
Celsion Corporation (5)
Rocket Pharmaceuticals Corporation (5)
Palatin Technologies, Inc. (2)(5)
Revance Therapeutics, Inc. (5)
Sample6, Inc. (2)
Strongbridge U.S. Inc. (5)
Sunesis Pharmaceuticals, Inc. (5)
vTv Therapeutics Inc. (2)(5)
Titan Pharmaceuticals, Inc. (2)(5)
AccuVein Inc. (2)
Aerin Medical, Inc. (2)
Conventus Orthopaedics, Inc. (2)
IntegenX, Inc. (2)
Lantos Technologies, Inc. (2)
Mederi Therapeutics, Inc. (2)
Mitralign, Inc. (2)
NinePoint Medical, Inc. (2)
OraMetrix, Inc. (2)
ReShape Lifesciences Inc. (5)
Tryton Medical, Inc. (2)
VERO Biotech LLC (2)
ViOptix, Inc.
Total Non-Affiliate Warrants — Life Science
Non-Affiliate Warrants — Technology — 4.6% (8)
Ekahau, Inc. (2)
Intelepeer Holdings, Inc.
PebblePost, Inc. (2)
Additech, Inc. (2)
Gwynnie Bee, Inc. (2)
Le Tote, Inc. (2)
Rhapsody International Inc. (2)
SavingStar, Inc. (2)
IgnitionOne, Inc. (2)
Jump Ramp Games, Inc. (2)
Kixeye, Inc. (2)
Rocket Lawyer Incorporated (2)
The NanoSteel Company, Inc. (2)
Nanocomp Technologies, Inc. (2)
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Drug Delivery
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Communications
Communications
Communications
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
604,038 Preferred Stock Warrants
4,634 Common Stock Warrants
73,112 Common Stock Warrants
408 Common Stock Warrants
7,051 Common Stock Warrants
608,058 Common Stock Warrants
34,113 Common Stock Warrants
661,956 Preferred Stock Warrants
160,714 Common Stock Warrants
2,050 Common Stock Warrants
95,293 Common Stock Warrants
280,612 Common Stock Warrants
75,769 Preferred Stock Warrants
1,818,182 Preferred Stock Warrants
720,000 Preferred Stock Warrants
170,646 Preferred Stock Warrants
471,979 Common Stock Warrants
248,736 Preferred Stock Warrants
64,190 Common Stock Warrants
29,102 Preferred Stock Warrants
812,348 Preferred Stock Warrants
134 Common Stock Warrants
122,362 Preferred Stock Warrants
800,000 Common Stock Warrants
375,763 Preferred Stock Warrants
978,261 Preferred Stock Warrants
2,256,549 Preferred Stock Warrants
598,850 Preferred Stock Warrants
150,000 Preferred Stock Warrants
268,591 Preferred Stock Warrants
202,974 Preferred Stock Warrants
852,273 Common Stock Warrants
850,439 Preferred Stock Warrants
Internet and Media
Internet and Media
Internet and Media
Internet and Media
Materials
Networking
262,910 Preferred Stock Warrants
159,766 Preferred Stock Warrants
791,251 Preferred Stock Warrants
261,721 Preferred Stock Warrants
379,360 Preferred Stock Warrants
1,440,489 Preferred Stock Warrants
See Notes to Consolidated Financial Statements
83
Principal
Amount
Cost of
Investments (6)
Fair
Value (14)
5,000
5,000
3,000
2,000
5,000
3,750
4,895
4,895
2,937
1,958
134,142
4,819
3,693
8,512
200,692
60
122
33
15
17
51
68
53
72
5
44
88
24
66
95
35
39
26
52
33
78
347
15
53
13
1,504
32
149
92
33
68
63
164
104
672
31
75
91
187
67
4,895
4,895
2,937
1,958
133,889
4,819
3,693
8,512
200,419
—
—
—
—
—
82
729
25
794
—
82
30
27
66
95
32
145
—
1
2
—
—
12
53
—
2,175
22
110
92
31
816
363
—
103
668
31
74
91
448
—
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2017
(In thousands)
Sector
Power Management
Semiconductors
Semiconductors
Semiconductors
Semiconductors
Semiconductors
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Portfolio Company (1)(3)
Powerhouse Dynamics, Inc. (2)
Avalanche Technology, Inc. (2)
eASIC Corporation (2)
Kaminario, Inc.
Luxtera, Inc.(2)
Soraa, Inc. (2)
Bolt Solutions Inc. (2)
Bridge2 Solutions, Inc. (2)
Clarabridge, Inc.
Digital Signal Corporation
Education Elements, Inc. (2)
Lotame Solutions, Inc. (2)
Metricly, Inc.
Riv Data Corp. (2)
ShopKeep.com, Inc. (2)
SIGNiX, Inc.
Skyword, Inc.
SpringCM, Inc. (2)
Sys-Tech Solutions, Inc.
Visage Mobile, Inc.
Weblinc Corporation (2)
xAd, Inc. (2)
Total Non-Affiliate Warrants — Technology
Non-Affiliate Warrants — Cleantech — 0.1% (8)
Renmatix, Inc.
Tigo Energy, Inc. (2)
Total Non-Affiliate Warrants — Cleantech
Non-Affiliate Warrants — Healthcare information and services — 0.4% (8)
LifePrint Group, Inc. (2)
ProterixBio, Inc. (2)
Singulex, Inc.
Verity Solutions Group, Inc.
Watermark Medical, Inc. (2)
HealthEdge Software, Inc. (2)
Medsphere Systems Corporation (2)
Recondo Technology, Inc. (2)
Total Non-Affiliate Warrants — Healthcare
information and services
Total Non-Affiliate Warrants
Diagnostics
Diagnostics
Other Healthcare
Other Healthcare
Other Healthcare
Software
Software
Software
Alternative Energy
Energy Efficiency
Type of Investment (4)(7)(9)(10)
Principal
Amount
290,698 Preferred Stock Warrants
202,602 Preferred Stock Warrants
40,445 Preferred Stock Warrants
1,087,203 Preferred Stock Warrants
3,546,553 Preferred Stock Warrants
203,616 Preferred Stock Warrants
202,892 Preferred Stock Warrants
125,458 Common Stock Warrants
53,486 Preferred Stock Warrants
125,116 Common Stock Warrants
238,121 Preferred Stock Warrants
288,115 Preferred Stock Warrants
41,569 Common Stock Warrants
321,428 Preferred Stock Warrants
193,962 Preferred Stock Warrants
133,560 Preferred Stock Warrants
301,056 Preferred Stock Warrants
2,385,686 Preferred Stock Warrants
375,000 Preferred Stock Warrants
1,692,047 Preferred Stock Warrants
195,122 Preferred Stock Warrants
4,343,350 Preferred Stock Warrants
53,022 Preferred Stock Warrants
804,604 Preferred Stock Warrants
49,000 Preferred Stock Warrants
3,156 Common Stock Warrants
294,231 Preferred Stock Warrants
300,360 Preferred Stock Warrants
27,373 Preferred Stock Warrants
110,644 Preferred Stock Warrants
7,097,792 Preferred Stock Warrants
556,796 Preferred Stock Warrants
Non-Affiliate Other Investments — 5.7% (8)
Espero Pharmaceuticals, Inc.
ZetrOZ, Inc.
Vette Technology, LLC
Triple Double Holdings, LLC
Total Non-Affiliate Other Investments
Non-Affiliate Equity — 1.0% (8)
Insmed Incorporated (5)
Revance Therapeutics, Inc.(5)
Sunesis Pharmaceuticals, Inc. (5)
SnagAJob.com, Inc.
TruSignal, Inc.
Total Non-Affiliate Equity
Total Non-Affiliate Portfolio Investment Assets
Biotechnology
Medical Device
Data Storage
Software
Royalty Agreement
Royalty Agreement
Royalty Agreement Due 4/18/2019
License Agreement
Biotechnology
Biotechnology
Biotechnology
Consumer-related
Technologies
Software
33,208 Common Stock
5,125 Common Stock
13,082 Common Stock
82,974 Common Stock
32,637 Common Stock
Cost of
Investments (6)
28
101
25
59
213
80
113
433
14
32
28
22
48
12
118
225
48
55
242
19
42
177
3,962
68
100
168
29
54
44
100
74
46
60
95
502
6,136
5,300
305
4,226
2,200
12,031
238
73
83
Fair
Value (14)
26
40
28
44
361
438
99
760
82
—
28
281
—
38
138
109
32
132
464
2
42
177
6,170
—
117
117
2
—
44
62
59
46
208
207
628
9,090
4,700
700
100
2,200
7,700
1,035
183
49
9
41
444
219,303
$
83
41
1,391
218,600
$
Affiliate Investments — 2.6% (8)
Affiliate Debt Investments — Technology — 2.5% (8)
Decisyon, Inc.
Software
Total Affiliate Debt Investments — Technology
Term Loan (13.678% cash (Libor + 12.308%;
Floor 12.50%), 8.00% ETP, Due 1/1/20)
Term Loan (13.678% cash (Libor + 12.308%;
Floor 12.50%), 8.00% ETP, Due 1/1/20)
Term Loan (12.02% PIK , Due 4/15/19) (13)
Term Loan (12.03% PIK , Due 4/15/19) (13)
Term Loan (12.24% PIK , Due 4/15/19) (13)
$
1,523
$
1,522
$
833
250
250
750
771
250
250
750
3,543
1,449
735
238
238
714
3,374
See Notes to Consolidated Financial Statements
84
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2017
(In thousands)
Portfolio Company (1)(3)
Affiliate Warrants — Technology — 0.0% (8)
Decisyon, Inc.
Total Affiliate Warrants — Technology
Affiliate Equity — Technology — 0.1% (8)
Decisyon, Inc.
Total Affiliate Equity
Total Affiliate Portfolio Investment Assets
Total Portfolio Investment Assets — 164.4%(8)
_____________________________
Sector
Type of Investment (4)(7)(9)(10)
Principal
Amount
Cost of
Investments (6)
Fair
Value (14)
Software
82,967 Common Stock Warrants
Software
45,365,936 Common Stock
46
46
185
185
3,774
223,077
$
$
$
$
—
—
125
125
3,499
222,099
(1)
All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the
United States.
(2) Has been pledged as collateral under the Key Facility.
(3)
(4)
All non-affiliate investments are investments in which the Company owns less than 5% ownership of the voting securities of the portfolio company. All
affiliate investments are investments in which the Company owns 5% or more of the voting securities of the portfolio company.
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. Debt investments are at fixed rates for the term of the debt investment, unless otherwise
indicated. All 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, 2017 is provided.
(5) Portfolio company is a public company.
(6) For debt investments, represents principal balance less unearned income.
(7) Warrants, Equity and Other Investments are non-income producing.
(8) Value as a percent of net assets.
(9)
The Company did not have any non-qualifying assets under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”), as of
December 31, 2017. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying
assets represent at least 70% of the Company’s total assets.
(10)
ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are
a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt
investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee the Company may
pay its Advisor will be based on income that the Company has not yet received in cash.
(11) Debt investment is on non-accrual status as of December 31, 2017.
(12)
Digital Signal Corporation, a Delaware corporation (“DSC”), made an assignment for the benefit of its creditors whereby DSC assigned all of its assets
to DSC (assignment for the benefit of creditors), LLC (“DSC ABC”), a Delaware limited liability company, established under Delaware law to
effectuate the Assignment for the Benefit of Creditors of DSC.
(13) Debt investment has a payment-in-kind (“PIK”) feature.
(14) Except for common stock in publicly traded companies, the fair value of the investment was valued using significant unobservable inputs.
See Notes to Consolidated Financial Statements
85
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2016
(In thousands)
Sector
Type of Investment (3)(4)(7)(9)(10)
Principal
Amount
Cost of
Investments (6)
Fair
Value (14)
Portfolio Company (1)
Debt Investments — 133.8% (8)
Debt Investments — Life Science — 38.5% (8)
Argos Therapeutics, Inc. (2)(5)
Biotechnology
Term Loan (9.38% cash (Libor + 8.75%; Floor
9.25%; Ceiling 10.75%), 5.00% ETP, Due
10/1/18)
Term Loan (9.38% cash (Libor + 8.75%; Floor
9.25%; Ceiling 10.75%), 5.00% ETP, Due
3/1/19)
New Haven Pharmaceuticals, Inc. (11)
Biotechnology
Term Loan (11.63% cash (Libor + 11.00%; Floor
11.50%), 11.42% ETP, Due 3/1/19)
Term Loan (11.63% cash (Libor + 11.00%; Floor
11.50%), 11.42% ETP, Due 3/1/19)
Term Loan (10.63% cash (Libor + 10.00%; Floor
10.50%), 6.10% ETP, Due 3/1/19)
Term Loan (10.13% cash (Libor + 9.50%; Floor
10.00%), 4.00% ETP, Due 4/1/19)
Term Loan (10.13% cash (Libor + 9.50%; Floor
10.00%), Due 1/31/17)
Palatin Technologies, Inc. (2)(5)
Biotechnology
Term Loan (9.13% cash (Libor + 8.50%; Floor
9.00%), 5.00% ETP, Due 1/1/19)
Term Loan (9.13% cash (Libor + 8.50%; Floor
9.00%), 5.00% ETP, Due 8/1/19)
Sample6, Inc. (2)
Biotechnology
Term Loan (9.63% cash (Libor + 9.00%; Floor
9.50%; Ceiling 11.00%), 4.00% ETP, Due
4/1/18)
Term Loan (9.63% cash (Libor + 9.00%; Floor
9.50%; Ceiling 11.00%), 4.00% ETP, Due
4/1/18)
Term Loan (9.63% cash (Libor + 9.00%; Floor
9.50%; Ceiling 11.00%), 4.00% ETP, Due
4/1/18)
Strongbridge U.S. Inc. (5)
Biotechnology
Term Loan (8.84% cash (Libor + 10.00%; Floor
vTv Therapeutics Inc. (2)(5)
Biotechnology
Term Loan (10.63% cash (Libor + 8.22%; Floor
10.50%), 8.00% ETP, Due 12/1/20)
8.75%), 6.00% ETP, Due 5/1/20)
Lantos Technologies, Inc. (2)
Medical Device
Term Loan (11.50% cash (Libor + 10.50%; Floor
Mederi Therapeutics, Inc. (2)
Medical Device
Term Loan (12.27% cash (Libor + 11.82%; Floor
11.50%), 5.00% ETP, Due 2/1/18)
12.00%), 4.00% ETP, Due 7/1/17)
Term Loan (12.27% cash (Libor + 11.82%; Floor
12.00%), 4.00% ETP, Due 7/1/17)
NinePoint Medical, Inc. (2)
Medical Device
Term Loan (9.38% cash (Libor + 8.75%; Floor
9.25%), 4.50% ETP, Due 3/1/19)
Term Loan (9.38% cash (Libor + 8.75%; Floor
9.25%), 4.50% ETP, Due 3/1/19)
Tryton Medical, Inc. (2)
Medical Device
Term Loan (10.66% cash (Prime + 7.16%),
2.50% ETP, Due 3/1/17)
Total Debt Investments — Life Science
Debt Investments — Technology — 75.4% (8)
Ekahau, Inc. (2)
Communications
Term Loan (11.75% cash, 2.50% ETP, Due
Gwynnie Bee, Inc. (2)
Consumer-related
Technologies
Le Tote, Inc. (2)
Rhapsody International, Inc. (2)
SavingStar, Inc. (2)
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
2/1/17)
Term Loan (11.75% cash, 2.50% ETP, Due
2/1/17)
Term Loan (11.13% cash (Libor + 10.50%; Floor
11.00%; Ceiling 12.50%), 2.00% ETP, Due
11/1/17)
Term Loan (11.13% cash (Libor + 10.50%; Floor
11.00%; Ceiling 12.50%), 2.00% ETP, Due
2/1/18)
Term Loan (11.13% cash (Libor + 10.50%; Floor
11.00%; Ceiling 12.50%), 2.00% ETP, Due
4/1/18)
Term Loan (10.28% cash (Libor + 9.65%; Floor
10.15%), 5.00% ETP, Due 3/1/20)
Term Loan (10.28% cash (Libor + 9.65%; Floor
10.15%), 5.00% ETP, Due 3/1/20)
Term Loan (11.13% cash (Libor + 10.50%; Floor
11.00%), 3.00% ETP, Due 10/1/19)
Term Loan (11.03% cash (Libor + 10.40%; Floor
10.90%), 3.00% ETP, Due 6/1/19)
Term Loan (11.03% cash (Libor + 10.40%; Floor
10.90%), 3.00% ETP, Due 3/1/20)
See Notes to Consolidated Financial Statements
86
$
4,375
$
4,339
$
4,339
5,000
1,282
427
1,973
6,185
593
4,000
5,000
972
591
2,083
7,500
6,250
2,479
1,352
1,352
4,500
2,250
1,313
57
19
667
433
500
4,000
3,000
7,500
2,900
2,000
4,969
1,274
424
1,960
6,118
593
3,960
4,955
969
588
2,073
7,353
6,106
2,455
1,344
1,344
4,461
2,225
4,969
651
217
1,002
3,127
303
3,960
4,955
969
588
2,073
7,353
6,106
2,320
1,344
1,344
4,461
2,225
1,309
58,819
1,309
53,615
57
19
657
424
492
3,942
2,955
7,336
2,860
1,965
57
19
657
424
492
3,942
2,955
7,336
2,860
1,965
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2016
(In thousands)
Portfolio Company (1)
MediaBrix, Inc. (2)
Zinio Holdings, LLC (2)
Sector
Internet and Media
Type of Investment (3)(4)(7)(9)(10)
Term Loan (11.63% cash (Libor + 11.00%; Floor
Internet and Media
Term Loan (11.88% cash (Libor + 11.25%; Floor
11.75%), 4.00% ETP, Due 2/1/20)
11.50%), 3.00% ETP, Due 1/1/20)
The NanoSteel Company, Inc. (2)
Materials
Term Loan (10.13% cash (Libor + 9.50%; Floor
Nanocomp Technologies, Inc. (2)
Networking
10.00%), 5.00% ETP, Due 7/1/19)
Term Loan (10.13% cash (Libor + 9.50%; Floor
10.00%), 5.00% ETP, Due 7/1/19)
Term Loan (10.13% cash (Libor + 9.50%; Floor
10.00%), 5.00% ETP, Due 1/1/20)
Term Loan (11.50% cash, 3.00% ETP, Due
11/1/17)
Term Loan (11.63% cash (Libor + 11.00%; Floor
11.50%), 3.00% ETP, Due 4/1/20)
Powerhouse Dynamics, Inc. (2)
Power Management
Term Loan (11.33% cash (Libor + 10.70%; Floor
Avalanche Technology, Inc. (2)
Semiconductors
Term Loan (10.00% cash (Libor + 9.25%; Floor
11.20%), 3.00% ETP, Due 3/1/19)
Luxtera, Inc. (2)
Semiconductors
10.00%; Ceiling 11.75%), 2.40% ETP, Due
4/1/17)
Term Loan (10.00% cash (Libor + 9.25%; Floor
10.00%; Ceiling 11.75%), 2.40% ETP, Due
10/1/18)
Term Loan (10.00% cash (Libor + 9.25%; Floor
10.00%; Ceiling 11.75%), 2.00% ETP, Due
2/1/19)
Term Loan (10.38% cash (Libor + 9.75%; Floor
10.25%; Ceiling 12.25%), 13.00% ETP, Due
7/1/17)
Term Loan (10.38% cash (Libor + 9.75%; Floor
10.25%; Ceiling 12.25%), 13.00% ETP, Due
7/1/17)
Term Loan (9.13% cash (Libor + 8.50%; Floor
9.00%), 4.50% ETP, Due 12/1/18)
Term Loan (9.13% cash (Libor + 8.50%; Floor
9.00%), 4.50% ETP, Due 12/1/18)
Term Loan (9.63% cash (Libor + 9.00%; Floor
9.50%), 4.50% ETP, Due 11/1/19)
Xtera Communications, Inc. (5)(11)
Semiconductors
Term Loan (12.50% cash, 22.92% ETP, Due
11/1/16)
Term Loan (12.50% cash, 22.92% ETP, Due
11/1/16)
Bridge2 Solutions, Inc.
Software
Term Loan (11.63% cash (Libor + 11.00%; Floor
ControlScan, Inc. (2)
Decisyon, Inc.
Software
Software
11.50%; Ceiling 14.50%), 2.00% ETP, Due
7/1/19)
Term Loan (11.63% cash (Libor + 11.00%; Floor
11.50%; Ceiling 14.50%), 2.00% ETP, Due
1/1/20)
Term Loan (10.88% cash (Libor + 10.25%),
3.00% ETP, Due 7/1/20)
Term Loan (12.94% cash (Libor + 12.308%;
Floor 12.50%), 6.50% ETP, Due 6/1/18)
Term Loan (12.94% cash (Libor + 12.308%;
Floor 12.50%), 6.50% ETP, Due 6/1/18)
Digital Signal Corporation (11)(13)
Software
Term Loan (10.88% cash (Libor + 10.25%; Floor
Education Elements, Inc. (2)
Software
Netuitive, Inc.
ScoreBig, Inc. (2)(11)(12)
Software
Software
10.43%), 5.00% ETP, Due 7/1/19)
Term Loan (10.88% cash (Libor + 10.25%; Floor
10.43%), 5.00% ETP, Due 7/1/19)
Term Loan (10.00% cash, Due 6/30/17)
Term Loan (10.63% cash (Libor + 10.00%; Floor
10.50%), 4.00% ETP, Due 1/1/19)
Term Loan (10.63% cash (Libor + 10.00%; Floor
10.50%), 4.00% ETP, Due 8/1/19)
Term Loan (12.88% cash (Libor + 12.25%; Floor
12.50%), 3.33% ETP, Due 9/1/17)
Term Loan (10.63% cash (Libor + 10.00%; Floor
10.50%), 4.00% ETP, Due 4/1/19)
Term Loan (10.63% cash (Libor + 10.00%; Floor
10.50%), 4.00% ETP, Due 4/1/19)
Term Loan (10.63% cash (Libor + 10.00%; Floor
10.50%), 4.00% ETP, Due 3/1/20)
Term Loan (10.63% cash (Libor + 10.00%; Floor
10.50%), 4.00% ETP, Due 10/31/16)
Term Loan (10.63% cash (Libor + 10.00%; Floor
10.50%), 4.00% ETP, Due 11/11/19)
See Notes to Consolidated Financial Statements
87
Principal
Amount
Cost of
Investments (6)
Fair
Value (14)
4,000
4,000
5,000
2,500
2,500
369
3,000
2,250
417
1,335
1,548
614
343
667
667
2,000
3,056
936
4,000
1,000
4,500
1,523
833
1,280
1,280
194
1,600
1,500
461
3,403
3,403
2,000
203
324
3,966
3,967
4,940
2,470
2,464
367
2,939
2,220
416
1,331
1,517
607
341
663
663
1,990
3,047
933
3,976
996
4,413
1,521
715
1,246
1,246
194
1,578
1,479
460
3,332
3,360
1,950
203
324
3,966
3,967
4,940
2,470
2,464
367
2,939
2,220
416
1,331
1,517
607
341
663
663
1,990
—
—
3,976
996
4,413
1,519
713
928
928
144
1,578
1,479
460
1,526
1,539
894
93
148
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2016
(In thousands)
Sector
Software
Software
Software
Software
Software
Type of Investment (3)(4)(7)(9)(10)
Term Loan (10.47% cash (Libor + 9.95%; Floor
10.45%), 3.00% ETP, Due 4/1/20)
Term Loan (11.63% cash (Libor + 11.00%; Floor
11.50%), Due 10/1/18)
Term Loan (10.98% cash (Libor + 10.35%; Floor
10.85%; Ceiling 12.85%), 3.00% ETP, Due
6/1/19)
Term Loan (11.58% cash (Libor + 10.95%; Floor
11.45%), 3.00% ETP, Due 8/1/19)
Term Loan (11.13% cash (Libor + 10.50%; Floor
11.00%; Ceiling 13.00%), 3.50% ETP, Due
12/1/17)
Portfolio Company (1)
ShopKeep.com, Inc. (2)
SIGNiX, Inc.
SilkRoad Technology, Inc. (2)
Skyword, Inc.
Social Intelligence Corp. (2)
Sys-Tech Solutions, Inc. (2)
Software
Term Loan (11.78% cash (Libor + 11.15%; Floor
VBrick Systems, Inc. (2)
Vidsys, Inc. (2)
xTech Holdings, Inc. (2)
Software
Software
Software
11.65%; Ceiling 12.65%), 4.50% ETP, Due
3/1/18)
Term Loan (11.78% cash (Libor + 11.15%; Floor
11.65%; Ceiling 12.65%), 9.00% ETP, Due
5/1/18)
Term Loan (11.63% cash (Libor + 11.00%; Floor
11.50%; Ceiling 13.50%), 5.00% ETP, Due
7/1/17)
Term Loan (13.00% cash, 12.58% ETP, Due
12/1/17)
Term Loan (11.13% cash (Libor + 10.50%; Floor
11.00%), 3.00% ETP, Due 4/1/19)
Term Loan (11.13% cash (Libor + 10.50%; Floor
11.00%), 3.00% ETP, Due 3/1/20)
Total Debt Investments — Technology
Debt Investments — Cleantech — 5.7% (8)
Rypos, Inc. (2)
Energy Efficiency
Term Loan (11.93% cash (Libor + 11.55%; Floor
11.80%), 4.25% ETP, Due 6/1/17)
Term Loan (11.93% cash (Libor + 11.55%; Floor
11.80%), 4.25% ETP, Due 1/1/18)
Lehigh Technologies, Inc. (2)
Waste Recycling
Term Loan (10.35% cash (Libor + 9.72%),
Total Debt Investments — Cleantech
Debt Investments — Healthcare information and services — 14.2% (8)
Interleukin Genetics, Inc. (2)(5)
Diagnostics
6.75% ETP, Due 8/1/19)
Term Loan (10.35% cash (Libor + 9.72%),
6.75% ETP, Due 8/1/19)
Term Loan (11.13% cash (Libor + 10.50%; Floor
11.00%), 6.50% ETP, Due 10/1/18)
Watermark Medical, Inc. (2)
Other Healthcare
Term Loan (10.13% cash (Libor + 9.50%; Floor
MedAvante, Inc. (2)
Software
Total Debt Investments — Healthcare information
and services
Total Debt Investments
10.00%; Ceiling 11.00%); 4.00% ETP, Due
4/1/18)
Term Loan (10.13% cash (Libor + 9.50%; Floor
10.00%; Ceiling 11.00%); 4.00% ETP, Due
4/1/18)
Term Loan (10.13% cash (Libor + 9.50%; Floor
10.00%; Ceiling 11.00%); 4.00% ETP, Due
4/1/18)
Term Loan (9.88% cash (Libor + 9.25%; Floor
9.75%), 4.00% ETP, Due 1/1/19)
Term Loan (9.88% cash (Libor + 9.25%; Floor
9.75%), 4.00% ETP, Due 1/1/19)
Term Loan (9.88% cash (Libor + 9.25%; Floor
9.75%), 4.00% ETP, Due 7/1/19)
See Notes to Consolidated Financial Statements
88
Principal
Amount
Cost of
Investments (6)
Fair
Value (14)
6,000
2,250
7,500
4,000
323
3,000
2,833
700
2,610
1,500
2,000
1,260
697
3,000
3,000
4,225
2,333
2,333
1,111
3,000
3,000
4,000
5,811
2,124
7,455
3,944
316
2,983
2,814
696
2,610
1,479
5,811
2,012
7,455
3,870
315
2,983
2,814
696
2,610
1,479
1,970
114,743
1,970
104,917
1,252
690
2,982
2,982
7,906
4,081
2,330
2,330
1,110
2,972
2,972
3,953
1,252
690
2,982
2,982
7,906
4,081
2,330
2,330
1,110
2,972
2,972
3,953
19,748
201,216
19,748
186,186
Portfolio Company (1)
Warrant Investments — 4.6% (8)
Warrants — Life Science — 0.5% (8)
ACT Biotech Corporation
Argos Therapeutics, Inc. (2)(5)
Celsion Corporation (5)
Inotek Pharmaceuticals Corporation (5)
New Haven Pharmaceuticals, Inc.
Nivalis Therapeutics, Inc. (5)
Ocera Therapeutics, Inc. (2)(5)
Palatin Technologies, Inc. (2)(5)
Revance Therapeutics, Inc. (5)
Sample6, Inc. (2)
Strongbridge U.S. Inc. (5)
vTv Therapeutics Inc. (2)(5)
Sunesis Pharmaceuticals, Inc. (5)
AccuVein Inc. (2)
EnteroMedics, Inc. (5)
IntegenX, Inc. (2)
Lantos Technologies, Inc. (2)
Mederi Therapeutics, Inc. (2)
Mitralign, Inc. (2)
NinePoint Medical, Inc. (2)
OraMetrix, Inc. (2)
Tryton Medical, Inc. (2)
ViOptix, Inc.
Total Warrants — Life Science
Warrants — Technology — 3.3% (8)
Ekahau, Inc. (2)
Additech, Inc. (2)
Gwynnie Bee, Inc. (2)
If(we), Inc.
Le Tote, Inc. (2)
Rhapsody International Inc. (2)
SavingStar, Inc. (2)
XIOtech, Inc.
The NanoSteel Company, Inc. (2)
IntelePeer, Inc.
Nanocomp Technologies, Inc. (2)
Aquion Energy, Inc.
Powerhouse Dynamics, Inc. (2)
Avalanche Technology, Inc. (2)
eASIC Corporation (2)
InVisage Technologies, Inc. (2)
Kaminario, Inc.
Luxtera, Inc.(2)
Soraa, Inc. (2)
Xtera Communications, Inc. (5)
Bolt Solutions Inc. (2)
Bridge2 Solutions, Inc.
Clarabridge, Inc.
ControlScan, Inc. (2)
Decisyon, Inc.
Digital Signal Corporation
Education Elements, Inc. (2)
Lotame Solutions, Inc. (2)
Netuitive, Inc.
Riv Data Corp. (2)
ScoreBig, Inc. (2)
ShopKeep.com, Inc. (2)
SIGNiX, Inc.
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2016
(In thousands)
Sector
Type of Investment (3)(4)(7)(9)(10)
Cost of
Investments (6)
Fair
Value
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Communications
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Data Storage
Materials
Networking
Networking
Power Management
Power Management
Semiconductors
Semiconductors
Semiconductors
Semiconductors
Semiconductors
Semiconductors
Semiconductors
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
1,521,820 Preferred Stock Warrants
33,112 Common Stock Warrants
5,708 Common Stock Warrants
28,204 Common Stock Warrants
103,982 Preferred Stock Warrants
18,534 Common Stock Warrants
6,491 Common Stock Warrants
608,058 Common Stock Warrants
34,377 Common Stock Warrants
494,988 Preferred Stock Warrants
160,714 Common Stock Warrants
76,290 Common Stock Warrants
2,050 Common Stock Warrants
75,769 Preferred Stock Warrants
134 Common Stock Warrants
170,646 Preferred Stock Warrants
66,665,256 Preferred Stock Warrants
248,736 Preferred Stock Warrants
641,909 Preferred Stock Warrants
566,038 Preferred Stock Warrants
812,348 Preferred Stock Warrants
122,362 Preferred Stock Warrants
375,763 Preferred Stock Warrants
978,261 Preferred Stock Warrants
150,000 Preferred Stock Warrants
268,591 Preferred Stock Warrants
190,868 Preferred Stock Warrants
202,974 Preferred Stock Warrants
852,273 Common Stock Warrants
98,860 Preferred Stock Warrants
2,217,979 Preferred Stock Warrants
299,211 Preferred Stock Warrants
141,549 Common Stock Warrants
707,387 Preferred Stock Warrants
115,051 Preferred Stock Warrants
290,698 Preferred Stock Warrants
202,602 Preferred Stock Warrants
40,445 Preferred Stock Warrants
395,009 Preferred Stock Warrants
1,087,203 Preferred Stock Warrants
2,508,671 Preferred Stock Warrants
203,616 Preferred Stock Warrants
37,831 Common Stock Warrants
202,892 Preferred Stock Warrants
75,458 Common Stock Warrants
53,486 Preferred Stock Warrants
2,295,918 Preferred Stock Warrants
82,967 Common Stock Warrants
125,116 Common Stock Warrants
238,122 Preferred Stock Warrants
288,115 Preferred Stock Warrants
41,569 Common Stock Warrants
237,361 Preferred Stock Warrants
879,014 Preferred Stock Warrants
165,779 Preferred Stock Warrants
89,767 Preferred Stock Warrants
See Notes to Consolidated Financial Statements
89
83
33
15
17
88
122
6
51
68
45
72
23
5
24
347
35
38
26
52
33
78
15
13
1,289
32
33
68
27
63
164
60
22
92
39
67
7
28
101
25
48
59
49
80
206
113
18
14
19
46
32
28
22
48
12
88
98
168
—
2
—
21
—
—
—
4
241
16
72
23
—
27
—
31
41
39
44
39
—
12
—
612
23
31
698
47
411
150
70
—
348
31
72
72
26
40
28
45
45
193
432
—
135
341
81
30
—
—
28
276
—
12
—
118
167
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2016
(In thousands)
Sector
Software
Software
Software
Software
Software
Software
Portfolio Company (1)
Skyword, Inc.
SpringCM, Inc. (2)
Sys-Tech Solutions, Inc.
Vidsys, Inc.
Visage Mobile, Inc.
xTech Holdings, Inc. (2)
Total Warrants — Technology
Warrants — Cleantech — 0.1% (8)
Renmatix, Inc.
Semprius, Inc.
Rypos, Inc. (2)
Tigo Energy, Inc. (2)
Lehigh Technologies, Inc. (2)
Total Warrants — Cleantech
Warrants — Healthcare information and services — 0.7% (8)
Accumetrics, Inc.
Candescent Health, Inc. (2)
Interleukin Genetics, Inc. (2)(5)
LifePrint Group, Inc. (2)
ProterixBio, Inc. (2)
Singulex, Inc.
Verity Solutions Group, Inc.
Watermark Medical, Inc. (2)
MedAvante, Inc. (2)
Medsphere Systems Corporation (2)
Recondo Technology, Inc. (2)
Total Warrants — Healthcare information and
services
Total Warrants
Diagnostics
Diagnostics
Diagnostics
Diagnostics
Diagnostics
Other Healthcare
Other Healthcare
Other Healthcare
Software
Software
Software
Alternative Energy
Alternative Energy
Energy Efficiency
Energy Efficiency
Waste Recycling
Type of Investment (3)(4)(7)(9)(10)
301,056 Preferred Stock Warrants
2,385,686 Preferred Stock Warrants
375,000 Preferred Stock Warrants
85,399 Preferred Stock Warrants
1,692,047 Preferred Stock Warrants
158,730 Preferred Stock Warrants
53,022 Preferred Stock Warrants
519,981 Preferred Stock Warrants
5,627 Preferred Stock Warrants
804,604 Preferred Stock Warrants
272,727 Preferred Stock Warrants
100,928 Preferred Stock Warrants
519,991 Preferred Stock Warrants
7,662,100 Common Stock Warrants
49,000 Preferred Stock Warrants
3,156 Common Stock Warrants
294,231 Preferred Stock Warrants
300,360 Preferred Stock Warrants
27,373 Preferred Stock Warrants
114,285 Preferred Stock Warrants
7,097,791 Preferred Stock Warrants
556,796 Preferred Stock Warrants
Other Investments — 0.4% (8)
ZetrOZ, Inc.
Vette Technology, LLC
Total Other Investments
Equity — 0.6% (8)
Insmed Incorporated (5)
Revance Therapeutics, Inc.(5)
Sunesis Pharmaceuticals, Inc. (5)
SnagAJob.com, Inc.
Decisyon, Inc.
Total Equity
Total Portfolio Investment Assets — 139.4% (8)
Medical Device
Data Storage
Royalty Agreement
Royalty Agreement Due 4/18/2019
Biotechnology
Biotechnology
Biotechnology
Consumer-related
Technologies
Software
33,208 Common Stock
4,861 Common Stock
78,493 Common Stock
82,974 Common Stock
4,200,934 Common Stock
Fair
Value
Cost of
Investments (6)
48
55
242
23
19
43
2,406
68
25
44
100
33
270
107
378
168
29
54
44
100
74
66
60
95
1,175
5,140
365
4,318
4,683
238
73
83
56
131
389
12
—
52
4,590
—
—
25
115
39
179
180
—
142
2
—
51
42
76
79
205
204
981
6,362
500
100
600
439
101
47
9
185
588
211,627
$
83
185
855
194,003
$
(1) All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the
United States.
(2) Has been pledged as collateral under the Key Facility.
(3) All investments are less than 5% ownership of the class and ownership of the portfolio company.
(4) All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the
annual interest rate on the debt investment and does not include ETPs and any additional fees related to the investments, such as deferred interest,
commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the debt investment, unless otherwise indicated. Debt
investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2016 is
provided.
(5) Portfolio company is a public company.
(6) For debt investments, represents principal balance less unearned income.
(7) Warrants, Equity and Other Investments are non-income producing.
See Notes to Consolidated Financial Statements
90
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2016
(In thousands)
(8) Value as a percent of net assets.
(9) The Company did not have any non-qualifying assets under Section 55(a) of the 1940 Act, as of December 31, 2016. Under the 1940 Act, the Company
may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total
assets.
(10) ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are
a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt
investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee the Company may
pay its Advisor will be based on income that the Company has not yet received in cash.
(11) Debt investment is on non-accrual status as of December 31, 2016.
(12) ScoreBig, Inc., a Delaware corporation (“ScoreBig”), made an assignment for the benefit of its creditors whereby ScoreBig assigned all of its assets to
SB (assignment for the benefit of creditors), LLC, a California limited liability company (“SBABC”), established under California law to effectuate the
Assignment for the Benefit of Creditors of ScoreBig. SBABC subsequently entered into a License Agreement with a third party (“Licensee”), whereby
SBABC granted a license of certain of SBABC’s intellectual property and general intangibles to Licensee in exchange for certain royalty payments on
the future net profits, if any, of Licensee. SBABC, in consideration for the Company’s consent to the License Agreement, agreed to pay all payments due
under the License Agreement, if any, to the Company until the payment in full in cash of the Company’s debt investments in ScoreBig.
(13) DSC, made an assignment for the benefit of its creditors whereby DSC assigned all of its assets to DSC (assignment for the benefit of creditors), LLC, a
Delaware limited liability company, established under Delaware law to effectuate the Assignment for the Benefit of Creditors of DSC.
(14) Except for common stock in publicly traded companies, the fair value of the investment was valued using significant unobservable inputs.
See Notes to Consolidated Financial Statements
91
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Organization
Horizon Technology Finance Corporation (the “Company”) was organized as a Delaware corporation on March 16, 2010 and is an externally managed,
non-diversified, closed-end investment company. The Company has elected to be regulated as a business development company (“BDC”) under the
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 (including net capital gains) the Company distributes to its
stockholders. The Company primarily makes secured debt investments to development-stage companies in the technology, life science, healthcare
information and services and cleantech industries. All of the Company’s debt investments consist of loans secured by all of, or a portion of, the applicable
debtor company’s tangible and intangible assets.
On October 28, 2010, the Company completed an initial public offering (“IPO”) and its common stock trades on the Nasdaq Global Select Market under
the symbol “HRZN.” The Company was formed to continue and expand the business of Compass Horizon Funding Company LLC, a Delaware limited
liability company, which commenced operations in March 2008 and became the Company’s wholly owned subsidiary upon the completion of the Company’s
IPO.
Horizon Credit II LLC (“Credit II”) was formed as a Delaware limited liability company on June 28, 2011, with the Company as its sole equity member.
Credit II is a special purpose bankruptcy remote entity and is a separate legal entity from the Company. Any assets conveyed to Credit II are not available to
creditors of the Company or any other entity other than Credit II’s lenders.
The Company formed Horizon Funding 2013-1 LLC (“2013-1 LLC”) as a Delaware limited liability company on June 7, 2013 and Horizon Funding
Trust 2013-1 (“2013-1 Trust” and, together with the 2013-1 LLC, the “2013-1 Entities”) as a Delaware trust on June 18, 2013. The 2013-1 Entities were
special purpose bankruptcy remote entities and were separate legal entities from the Company. The Company formed the 2013-1 Entities for purposes of
securitizing $189.3 million of secured loans (the “2013-1 Securitization”) and issuing fixed-rate asset-backed notes in an aggregate principal amount of $90.0
million (the “Asset-Backed Notes”). The 2013-1 Entities were dissolved as of December 31, 2016.
The Company has also established an additional wholly owned subsidiary, which is structured as a Delaware limited liability company, to hold the assets
of a portfolio company acquired in connection with foreclosure or bankruptcy, which is a separate legal entity from the Company.
The Company’s investment strategy is to maximize the investment portfolio’s return by generating current income from the debt investments the
Company makes and capital appreciation from the warrants the Company receives when making such debt investments. The Company has entered into an
investment management agreement (the “Investment Management Agreement”) with Horizon Technology Finance Management LLC (the “Advisor”), under
which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.
On March 24, 2015, the Company completed a public offering of 2,000,000 shares of its common stock at a public offering price of $13.95 per share,
for total net proceeds to the Company of $26.5 million, after deducting underwriting commission and discounts and other offering expenses (the “2015
Offering”).
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-K 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.
92
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Principles of consolidation
As required under GAAP and Regulation S-X, the Company will generally consolidate its investment in a company that is an investment company
subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the
results of the Company’s wholly-owned subsidiaries in its consolidated financial statements.
Use of estimates
In preparing the consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the balance sheet and income and expenses for
the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to
the valuation of investments.
Fair value
The Company records all of its investments at fair value in accordance with relevant GAAP, which establishes a framework used to measure fair value
and requires disclosures for fair value measurements. The Company has categorized its investments carried at fair value, based on the priority of the valuation
technique, into a three-level fair value hierarchy as more fully described in Note 6. 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 6 for additional information regarding fair value.
Segments
The Company has determined that it has a single reporting segment and operating unit structure. The Company lends to and invests in portfolio
companies in various technology, life science, healthcare information and services and cleantech industries. The Company separately evaluates the
performance of each of its lending and investment relationships. However, because each of these debt investments and investment relationships has similar
business and economic characteristics, they have been aggregated into a single lending and investment segment.
Investments
Investments are recorded at fair value. The Company’s board of directors (the “Board”) determines the fair value of the Company’s portfolio
investments. The Company has the intent to hold its debt investments for the foreseeable future or until maturity or payoff.
Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is
determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more
past due, or if the Company otherwise does not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and
the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash
basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. As of December 31,
2017, there was one investment on non-accrual status with a cost of $3.0 million and a fair value of $2.9 million. As of December 31, 2016, there were four
investments on non-accrual status with a cost of $26.2 million and a fair value of $11.5 million. For the year ended December 31, 2017, the Company
recognized, as interest income, payments of $0.1 million received from one portfolio company whose debt investment was on non-accrual status. For the year
ended December 31, 2016, the Company did not recognize interest income from debt investments on non-accrual status. For the year ended December 31,
2015, the Company recognized, as interest income, payments of $0.2 million received from one portfolio company whose debt investment was on non-accrual
status.
93
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The Company receives a variety of fees from borrowers in the ordinary course of conducting its business, including advisory fees, commitment fees,
amendment fees, non-utilization fees, success fees and prepayment fees. In a limited number of cases, the Company may also receive a non-refundable
deposit earned upon the termination of a transaction. Debt investment origination fees, net of certain direct origination costs, are deferred and, along with
unearned income, are amortized as a level-yield adjustment over the respective term of the debt investment. All other income is recognized when earned. Fees
for counterparty debt investment commitments with multiple debt investments are allocated to each debt investment based upon each debt investment’s
relative fair value. When a debt investment is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the
debt investment is returned to accrual status.
Certain debt investment agreements also require the borrower to make an ETP, that is accrued into interest receivable and taken into income over the life
of the debt investment to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient
value to support the accrual or the Company does not expect the borrower to be able to pay the ETP when due. The proportion of the Company’s total
investment income that resulted from the portion of ETPs not received in cash for the years ended December 31, 2017, 2016 and 2015 was 6.0%, 10.8% and
7.1%, respectively.
In connection with substantially all lending arrangements, the Company receives warrants to purchase shares of stock from the borrower. The warrants
are recorded as assets at estimated fair value on the grant date using the Black-Scholes valuation model. The warrants are considered loan fees and are
recorded as unearned income on the grant date. The unearned income is recognized as interest income over the contractual life of the related debt investment
in accordance with the Company’s income recognition policy. Subsequent to debt investment origination, the fair value of the warrants is determined using
the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized appreciation or depreciation on investments.
Gains and losses from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains and losses on
investments.
Realized gains or losses on the sale of investments, or upon the determination that an investment balance, or portion thereof, is not recoverable, are
calculated using the specific identification method. The Company measures realized gains or losses by calculating the difference between the net proceeds
from the repayment or sale and the amortized cost basis of the investment. Net change in unrealized appreciation or depreciation reflects the change in the fair
values of the Company’s portfolio investments during the reporting period, including any reversal of previously recorded unrealized appreciation or
depreciation when gains or losses are realized.
Debt issuance costs
Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt
securities. The unamortized balance of debt issuance costs as of December 31, 2017 and 2016 was $2.1 million and $1.6 million, respectively. These amounts
are amortized and included in interest expense in the consolidated statements of operations over the life of the borrowings. The accumulated amortization
balances as of December 31, 2017 and 2016 were $1.8 million and $2.4 million, respectively. The amortization expense for the years ended December 31,
2017, 2016 and 2015 was $0.8 million, $0.6 million and $0.9 million, respectively.
94
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Income taxes
As a BDC, the Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax
treatment applicable to RICs. In order to qualify as a RIC and to avoid the imposition of corporate-level income tax on the portion of its taxable income
distributed to stockholders, among other things, the Company is required to meet certain source of income and asset diversification requirements and to
timely distribute dividends out of assets legally available for distribution to its stockholders of an amount generally at least equal to 90% of its investment
company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid, for each tax year. The Company, among
other things, has made and intends to continue to make the requisite distributions to its stockholders, which generally relieves the Company from corporate-
level U.S. federal income taxes. Accordingly, no provision for federal income tax has been recorded in the financial statements. Differences between taxable
income and net increase in net assets resulting from operations either can be temporary, meaning they will reverse in the future, or permanent. In accordance
with Topic 946, Financial Services—Investment Companies, of the Financial Accounting Standards Board’s (“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 fiscal year. These permanent book-to-tax differences are reclassified on the
consolidated statements of changes in net assets to reflect their tax character but have no impact on total net assets. For the year ended December 31, 2017,
the Company reclassified $0.03 million to paid-in capital from distributions in excess of net investment income, which related to excise taxes payable. For the
year ended December 31, 2016, the Company reclassified $0.1 million to paid-in capital from distributions in excess of net investment income, which related
to excise taxes refunded in 2016. For the year ended December 31, 2015, the Company reclassified $1.0 million to paid-in capital from distributions in excess
of net investment income of $0.9 million and net realized loss on investments of $0.1 million, which related to excise taxes paid in prior years.
Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year
distributions into the next tax year and incur a 4% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its
estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues excise tax, if any, on estimated
excess taxable income as taxable income is earned. For the years ended December 31, 2017 and 2016, $0.03 million and $0.1 million, respectively, was
recorded for U.S. federal excise tax. For the year ended December 31, 2015, there was no U.S. federal excise tax recorded.
The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-
likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes, as modified by ASC Topic 946. Tax
benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year.
It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no material
uncertain tax positions at December 31, 2017 and 2016. The 2016, 2015 and 2014 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 capital gains, if any, may be distributed, although the Company may decide to retain such net realized gains for investment.
The Company has adopted a dividend reinvestment plan that provides for reinvestment of cash distributions on behalf of its stockholders, unless a
stockholder elects to receive cash. As a result, if the Board declares a cash distribution, then stockholders who have not “opted out” of the dividend
reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving the
cash distribution. The Company may use newly issued shares to implement the plan or the Company may purchase shares in the open market to fulfill its
obligations under the plan.
95
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Stock Repurchase Program
On April 27, 2017, the Board extended a previously authorized stock repurchase program which allows the Company to repurchase up to $5.0 million of
its common stock at prices below the Company’s net asset value per share as reported in its most recent consolidated financial statements. Under the
repurchase program, the Company may, but is not obligated to, repurchase shares of its outstanding common stock in the open market or in privately
negotiated transactions from time to time. Any repurchases by the Company will comply with the requirements of Rule 10b-18 under the Securities Exchange
Act of 1934, as amended, and any applicable requirements of the 1940 Act. Unless extended by the Board, the repurchase program will terminate on the
earlier of June 30, 2018 or the repurchase of $5.0 million of the Company’s common stock. During the year ended December 31, 2017, the Company
repurchased 5,923 shares of its common stock at an average price of $9.97 on the open market at a total cost of $0.1 million. During the year ended December
31, 2016, the Company repurchased 48,160 shares of its common stock at an average price of $10.66 on the open market at a total cost of $0.5 million.
During the year ended December 31, 2015, the Company repurchased 113,382 shares of its common stock at an average price of $11.53 on the open market at
a total cost of $1.3 million. From the inception of the stock repurchase program through December 31, 2017, the Company repurchased 167,465 shares of its
common stock at an average price of $11.22 on the open market at a total cost of $1.9 million.
Transfers of financial assets
Assets related to transactions that do not meet the requirements under ASC Topic 860, Transfers and Servicing for sale treatment under GAAP are
reflected in the Company’s consolidated statements of assets and liabilities as investments. Those assets are owned by special purpose entities that are
consolidated in the Company’s financial statements. The creditors of the special purpose entities have received security interests in such assets and such assets
are not intended to be available to the creditors of the Company (or any other affiliate of the Company).
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company — put presumptively beyond the reach of the transferor and its creditors, even in
bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both
entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific
assets, other than through a cleanup call.
Recently issued accounting pronouncement
In April 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which
amends existing revenue recognition guidance to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim periods beginning on or after
December 15, 2017. The Company has evaluated ASU 2014-09 and determined it will not have a material impact on its consolidated financial statements and
disclosures.
Note 3. Related party transactions
Investment Management Agreement
The Investment Management Agreement was reapproved by the Board on July 28, 2017. 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 “SEC”). 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.
96
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The base management fee under the Investment Management Agreement is calculated at an annual rate of 2.00% of (i) the Company’s gross assets, less
(ii) assets consisting of cash and cash equivalents, and is payable monthly in arrears. For purposes of calculating the base management fee, the term “gross
assets” includes any assets acquired with the proceeds of leverage. In addition, the Advisor agreed to waive its base management fee relating to the proceeds
raised in the 2015 Offering, 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. As of December 31, 2015, the Company had met condition (ii) above as net investment
income exceeded distributions declared for the quarters ended September 30, 2015 and December 31, 2015.
During the year ended December 31, 2015, the Advisor waived base management fees of $0.3 million, which the Advisor would have otherwise earned
on the proceeds raised in the 2015 Offering. The base management fee payable at December 31, 2017 and 2016 was $0.4 million and $0.3 million,
respectively. After giving effect of the waiver, the base management fee expense was $3.8 million, $4.7 million and $4.4 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
The incentive fee has two parts, as follows:
The first part, which is subject to the Incentive Fee Cap and Deferral Mechanism, as defined below, is calculated and payable quarterly in arrears
based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, “Pre-Incentive Fee
Net Investment Income” means interest income, dividend income and any other income (including any other fees (other than fees for providing
managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies)
accrued during the calendar quarter, minus expenses for the quarter (including the base management fee, expenses payable under the Administration
Agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the
incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue
discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income the Company has not yet received in cash. The
incentive fee with respect to the Pre-Incentive Fee Net Investment Income is 20.00% of the amount, if any, by which the Pre-Incentive Fee Net
Investment Income for the immediately preceding calendar quarter exceeds a hurdle rate of 1.75% (which is 7.00% annualized) of the Company’s net
assets at the end of the immediately preceding calendar quarter, subject to a “catch-up” provision measured as of the end of each calendar quarter. Under
this provision, in any calendar quarter, the Advisor receives no incentive fee until the Pre-Incentive Fee Net Investment Income equals the hurdle rate of
1.75%, but then receives, as a “catch-up,” 100.00% of the Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive
Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.1875% quarterly (which is 8.75% annualized). The effect of this
“catch-up” provision is that, if Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter, the Advisor will receive 20.00% of
the Pre-Incentive Fee Net Investment Income as if the hurdle rate did not apply.
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.
97
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Commencing with the calendar quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee
cap and deferral mechanism which is determined based upon a look-back period of up to three years and is expensed when incurred. For this purpose,
the look-back period for the incentive fee based on Pre-Incentive Fee Net Investment Income (the “Incentive Fee Look-back Period”) commenced on
July 1, 2014 and increased by one quarter in length at the end of each calendar quarter until June 30, 2017, after which time, the Incentive Fee Look-
back Period includes the relevant calendar quarter and the 11 preceding full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee
Net Investment Income is subject to a cap (the “Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such
deferred incentive fees (collectively, the “Incentive Fee Cap and Deferral Mechanism”). The Incentive Fee Cap is equal to (a) 20.00% of Cumulative
Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to the
Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or a negative value in any calendar quarter, the
Company will not pay an incentive fee on Pre-Incentive Fee Net Investment Income to the Advisor in that quarter. To the extent that the payment of
incentive fees on Pre-Incentive Fee Net Investment Income is limited by the Incentive Fee Cap, the payment of such fees will be deferred and paid in
subsequent calendar quarters up to three years after their date of deferment, subject to certain limitations, which are set forth in the Investment
Management Agreement. The Company only pays incentive fees on Pre-Incentive Fee Net Investment Income to the extent allowed by the Incentive
Fee Cap and Deferral Mechanism. “Cumulative Pre-Incentive Fee Net Return” during any Incentive Fee Look-back Period means the sum of (a) Pre-
Incentive Fee Net Investment Income and the base management fee for each calendar quarter during the Incentive Fee Look-back Period and (b) the
sum of cumulative realized capital gains and losses, cumulative unrealized capital appreciation and cumulative unrealized capital depreciation during
the applicable Incentive Fee Look-back Period.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or, upon termination of the
Investment Management Agreement, as of the termination date), and equals 20.00% of the Company’s realized capital gains, if any, on a cumulative
basis from the date of the election to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized capital
depreciation on a cumulative basis through the end of such year, less all previous amounts paid in respect of the capital gain incentive fee. However, in
accordance with GAAP, the Company is required to include the aggregate unrealized capital appreciation on investments in the calculation and accrue a
capital gain incentive fee on a quarterly basis, as if such unrealized capital appreciation were realized, even though such unrealized capital appreciation
is not permitted to be considered in calculating the fee actually payable under the Investment Management Agreement.
During the year ended December 31, 2017, the Advisor waived performance based incentive fees of $0.1 million which the Advisor would have
otherwise earned. The performance based incentive fee expense was $1.6 million, $2.1 million and $3.5 million for the years ended December 31, 2017, 2016
and 2015, respectively. The incentive fee on Pre-Incentive Fee Net Investment Income was subject to the Incentive Fee Cap and Deferral Mechanism for the
years ended December 31, 2017 and 2016, which resulted in $1.1 million and $1.7 million, respectively, of reduced expense and additional net investment
income. As of December 31, 2015, the incentive fee on Pre-Incentive Fee Net Investment Income was not limited by the Incentive Fee Cap and Deferral
Mechanism. The performance based incentive fee payable at December 31, 2017 was $0.5 million. The entire incentive fee payable at December 31, 2017
represented part one of the incentive fee. There was no performance based incentive fee payable at December 31, 2016.
Administration Agreement
The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the
Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s allocable portion of overhead and
other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated
with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s Chief
Financial Officer and Chief Compliance Officer and their respective staffs. The administrative fee expense was $0.7 million, $0.9 million and $1.1 million for
the years ended December 31, 2017, 2016 and 2015, respectively.
98
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investments
The following table shows the Company’s investments as of December 31, 2017 and 2016:
Investments
Debt
Warrants
Other
Equity
Total investments
December 31, 2017
December 31, 2016
Cost
Fair Value
Cost
Fair Value
(In thousands)
$
$
204,235 $
6,182
12,031
629
223,077 $
203,793 $
9,090
7,700
1,516
222,099 $
201,216 $
5,140
4,683
588
211,627 $
186,186
6,362
600
855
194,003
The following table shows the Company’s investments by industry sector as of December 31, 2017 and 2016:
Life Science
Biotechnology
Drug Delivery
Medical Device
Technology
Communications
Consumer-Related
Data Storage
Internet and Media
Materials
Networking
Power Management
Semiconductors
Software
Cleantech
Alternative Energy
Energy Efficiency
Waste Recycling
Healthcare Information and Services
Diagnostics
Other
Software
Total investments
Note 5. Transactions with affiliated companies
$
December 31, 2017
December 31, 2016
Cost
Fair Value
Cost
Fair Value
(In thousands)
21,249 $
6,918
37,374
19,823
11,359
4,226
39,768
9,511
66
1,262
3,823
58,516
68
100
—
22,694 $
6,860
37,306
19,773
12,314
100
39,763
9,772
—
1,260
4,256
58,744
—
117
—
46,703 $
—
14,164
108
21,055
4,340
7,933
9,966
3,412
2,255
12,076
60,516
93
2,086
5,997
41,578
—
13,736
99
22,121
100
7,933
10,222
3,409
2,318
8,311
55,362
—
2,082
6,003
83
218
8,713
223,077 $
2
165
8,973
222,099 $
4,817
5,988
10,118
211,627 $
4,405
5,939
10,385
194,003
$
An affiliated company is generally a portfolio company in which the Company owns 5% or more of its voting securities. Transactions related to
investments in affiliated companies for the year ended December 31, 2017 were as follows:
Portfolio
Company
Fair value at
December 31,
2016
Purchases
Sales
Year ended December 31, 2017
Transfers in
at fair
value
Discount
accretion
Net
unrealized
loss
Fair value at
December 31,
2017
Net realized
gain (loss)
Interest
income
Decisyon, Inc. (1)
Total Affiliates
$
$
—
—
$
$
750
750
$
$
—
—
$
$
(In thousands)
$
$
16
16
$
$
2,754
2,754
(21) $
(21) $
3,499
3,499
$
$
—
—
$
$
225
225
(1) During the year ended December 31, 2017, the Company's ownership in the portfolio company increased to five percent of the portfolio company's
voting securities.
99
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
There were no transactions related to investments in affiliated companies for the year ended December 31, 2016.
Note 6. Fair value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or
liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the asset or liability.
Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a
change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market
participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of
significant judgment.
The Company’s fair value measurements are classified into a fair value hierarchy in accordance with ASC Topic 820, Fair Value Measurement, based
on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three categories within the
hierarchy are as follows:
Level 1
Quoted prices in active markets for identical assets and liabilities.
Level 2
Level 3
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.
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow
methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management
judgment or estimation.
Investments are valued at fair value as determined in good faith by the Board, based on input of management, the audit committee and independent
valuation firms which are engaged at the direction of the Board to assist in the valuation of each portfolio investment lacking a readily available market
quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied valuation process. This valuation process is
conducted at the end of each fiscal quarter, with at least 25% (based on fair value) of the Company’s valuation of portfolio companies lacking readily
available market quotations subject to review by an independent valuation firm.
Because there is not a readily available market value for most of the investments in its portfolio, the Company values substantially all of its portfolio
investments at fair value as determined in good faith by the Board, as described herein. Due to the inherent uncertainty of determining the fair value of
investments that do not have a readily available market value, the fair value of the Company's investments may fluctuate from period to period. Additionally,
the fair value of the Company's investments may differ significantly from the values that would have been used had a ready market existed for such
investments and may differ materially from the values that the Company may ultimately realize. Further, such investments are generally subject to legal and
other restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment in a
forced or liquidation sale, the Company could realize significantly less than the value at which the Company has recorded such portfolio investment.
100
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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.
Debt investments: The fair value of debt investments is estimated by discounting the expected future cash flows using the year end rates at which
similar debt investments would be made to borrowers with similar credit ratings and for the same remaining maturities. At December 31, 2017 and 2016, the
hypothetical market yields used ranged from 10% to 25% and 11% to 25%, 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.
• 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 initial public offerings, 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.
101
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Equity investments: The fair value of an equity investment in a privately held company is initially the face value of the amount invested. The Company
adjusts the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing. The Company may
make adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in a portfolio company’s financial or operational
performance. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement. The Company
has categorized these equity investments as Level 3 within the fair value hierarchy described above. The fair value of an equity investment in a publicly
traded company is based upon the closing public share price on the date of measurement. Therefore, the Company has categorized these equity investments as
Level 1 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.
Other investments: Other investments are valued based on the facts and circumstances of the underlying contractual agreement. The Company currently
values these contractual agreements using a multiple probability weighted cash flow model as the contractual future cash flows contain elements of
variability. Significant changes in the estimated cash flows and probability weightings would result in a significantly higher or lower fair value measurement.
The Company has categorized these other investments as Level 3 within the fair value hierarchy described above. These other investments are recorded at fair
value on a recurring basis.
The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of
December 31, 2017 and 2016. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy, the Company
may also use other valuation techniques and methodologies when determining its fair value measurements.
The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s
fair value measurements as of December 31, 2017:
Investment Type
Debt investments
Fair
Value
December 31, 2017
Valuation Techniques/
Methodologies
(Dollars in thousands, except per share data)
Unobservable
Input
$
200,893
Discounted Expected Future Cash Flows
Hypothetical Market Yield
2,900
Liquidation Scenario
Warrant investments
7,371
Black-Scholes Valuation Model
2
Expected Proceeds
Discount Rate
Marketability Discount
Uncertainty Discount
Price Per Share
Average Industry Volatility
Marketability Discount
Estimated Time to Exit
Price Per Share
Other investments
7,700
Multiple Probability Weighted Cash Flow
Model
Discount Rate
Probability Weighting
Range
10% – 25%
18%
20%
20%
$0.00 – $22.38
20%
20%
1 to 5 years
$0.001
$
$
18% – 25%
0% – 100%
Equity investments
Total Level 3 investments
249
219,115
$
Last Equity Financing
Price Per Share
$0.00 – $1.26
$
Weighted
Average
13%
18%
20%
20%
3.69
20%
20%
3 years
0.001
19%
36%
0.54
102
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s
fair value measurements as of December 31, 2016:
Investment Type
Debt investments
Fair
Value
December 31, 2016
Valuation Techniques/
Methodologies
(Dollars in thousands, except per share data)
Unobservable
Input
$
174,686
Discounted Expected Future Cash Flows
Hypothetical Market Yield
11,500
Liquidation Scenario
Probability Weighting
Warrant investments
5,677
Black-Scholes Valuation Model
Price Per Share
Average Industry Volatility Volatility
Marketability Discount
Estimated Time to Exit
Other investments
180
Expected Settlement
600
Multiple Probability Weighted Cash Flow
Model
Price Per Share
Discount Rate
Probability Weighting
Range
11% – 25%
25% – 100%
$
$0.00 – $63.98
21%
20%
1 to 5 years
$1.78
$
25%
25% – 100%
Equity investments
Total Level 3 investments
268
192,911
$
Last Equity Financing
Price Per Share
$0. 04 – $1.00
$
Weighted
Average
13%
40%
4.02
21%
20%
3 years
1.78
25%
43%
0.34
Borrowings: The carrying amount of borrowings under the Company’s revolving credit facility (the “Key Facility”) with KeyBank National
Association (“Key”) approximates fair value due to the variable interest rate of the Key Facility and is categorized as Level 2 within the fair value hierarchy
described above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed rate
2022 Notes and 2019 Notes (as defined in Note 7) is based on the closing public share price on the date of measurement. On December 31, 2017, the closing
price of the 2022 Notes on the New York Stock Exchange was $25.40 per note, or $38.0 million. Therefore, the Company has categorized this borrowing as
Level 1 within the fair value hierarchy described above.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings. Therefore, the Company has categorized these
instruments as Level 3 within the fair value hierarchy described above.
The following tables detail the assets that are carried at fair value and measured at fair value on a recurring basis as of December 31, 2017 and 2016 and
indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
Debt investments
Warrant investments
Other investments
Equity investments
Debt investments
Warrant investments
Other investments
Equity investments
December 31, 2017
Total
Level 1
Level 2
Level 3
203,793 $
9,090 $
7,700 $
1,516 $
(In thousands)
— $
— $
— $
1,267 $
— $
1,717 $
— $
— $
203,793
7,373
7,700
249
December 31, 2016
Total
Level 1
Level 2
Level 3
186,186 $
6,362 $
600 $
855 $
(In thousands)
— $
— $
— $
587 $
— $
505 $
— $
— $
186,186
5,857
600
268
$
$
$
$
$
$
$
$
103
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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
year ended December 31, 2017:
Debt
Investments
Warrant
Investments
December 31, 2017
Equity
Investments
(In thousands)
Other
Investments
Level 3 assets, beginning of period
Purchase of investments
Warrants and equity received and classified as Level 3
Principal payments received on investments
Proceeds from sale of investments
Net realized (loss) gain on investments
Unrealized appreciation (depreciation) included in earnings
Transfer from debt investments to other investments
Other
Level 3 assets, end of period
$
$
186,186 $
135,556
—
(103,659)
—
(21,219)
16,427
(7,500)
(1,998)
203,793 $
5,857 $
—
2,355
—
(1,804)
766
199
—
—
7,373 $
268 $
—
41
—
—
—
(60)
—
—
249 $
600 $
—
—
(152)
—
—
(248)
7,500
—
7,700 $
Total
192,911
135,556
2,396
(103,811)
(1,804)
(20,453)
16,318
—
(1,998)
219,115
The Company’s transfers between levels are recognized at the end of each reporting period. During the year ended December 31, 2017, there were no
transfers between levels.
The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at December 31,
2017 includes $0.1 million in unrealized appreciation on debt and other investments, $0.3 million in unrealized depreciation on warrant investments and $0.01
million in unrealized appreciation on equity investments.
The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the
year ended December 31, 2016:
Debt
Investments
Warrant
Investments
December 31, 2016
Equity
Investments
(In thousands)
Other
Investments
Level 3 assets, beginning of period
Purchase of investments
Warrants and equity received and classified as Level 3
Principal payments received on investments
Proceeds from sale of investments
Net realized (loss) gain on investments
Unrealized (depreciation) appreciation included in earnings
Transfer from debt to other investments
Other
Level 3 assets, end of period
$
$
242,167 $
59,858
—
(95,639)
—
(7,597)
(12,296)
(383)
76
186,186 $
5,793 $
—
402
—
(855)
340
177
—
—
5,857 $
316 $
—
84
—
(129)
(367)
364
—
—
268 $
300 $
—
—
(121)
—
—
38
383
—
600 $
Total
248,576
59,858
486
(95,760)
(984)
(7,624)
(11,717)
—
76
192,911
The Company’s transfers between levels are recognized at the end of each reporting period. During the year ended December 31, 2016, there were no
transfers between levels.
104
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The change in unrealized depreciation included in the consolidated statement of operations attributable to Level 3 investments still held at December 31,
2016 includes $14.7 million in unrealized depreciation on debt and other investments, $0.3 million in unrealized appreciation on warrants and $0.1 million in
unrealized appreciation on equity.
The Company discloses fair value information about financial instruments, whether or not recognized in the consolidated statement of assets and
liabilities, for which it is practicable to estimate that value. Certain financial instruments are excluded from the disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value amounts for 2017 and 2016 have been measured as of the reporting date and have not been reevaluated or updated for purposes of these
financial statements subsequent to that date. As such, the fair values of these financial instruments subsequent to the reporting date may be different than
amounts reported at year-end.
As of December 31, 2017 and 2016, the recorded balances equaled fair values of all the Company’s financial instruments, except for the Company’s
2019 Notes and 2022 Notes, as previously described.
Off-balance-sheet instruments
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair
values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Management
monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new debt investments and by investing
in securities with terms that mitigate the Company’s overall interest rate risk.
Note 7. Borrowings
The following table shows the Company’s borrowings as of December 31, 2017 and 2016:
Total
Commitment
December 31, 2017
Balance
Outstanding
Unused
Commitment
Total
Commitment
December 31, 2016
Balance
Outstanding
Unused
Commitment
Key Facility
2022 Notes
2019 Notes
Total before debt issuance costs
Unamortized debt issuance costs
attributable to term borrowings
Total borrowings outstanding, net
$
$
$
95,000
37,375
—
132,375
—
132,375
$
$
58,000
37,375
—
95,375
(1,300)
94,075
$
$
(In thousands)
37,000
—
—
37,000
—
37,000
$
$
95,000
—
33,000
128,000
—
128,000
$
$
63,000
—
33,000
96,000
(403)
95,597
$
32,000
—
—
32,000
—
32,000
In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that the Company’s asset
coverage, as defined in the 1940 Act, is at least 200% after such borrowings. As of December 31, 2017, the asset coverage for borrowed amounts was 242%.
105
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The Company entered into the Key Facility with Key effective November 4, 2013. The Key Facility has an accordion feature which allows for an
increase in the total loan commitment to $150 million from the current $95 million commitment. The Key Facility is collateralized by all debt investments
and warrants held by Credit II and permits an advance rate of up to 50% of eligible debt investments held by Credit II. The Key Facility contains covenants
that, among other things, require the Company to maintain a minimum net worth and to restrict the debt investments securing the Key Facility to certain
criteria for qualified debt investments and includes portfolio company concentration limits as defined in the related loan agreement. The Key Facility has a
three-year revolving period which ends on August 12, 2018 followed by a two-year amortization period and matures on August 12, 2020. The interest rate is
based upon the one-month London Interbank Offered Rate (“LIBOR”), plus a spread of 3.25%, with a LIBOR floor of 0.75%. The LIBOR rate was 1.56%
and 0.77% on December 31, 2017 and 2016, respectively. The average rate for the years ended December 31, 2017 and 2016 was 4.33% and 4.00%,
respectively. The Key Facility requires the payment of an unused line fee in an amount equal to 0.50% of any unborrowed amount available under the facility
annually. As of December 31, 2017 and 2016, the Company had borrowing capacity of $37.0 and $32.0 million, respectively. At December 31, 2017 and
2016, $23.6 million and $4.6 million, respectively, was available, subject to existing terms and advance rates.
On March 23, 2012, the Company issued and sold an aggregate principal amount of $30.0 million of 7.375% senior unsecured notes due in 2019 and on
April 18, 2012, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $3.0 million of such notes
(collectively, the “2019 Notes”). The 2019 Notes had a stated maturity of March 15, 2019 and were redeemable in whole or in part at the Company’s option at
any time or from time to time at a redemption price of $25 per security plus accrued and unpaid interest. The 2019 Notes bore interest at a rate of 7.375% per
year payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2019 Notes were the Company’s direct unsecured obligations
and (i) ranked equally in right of payment with the Company’s future unsecured indebtedness; (ii) were senior in right of payment to any of the Company’s
future indebtedness that expressly provided it was subordinated to the 2019 Notes; (iii) were effectively subordinated to all of the Company’s existing and
future secured indebtedness (including indebtedness that was initially unsecured to which the Company subsequently granted security), to the extent of the
value of the assets securing such indebtedness, and (iv) were structurally subordinated to all existing and future indebtedness and other obligations of any of
the Company’s subsidiaries. On October 30, 2017 (the “Redemption Date”), the Company redeemed all of the issued and outstanding 2019 Notes in an
aggregate principal amount of $33.0 million and paid accrued interest of $0.3 million. The Company accelerated $0.2 million of unamortized debt issuance
costs related to the 2019 Notes. The 2019 Notes were delisted effective on the Redemption Date.
On September 29, 2017, the Company issued and sold an aggregate principal amount of $32.5 million of 6.25% notes due in 2022 and on October 11,
2017, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $4.9 million of such notes (collectively, the
“2022 Notes”). The 2022 Notes have a stated maturity of September 15, 2022 and may be redeemed in whole or in part at the Company’s option at any time
or from time to time on or after September 15, 2019 at a redemption price of $25 per security plus accrued and unpaid interest. The 2022 Notes bear interest
at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2022 Notes are the Company’s direct
unsecured obligations and (i) rank equally in right of payment with the Company’s current and future unsecured indebtedness; (ii) are senior in right of
payment to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2022 Notes; (iii) are effectively subordinated to all of
the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants
security), to the extent of the value of the assets securing such indebtedness, and (iv) are structurally subordinated to all existing and future indebtedness and
other obligations of any of the Company’s subsidiaries. As of December 31, 2017, the Company was in material compliance with the terms of the 2022 Notes.
The 2022 Notes are listed on the New York Stock Exchange under the symbol “HTFA”.
On June 28, 2013, the Company completed the 2013-1 Securitization. In connection with the 2013-1 Securitization, 2013-1 Trust, a wholly owned
subsidiary of the Company, issued $90.0 million in the Asset-Backed Notes, which were rated A1(sf) by Moody’s Investors Service, Inc. The Asset-Backed
Notes were issued by 2013-1 Trust and were backed by a pool of loans made to certain portfolio companies of the Company and secured by certain assets of
such portfolio companies. The Asset-Backed Notes were secured obligations of 2013-1 Trust and non-recourse to the Company. In connection with the
issuance and sale of the Asset-Backed Notes, the Company made customary representations, warranties and covenants. The Asset-Backed Notes bore interest
at a fixed rate of 3.00% per annum and had a stated maturity of May 15, 2018. As of December 31, 2016, the Asset-Backed Notes were repaid in full.
106
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table shows information about our senior securities as of December 31, 2017, 2016, 2015, 2014 and 2013:
Class and Year
Credit facilities
2017
2016
2015
2014
2013
2022 Notes
2017
2019 Notes
2017
2016
2015
2014
2013
2013-1 Securitization
2017
2016
2015
2014
2013
Total senior securities
2017
2016
2015
2014
2013
Total Amount
Outstanding
Exclusive of
Treasury
Securities(1)
Involuntary
Liquidation
Preference
per Unit(3)
(In thousands, except unit data)
Asset Coverage
per Unit(2)
Average
Market
Value per
Unit(4)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
58,000 $
63,000 $
68,000 $
10,000 $
10,000 $
3,973
3,733
4,048
22,000
25,818
—
—
—
—
—
N/A
N/A
N/A
N/A
N/A
37,375 $
6,166
— $
25.66
—
33,000 $
33,000 $
33,000 $
33,000 $
—
—
14,546 $
38,753 $
79,343 $
95,375 $
96,000 $
115,546 $
81,753 $
122,343 $
—
7,127
8,342
6,667
7,824
—
—
18,926
5,677
3,254
2,416
2,450
2,383
2,691
2,110
—
— $
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
25.42
25.26
25.64
25.70
—
—
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Total amount of senior securities outstanding at the end of the period presented.
(2) Asset coverage per unit is the ratio of the original cost less accumulated depreciation, amortization or impairment of the Company’s total consolidated
assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness.
Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
(3) The amount which the holder of such class of senior security would be entitled upon the voluntary liquidation of the applicable issuer in preference to
any security junior to it. The “ — ” in this column indicates that the SEC expressly does not require this information to be disclosed for certain types of
securities.
(4) Not applicable to the Company’s credit facilities and 2013-1 Securitization because such securities are not registered for public trading.
Note 8. Federal income tax
The Company has elected to be treated as a RIC under Subchapter M of the Code and to distribute substantially all of its taxable income. Accordingly,
no provision for federal, state or local income tax has been recorded in the financial statements. Taxable income differs from net increase in net assets
resulting from operations primarily due to unrealized appreciation on investments as investment gains and losses are not included in taxable income until they
are realized.
107
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table reconciles net increase (decrease) in net assets resulting from operations to taxable income:
Net increase (decrease) in net assets resulting from operations
Net unrealized (appreciation) depreciation on investments
Other book-tax differences
Capital loss carry forward
Taxable income before deductions for distributions
The tax characters of distributions paid are as follows:
Ordinary income
Total
The components of undistributed ordinary income earnings on a tax basis were as follows:
Undistributed ordinary income
Long term capital loss carry forward
Unrealized appreciation
Unrealized depreciation
Other temporary differences
Total
2017
Years Ended December 31,
2016
(In thousands)
2015
$
$
9,591 $
(18,485)
806
21,191
13,103 $
(4,913) $
14,236
(844)
7,776
16,255 $
11,856
490
(239)
1,650
13,757
2017
Years Ended December 31,
2016
(In thousands)
2015
$
$
13,818 $
13,818 $
15,759 $
15,759 $
16,465
16,465
2017
As of December 31,
2016
(In thousands)
2015
1,036 $
(41,702)
6,049
(7,027)
2,955
(38,689) $
1,753 $
(20,511)
3,830
(23,293)
2,169
(36,052) $
1,256
(12,735)
4,384
(9,611)
(3,277)
(19,983)
$
$
Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year
distributions into the next tax year and incur a 4% excise tax on such income, as required. For the years ended December 31, 2017 and 2016, the Company
elected to carry forward taxable income in excess of current year distributions of $1.0 million and $1.8 million, respectively. At December 31, 2017 and 2016,
a provision for excise tax of $0.03 million and $0.1 million, respectively, was recorded.
Capital losses in excess of capital gains earned in a tax year may generally be carried forward, without expiration, and used to offset capital gains,
subject to certain limitations. During the years ended December 31, 2017, 2016 and 2015, the Company did not use any of its capital loss carry forward to
offset capital gains.
For federal income tax purposes, the tax cost of investments at December 31, 2017 and 2016 was $223.1 million and $211.6 million, respectively. The
gross unrealized appreciation on investments at December 31, 2017 and 2016 was $6.0 million and $3.8 million, respectively. The gross unrealized
depreciation on investments at December 31, 2017 and 2016 was $7.0 million and $23.3 million, respectively.
Note 9. Financial instruments with off-balance-sheet risk
In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its borrowers.
These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized
in the consolidated statement of assets and liabilities. The Company attempts to limit its credit risk by conducting extensive due diligence and obtaining
collateral where appropriate.
108
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The balance of unfunded commitments to extend credit was $33.3 million and $20.8 million as of December 31, 2017 and 2016, respectively.
Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving credit
arrangements or similar transactions. These commitments are often subject to financial or non-financial milestones and other conditions to borrow that must
be achieved before the commitment can be drawn. In addition, the commitments generally have fixed expiration dates or other termination clauses. Since
commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The following table provides the Company’s unfunded commitments by portfolio company as of December 31, 2017:
Aerin Medical, Inc.
GeNO LLC
HealthEdge Software, Inc.
Intelepeer Holdings, Inc.
Kixeye, Inc.
PebblePost, Inc.
Titan Pharmaceuticals, Inc.
Weblinc Corporation
Total
December 31, 2017
Fair Value of
Unfunded
Commitment
Liability
Principal
Balance
(In thousands)
5,000 $
2,000
11,250
3,000
3,000
4,000
3,000
2,000
33,250 $
63
20
112
40
45
59
30
37
406
$
$
The table above also provides the fair value of the Company’s unfunded commitment liability as of December 31, 2017 which totaled $0.4 million. The
fair value at inception of the delay draw credit agreements is equal to the fees and/or warrants received to enter into these agreements, taking into account the
remaining terms of the agreements and the counterparties’ credit profile. The unfunded commitment liability reflects the fair value of these future funding
commitments and is included in the Company’s consolidated statement of assets and liabilities.
Note 10. Concentrations of credit risk
The Company’s debt investments consist primarily of loans to development-stage companies at various stages of development in the technology, life
science, healthcare information and services and cleantech industries. Many of these companies may have relatively limited operating histories and also may
experience variation in operating results. Many of these companies conduct business in regulated industries and could be affected by changes in government
regulations. Most of the Company’s borrowers will need additional capital to satisfy their continuing working capital needs and other requirements, and in
many instances, to service the interest and principal payments on the loans.
The Company’s largest debt investments may vary from year to year as new debt investments are recorded and existing debt investments are repaid. The
Company’s five largest debt investments, at cost, represented 29% and 24% of total debt investments outstanding as of December 31, 2017 and 2016,
respectively. No single debt investment represented more than 10% of the total debt investments as of December 31, 2017 or 2016. Investment income,
consisting of interest and fees, can fluctuate significantly upon repayment of large debt investments. Interest income from the five largest debt investments
accounted for 14%, 17% and 14% of total interest and fee income on investments for the years ended December 31, 2017, 2016 and 2015, respectively.
109
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Distributions
The Company’s distributions are recorded on the declaration date. The following table summarizes the Company’s distribution activity for the years
ended December 31, 2017 and 2016:
Date
Declared
Record Date
Payment Date
Amount
Per Share
Cash
Distribution
DRIP
Shares
Issued
DRIP
Share
Value
(In thousands, except share and per share data)
Year Ended December, 2017
10/27/17
10/27/17
10/27/17
7/28/17
7/28/17
7/28/17
4/27/17
4/27/17
4/27/17
3/3/17
3/3/17
3/3/17
2/21/18
1/22/18
12/20/17
11/20/17
10/19/17
9/20/17
8/18/17
7/20/17
6/20/17
5/19/17
4/21/17
3/20/17
Year Ended December 31, 2016
10/28/16
10/28/16
10/28/16
7/29/16
7/29/16
7/29/16
4/28/16
4/28/16
4/28/16
3/3/16
3/3/16
3/3/16
2/22/17
1/19/17
12/20/16
11/18/16
10/20/16
9/20/16
8/19/16
7/20/16
6/20/16
5/19/16
4/20/16
3/18/16
3/15/18 $
2/15/18
1/17/18
12/15/17
11/15/17
10/16/17
9/15/17
8/15/17
7/14/17
6/15/17
5/16/17
4/18/17
$
3/15/17 $
2/15/17
1/13/17
12/15/16
11/15/16
10/17/16
9/15/16
8/15/16
7/15/16
6/15/16
5/16/16
4/15/16
$
0.10 $
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
1.20 $
0.10 $
0.10
0.10
0.115
0.115
0.115
0.115
0.115
0.115
0.115
0.115
0.115
1.335 $
—
1,139
1,139
1,139
1,139
1,138
1,140
1,140
1,138
1,137
1,137
1,134
12,520
1,134
1,133
1,137
1,308
1,308
1,305
1,307
1,302
1,305
1,305
1,283
1,306
15,133
—
1,185
1,119
1,227
1,195
1,205
1,199
1,159
1,164
1,202
1,287
1,510
13,452 $
1,665 $
1,542
1,550
1,712
1,896
1,716
1,535
1,842
1,734
1,898
3,821
1,840
22,751 $
—
13
13
13
13
14
13
12
13
14
15
18
151
16
17
16
19
21
22
21
25
23
23
44
21
268
On March 1, 2018, the Board declared monthly distributions per share, payable as set forth in the following table:
Ex-Dividend Date
May 16, 2018
April 18, 2018
March 16, 2018
Record Date
Payment Date
May 17, 2018
April 19, 2018
March 19, 2018
June 15, 2018
May 15, 2018
April 17, 2018
Distributions Declared
0.10
$
0.10
$
0.10
$
After paying distributions of $1.10 per share deemed paid for tax purposes in 2017, declaring on October 27, 2017 a distribution of $0.10 per share
payable January 17, 2018, and taxable earnings of $1.14 per share in 2017, the Company’s undistributed spillover income as of December 31, 2017 was $0.09
per share. Spillover income includes any ordinary income and net capital gains from the preceding tax years that were not distributed during such tax years.
Note 12. Subsequent events
On February 14, 2018, DSC ABC, a borrower of the Company, sold substantially all of its assets (the "DSC Assets") to StereoVision Imaging, Inc.
("SVI") for approximately $2.7 million. The Company received the proceeds of the sale of the DSC Assets. In order to finance SVI's purchase of the DSC
Assets and to provide SVI working capital, the Company made a debt investment of $3.2 million in SVI.
On March 6, 2018, the Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled to
receive under the Investment Management Agreement for the period commencing on January 1, 2018 and ending on December 31, 2018. Such waived
incentive fees will not be subject to recoupment.
110
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Financial highlights
The following table shows financial highlights for the Company:
Per share data:
Net asset value at beginning of period
Net investment income
Realized loss on investments
Unrealized appreciation (depreciation) on
investments
Net increase (decrease) in net assets resulting from
operations
Net dilution from issuance of common stock
Distributions declared(1)
From net investment income
From net realized gain on investments
Return of capital
Net accretion from repurchase of common stock
Other (2)
Net asset value at end of period
Per share market value, beginning of period
Per share market value, end of period
Total return based on a market value (3)
Shares outstanding at end of period
Ratios, net of waivers, to average net assets:
Expenses without incentive fees
Incentive fees
Net expenses
Net investment income with incentive fees
Ratios, without waivers, to average net assets:
Expenses without incentive fees(4)
Incentive fees(4)
Net expenses(4)
Net investment income with incentive fees(4)
Net assets at the end of the period
Average net asset value
Average debt per share
Portfolio turnover ratio
$
$
$
$
$
$
2017
$
12.09
1.07
(1.84)
1.60
0.83
—
(1.20)
(1.20)
—
—
—
—
11.72
10.53
11.22
17.9%
$
$
Years Ended December 31,
2015
(In thousands, except share and per share data)
2014
2016
$
13.85
1.48
(0.67)
(1.24)
(0.43)
—
(1.34)
(1.34)
—
—
0.01
—
12.09
11.73
10.53
$
$
1.5%
$
$
$
14.36
1.25
(0.15)
(0.04)
1.06
(0.18)
(1.38)
(1.38)
—
—
0.02
(0.03)
13.85
13.99
11.73
(6.3)%
$
14.14
1.11
(0.37)
0.86
1.60
—
(1.38)
(1.38)
—
—
—
—
14.36
14.21
13.99
$
$
8.2%
2013
15.15
1.38
(0.78)
(0.23)
0.37
—
(1.38)
(1.38)
—
—
—
—
14.14
14.92
14.21
4.5%
11,520,406
11,510,424
11,535,212
9,628,124
9,608,949
8.6%
1.2%
9.8%
9.0%
8.6%
1.3%
9.9%
8.9%
$
135,075
$
137,293
6.60
$
79.4%
9.2%
1.4%
10.6%
11.4%
9.2%
1.4%
10.6%
11.4%
$
139,192
$
150,612
8.91
$
27.1%
8.6%
2.2%
10.8%
8.9%
8.9%
2.2%
11.1%
8.7%
$
159,751
$
157,612
7.87
$
56.1%
13.3%
1.5%
14.8%
7.8%
13.5%
1.5%
15.0%
7.5%
$
$
$
46.5%
138,248
137,848
10.68
11.8%
2.3%
14.1%
9.2%
11.9%
2.3%
14.2%
9.1%
135,835
142,327
12.06
37.9%
(1) Distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined
under GAAP due to (i) changes in unrealized appreciation and depreciation, (ii) temporary and permanent differences in income and expense
recognition, and (iii) the amount of spillover income carried over from a given tax year for distribution in the following tax year. The final determination
of taxable income for each tax year, as well as the tax attributes for distributions in such tax year, will be made after the close of the tax year.
Includes the impact of the different share amounts as a result of calculating per share data based on the weighted average basic shares outstanding during
the period and certain per share data based on the shares outstanding as of a period end or transaction date.
(2)
(3) The total return equals the change in the ending market value over the beginning of period price per share plus distributions paid per share during the
period, divided by the beginning price.
(4) During the years ended December 31, 2015, 2014 and 2013, the Advisor waived $0.3 million, $0.2 million and $0.1 million, respectively, of base
management fee. During the years ended December 31, 2017 and 2014, the Advisor waived $0.1 million of incentive fee.
111
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Selected quarterly financial data (unaudited)
Total investment income
Net investment income
Net realized and unrealized gain (loss)
Net increase in net asset resulting from operations
Net investment income per share (1)
Net increase in net assets per share (1)
Net asset value per share at period end (2)
Total investment income
Net investment income
Net realized and unrealized loss
Net (decrease) increase in net asset resulting from operations
Net investment income per share (1)
Net (decrease) increase in net assets per share (1)
Net asset value per share at period end (2)
December 31,
2017
September 30,
2017
June 30,
2017
March 31,
2017
(In thousands, except per share data)
$
$
$
$
$
$
$
6,163 $
2,379 $
117 $
2,496 $
0.21 $
0.21 $
11.72 $
6,774 $
3,797 $
(1,088) $
2,709 $
0.33 $
0.24 $
11.81 $
5,878 $
2,754 $
(2,021) $
733 $
0.24 $
0.06 $
11.87 $
6,962
3,367
286
3,653
0.29
0.32
12.11
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
(In thousands, except per share data)
$
$
$
$
$
$
$
6,987 $
3,815 $
(4,404) $
(589) $
0.33 $
(0.05) $
12.09 $
7,608 $
4,375 $
(10,018) $
(5,643) $
0.38 $
(0.49) $
12.44 $
9,092 $
4,512 $
(4,590) $
(78) $
0.39 $
(0.01) $
13.27 $
9,297
4,397
(3,000)
1,397
0.38
0.12
13.62
(1) Based on weighted average shares outstanding for the respective period.
(2) Based on shares outstanding at the end of the respective period.
112
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
As of December 31, 2017, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our management, including
our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable
assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such
possible controls and procedures.
(b) Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting and RSM US LLP’s Report of Independent Registered Public Accounting Firm are
included in “Item 8. Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
(c) Changes in internal controls over financial reporting.
There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None
113
PART III
We will file a definitive Proxy Statement for our 2018 Annual Meeting of Stockholders with the SEC, pursuant to Regulation 14A, not later than
120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K.
Only those sections of our definitive Proxy Statement that specifically address the items set forth herein are incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2018 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal year.
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2018 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2018 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2018 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal year.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2018 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal year.
114
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial statements
(1) Financial statements — Refer to Item 8 starting on page 73.
(2) Financial statement schedules — None
(3) Exhibits
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
Description
Amended and Restated Certificate of Incorporation (Incorporated by reference to exhibit (a) of the Company’s Pre-effective Amendment No. 2 to
the Registration Statement on Form N-2, filed on July 2, 2010)
Amended and Restated Bylaws (Incorporated by reference to exhibit (b) of the Company’s Pre-effective Amendment No. 2 to the Registration
Statement on Form N-2, filed on July 2, 2010)
Form of Specimen Certificate (Incorporated by reference to exhibit (d) of the Company’s Pre-effective Amendment No. 3 to the Registration
Statement on Form N-2, filed on July 19, 2010)
Indenture, dated as of March 23, 2012, between the Company and U.S. Bank National Association. (Incorporated by reference to Exhibit (d)(7)
of the Company’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2, File No. 333-178516, filed on March 23, 2012)
Second Supplemental Indenture, dated as of September 29, 2017, between the Company and U.S. Bank National Association (Incorporated by
reference to Exhibit (d)(12) of the Company’s Post-Effective Amendment No. 5 to the Registration Statement on Form N-2, File No. 333-
201886, filed on September 29, 2017)
4.4
Form of 6.25% 2022 Notes due 2022 (included as part of Exhibit 4.3)
10.1
Amended and Restated Investment Management Agreement (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on
Form 8-K, filed on August 5, 2014)
10.2
Form of Custodial Agreement (Incorporated by reference to exhibit (j) of the Company’s Pre-effective Amendment No. 3 to the Registration
Statement on Form N-2, filed on July 19, 2010)
10.3
Form of Administration Agreement (Incorporated by reference to exhibit (k)(1) of the Company’s Pre-effective Amendment No. 2 to the
Registration Statement on Form N-2, filed on July 2, 2010)
10.4
Form of Trademark License Agreement by and between the Company and Horizon Technology Finance, LLC (Incorporated by reference to
exhibit (k)(2) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)
10.5
Form of Dividend Reinvestment Plan (Incorporated by reference to exhibit (e) of the Company’s Pre-effective Amendment No. 2 to the
Registration Statement on Form N-2, filed on July 2, 2010)
10.6
10.7
10.8
Amended and Restated Loan and Security Agreement, dated as of November 4, 2013, by and among Horizon Credit II LLC, as the borrower, the
Lenders that are signatories thereto, as the lenders, and Key Equipment Finance Inc., as the arranger and the agent (Incorporated by reference to
Exhibit 10.14 of the Company’s Annual Report on Form 10-K, filed on March 11, 2014)
Amendment No. 1 to Amended and Restated Loan Agreement, dated as of August 12, 2015, by and among Horizon Credit II LLC, as the
borrower, Alostar Bank of Commerce, as lender, and KeyBank National Association, as lender, arranger and agent (Incorporated by reference to
Exhibit (k)(13) of Pre-effective Amendment No. 3 to the Company’s Registration Statement on Form N-2, filed on August 19, 2015)
Amended and Restated Sale and Servicing Agreement, dated as of November 4, 2013, by and among Horizon Credit II LLC, as the buyer,
Horizon Technology Finance Corporation, as the originator and the servicer, Horizon Technology Finance Management LLC, as the sub-servicer,
U.S. Bank National Association, as the collateral custodian and backup servicer, and Key Equipment Finance Inc., as the agent (Incorporated by
reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K, filed on March 11, 2014)
115
10.9
10.10
Agreement Regarding Loan Assignment and Related Matters, dated as of November 4, 2013, by and among Horizon Credit II LLC, Wells Fargo
Capital Finance, LLC and Key Equipment Finance Inc. (Incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form
10-K, filed on March 11, 2014)
Joinder Agreement, dated April 27, 2016, by and among MUFG Union Bank, N.A., as lender, KeyBank National Association as agent, Horizon
Credit II LLC, as borrower, and the Company, as servicer (Incorporated by reference to Exhibit (k)(11) to the Post-Effective Amendment No. 2
to the Company’s Registration Statement on Form N-2, File No. 333-201886, filed on June 10, 2016)
14.1
Code of Ethics of the Company (Incorporated by reference to Exhibit 14.1 of the Company’s Annual Report on Form 10-K, filed on March 7,
2017)
List of Subsidiaries
Power of Attorney (included on signature page hereto)
21*
24
31.1*
Certificate of the Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a)
31.2*
Certificate of the Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a)
32.1*
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2*
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.1
Privacy Policy of the Company (Incorporated by reference to Exhibit 99.1 of the Company’s Annual Report on Form 10-K, filed on March 16,
2011)
*
Filed herewith
116
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-
K to be signed on its behalf by the undersigned, thereunto duly authorized.
HORIZON TECHNOLOGY FINANCE CORPORATION
Date: March 6, 2018
By:
/s/ Robert D. Pomeroy, Jr.
Name: Robert D. Pomeroy, Jr.
Title:
Chief Executive Officer and Chairman of the Board of
Directors
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert D. Pomeroy, Jr., Daniel R.
Trolio and Gerald A. Michaud as his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities
and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Robert D. Pomeroy, Jr.
Robert D. Pomeroy, Jr.
/s/ Daniel R. Trolio
Daniel R. Trolio
/s/ Gerald A. Michaud
Gerald A. Michaud
/s/ James J. Bottiglieri
James J. Bottiglieri
/s/ Edmund V. Mahoney
Edmund V. Mahoney
/s/ Elaine A. Sarsynski
Elaine A. Sarsynski
/s/ Joseph J. Savage
Joseph J. Savage
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
President and Director
Director
Director
Director
Director
117
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
March 6, 2018
LIST OF SUBSIDIARIES OF
HORIZON TECHNOLOGY FINANCE CORPORATION
AS OF 12/31/17
Compass Horizon Funding Company LLC — Delaware Limited Liability Company
Horizon Credit II LLC — Delaware Limited Liability Company
HSBG LLC — Delaware Limited Liability Company
EXHIBIT 21
CERTIFICATION PURSUANT TO EXCHANGE ACT
RULES 13a-14 AND 15d-14, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CHIEF EXECUTIVE OFFICER CERTIFICATION
EXHIBIT 31.1
I, Robert D. Pomeroy, Jr., as Chairman of the Board and Chief Executive Officer of Horizon Technology Finance Corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of Horizon Technology Finance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 6, 2018
By:
/s/ Robert D. Pomeroy, Jr.
Chief Executive Officer and
Chairman of the Board
CERTIFICATION PURSUANT TO EXCHANGE ACT
RULES 13a-14 AND 15d-14, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CHIEF FINANCIAL OFFICER CERTIFICATION
EXHIBIT 31.2
I, Daniel R. Trolio, Chief Financial Officer of Horizon Technology Finance Corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of Horizon Technology Finance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 6, 2018
By:
/s/ Daniel R. Trolio
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of Horizon Technology Finance Corporation (the “Company”) for the annual period ended
December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert D. Pomeroy, Jr., as Chairman of the
Board and Chief Executive Officer of the Company hereby certify, to the best of my knowledge that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert D. Pomeroy, Jr.
Name: Robert D. Pomeroy, Jr.
Title: Chief Executive Officer and
Chairman of the Board
Date: March 6, 2018
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
EXHIBIT 32.2
In connection with the Annual Report on Form 10-K of Horizon Technology Finance Corporation (the “Company”) for the annual period ended
December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel R. Trolio, as Chief Financial Officer of
the Company hereby certify, to the best of my knowledge that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Daniel R. Trolio
Name: Daniel R. Trolio
Title: Chief Financial Officer
Date: March 6, 2018