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, 2018
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 814-00802
HORIZON TECHNOLOGY FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(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 every Interactive Data File required to be submitted 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 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, a 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 ☐
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 29, 2018 based on the closing price on that date of $10.08 on the
Nasdaq Global Select Market was $114.2 million. For the purposes of calculating this amount only, all directors and executive officers of the Registrant have
been treated as affiliates. There were 11,537,420 shares of the Registrant’s common stock outstanding as of March 1, 2019.
Documents Incorporated by Reference: Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2019 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, 2018
TABLE OF CONTENTS
PART I
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 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
PART III
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
Exhibits, Financial Statement Schedules
Signatures
PART IV
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In this annual report on Form 10-K, except where the context suggests otherwise, the terms:
PART I
·
·
·
·
·
·
·
“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” or “Debt Securities” 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; and
“HSLFI” refers to Horizon Secured Loan Fund I, a joint venture formed with Arena Sunset SPV, LLC, or Arena.
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.
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. On March 23, 2018, the Small Business Credit Availability Act, or SBCAA, amended Section 61(a) of the 1940 Act to add
Section 61(a)(2) which enables BDCs to reduce their asset coverage requirements from 200% to 150%. This provision permits a BDC to double the maximum
amount of leverage that it is permitted to incur, so long as the BDC meets certain disclosure requirements and obtains certain approvals. As defined in the 1940
Act, asset coverage of 150% means that for every $100 of net assets a BDC holds, it may raise up to $200 from borrowing and issuing senior securities. We
received approval from our stockholders to reduce our asset coverage requirement from 200% to 150% on October 30, 2018. The amount of leverage that we
may employ will depend 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.
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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 Compass Horizon on March 4, 2008 through December 31, 2018, we funded 168 portfolio companies and
invested $1.1 billion in debt investments. As of December 31, 2018, our debt investment portfolio consisted of 34 debt investments with an aggregate fair value
of $216.4 million. As of December 31, 2018, 98.5%, or $213.2 million, of our debt investment portfolio at fair value consisted of Senior Term Loans. As of
December 31, 2018, our net assets were $134.3 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, 2018, our dollar-weighted annualized yield on average debt investments (excluding any yield from warrants, equity, other
investments and HSLFI) was 15.3%. We calculate the dollar-weighted yield on average debt investments for any period as (1) total investment income
(excluding income from HSLFI) 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 annualized 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, 2018, our investment portfolio (including any yield from warrants, equity, other investments and HSLFI) had an overall
total yield of 13.9%. We calculate the dollar-weighted yield on 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 annualized 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, 2018, our debt investments had a dollar-weighted average term of 46 months from inception and a dollar-weighted average remaining
term of 36 months. As of December 31, 2018, substantially all of our debt investments had an original committed principal amount of between $3 million and
$20 million, repayment terms of between 10 and 60 months and bore current pay interest at annual interest rates of between 10% and 15%.
For the year ended December 31, 2018, our total return based on market value was 11.0%. 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, 2018, we held warrants to purchase stock, predominantly preferred stock, in 67 portfolio companies,
equity positions in nine portfolio companies and success fee arrangements in nine portfolio companies.
On June, 1 2018, we and Arena formed a joint venture, HSLFI, to make investments, either directly or indirectly through subsidiaries, primarily in the form
of secured loans to development-stage companies in the technology, life science, healthcare information and services and cleantech industries. HSLFI was
formed as a Delaware limited liability company and is not consolidated by either us or Arena for financial reporting purposes. Investments held by HSLFI are
measured at fair value. As of December 31, 2018, HSLFI had total assets of $26.4 million. HSLFI’s portfolio consisted of debt investments in four portfolio
companies as of December 31, 2018. As of December 31, 2018, the largest investment in a single portfolio company in the HSLFI’s portfolio in aggregate
principal amount was $8.3 million and the four largest investments in portfolio companies in HSLFI’s portfolio totaled $25.0 million. As of December 31, 2018,
HSLFI had no investments on non-accrual status. HSLFI invests in portfolio companies in the same industries in which we may directly invest.
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We invest cash or securities in portfolio companies in HSLFI in exchange for limited liability company equity interests in HSLFI. As of December 31, 2018,
we and Arena each owned 50.0% of the equity interests of HSLFI. We had an original commitment to fund $25.0 million of equity interests in HSLFI. As of
December 31, 2018, $11.7 million was unfunded. Our investment in HSLFI consisted of an equity contribution of $13.3 million as of December 31, 2018.
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.
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.
5
•
•
•
•
•
•
“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.
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 our Target Industries. 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.
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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;
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 $1.5 billion to more than 235 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 235 companies in our Target Industries under the “Horizon
Technology Finance” brand.
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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.
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.
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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.
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.
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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.
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
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.
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2
1
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.
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.
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Base management fee. Through October 30, 2018, the base management fee, payable monthly in arrears, was 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. From and after October 31, 2018, the first date on which the reduced asset coverage requirements in Section 61(a)(2) of the 1940
Act apply to the Company, the base management fee was and will be calculated at an annual rate of 2.00% of the Company’s gross assets (less cash and cash
equivalents) including any assets acquired with the proceeds of leverage; provided, that, to the extent the Company’s gross assets (less cash and cash
equivalents) exceed $250 million, the base management fee on the amount of such excess over $250 million is calculated at an annual rate of 1.60% of the
Company’s gross assets (less cash and cash equivalents) including any assets acquired with the proceeds of leverage.
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, or PIK, 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, or 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. Since July 1, 2017, the Incentive Fee Look-back Period includes the
most recently completed 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, or 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.
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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 are
not subject to recoupment.
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)
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%
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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%
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.
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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%
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.
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Example 3: Capital gains portion of incentive fee
Alternative 1
Assumptions:
Year 1: $20 million investment made in Company A, or Investment A, and $30 million investment made in Company B, or Investment B
Year 2: Investment A sold for $50 million and fair market value, or 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))
Alternative 2
Assumptions:
Year 1: $20 million investment made in Company A, or Investment A, $30 million investment made in Company B, or Investment B and $25 million
investment made in Company C, or 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)
(2)
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.
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)).
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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:
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•
•
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•
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•
•
•
•
•
•
•
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our organization;
calculating our net asset value, or NAV (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;
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
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•
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.
Board approval of the Investment Management Agreement
Our Board held an in-person meeting on July 27, 2018 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 27, 2018. 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.”
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Administration Agreement
The Administration Agreement was considered and reapproved by our Board, and a majority of our independent directors, on July 27, 2018. 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, or HTF, 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.
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.
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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;
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.
20
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 NAV per share. We may, however, issue and sell our common stock, at a price
below the current NAV of the common stock, or issue and sell warrants, options or rights to acquire such common stock, at a price below the current NAV 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 NAV in the future.
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 150% 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.
21
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. Each code of ethics is attached as an exhibit to our Annual Report on
Form10-K (File No. 814-00802 filed with the SEC on March 7, 2017 as Exhibit 14.1), which 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.
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.
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;
22
•
•
•
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.
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:
23
• 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.
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 PIK 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 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 any two of the three of Mr. Pomeroy, our Chief Executive Officer, Mr. Michaud, our President, or Mr. Trolio, our Chief Financial Officer,
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.
25
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.
As leverage magnifies gains, if any, on our portfolio, as discussed above, our Pre-Incentive Fee Net Investment Income may exceed the quarterly hurdle rate for
the incentive fee on income payable. Thus, if we incur additional leverage, the incentive fees payable to the Advisor may increase without any corresponding
increase in our performance. 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 or incentive 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 the extent permitted by the 1940 Act and the risk retention rules adopted
pursuant to Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. 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.
On June 7, 2018, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our Board approved the reduced asset coverage requirements and
separately recommended that our stockholders approve the reduced asset coverage requirements at a special meeting of our stockholders. The Company held a
special meeting on October 30, 2018 during which the reduced asset coverage requirements were approved by stockholders. The reduced asset coverage
requirements took effect October 31, 2018.
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Illustration: The following table illustrates the effect of leverage on returns from an investment in our common stock assuming that we employ leverage
such that our asset coverage equals (1) our actual asset coverage as of December 31, 2018 and (2) 150% at 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:
Corresponding return to common stockholder
assuming actual asset coverage as of December 31,
2018(1)
Corresponding return to common stockholder
assuming 150% asset coverage(2)
____________
-10%
-5%
Assumed Return on Portfolio
(Net of Expenses)
0%
5%
10%
(25.56)%
(15.59)%
(5.63)%
4.33%
14.30%
(42.16)%
(26.97)%
(11.79)%
3.40%
18.59%
(1) Assumes $267 million in total assets, $128 million in outstanding debt, $134 million in net assets, and an average cost of borrowed funds of 5.89% at
December 31, 2018.
(2) Assumes $407 million in total assets, $268 million in outstanding debt, $134 million in net assets, and an average cost of borrowed funds of 5.89% at
December 31, 2018.
Based on our outstanding indebtedness of $128 million as of December 31, 2018 and the average cost of borrowed funds of 5.89% as of that date, our
investment portfolio would have needed to experience an annual return of at least 3.47% to cover annual interest payments on the outstanding debt. Actual
interest payments may be different.
Based on an outstanding indebtedness of $268 million on an assumed 150% asset coverage ratio and an average cost of borrowed funds of 5.89%, our
investment portfolio would need to experience an annual return of at least 4.42% 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.
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 April 6, 2021. 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 April 6, 2023, unless such date
is extended in accordance with the terms of the Key Facility. 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.
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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 150%, subject to certain disclosures. 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.
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.
While interest rates remain relatively 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.”
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In a rising interest rate environment, 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.
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 London InterBank Offered Rate, or LIBOR, after 2021, or 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, or 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.
In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in
reported LIBOR, which could have an adverse impact on the market value for or value of any LIBOR-linked securities, loans, and other financial obligations or
extensions of credit held by or due to us and could have a material adverse effect on our business, financial condition and results of operations. 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.
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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 150% after each
issuance of senior securities, subject to certain disclosure requirements. If our asset coverage is not at least 150%, 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.
Recently passed legislation allows us to incur additional leverage.
A BDC has historically been able to issue “senior securities,” including borrowing money from banks or other financial institutions, only in amounts such
that its asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance. On March 23, 2018, the SBCAA was signed into law
and amended the 1940 Act to decrease the asset coverage requirements applicable to BDCs from 200% to 150% if such lower asset coverage requirements have
been approved by either (a) a majority of a BDC’s directors who have no financial interest in such approval and a majority of the BDC’s directors who are not
interested persons, as defined by the 1940 Act (a “required majority” as defined in Section 57(o) of the 1940 Act), of such BDC, in which case such reduced
asset coverage requirements would take effect on the first anniversary of the date of such approval, or (b) a majority of votes cast by the stockholders of such
BDC at a special or annual meeting at which a quorum is present, in which case such reduced asset coverage requirements shall take effect on the day after such
approval. On June 7, 2018, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our Board approved the reduced asset coverage requirements
and separately recommended that our stockholders approve the reduced asset coverage requirements at a special meeting of our stockholders. The Company held
a special meeting on October 30, 2018 during which the reduced asset coverage requirements were approved by stockholders. The reduced asset coverage
requirements took effect October 31, 2018.
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As a result, if we comply with certain disclosure requirements, we will be able to incur additional indebtedness, which may increase the risk of investing in
us. See “We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.” In addition, since
our base management fee is payable based upon our gross assets (less cash and cash equivalents), which includes any assets acquired with the proceeds of
borrowings, the base management fee expense will increase if we incur additional leverage.
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.
Changes to U.S. tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us.
There has been ongoing discussion and commentary regarding potential significant changes to U.S. trade policies, treaties and tariffs. The current U.S.
presidential administration, along with the U.S. Congress, has created significant uncertainty about the future relationship between the United States and other
countries with respect to trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a material adverse
effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the
impacted nations and the United States. Any of these factors could depress economic activity and restrict our portfolio companies' access to suppliers or
customers and have a material adverse effect on their business, financial condition and results of operations, which in turn would negatively impact us.
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 PIK, 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 PIK 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, 2018, 2017 and 2016 was 10.4%, 9.5% and 12.6%, 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 PIK 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. 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 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 portions 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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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.
Additionally, on February 3, 2017, President Trump signed Executive Order 13772 announcing the Administration's policy to regulate the U.S. financial
system in a manner consistent with certain "Core Principles," including regulation that is efficient, effective and appropriately tailored. The Executive Order
directed the Secretary of the Treasury, in consultation with the heads of the member agencies of the Financial Stability Oversight Council, to report to the
President on the extent to which existing laws, regulations and other government policies promote the Core Principles and to identify any laws, regulations or
other government policies that inhibit federal regulation of the U.S. financial system. On June 12, 2017, the U.S. Department of the Treasury published the first
of several reports in response to the Executive Order on the depository system covering banks and other savings institutions. On October 6, 2017, the Treasury
released a second report outlining ways to streamline and reform the U.S. regulatory system for capital markets, followed by a third report, on October 26, 2017,
examining the current regulatory framework for the asset management and insurance industries. Subsequent reports are expected to address: retail and
institutional investment products and vehicles; non-bank financial institutions; financial technology; and financial innovation.
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, which increased from $50
billion to $250 billion the asset threshold for designation of "systemically important financial institutions" or "SIFIs" subject to enhanced prudential standards set
by the Federal Reserve Board, staggering application of this change based on the size and risk of the covered bank holding company. On May 30, 2018, the
Federal Reserve Board voted to consider changes to the Volcker Rule that would loosen compliance requirements for all banks. The effect of this change and any
further rules or regulations are and could be complex and far-reaching, and the change and any future laws or regulations or changes thereto could negatively
impact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect
our business, financial condition and results of operations.
Uncertainty about presidential administration initiatives could negatively impact our business, financial condition and results of operations.
The Trump administration has called for significant changes to U.S. trade, healthcare, immigration, foreign and government regulatory policy. In this regard,
there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent
events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-
reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade
volumes and fiscal and monetary policy. To the extent the U.S. Congress or the Trump administration implements changes to U.S. policy, those changes may
impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S.
regulatory environment, inflation and other areas. Although we cannot predict the impact, if any, of these changes to our business, they could adversely affect
our business, financial condition, operating results and cash flows. Until we know what policy changes are made and how those changes impact our business and
the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.
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.
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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 HTF 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.
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.
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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 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 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.
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.
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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.
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.
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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.
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:
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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. Although we are classified as a non-diversified investment company within the meaning of the 1940 Act, we maintain the flexibility to
operate as a diversified investment company and have done so for an extended period of time. To the extent that we operate as a non-diversified investment
company in the future, we may be subject to greater risk
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.
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.
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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:
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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.
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.
A 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.
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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.
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.
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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.
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.
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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.
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. In addition, if we take control of a distressed company in connection with a reorganization, it could require
additional costs and significant amounts of our management’s time and attention.
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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.
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.
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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.
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.
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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.
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.
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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.
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:
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actual or anticipated changes in our earnings or fluctuations in our operating results;
changes in the value of our portfolio of investments;
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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:
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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 Decurities. These factors include:
•
•
•
•
•
the time remaining to the maturity of these Debt Securities;
the outstanding principal amount of debt securities with terms identical to our Debt Securities;
the supply of debt securities trading in the secondary market, if any;
the redemption or repayment features, if any, of our 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 our 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 our Debt Securities or the trading market for our Debt Securities.
51
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 our Debt Securities. In addition, if such debt securities are subject to mandatory redemption, we may be required to redeem our
Debt Securities at times when prevailing interest rates are lower than the interest rate paid on our 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. Because we approved increasing the amount we are permitted to borrow under the
1940 Act, our credit rating may decline and we may incur additional costs in borrowing.
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 Debt Securities are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the
future.
Our Debt Securities are not secured by any of our assets or any of the assets of our subsidiaries. As a result, our Debt Securities 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 our Debt Securities.
Our Debt Securities are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
Our Debt Securities are obligations exclusively of Horizon Technology Finance Corporation, and not of any of our subsidiaries. None of our subsidiaries is a
guarantor of our Debt Securities and our Debt Securities 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 our Debt Securities.
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 our Debt Securities) 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, our Debt Securities 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 our Debt Securities.
52
The indenture governing our Debt Securities contains limited protection for holders of our Debt Securities.
The indenture governing our Debt Securities offers limited protection to holders of our Debt Securities. The terms of the indenture 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 our Debt Securities. In particular, the terms of the indenture do not place any restrictions on our or our subsidiaries’ ability to:
·
·
·
·
·
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 our Debt Securities, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right
of payment to our Debt Securities 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 our Debt Securities 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 our Debt Securities 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 150% 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 our
Debt Securities, 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 150% 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 our Debt Securities in connection with a change of control or any other event.
Furthermore, the terms of the indenture do not protect holders of our Debt Securities 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 our Debt Securities may have
important consequences for holders of our Debt Securities, including making it more difficult for us to satisfy our obligations with respect to our Debt Securities
or negatively affecting the trading value of our Debt Securities.
Certain of our current debt instruments include more protections for their holders than the indenture. In addition, other debt we issue or incur in the future
could contain more protections for its holders than the indenture, 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 our Debt Securities.
53
An active trading market for our Debt Securities may not exist, which could limit holders’ ability to sell our Debt Securities or affect the market price of our
Debt Securities.
We cannot provide any assurances that an active trading market for our Debt Securities will exist in the future or that you will be able to sell our Debt
Securities. Even if an active trading market does exist, our Debt Securities 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 our Debt Securities may be harmed. Accordingly, you may
be required to bear the financial risk of an investment in our Debt Securities for an indefinite period of time.
The optional redemption provision may materially adversely affect the return on our Debt Securities.
Our Debt Securities may provide that such securities are redeemable in whole or in part prior to their maturity date at our sole option. We may choose to
redeem our Debt Securities at times when prevailing interest rates are lower than the interest rate paid on our Debt Securities. In this circumstance, the holders of
our Debt Securities may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as our Debt Securities being
redeemed.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on our Debt Securities.
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 our Debt Securities and substantially decrease the market value of our Debt Securities. 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 our Debt Securities 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 our Debt Securities as well as, after December 31,
2018, to payments made upon maturity, redemption, or sale of our Debt Securities, 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 Debt Securities are held, the holder could be subject to this 30% withholding tax in respect of any interest paid on our Debt Securities as well
as any proceeds from the sale or other disposition of our Debt Securities. Holders of our Debt Securities should consult their own tax advisors regarding FATCA
and how it may affect their investment in our Debt Securities.
Item 1B. Unresolved Staff Comments
None
54
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
55
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common stock
PART II
Our common stock is traded on Nasdaq, under the symbol “HRZN.” The last reported price for our common stock on March 1, 2019 was $12.97 per share,
which represented an 11% premium to NAV per share. As of March 1, 2019 we had 17 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, 2018, 2017 and 2016.
Issuer Purchases of Equity Securities
On April 27, 2018, 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, 2019 and the repurchase of $5.0 million of common
stock. During the quarter ended December 31, 2018, we did not repurchase any shares of our common stock. During the year ended December 31, 2018, we did
not repurchase any shares 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. From the inception of the stock repurchase program through December 31,
2018, 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 NAV per share as reported in our most recent financial
statements, share repurchases may have the effect of increasing our NAV 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.
56
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.
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.
57
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 31, 2013 through December 31, 2018. The graph assumes that, on December 31, 2013, 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 our
annual report on 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.
58
Item 6. Selected Financial Data
The following selected consolidated financial data of the Company as of December 31, 2018, 2017, 2016, 2015 and 2014, and for the years ended December
31, 2018, 2017, 2016, 2015 and 2014 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 gain (loss) on investments
Net unrealized (depreciation) appreciation 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 gain (loss) on investments
Net change in unrealized (depreciation) appreciation 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 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,
2018
2017
2016
2015
2014
$
$
$
$
$
$
$
31,090
4,578
4,393
9,403
(1,184)
13,900
34
13,866
645
(1,501)
$
13,010
$
13,837
$
11.64
1.20
0.06
(0.13)
1.13
1.20
$
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
248,441
18,308
266,749
126,853
132,492
134,257
$
$
222,099
12,047
234,146
94,075
99,071
135,075
$
$
$
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
194,003
45,249
239,252
95,597
100,060
139,192
$
$
$
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
250,267
30,629
280,896
114,954
121,145
159,751
$
$
205,101
20,095
225,196
81,753
86,948
138,248
15.3%
13.9%
15.1%
14.0%
14.9%
14.4%
14.2%
13.7%
15.3%
14.8%
33
72
6
4
44
78
5
2
52
83
6
1
50
75
4
1
34
67
9
4
59
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;
the impact of the SBCAA on our operations and the BDC industry;
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;
the impact of changes to tax legislation and, generally, our tax position; and
our ability to fund unfunded commitments.
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.
60
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, 2018, 98.5%, or $213.2 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. On
March 23, 2018, the SBCAA amended Section 61(a) of the 1940 Act to add Section 61(a)(2) which enables BDCs to reduce their asset coverage requirements
from 200% to 150%. This provision permits a BDC to double the maximum amount of leverage that it is permitted to incur, so long as the BDC meets certain
disclosure requirements and obtains certain approvals. As defined in the 1940 Act, asset coverage of 150% means that for every $100 of net assets a BDC holds,
it may raise up to $200 from borrowing and issuing senior securities. We received approval from our stockholders to reduce our asset coverage requirement from
200% to 150% on October 30, 2018. The amount of leverage that we may employ will depend 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, 2018 and 2017:
Debt investments
Warrants
Other investments
Equity
Equity interest in HSLFI
Total
December 31, 2018
December 31, 2017
Number of
Investments
Fair
Value
Percentage
of Total
Portfolio
Number of
Investments
Fair
Value
Percentage
of Total
Portfolio
(Dollars in thousands)
34 $
67
4
9
1
$
216,401
9,324
7,640
1,833
13,243
248,441
87.1%
3.8
3.1
0.7
5.3
100.0%
33 $
72
4
6
—
$
203,793
9,090
7,700
1,516
—
222,099
91.8%
4.0
3.5
0.7
—
100.0%
61
The following table shows total portfolio investment activity as of and for the years ended December 31, 2018 and 2017:
Beginning portfolio
New debt investments
Less refinanced debt investments
Net new debt investments
Investment in controlled affiliate investments
Principal payments received on investments
Early pay-offs
Accretion of debt investment fees
New debt investment fees
New equity
Warrants received in settlement of fee income
Proceeds from sale of investments
Dividend income from controlled affiliate investments
Distributions from controlled affiliate investments
Net realized gain (loss) on investments
Net unrealized (depreciation) appreciation on investments
Other
Ending portfolio
December 31,
2018
2017
(In thousands)
222,099 $
111,725
(10,468)
101,257
13,262
(24,254)
(60,185)
2,390
(2,279)
1,090
161
(4,293)
(255)
255
553
(1,501)
141
248,441 $
194,003
139,256
(3,700)
135,556
—
(30,477)
(72,613)
1,881
(1,705)
—
—
(1,840)
—
—
(21,191)
18,485
—
222,099
$
$
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, 2018 and 2017:
Life Science
Biotechnology
Drug Delivery
Medical Device
Technology
Communications
Consumer-Related
Data Storage
Internet and Media
Materials
Power Management
Semiconductors
Software
Healthcare Information and Services
Software
Total
December 31, 2018
December 31, 2017
Debt
Investments at
Fair Value
Percentage
of Total
Portfolio
Debt
Investments at
Fair Value
Percentage
of Total
Portfolio
(Dollars in thousands)
19,369
1,495
46,162
10,539
20,491
9,835
36,984
8,372
512
3,413
35,747
8.9% $
0.7
21.3
4.9
9.5
4.5
17.1
3.9
0.2
1.6
16.5
15,015
6,830
36,173
19,549
10,918
—
38,899
9,324
1,234
3,345
53,994
7.4%
3.4
17.7
9.6
5.3
—
19.1
4.6
0.6
1.6
26.5
23,482
216,401
10.9
100.0% $
8,512
203,793
4.2
100.0%
$
$
62
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 32% and 29% of total debt investments outstanding as of December 31, 2018 and 2017, respectively. No single
debt investment represented more than 10% of our total debt investments as of December 31, 2018 or 2017.
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, 2018 and 2017, our debt investments had a weighted average credit rating of 3.1 and 3.0, respectively. The following table shows the classification of our
debt investment portfolio by credit rating as of December 31, 2018 and 2017:
December 31, 2018
Debt
Investments
at Fair Value
Percentage
of Debt
Investments
December 31, 2017
Debt
Investments
at Fair Value
Percentage
of Debt
Investments
Number of
Investments
Number of
Investments
(Dollars in thousands)
6 $
23
5
—
34 $
41,677
155,439
19,285
—
216,401
19.3%
71.8
8.9
—
100.0%
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%
Credit Rating
4
3
2
1
Total
As of December 31, 2018, there were no debt investments with an internal credit rating of 1. 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.
Horizon Secured Loan Fund I LLC
On June, 1 2018, we and Arena formed a joint venture, or HSLFI, to make investments, either directly or indirectly through subsidiaries, primarily in the
form of secured loans to development-stage companies in the technology, life science, healthcare information and services and cleantech industries. HSLFI was
formed as a Delaware limited liability company and is not consolidated by either us or Arena for financial reporting purposes. Investments held by HSLFI are
measured at fair value. As of December 31, 2018, HSLFI had total assets of $26.4 million. HSLFI’s portfolio consisted of debt investments in four portfolio
companies as of December 31, 2018. As of December 31, 2018, the largest investment in a single portfolio company in the HSLFI’s portfolio in aggregate
principal amount was $8.3 million and the four largest investments in portfolio companies in HSLFI’s portfolio totaled $25.0 million. As of December 31, 2018,
HSLFI had no investments on non-accrual status. HSLFI invests in portfolio companies in the same industries in which we may directly invest.
We invest cash or securities in portfolio companies in HSLFI in exchange for limited liability company equity interests in HSLFI. As of December 31, 2018,
we and Arena each owned 50.0% of the equity interests of HSLFI. We had an original commitment to fund $25.0 million of equity interests in HSLFI. As of
December 31, 2018, $11.7 million was unfunded. Our investment in HSLFI consisted of an equity contribution of $13.3 million as of December 31, 2018.
We and Arena each appointed two members to HSLFI’s four-person board of managers. All material decisions with respect to HSLFI, including those
involving its investment portfolio, require unanimous approval of a quorum of the board of managers. Quorum is defined as (i) the presence of two members of
the board of managers; provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of three
members of the board of managers, provided that the individual that was elected, designated or appointed by the member with only one individual present will
be entitled to cast two votes on each matter; or (iii) the presence of all four members of the board of managers.
Horizon Funding I, LLC, or HFI, was formed as a Delaware limited liability company on May 9, 2018, with HSLFI as its sole member. HFI is a special
purpose bankruptcy-remote entity and is a separate legal entity from HSLFI. Any assets conveyed to HFI are not available to creditors of HSLFI or any other
entity other than HFI’s lenders.
63
In addition, on June 1, 2018, HSLFI entered into a sale and servicing agreement with HFI, as Issuer, and us, as Servicer, pursuant to which HSLFI will sell
or contribute to HFI certain secured loans made to certain portfolio companies. HFI entered into a Note Funding Agreement, or the NYL Facility, with several
entities owned or affiliated with New York Life Insurance Company, or the Noteholders, for an aggregate purchase price of up to $100.0 million, with an
accordion feature of up to $200.0 million at the mutual discretion and agreement of HSLFI and the Noteholders. The Note Funding Agreement has an investment
period that ends on June 1, 2020, if not extended, followed by a five year amortization period and a scheduled final payment date of June 10, 2025, subject to
any extension of the investment period. Any notes issued by HFI will be collateralized by all investments held by HFI and permit an advance rate of up to 67%
of the aggregate principal amount of eligible debt investments. The interest rate on the notes issued under the NYL Facility is based on the three year USD mid-
market swap rate plus a margin of between 2.75% and 3.25% depending on the rating of such notes at the time of issuance. There were no advances made by the
Noteholders as of December 31, 2018.
The following table shows a summary of HSLFI’s investment portfolio:
Total investments at fair value
Dollar-weighted annualized yield on average debt investments(1)
Number of portfolio companies in HSLFI
Largest portfolio company investment at fair value
Total of four largest portfolio company investments at fair value
For the period
June 1, 2018
through
December 31, 2018
(Dollars in thousands)
24,734
$
$
$
12.9%
4
8,154
24,734
(1) HSLFI calculates the yield on dollar-weighted average debt investments for any period measured as (1) total investment income during the period divided
by (2) the average of the fair value of debt investments outstanding on (a) the last day of the calendar month immediately preceding the first day of the
period and (b) the last day of each calendar month during the period. The yield on dollar-weighted average debt investments represents the portfolio yield
and does not reflect HSLFI’s expenses.
The following table shows HSLFI’s individual investments as of December 31, 2018:
Portfolio Company (1)
Debt Investments — Life science
Celsion Corporation (6)(7)(8)
Sector
Type of Investment (2)(3)(4)
(Dollars in thousands)
Biotechnology
Term Loan (9.98% cash (Libor + 7.63%;
Floor 9.63%), 4.00% ETP, Due 7/1/22)
Term Loan (9.98% cash (Libor + 7.63%;
Floor 9.63%), 4.00% ETP, Due 7/1/22)
Total Debt Investments — Life science
Debt Investments — Technology
Intelepeer Holdings, Inc. (6)(7)
Communications
New Signature US, Inc. (6)(7)(9)
Software
Term Loan (12.30% cash (Libor + 9.95%;
Floor 11.25%), 2.50% ETP, Due 7/1/21)
Term Loan (12.30% cash (Libor + 9.95%;
Floor 11.25%), 2.50% ETP, Due 7/1/21)
Term Loan (10.85% cash (Libor + 8.50%;
Floor 10.50%), 3.50% ETP, Due 7/1/22)
Total Debt Investments — Technology
Debt Investments — Healthcare information and services
HealthEdge Software, Inc. (6)(7)
Total Debt Investments — Healthcare information and services
Total Debt Investments
Software
Term Loan (10.60% cash (Libor + 8.25%;
Floor 9.25%), 3.00% ETP, Due 10/1/23)
Principal
Amount
Cost of
Investments(5)
Fair
Value
$
2,500
$
2,449
$
2,500
4,000
4,000
8,250
3,750
2,449
4,898
3,948
3,948
8,098
15,994
3,699
3,699
24,591
2,449
2,449
4,898
3,948
3,948
8,098
15,994
3,699
3,699
24,591
64
Portfolio Company (1)
Sector
Type of Investment (2)(3)(4)
(Dollars in thousands)
Principal
Amount
Cost of
Investments(5)
Fair
Value
Biotechnology
95,057 Common Stock Warrants
Communications
Software
1,280,000 Preferred Stock Warrants
412,500 Preferred Stock Warrants
Software
47,418 Preferred Stock Warrants
Warrant Investments — Life science
Celsion Corporation (6)(7)(8)
Total Warrant Investments — Life science
Warrant Investments — Technology
Intelepeer Holdings, Inc. (6)(7)
BSI Platform Holdings, LLC (6)(7)(9)
Total Warrant Investments — Technology
Warrant Investments — Healthcare information and services
HealthEdge Software, Inc. (6)(7)
Total Warrant Investments — Healthcare information and
services
Total Warrant Investments
Total Portfolio Investment Assets
Short Term Investments — Money Market Funds
US Bank Money Market Deposit Account (6)
Total Short Term Investments — Money Market Funds
58
58
49
57
106
16
16
180
1
1
70
56
126
16
16
143
$
$
$
24,771
$
24,734
74
74
$
$
74
74
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
All investments of HSLFI are in entities which are organized under the laws of the United States and have a principal place of business in the United
States.
All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to HSLFI’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. Debt investments are at variable 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, 2018 is
provided.
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.
Warrants are non-income producing.
For debt investments, represents principal balance less unearned income.
Has been pledged as collateral under the NYL Facility.
The fair value of the investment was valued using significant unobservable inputs.
Portfolio company is a public company.
New Signature US, Inc. is a subsidiary of BSI Platform Holdings, LLC.
The following table provides HSLFI’s unfunded commitments by portfolio company as of December 31, 2018:
New Signature US, Inc.
Total
65
December 31, 2018
Principal
Balance
Fair Value of
Unfunded
Commitment
Liability
$
$
(In thousands)
3,000 $
3,000 $
30
30
The following tables show certain summarized financial information for HSLFI as of December 31, 2018 and for the period June 1, 2018 through December
31, 2018:
Selected Statement of Assets and Liabilities Information
Total investments at fair value (cost of $24,771)
Cash and cash equivalents
Investments in money market funds
Interest receivable
Other assets
Total assets
Other liabilities
Total liabilities
Members’ equity
Total liabilities and members’ equity
Selected Statements of Operations Information
Interest income on investments
Total expenses
Net investment income
Net unrealized depreciation on investments
Net increase in net assets resulting from operations
December 31,
2018
(In thousands)
$
$
$
$
24,734
76
74
252
1,306
26,442
81
81
26,361
26,442
For the period
June 1, 2018
through
December 31, 2018
(In thousands)
$
$
$
$
$
689
180
509
(37)
472
Consolidated results of operations of Horizon Technology Finance Corporation
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, 2018, 2017 and 2016:
Total investment income
Total expenses
Performance based incentive fees waived
Net expenses
Net investment income before excise tax
Provision (credit) for excise tax
Net investment income
Net realized gain (loss) on investments
Net unrealized (depreciation) appreciation on investments
Net increase (decrease) in net assets resulting from operations
Average debt investments, at fair value
Average borrowings outstanding
2018
2017
(In thousands)
2016
31,090 $
18,374
(1,184)
17,190
13,900
34
13,866
645
(1,501)
13,010 $
200,911 $
99,415 $
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
$
$
$
$
66
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.
Investment income
Total investment income increased by $5.3 million, or 20.6%, to $31.1 million for the year ended December 31, 2018 as compared to the year ended
December 31, 2017. For the year ended December 31, 2018, total investment income consisted primarily of $28.8 million in interest income from investments,
which included $6.0 million in income from the accretion of origination fees and ETP, $2.0 million in fee income and $0.2 million in dividend income. Interest
income on debt investments increased by $5.0 million, or 21.1%, to $28.8 million for the year ended December 31, 2018 as compared to the year ended
December 31, 2017. Interest income on investments increased primarily due to an increase of $30.2 million, or 17.7%, in the average size of our debt investment
portfolio and an increase in LIBOR which is the base rate for most of our variable rate debt investments for the year ended December 31, 2018 as compared to
the year ended December 31, 2017. Fee income, which includes success fee and prepayment fee income on debt investments, remained flat at $2.0 million for
the year ended December 31, 2018 compared to the year ended December 31, 2017.
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.
The following table shows our dollar-weighted annualized yield for the years ended December 31, 2018 and 2017:
Investment type:
Debt investments(1)(2)
Debt investments and equity investment in HSLFI(1)(3)(4)
Equity investment in HSLFI(1)(4)(5)
All investments(1)(6)
For the years ended
December 31,
2017
2018
2016
15.3%
15.2%
9.0%
13.9%
15.1%
15.1%
—
14.0%
14.9%
14.9%
—
14.4%
(1) We calculate the dollar-weighted annualized yield on average investment type for any period as (1) total related investment income during the period
divided by (2) the average of the fair value of the investment type 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 annualized yield on average investment type is higher than
what investors will realize because it does not reflect our expenses or any sales load paid by investors
(2) Excludes any yield from warrants, equity, other investments and equity investment in HSLFI. Related investment income includes interest income and fee
income from debt investments.
(3) Excludes any yield from warrants, equity and other investments. Related investment income includes interest income and fee income from debt investments
and dividend income from equity investment in HSLFI.
(4) HSLFI was formed on June 1, 2018. There was no yield from equity investment in HSLFI for the years ended December 31, 2017 and 2016.
(5) Excludes any yield from debt investments, warrants, equity and other investments. Related investment income includes dividend income from equity
investment in HSLFI.
(6) Includes any yield from debt investments, warrants, equity, other investments and equity investment in HSFLI. Related investment income includes interest
income, fee income and dividend income.
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 25%, 14% and 17% of investment income for the years ended December
31, 2018, 2017 and 2016, respectively.
67
Expenses
Total net expenses increased by $3.7 million, or 27.8%, to $17.2 million for the year ended December 31, 2018 as compared to the year ended December 31,
2017. 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 expenses for each period consisted of interest expense, base management fee, incentive and administrative fees, professional fees and
general and administrative expenses.
Interest expense increased by $1.2 million, or 23.1%, to $6.4 million for the year ended December 1, 2018 as compared to the year ended December 31,
2017. Interest expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $23.5 million, or
30.9%, which was partially offset by the acceleration of $0.2 million of unamortized debt issuance costs related to the redemption of the 2019 Notes. 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.
Base management fee expense increased by $0.8 million, or 20.9%, to $4.6 million for the year ended December 31, 2018 as compared to the year ended
December 31, 2017 primarily due to an increase of $30.2 million, or 17.7%, in the average size of our investment portfolio for the year ended December 31,
2018 as compared to the year ended December 31, 2017. 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 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.
On March 6, 2018, our 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. During the year ended December 31, 2018, our Advisor waived performance based incentive fees of $1.2 million which our
Advisor would have otherwise earned. This resulted in $1.2 million of reduced expense and additional net investment income for the year ended December 31,
2018.
Performance based incentive fee expense, net of waiver, increased by $1.6 million, or 96.3%, to $3.2 million for the year ended December 31, 2018 as
compared to the year ended December 31, 2017. This increase was due to (i) an increase of $3.1 million, or 22.6%, to $17.1 million in Pre-Incentive Fee Net
Investment Income for the year ended December 31, 2018 as compared to the year ended December 31, 2017 and (ii) an increase in the Incentive Fee Cap
calculated based on the incentive fee cap and deferral mechanism in our Investment Management Agreement. The incentive fee on pre-incentive fee net
investment income was subject to the Incentive Fee Cap for the year ended December 31, 2018 due to the cumulative incentive fees paid exceeding 20% of
cumulative pre-incentive fee net return during the applicable quarter and the 11 preceding full calendar quarters. 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 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
for the year ended December 31, 2017 due to the cumulative incentive fees paid exceeding 20% of cumulative pre-incentive fee net return during the applicable
quarter and the 11 preceding full calendar quarters.
In 2018 and 2017, 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, 2018 and 2017, we elected to carry forward taxable income in excess of current year distributions of $1.3 million and
$1.0 million, respectively. At December 31, 2018 and 2017, excise tax payable of $0.03 million was recorded.
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Administrative fee expense, professional fees and general and administrative expenses were $3.0 million, $2.9 million and $3.2 million for the years ended
December 31, 2018, 2017 and 2016, 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, 2018, we realized net gains totaling $0.6 million primarily due to gains realized on the sale of equity received upon the
exercise of warrants. 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, 2018, net unrealized depreciation on investments totaled $1.5 million which was primarily due to the unrealized
depreciation on our warrant and equity investments in public companies. 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.
Liquidity and capital resources
As of December 31, 2018 and 2017, we had cash of $12.6 million and $6.6 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 public debt offerings.
On April 27, 2018, 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 NAV 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, 2019 or the repurchase of $5.0 million of our common stock. During the year ended
December 31, 2018, we did not repurchase any shares 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. From the inception of the stock repurchase program
through December 31, 2018, 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.
At December 31, 2018 and 2017, the outstanding principal balance under the Key Facility was $90.5 million and $58.0 million, respectively. As of
December 31, 2018 and 2017, we had borrowing capacity under the Key Facility of $34.5 million and $37.0 million, respectively. At December 31, 2018 and
2017, $0.9 million and $23.6 million, respectively, was available, subject to existing terms and advance rates.
69
Our operating activities used cash of $12.1 million for the year ended December 31, 2018, and our financing activities provided cash of $18.1 million for the
same period. Our operating activities used cash primarily for investments made in portfolio companies and HSLFI, partially offset by principal payments
received on our debt investments. Our financing activities provided cash primarily from advances on our Key Facility partially offset by repayment of our Key
Facility and payment of distributions to our stockholders.
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 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 150%. 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, 2018 and 2017:
Total
December 31, 2018
Balance
Unused
Total
December 31, 2017
Balance
Commitment
Outstanding
Commitment
Commitment
Outstanding
Unused
Commitment
Key Facility
2022 Notes
Total before debt issuance costs
Unamortized debt issuance costs attributable
to term borrowings
Total borrowings outstanding, net
$
$
125,000 $
37,375
162,375
90,500 $
37,375
127,875
(In thousands)
34,500 $
—
34,500
95,000 $
37,375
132,375
—
162,375 $
(1,022)
126,853 $
—
34,500 $
—
132,375 $
58,000 $
37,375
95,375
(1,300)
94,075 $
37,000
—
37,000
—
37,000
We entered into the Key Facility effective November 4, 2013. The interest rate on the Key Facility is based upon the one-month LIBOR plus a spread of
3.25%, with a LIBOR floor of 0.75%. The LIBOR rate was 2.50% and 1.56% as of December 31, 2018 and 2017, respectively. The interest rates in effect were
5.60% and 4.61% as of December 31, 2018 and 2017, 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.
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The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million. On December 28, 2018, we amended
the Key Facility, increasing the aggregate commitments under the Key Facility by $25 million to $125 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. The period during which we may
request advances under the Key Facility, or the Revolving Period, extends through April 6, 2021. 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. The maturity of the Key Facility, the date on which all outstanding
advances under the Key Facility are due and payable is on April 6, 2023.
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, 2018, 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”.
Other assets
As of December 31, 2018 and 2017, other assets were $1.8 million and $1.5 million, respectively, which is primarily comprised of debt issuance costs and
prepaid expenses.
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, 2018:
Borrowings
Unfunded commitments
Total
Total
Less than
1 year
Payments due by period
1 – 3
Years
(In thousands)
3 – 5
Years
After 5
years
$
$
127,875 $
27,500
155,375 $
12,674 $
27,500
40,174 $
66,681 $
—
66,681 $
48,520 $
—
48,520 $
—
—
—
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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, 2018, we had such unfunded commitments of $27.5 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, 2018, 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.
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.
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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 NAV, 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, 2018, 2017 and 2016, we paid the Advisor $7.8 million, $5.4 million and $6.9 million, respectively, pursuant to the Investment
Management Agreement.
Our Advisor is 60% owned by HTF Holdings LLC, which is 100% owned by HTF. By virtue of their ownership interest in HTF, 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, 2018, 2017 and 2016, we paid the Advisor $0.7 million, $0.7 million and
$0.9 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.
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.
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The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the
type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more
judgment. The three categories within the hierarchy are as follows:
Level 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, 2018, we
did not receive any payments from debt investments 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.
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.
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Distributions from HSLFI are evaluated at the time of distribution to determine if the distribution should be recorded as dividend income or a return of
capital. Generally, we will not record distributions from HSLFI as dividend income unless there are sufficient accumulated tax-basis earnings and profit in
HSLFI prior to distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment. For the period
June 1, 2018 (the commencement of HSLFI’s operations) through December 31, 2018, HSLFI distributed $0.3 million classified as dividend income to us.
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, 2018 and 2017.
Recently adopted accounting pronouncements
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. ASU 2014-09 is effective for annual and interim periods beginning after
December 15, 2017. As required, we adopted ASU 2014-09 effective January 1, 2018, and such adoption did not have an impact on our consolidated financial
statements and disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements
for Fair Value Measurement, or ASU 2018-13, which modifies disclosure requirements for the fair value measurement of Level 3 securities of public companies.
This guidance is effective for annual and interim periods beginning on or after December 15, 2019 and early adoption is permitted. We elected to early adopt
ASU 2018-13 for the year ended December 31, 2018. As a result, no significant changes were made to our disclosures in the notes to the consolidated financial
statements.
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SEC Disclosure Update and Simplification
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, or the SEC Release, amending
certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The SEC Release is effective for all filings on or after
November 5, 2018. As required, we adopted the SEC Release for the year ended December 31, 2018. The SEC Release required changes to the presentation of
our Consolidated Statements of Assets and Liabilities and the Consolidated Statements of Changes in Net Assets. Prior to adoption, we presented distributable
earnings on the Consolidated Statements of Assets and Liabilities and the Consolidated Statement of Net Assets as three components: 1) distributions in excess
of net investment income; 2) net unrealized depreciation on investments; and 3) net realized loss on investments. Upon adoption, we present distributable
earnings in total on the Consolidated Statements of Assets and Liabilities and the Consolidated Statements of Changes in Net Assets. The changes in
presentation have been retrospectively applied to the Consolidated Statement of Assets and Liabilities as of December 31, 2017 and to the Consolidated
Statements of Changes in Net Assets for the years ended December 31, 2017 and 2016.
Recent development
On March 5, 2019, our 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, 2019 and ending on December 31, 2019. Such waived incentive fees
will not be subject to recoupment.
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, 2018 and 2017, 99% 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, 2018 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) and the
base index rates at December 31, 2018, 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
Investment
Income
Interest
Expense
(In thousands)
Change in
Net Assets(1)
$
$
$
$
$
$
6,915 $
4,584 $
2,253 $
(2,184) $
(2,128) $
(1,680) $
2,753 $
1,835 $
918 $
(1,467) $
(1,467) $
(918) $
4,162
2,749
1,335
(717)
(661)
(762)
(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.
76
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, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Net Assets for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Schedules of Investments as of December 31, 2018 and 2017
Notes to the Consolidated Financial Statements
77
Page
78
79
80
81
82
84
85
86
96
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, 2018. 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, 2018, 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, 2018, which appears in this annual report on Form 10-K.
78
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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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 5, 2019, 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, 2018 and 2017, by correspondence with the custodian or borrower or by other
appropriate auditing procedures where replies from the custodian or borrower 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 5, 2019
79
To the Stockholders and the Board of Directors
Horizon Technology Finance Corporation
Report of Independent Registered Public Accounting Firm
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, 2018,
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, 2018, 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, 2018 and 2017, 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, 2018, and our report
dated March 5, 2019 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 5, 2019
80
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 $229,772 and $219,303, respectively)
Non-controlled affiliate investments at fair value (cost of $7,887 and $3,774, respectively) (Note 5)
Controlled affiliate investments at fair value (cost of $13,262 and $0, respectively) (Note 5)
Total investments at fair value (cost of $250,921 and $223,077, respectively) (Note 4)
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 (Notes 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, 2018 and 2017
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 11,702,594 and 11,687,871 shares issued
and 11,535,129 and 11,520,406 shares outstanding as of December 31, 2018 and 2017, respectively
Paid-in capital in excess of par
Distributable earnings(1)
Total net assets
Total liabilities and net assets
Net asset value per common share
(1) See Note 2. Basis of presentation and significant accounting policies.
See Notes to Consolidated Financial Statements
81
December 31,
2018
2017
227,624 $
7,574
13,243
248,441
12,591
3,966
1,751
266,749 $
126,853 $
3,461
422
991
765
132,492
218,600
3,499
—
222,099
6,594
3,986
1,467
234,146
94,075
3,456
379
541
620
99,071
—
—
12
179,616
(45,371)
134,257
266,749 $
11.64 $
12
179,641
(44,578)
135,075
234,146
11.72
$
$
$
$
$
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 fee income
Dividend income
Dividend income on controlled affiliate investments
Total dividend income
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
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 gain (loss) on non-affiliate investments
Net realized gain (loss) on investments
Net unrealized (depreciation) appreciation on non-affiliate investments
Net unrealized depreciation on affiliate investments
Net unrealized depreciation on controlled affiliate investments
Net unrealized (depreciation) appreciation on investments
$
Year Ended December 31,
2017
2018
2016
28,061 $
725
28,786
1,159
867
23
2,049
255
255
31,090
6,363
4,578
4,393
708
1,343
989
18,374
(1,184)
17,190
13,900
34
13,866
645
645
(1,445)
(37)
(19)
(1,501)
23,538 $
225
23,763
1,432
567
15
2,014
—
—
25,777
5,167
3,786
1,714
699
1,365
803
13,534
(79)
13,455
12,322
25
12,297
(21,191)
(21,191)
18,506
(21)
—
18,485
31,397
—
31,397
794
793
—
1,587
—
—
32,984
5,878
4,727
2,126
869
1,486
886
15,972
—
15,972
17,012
(87)
17,099
(7,776)
(7,776)
(14,236)
—
—
(14,236)
Net realized and unrealized loss on investments
(856)
(2,706)
(22,012)
Net increase (decrease) in net assets resulting from operations
$
13,010 $
9,591 $
(4,913)
See Notes to Consolidated Financial Statements
82
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share data)
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,
2017
2018
1.20 $
1.13 $
1.20 $
11,527,777
1.07 $
0.83 $
1.20 $
11,516,846
2016
1.48
(0.43)
1.335
11,543,708
$
$
$
See Notes to Consolidated Financial Statements
83
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets
(In thousands, except share data)
Balance at December 31, 2015
Net decrease in net assets resulting from operations, net
of excise tax:
Net investment income, net of excise tax
Net realized loss on investments
Net unrealized depreciation on investments
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:
Net investment income, net of excise tax
Net realized loss on investments
Net unrealized appreciation on investments
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
Net increase in net assets resulting from operations, net
of excise tax:
Net investment income, net of excise tax
Net realized gain on investments
Net unrealized depreciation on investments
Financing costs
Issuance of common stock under dividend reinvestment
plan
Distributions declared
Reclassification of permanent tax differences (Note 2)
Balance at December 31, 2018
Common Stock
Shares
Amount
Paid-In Capital
in Excess of
Par
Distributable
Earnings(1)
Total Net
Assets
11,535,212 $
12 $
179,707 $
(19,968) $
159,751
—
—
—
23,372
(48,160)
—
—
11,510,424
—
—
—
15,905
(5,923)
—
—
11,520,406
—
—
—
—
14,723
—
—
11,535,129 $
—
—
—
—
—
—
—
12
—
—
—
—
—
—
—
12
—
—
—
—
—
—
—
12 $
—
—
—
273
(516)
—
87
179,551
—
—
—
174
(59)
—
(25)
179,641
—
—
—
(155)
164
—
(34)
179,616 $
17,099
(14,236)
(7,776)
—
—
(15,403)
(87)
(40,371)
12,297
(21,191)
18,485
—
—
(13,823)
25
(44,578)
13,866
645
(1,501)
—
—
(13,837)
34
(45,371) $
17,099
(14,236)
(7,776)
273
(516)
(15,403)
—
139,192
12,297
(21,191)
18,485
174
(59)
(13,823)
—
135,075
13,866
645
(1,501)
(155)
164
(13,837)
—
134,257
(1) See Note 2. Basis of presentation and significant accounting policies.
See Notes to Consolidated Financial Statements
84
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 cash
$
Year Ended December 31,
2017
2018
2016
13,010 $
9,591 $
(4,913)
(used in) provided by operating activities:
Amortization of debt issuance costs
Net realized (gain) loss on investments
Net unrealized depreciation (appreciation) on investments
Purchase of investments
Principal payments received on investments
Investments in controlled affiliate investments
Proceeds from sale of investments
Dividend income from controlled affiliate investments
Distributions from controlled affiliate investments
Equity received in settlement of fee income
Warrants received in settlement of fee income
Changes in assets and liabilities:
Net decrease in investments in money market funds
Net decrease in restricted investments in money market funds
Decrease (increase) in interest receivable
(Increase) decrease in end-of-term payments
Decrease in unearned income
(Increase) decrease in other assets
Increase (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
Repayment of Asset-Backed Notes
Advances on credit facility
Repayment of credit facility
Distributions paid
Repurchase of common stock
Debt issuance costs
Financing costs
Net cash provided by (used in) financing activities
Net increase (decrease) 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
554
(645)
1,501
(101,257)
84,439
(13,262)
4,453
255
(255)
(299)
(161)
—
—
99
(79)
(1,043)
(6)
145
43
450
(12,058)
—
—
—
52,500
(20,000)
(13,668)
—
(622)
(155)
18,055
5,997
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
$
$
$
$
$
6,594
12,591 $
37,135
6,594 $
20,765
37,135
5,671 $
4,397 $
1,457 $
3,461 $
3,015 $
2,463 $
3,456 $
2,936 $
5,305
554
3,453
5,074
See Notes to Consolidated Financial Statements
85
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2018
(In thousands)
Sector
Type of Investment (4)(7)(9)(10)
Principal
Amount
Cost of
Investments (6)
Fair
Value
$
2,500
$
2,450
$
Portfolio Company (1)(3)
Non-Affiliate Investments — 169.6% (8)
Non-Affiliate Debt Investments — 156.3% (8)
Non-Affiliate Debt Investments — Life Science — 49.9% (8)
Celsion Corporation (2)(5)(12)
Biotechnology
Espero BioPharma, Inc. (2)(12)
Biotechnology
Palatin Technologies, Inc. (2)(5)(12)
Biotechnology
vTv Therapeutics Inc. (2)(5)(12)
Biotechnology
Titan Pharmaceuticals, Inc. (2)(5)(12)
Drug Delivery
Aerin Medical, Inc. (2)(12)
Medical Device
Conventus Orthopaedics, Inc. (2)(12)
Medical Device
CSA Medical, Inc. (2)(12)
Medical Device
Lantos Technologies, Inc. (2)(12)
Medical Device
MacuLogix, Inc. (2)(12)
Medical Device
VERO Biotech LLC (2)(12)
Medical Device
Total Non-Affiliate Debt Investments — Life Science
Non-Affiliate Debt Investments — Technology — 88.9% (8)
Audacy Corporation (2)(12)
Communications
Intelepeer Holdings, Inc. (2)(12)
Communications
Food52, Inc. (2)(12)
Consumer-related Technologies
Mohawk Group Holdings, Inc. (2)(12)
Consumer-related Technologies
Term Loan (9.98% cash (Libor + 7.63%; Floor
9.63%), 4.00% ETP, Due 7/1/22)
Term Loan (9.98% cash (Libor + 7.63%; Floor
9.63%), 4.00% ETP, Due 7/1/22)
Term Loan (12.25% cash (Libor + 9.9%; Floor
12.00%), 4.00% ETP, Due 6/30/19)
Term Loan (10.85% cash (Libor + 8.50%; Floor
9.00%), 5.00% ETP, Due 8/1/19)
Term Loan (10.85% cash (Libor + 8.50%; Floor
9.00%), 3.27% ETP, Due 8/1/19)
Term Loan (12.35% cash (Libor + 10.00%; Floor
10.50%), 6.00% ETP, Due 5/1/20)
Term Loan (12.35% cash (Libor + 10.00%; Floor
10.50%), 6.00% ETP, Due 10/1/20)
Term Loan (10.75% cash (Libor + 8.40%; Floor
9.50%), 5.00% ETP, Due 6/1/21)
Term Loan (9.80% cash (Libor + 7.45%; Floor
8.75%), 4.00% ETP, Due 1/1/22)
Term Loan (9.80% cash (Libor + 7.45%; Floor
8.75%), 4.00% ETP, Due 1/1/22)
Term Loan (9.80% cash (Libor + 7.45%; Floor
8.75%), 4.00% ETP, Due 1/1/22)
Term Loan (10.35% cash (Libor + 8.00%; Floor
9.25%), 6.00% ETP, Due 6/1/21)
Term Loan (10.35% cash (Libor + 8.00%; Floor
9.25%), 6.00% ETP, Due 6/1/21)
Term Loan (10.35% cash (Libor + 8.00%; Floor
9.25%), 6.00% ETP, Due 6/1/21)
Term Loan (10.28% cash (Libor + 7.93%; Floor
10.00%), 5.00% ETP, Due 10/1/22)
Term Loan (10.78% cash (Libor + 8.43%; Floor
10.00%), 6.00% ETP, Due 9/1/21)
Term Loan (10.02% cash (Libor + 7.68%; Floor
9.50%), 4.00% ETP, Due 8/1/22)
Term Loan (10.14% cash (Libor + 7.68%; Floor
9.50%), 4.00% ETP, Due 8/1/22)
Term Loan (10.35% cash (Libor + 8.00%; Floor
9.25%), 5.00% ETP, Due 1/1/22)
Term Loan (10.35% cash (Libor + 8.00%; Floor
9.25%), 5.00% ETP, Due 1/1/22)
Term Loan (10.25% cash (Libor + 7.90%; Floor
9.50%), 5.00% ETP, Due 7/1/22)
Term Loan (12.30% cash (Libor + 9.95%; Floor
11.25%), 2.50% ETP, Due 7/1/21)
Term Loan (12.30% cash (Libor + 9.95%; Floor
11.25%), 2.50% ETP, Due 2/1/21)
Term Loan (10.90% cash (Libor + 8.40%; Floor
10.90%), 3.00% ETP, Due 1/1/23)
Term Loan (10.90% cash (Libor + 8.40%; Floor
10.90%), 3.00% ETP, Due 1/1/23)
Term Loan (9.90% cash (Libor + 7.40%; Floor
9.90%), 4.00% ETP, Due 1/1/23)
Term Loan (9.90% cash (Libor + 7.40%; Floor
9.90%), 4.00% ETP, Due 1/1/23)
Term Loan (9.90% cash (Libor + 7.40%; Floor
9.90%), 4.00% ETP, Due 1/1/23)
2,500
5,000
1,167
1,167
4,167
3,281
1,600
4,000
3,000
3,000
4,000
4,000
4,000
6,000
4,000
3,750
3,750
4,000
4,000
4,000
4,000
3,000
3,000
3,000
5,000
5,000
5,000
2,450
4,760
1,156
1,167
4,136
3,250
1,495
3,891
2,966
2,966
3,949
3,949
3,949
5,768
3,563
3,623
3,638
3,950
3,950
2,450
2,450
4,760
1,156
1,167
4,136
3,250
1,495
3,891
2,966
2,966
3,949
3,949
3,949
5,768
3,563
3,623
3,638
3,950
3,950
67,026
67,026
3,936
3,948
2,955
2,918
2,918
4,885
4,885
4,885
3,636
3,948
2,955
2,918
2,918
4,885
4,885
4,885
See Notes to Consolidated Financial Statements
86
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2018
(In thousands)
Portfolio Company (1)(3)
Kaminario, Inc. (2)(12)
Data Storage
Sector
IgnitionOne, Inc. (2)(12)
Internet and Media
Jump Ramp Games, Inc. (2)(12)
Internet and Media
Kixeye, Inc. (2)(12)
Internet and Media
Rocket Lawyer Incorporated (2)(12)
Internet and Media
Verve Wireless, Inc. (2)(12)
Internet and Media
Zinio Holdings, LLC (2)(12)
Internet and Media
The NanoSteel Company, Inc. (2)(12)
Materials
Powerhouse Dynamics, Inc. (2)(12)
Power Management
Luxtera, Inc. (12)
Semiconductors
Bridge2 Solutions, LLC. (2)(12)
Software
Education Elements, Inc. (2)(12)
Software
New Signature US, Inc. (2)(12)(13)
Software
SIGNiX, Inc. (12)
xAd, Inc. (2)(12)
Software
Software
Type of Investment (4)(7)(9)(10)
Term Loan (10.87% cash (Libor + 8.40%; Floor
10.65%), 3.00% ETP, Due 1/1/23)
Term Loan (10.87% cash (Libor + 8.40%; Floor
10.65%), 3.00% ETP, Due 1/1/23)
Term Loan (12.58% cash (Libor + 10.23%; Floor
10.23%), 2.00% ETP, Due 4/1/22)
Term Loan (12.58% cash (Libor + 10.23%; Floor
10.23%), 2.00% ETP, Due 4/1/22)
Term Loan (12.58% cash (Libor + 10.23%; Floor
10.23%), 2.00% ETP, Due 4/1/22)
Term Loan (12.58% cash (Libor + 10.23%; Floor
10.23%), 2.00% ETP, Due 4/1/22)
Term Loan (12.08% cash (Libor + 9.73%),
3.00% ETP, Due 4/1/21)
Term Loan (11.95% cash (Libor + 9.60%; Floor
10.75%), 2.00% ETP, Due 5/1/21)
Term Loan (11.95% cash (Libor + 9.60%; Floor
10.75%), 2.00% ETP, Due 5/1/21)
Term Loan (11.75% cash (Libor + 9.40%; Floor
10.50%), 3.00% ETP, Due 7/1/21)
Term Loan (11.75% cash (Libor + 9.40%; Floor
10.50%), 3.00% ETP, Due 7/1/21)
Term Loan (11.75% cash (Libor + 9.40%; Floor
10.50%), 3.00% ETP, Due 11/1/21)
Term Loan (11.15% cash (Libor + 8.80%; Floor
10.80%), 3.33% ETP, Due 9/1/21)
Term Loan (13.60% cash (Libor + 11.25%; Floor
11.75%), 6.00% ETP, Due 2/1/20)
Term Loan (11.00% cash (Libor + 8.50%; Floor
11.00%), 4.0% ETP, Due 6/1/22)
Term Loan (11.00% cash (Libor + 8.50%; Floor
11.00%), 4.0% ETP, Due 6/1/22)
Term Loan (13.05% cash (Libor + 10.70%; Floor
11.20%), 3.32% ETP, Due 9/1/19)
Term Loan (12.00% cash (Prime + 6.75%),
Due 3/28/20)
Term Loan (12.00% cash (Prime + 6.75%),
Due 3/28/20)
Term Loan (11.60% cash (Libor + 9.25%; Floor
10.50%), 2.00% ETP, Due 11/1/21)
Term Loan (11.60% cash (Libor + 9.25%; Floor
10.50%), 2.00% ETP, Due 11/1/21)
Term Loan (12.35% cash (Libor + 10.00%; Floor
10.50%), 4.00% ETP, Due 8/1/19)
Term Loan (10.85% cash (Libor + 8.50%; Floor
10.50%), 3.50% ETP, Due 7/1/22)
Term Loan (13.35% cash (Libor + 11.00%; Floor
11.50%), 8.67% ETP, Due 2/1/20)
Term Loan (11.05% cash (Libor + 8.70%; Floor
10.00%), 4.75% ETP, Due 11/1/21)
Term Loan (11.05% cash (Libor + 8.70%; Floor
10.00%), 4.75% ETP, Due 11/1/21)
Term Loan (11.05% cash (Libor + 8.70%; Floor
10.00%), 4.75% ETP, Due 11/1/21)
Term Loan (11.05% 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 — 17.5% (8)
Catasys, Inc. (2)(5)(12)
Software
Term Loan (10.10% cash (Libor + 7.75%;
Floor 9.75%), 6.00% ETP, Due 3/1/22)
Term Loan (10.10% cash (Libor + 7.75%;
Floor 9.75%), 6.00% ETP, Due 3/1/22)
Term Loan (10.10% cash (Libor + 7.75%;
Floor 9.75%), 6.00% ETP, Due 3/1/22)
See Notes to Consolidated Financial Statements
87
Principal
Amount
5,000
5,000
3,000
3,000
3,000
3,000
4,000
2,700
2,700
4,000
4,000
2,000
3,300
3,225
4,250
4,250
525
2,000
1,500
5,000
5,000
350
2,750
1,845
5,000
5,000
3,000
2,000
2,500
2,500
2,500
Cost of
Investments (6)
4,918
4,917
2,871
2,871
2,871
2,871
3,960
2,617
2,661
3,952
3,952
1,973
3,172
3,213
4,186
4,186
512
1,945
1,468
4,835
4,835
346
2,699
1,790
4,923
4,923
2,954
1,969
Fair
Value
4,918
4,917
2,871
2,871
2,871
2,871
3,960
2,617
2,661
3,952
3,952
1,973
3,172
3,213
4,186
4,186
512
1,945
1,468
4,835
4,835
346
2,699
1,555
4,923
4,923
2,954
1,969
119,720
119,185
2,478
2,478
2,477
2,478
2,478
2,477
Portfolio Company (1)(3)
HealthEdge Software, Inc. (2)(12)
Software
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2018
(In thousands)
Sector
Type of Investment (4)(7)(9)(10)
Term Loan (10.60% cash (Libor + 8.25%;
Floor 9.25%), 3.00% ETP, Due 7/1/22)
Term Loan (10.60% cash (Libor + 8.25%;
Floor 9.25%), 3.00% ETP, Due 1/1/23)
Term Loan (10.60% cash (Libor + 8.25%;
Floor 9.25%), 3.00% ETP, Due 4/1/23)
Term Loan (10.69% cash (Libor + 8.25%;
Floor 9.25%), 3.00% ETP, Due 1/1/24)
Total Non- Affiliate Debt Investments — Healthcare information and services
Total Non- Affiliate Debt Investments
Principal
Amount
5,000
3,750
3,750
3,750
Cost of
Investments (6)
4,948
3,704
3,701
3,696
Fair
Value
4,948
3,704
3,701
3,696
23,482
210,228
23,482
209,693
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
Non-Affiliate Warrant Investments — 6.9% (8)
Non-Affiliate Warrants — Life Science — 1.5% (8)
ACT Biotech Corporation
Alpine Immune Sciences, Inc. (5)(12)
Celsion Corporation (2)(5)(12)
Espero BioPharma, Inc. (2)(5)(12)
Rocket Pharmaceuticals Corporation (5)(12)
Palatin Technologies, Inc. (2)(5)(12)
Revance Therapeutics, Inc. (5)(12)
Sample6, Inc. (2)(12)
Strongbridge U.S. Inc. (2)(5)(12)
Sunesis Pharmaceuticals, Inc. (5)(12)
vTv Therapeutics Inc. (2)(5)(12)
Titan Pharmaceuticals, Inc. (2)(5)(12)
AccuVein Inc. (2)(12)
Aerin Medical, Inc. (2)(12)
Conventus Orthopaedics, Inc. (2)(12)
CSA Medical, Inc. (12)
Lantos Technologies, Inc. (2)(12)
MacuLogix, Inc. (2)(12)
Mitralign, Inc. (2)(12)
NinePoint Medical, Inc. (2)(12)
ReShape Lifesciences Inc. (5)(12)
Tryton Medical, Inc. (2)(12)
VERO Biotech LLC (2)(12)
Total Non-Affiliate Warrants — Life Science
Non-Affiliate Warrants — Technology — 4.8% (8)
Audacy Corporation (2)(12)
Intelepeer Holdings, Inc. (2)(12)
PebblePost, Inc. (2)(12)
Food52, Inc. (2)(12)
Gwynnie Bee, Inc. (2)(12)
Le Tote, Inc. (2)(12)
Mohawk Group Holdings, Inc. (2)(12)
Rhapsody International Inc. (2)(12)
Kaminario, Inc. (2)(12)
IgnitionOne, Inc. (2)(12)
Jump Ramp Games, Inc. (2)(12)
Kixeye, Inc. (2)(12)
Rocket Lawyer Incorporated (2)(12)
Verve Wireless, Inc. (2)(12)
The NanoSteel Company, Inc. (2)(12)
Powerhouse Dynamics, Inc. (2)(12)
Avalanche Technology, Inc. (2)(12)
Luxtera, Inc.(2)(12)
Soraa, Inc. (2)(12)
Communications
Communications
Communications
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Data Storage
Internet and Media
Internet and Media
Internet and Media
Internet and Media
Internet and Media
Materials
Power Management
Semiconductors
Semiconductors
Semiconductors
130,872 Preferred Stock Warrants
4,634 Common Stock Warrants
95,465 Common Stock Warrants
1,506,937 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
2,240,000 Common Stock Warrants
1,174,881 Preferred Stock Warrants
1,818,182 Preferred Stock Warrants
720,000 Preferred Stock Warrants
745,562 Preferred Stock Warrants
1,715,926 Common Stock Warrants
234,742 Preferred Stock Warrants
64,190 Common Stock Warrants
29,102 Preferred Stock Warrants
121 Common Stock Warrants
122,362 Preferred Stock Warrants
800 Common Stock Warrants
1,545,575 Preferred Stock Warrants
1,171,549 Preferred Stock Warrants
598,850 Preferred Stock Warrants
102,941 Preferred Stock Warrants
268,591 Preferred Stock Warrants
202,974 Preferred Stock Warrants
300,000 Common Stock Warrants
852,273 Common Stock Warrants
9,981,346 Preferred Stock Warrants
262,910 Preferred Stock Warrants
159,766 Preferred Stock Warrants
791,251 Preferred Stock Warrants
261,721 Preferred Stock Warrants
112,805 Common Stock Warrants
467,277 Preferred Stock Warrants
348,838 Preferred Stock Warrants
202,602 Preferred Stock Warrants
3,546,553 Preferred Stock Warrants
203,616 Preferred Stock Warrants
12
122
79
184
17
51
68
53
72
5
44
95
24
66
95
89
253
179
52
33
341
15
53
2,002
194
94
92
104
68
63
195
164
124
672
32
75
92
120
233
33
101
213
80
—
—
1
185
—
34
210
26
356
—
1
89
28
68
99
86
285
90
1
6
—
13
331
1,909
—
57
158
104
820
368
195
—
161
665
1
61
76
120
567
—
53
744
426
See Notes to Consolidated Financial Statements
88
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2018
(In thousands)
Portfolio Company (1)(3)
Sector
Type of Investment (4)(7)(9)(10)
Principal
Amount
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Bolt Solutions Inc. (2)(12)
Bridge2 Solutions, Inc. (2)(12)
BSI Platform Holdings, LLC (2)(12)(13)
Clarabridge, Inc. (12)
Education Elements, Inc. (2)(12)
Lotame Solutions, Inc. (2)(12)
Metricly, Inc. (12)
Riv Data Corp. (2)(12)
ShopKeep.com, Inc. (2)(12)
SIGNiX, Inc. (12)
Skyword, Inc. (12)
Sys-Tech Solutions, Inc. (2)(12)
Weblinc Corporation (2)(12)
xAd, Inc. (2)(12)
Total Non-Affiliate Warrants — Technology
Non-Affiliate Warrants — Cleantech — 0.1% (8)
Renmatix, Inc. (2)(12)
Tigo Energy, Inc. (2)(12)
Total Non-Affiliate Warrants — Cleantech
Non-Affiliate Warrants — Healthcare information and services — 0.5% (8)
LifePrint Group, Inc. (2)(12)
ProterixBio, Inc. (2)(12)
Singulex, Inc. (12)
Verity Solutions Group, Inc. (12)
Watermark Medical, Inc. (2)(12)
HealthEdge Software, Inc. (2)(12)
Medsphere Systems Corporation (2)(12)
Recondo Technology, Inc. (2)(12)
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
Non-Affiliate Other Investments — 5.7% (8)
Espero Pharmaceuticals, Inc. (12)
ZetrOZ, Inc. (12)
Vette Technology, LLC (12)
Triple Double Holdings, LLC (12)
Total Non-Affiliate Other Investments
Biotechnology
Medical Device
Data Storage
Software
Non-Affiliate Equity — 0.7% (8)
Insmed Incorporated (5)
Revance Therapeutics, Inc.(5)
Sunesis Pharmaceuticals, Inc. (5)
SnagAJob.com, Inc. (12)
Verve Wireless, Inc. (2)(12)
Formetrix, Inc. (2)(12)
TruSignal, Inc. (12)
Total Non-Affiliate Equity
Total Non-Affiliate Portfolio Investment Assets
Biotechnology
Biotechnology
Biotechnology
Consumer-related Technologies
Internet and Media
Materials
Software
Non-controlled Affiliate Investments — 5.6% (8)
Non-controlled Affiliate Debt Investments — Technology — 5.0% (8)
Decisyon, Inc. (12)
Software
202,892 Preferred Stock Warrants
125,458 Common Stock Warrants
137,500 Preferred Stock Warrants
53,486 Preferred 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
375,000 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
2,676 Common Stock Warrants
294,231 Preferred Stock Warrants
300,360 Preferred Stock Warrants
27,373 Preferred Stock Warrants
205,481 Preferred Stock Warrants
7,097,792 Preferred Stock Warrants
556,796 Preferred Stock Warrants
Royalty Agreement
Royalty Agreement
Royalty Agreement Due 4/18/2019
License Agreement
33,208 Common Stock
5,125 Common Stock
13,082 Common Stock
82,974 Common Stock
100,598 Preferred Stock
74,286 Common Stock
32,637 Common Stock
Cost of
Investments (6)
113
432
19
14
28
22
48
12
118
225
48
242
42
177
4,289
68
100
168
29
42
44
100
74
83
60
95
527
6,986
5,300
142
4,173
2,200
11,815
238
73
83
9
225
74
41
743
229,772
$
Fair
Value
—
756
19
106
23
286
—
36
114
35
3
429
—
251
6,634
—
112
112
2
—
45
65
62
71
212
212
669
9,324
4,700
700
40
2,200
7,640
436
103
5
83
225
74
41
967
227,624
$
Term Loan (14.658% cash (Libor + 12.308%; Floor
12.50%), 8.00% ETP, Due 12/1/20)
Term Loan (14.658% cash (Libor + 12.308%; Floor
12.50%), 8.00% ETP, Due 12/1/20)
Term Loan (12.02% cash, Due 12/31/19)
Term Loan (12.03% cash, Due 12/31/19)
Term Loan (12.24% cash, Due 12/31/19)
Term Loan (13.08% cash, Due 12/31/19)
Term Loan (13.10% cash, Due 12/31/19)
$
1,523
$
1,522
$
1,464
833
250
250
750
300
200
795
250
250
750
300
200
764
240
240
721
289
192
See Notes to Consolidated Financial Statements
89
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2018
(In thousands)
Portfolio Company (1)(3)
StereoVision Imaging, Inc. (12)
Software
Sector
Type of Investment (4)(7)(9)(10)
Term Loan (9.38% Cash (Libor + 7.03%; Floor
8.50%), 8.50% ETP, Due 9/1/21) (11)
Principal
Amount
3,200
Cost of
Investments (6)
2,798
Total Non-controlled Affiliate Debt Investments — Technology
Non-controlled Affiliate Warrants — Technology — 0.0% (8)
Decisyon, Inc. (12)
Total Non-controlled Affiliate Warrants — Technology
Software
Non-controlled Affiliate Equity — Technology — 0.6% (8)
Decisyon, Inc. (12)
StereoVision Imaging, Inc. (12)
Total Non-controlled Affiliate Equity
Total Non-controlled Affiliate Portfolio Investment Assets
Software
Software
Controlled Affiliate Investments — 9.9% (8)
Controlled Affiliate Equity — Financial — 9.9% (8)
Horizon Secured Loan Fund I LLC (12)(14)
Total Controlled Affiliate Equity
Total Controlled Affiliate Portfolio Investment Assets
Investment funds
Total Portfolio Investment Assets — 185.1%(8)
82,967 Common Stock Warrants
45,365,936 Common Stock
1,943,572 Common Stock
$
$
$
$
Fair
Value
2,798
6,708
—
—
75
791
866
7,574
6,865
46
46
185
791
976
7,887
$
13,262
13,262
13,262
$
$
13,243
13,243
13,243
250,921
$
248,441
(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 revolving credit facility with KeyBank National Association (the “Key Facility”).
(3)
(4)
All non-affiliate investments are investments in which the Company owns less than 5% of the voting securities of the portfolio company. All non-controlled
affiliate investments are investments in which the Company owns 5% or more of the voting securities of the portfolio company but not more than 25% of
the voting securities of the portfolio company. All controlled affiliate investments are investments in which the Company owns more than 25% of the
portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including
through a management agreement).
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 variable rates for the term of the debt investment, unless otherwise
indicated. All debt investments based on the London InterBank Offered Rate (“LIBOR”) are based on one-month LIBOR. For each debt investment, the
current interest rate in effect as of December 31, 2018 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)
As of December 31, 2018, 5.0% of the Company’s total investments on a cost and fair value basis are in non-qualifying assets. Under the Investment
Company Act of 1940, as amended (the “1940 Act”), the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made,
qualifying assets represent at least 70% of the Company’s total assets.
(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 has a payment-in-kind (“PIK”) feature.
(12) The fair value of the investment was valued using significant unobservable inputs.
(13) New Signature US, Inc. is a subsidiary of BSI Platform Holdings, LLC.
(14)
On June 1, 2018, the Company entered into an agreement with Arena Sunset SPV, LLC (“Arena”) to co-invest through Horizon Secured Loan Fund I
(“HSLFI”), a joint venture, which is expected to make investments, either directly or indirectly through subsidiaries, primarily in the form of secured loans
to development-stage companies in the technology, life science, healthcare information and services and cleantech industries. All HSLFI investment
decisions require unanimous approval of a quorum of HSLFI’s board of managers. Although the Company owns more than 25% of the voting securities of
HSLFI, the Company does not believe it controls HSLFI for purposes of the 1940 Act or otherwise.
See Notes to Consolidated Financial Statements
90
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
$
2,000
$
1,980
$
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)(14)
Biotechnology
vTv Therapeutics Inc. (2)(5)(14)
Biotechnology
Titan Pharmaceuticals, Inc. (2)(5)(14)
Drug Delivery
Aerin Medical, Inc. (2)(14)
Medical Device
Conventus Orthopaedics, Inc. (2)(14)
Medical Device
Lantos Technologies, Inc. (2)(14)
Medical Device
Mederi Therapeutics, Inc. (2)(14)
Medical Device
NinePoint Medical, Inc. (2)(14)
Medical Device
VERO Biotech LLC (2)(14)
Medical Device
Total Non-Affiliate Debt Investments — Life Science
Non-Affiliate Debt Investments — Technology — 99.1% (8)
Intelepeer Holdings, Inc. (14)
Communications
PebblePost, Inc. (2)(14)
Communications
Le Tote, Inc. (2)(14)
Consumer-related Technologies
SavingStar, Inc. (2)(14)
Consumer-related Technologies
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)
See Notes to Consolidated Financial Statements
91
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
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2017
(In thousands)
Portfolio Company (1)(3)
IgnitionOne, Inc. (2)(14)
Internet and Media
Sector
Jump Ramp Games, Inc. (2)(14)
Internet and Media
Kixeye, Inc. (2)(14)
Internet and Media
MediaBrix, Inc. (2)(14)
Internet and Media
Rocket Lawyer Incorporated (2)(14)
Internet and Media
Zinio Holdings, LLC (2)(14)
Internet and Media
The NanoSteel Company, Inc. (2)(14)
Materials
Powerhouse Dynamics, Inc. (2)(14)
Power Management
Luxtera, Inc. (14)
Semiconductors
Bridge2 Solutions, LLC. (2)(14)
Software
Digital Signal Corporation (11)(12)(14)
Software
Education Elements, Inc. (2)(14)
Software
Metricly, Inc. (14)
ShopKeep.com, Inc. (2)(14)
SIGNiX, Inc. (14)
SilkRoad Technology, Inc. (2)(14)
Weblinc Corporation (2)(14)
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)
Principal
Amount
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
Cost of
Investments (6)
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
Fair
Value
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
See Notes to Consolidated Financial Statements
92
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2017
(In thousands)
Portfolio Company (1)(3)
xAd, Inc. (2)(14)
Software
Sector
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)(14)
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
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
Non-Affiliate Warrant Investments — 6.7% (8)
Non-Affiliate Warrants — Life Science — 1.6% (8)
ACT Biotech Corporation (14)
Alpine Immune Sciences, Inc. (5)(14)
Argos Therapeutics, Inc. (2)(5)(14)
Celsion Corporation (5)(14)
Rocket Pharmaceuticals Corporation (5)(14)
Palatin Technologies, Inc. (2)(5)(14)
Revance Therapeutics, Inc. (5)(14)
Sample6, Inc. (2)(14)
Strongbridge U.S. Inc. (5)(14)
Sunesis Pharmaceuticals, Inc. (5)(14)
vTv Therapeutics Inc. (2)(5)(14)
Titan Pharmaceuticals, Inc. (2)(5)(14)
AccuVein Inc. (2)(14)
Aerin Medical, Inc. (2)(14)
Conventus Orthopaedics, Inc. (2)(14)
IntegenX, Inc. (2)(14)
Lantos Technologies, Inc. (2)(14)
Mederi Therapeutics, Inc. (2)(14)
Mitralign, Inc. (2)(14)
NinePoint Medical, Inc. (2)(14)
OraMetrix, Inc. (2)(14)
ReShape Lifesciences Inc. (5)(14)
Tryton Medical, Inc. (2)(14)
VERO Biotech LLC (2)(14)
ViOptix, Inc. (14)
Total Non-Affiliate Warrants — Life Science
Non-Affiliate Warrants — Technology — 4.6% (8)
Ekahau, Inc. (2)(14)
Intelepeer Holdings, Inc. (14)
PebblePost, Inc. (2)(14)
Additech, Inc. (2)(14)
Gwynnie Bee, Inc. (2)(14)
Le Tote, Inc. (2)(14)
Rhapsody International Inc. (2)(14)
SavingStar, Inc. (2)(14)
IgnitionOne, Inc. (2)(14)
Jump Ramp Games, Inc. (2)(14)
Kixeye, Inc. (2)(14)
Rocket Lawyer Incorporated (2)(14)
The NanoSteel Company, Inc. (2)(14)
Nanocomp Technologies, Inc. (2)(14)
Communications
Communications
Communications
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Internet and Media
Internet and Media
Internet and Media
Internet and Media
Materials
Networking
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
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
93
Principal
Amount
5,000
5,000
3,000
2,000
5,000
3,750
Cost of
Investments (6)
4,895
4,895
2,937
1,958
Fair
Value
4,895
4,895
2,937
1,958
134,142
133,889
4,819
3,693
8,512
200,692
4,819
3,693
8,512
200,419
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
—
—
—
—
—
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)(14)
Avalanche Technology, Inc. (2)(14)
eASIC Corporation (2)(14)
Kaminario, Inc.(14)
Luxtera, Inc.(2)(14)
Soraa, Inc. (2)(14)
Bolt Solutions Inc. (2)(14)
Bridge2 Solutions, Inc. (2)(14)
Clarabridge, Inc. (14)
Digital Signal Corporation (14)
Education Elements, Inc. (2)(14)
Lotame Solutions, Inc. (2)(14)
Metricly, Inc. (14)
Riv Data Corp. (2)(14)
ShopKeep.com, Inc. (2)(14)
SIGNiX, Inc. (14)
Skyword, Inc. (14)
SpringCM, Inc. (2)(14)
Sys-Tech Solutions, Inc. (14)
Visage Mobile, Inc. (14)
Weblinc Corporation (2)(14)
xAd, Inc. (2)(14)
Total Non-Affiliate Warrants — Technology
Non-Affiliate Warrants — Cleantech — 0.1% (8)
Renmatix, Inc. (14)
Tigo Energy, Inc. (2)(14)
Total Non-Affiliate Warrants — Cleantech
Non-Affiliate Warrants — Healthcare information and services — 0.4% (8)
LifePrint Group, Inc. (2)(14)
ProterixBio, Inc. (2)(14)
Singulex, Inc. (14)
Verity Solutions Group, Inc. (14)
Watermark Medical, Inc. (2)(14)
HealthEdge Software, Inc. (2)(14)
Medsphere Systems Corporation (2)(14)
Recondo Technology, Inc. (2)(14)
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
Non-Affiliate Other Investments — 5.7% (8)
Espero Pharmaceuticals, Inc. (14)
ZetrOZ, Inc. (14)
Vette Technology, LLC (14)
Triple Double Holdings, LLC (14)
Total Non-Affiliate Other Investments
Biotechnology
Medical Device
Data Storage
Software
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
Royalty Agreement
Royalty Agreement
Royalty Agreement Due 4/18/2019
License Agreement
Non-Affiliate Equity — 1.0% (8)
Insmed Incorporated (5)
Revance Therapeutics, Inc.(5)
Sunesis Pharmaceuticals, Inc. (5)
SnagAJob.com, Inc. (14)
TruSignal, Inc. (14)
Total Non-Affiliate Equity
Total Non-Affiliate Portfolio Investment Assets
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
See Notes to Consolidated Financial Statements
94
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
9
41
444
219,303
$
Fair
Value
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
83
41
1,391
218,600
$
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
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)
82,967 Common Stock Warrants
$
1,523
$
1,522
$
1,449
833
250
250
750
$
$
771
250
250
750
3,543
46
46
185
185
3,774
$
735
238
238
714
3,374
—
—
125
125
3,499
223,077
$
222,099
Portfolio Company (1)(3)
Affiliate Investments — 2.6% (8)
Affiliate Debt Investments — Technology — 2.5% (8)
Software
Decisyon, Inc. (14)
Total Affiliate Debt Investments — Technology
Affiliate Warrants — Technology — 0.0% (8)
Decisyon, Inc. (14)
Total Affiliate Warrants — Technology
Software
Affiliate Equity — Technology — 0.1% (8)
Decisyon, Inc. (14)
Total Affiliate Equity
Total Affiliate Portfolio Investment Assets
Software
45,365,936 Common Stock
Total Portfolio Investment Assets — 164.4%(8)
(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 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 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, 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 PIK feature.
(14) The fair value of the investment was valued using significant unobservable inputs.
95
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Organization
Horizon Technology Finance Corporation (the “Company”) was organized as a Delaware corporation on March 16, 2010 and is an externally managed, non-
diversified, closed-end investment company. The Company has elected to be regulated as a business development company (“BDC”) under the 1940 Act. In
addition, for tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) as defined under Subchapter M of the Internal
Revenue Code of 1986, as amended (the “Code”). As a RIC, the Company generally is not subject to corporate-level federal income tax on the portion of its
taxable income (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 has also established an additional wholly owned subsidiary, which is structured as a Delaware limited liability company, to hold the assets of
a portfolio company acquired in connection with foreclosure or bankruptcy, which is a separate legal entity from the Company.
The Company’s investment strategy is to maximize the investment portfolio’s return by generating current income from the debt investments the Company
makes and capital appreciation from the warrants the Company receives when making such debt investments. The Company has entered into an investment
management agreement (the “Investment Management Agreement”) with Horizon Technology Finance Management LLC (the “Advisor”) under which the
Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.
Note 2. Basis of presentation and significant accounting policies
The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and
pursuant to the requirements for reporting on Form 10-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.
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. The Company does not consolidate its non-controlling interest in HSLFI.
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.
96
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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, 2018, there
were no debt investments 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. For the year ended December 31, 2018, the Company did not receive any payments from debt investments on non-accrual status. 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.
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.
97
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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, 2018, 2017 and 2016 was 6.5%, 6.0% and 10.8%,
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.
Distributions from HSLFI are evaluated at the time of distribution to determine if the distribution should be recorded as dividend income or a return of
capital. Generally, the Company will not record distributions from HSLFI as dividend income unless there are sufficient accumulated tax-basis earnings and
profit in HSLFI prior to distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment. For the
period June 1, 2018 (the commencement of HSLFI’s operations) through December 31, 2018, HSLFI distributed $0.3 million classified as dividend income to
the Company.
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, 2018 and 2017 was $2.2 million and $2.1 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, 2018 and 2017 were $2.4 million and $1.8 million, respectively. The amortization expense for the years ended December 31, 2018, 2017 and
2016 was $0.6 million, $0.8 million and $0.6 million, respectively.
98
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, 2018, 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, 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.
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, 2018, 2017 and 2016, $0.03 million, $0.03 million and $0.1 million,
respectively, was recorded for U.S. federal excise tax.
The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-
than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, 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, 2018 and 2017. The 2017, 2016 and 2015 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.
Stock Repurchase Program
On April 27, 2018, 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
(the “Exchange Act”), and any applicable requirements of the 1940 Act. Unless extended by the Board, the repurchase program will terminate on the earlier of
June 30, 2019 or the repurchase of $5.0 million of the Company’s common stock. During the year ended December 31, 2018, the Company did not repurchase
any shares of its 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. From the inception of the stock repurchase program through December 31, 2018,
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.
99
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Transfers of financial assets
Assets related to transactions that do not meet the requirements under ASC Topic 860, Transfers and Servicing for 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 adopted accounting pronouncements
In April 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“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. ASU 2014-09 is effective for annual and interim periods beginning after
December 15, 2017. As required, the Company adopted ASU 2014-09 effective January 1, 2018, and such adoption did not have an impact on the Company’s
consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”), which modifies disclosure requirements for the fair value measurement of Level 3 securities of public
companies. This guidance is effective for annual and interim periods beginning on or after December 15, 2019 and early adoption is permitted. The Company
has elected to early adopt ASU 2018-13 for the year ended December 31, 2018. As a result, no significant changes were made to the Company’s disclosures in
the notes to the consolidated financial statements.
Securities and Exchange Commission Disclosure Update and Simplification
In August 2018, the Securities and Exchange Commission (the “SEC”) adopted the final rule under SEC Release No. 33-10532, Disclosure Update and
Simplification (the “SEC Release”), amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The SEC
Release is effective for all filings on or after November 5, 2018. As required, the Company adopted the SEC Release for the year ended December 31, 2018. The
SEC Release required changes to the presentation of the Company's Consolidated Statements of Assets and Liabilities and the Consolidated Statements of
Changes in Net Assets. Prior to adoption, the Company presented distributable earnings on the Consolidated Statements of Assets and Liabilities and the
Consolidated Statement of Net Assets as three components: 1) distributions in excess of net investment income; 2) net unrealized depreciation on investments;
and 3) net realized loss on investments. Upon adoption, the Company presents distributable earnings in total on the Consolidated Statements of Assets and
Liabilities and the Consolidated Statements of Changes in Net Assets. The changes in presentation have been retrospectively applied to the Consolidated
Statement of Assets and Liabilities as of December 31, 2017 and to the Consolidated Statements of Changes in Net Assets for the years ended December 31,
2017 and 2016.
100
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table provides a reconciliation of previously disclosed components of distributable earnings on the Consolidated Statement of Assets and
Liabilities as of December 31, 2017 to currently disclosed total distributable earnings on the Consolidated Statement of Assets and Liabilities as of December 31,
2017:
Distributions in excess of net investment income
Net unrealized depreciation on investments
Net realized loss on investments
Distributable earnings
December 31, 2017
(In thousands)
$
$
(1,898)
(978)
(41,702)
(44,578)
The following table provides a reconciliation of previously disclosed components of distributable earnings on the Consolidated Statement of Changes in Net
Assets as of December 31, 2017 and 2016 to currently disclosed total distributable earnings on the Consolidated Statement of Assets and Liabilities as of
December 31, 2017 and 2016:
For the year ended December 31, 2017
Accumulated
Undistributed
(Distributions in
Excess of) Net
Investment Income
Net
Unrealized
Appreciation
on
Investments
Net Realized
Loss on
Investments
Distributable
Earnings
Net investment income, net of excise tax
Net unrealized appreciation on investments
Net realized loss on investments
Net increase in net assets resulting from operations
$
$
12,297 $
—
—
12,297 $
(In thousands)
— $
18,485
—
18,485 $
— $
—
(21,191)
(21,191) $
12,297
18,485
(21,191)
9,591
For the year ended December 31, 2016
Accumulated
Undistributed
(Distributions in
Excess of) Net
Investment Income
Net
Unrealized
Depreciation
on
Investments
Net Realized
Loss on
Investments
Distributable
Earnings
Net investment income, net of excise tax
Net unrealized depreciation on investments
Net realized loss on investments
Net decrease in net assets resulting from operations
$
$
17,099 $
—
—
17,099 $
(In thousands)
— $
(14,236)
—
(14,236) $
— $
—
(7,776)
(7,776) $
17,099
(14,236)
(7,776)
(4,913)
Note 3. Related party transactions
Investment Management Agreement
The Investment Management Agreement was reapproved by the Board on July 27, 2018. On October 30, 2018, the shareholders, at a special meeting of the
stockholders, approved a new Investment Management Agreement to replace the existing Investment Management Agreement which will go into effect upon a
change of control of the Advisor. 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 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.
101
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Through October 30, 2018, the base management fee is calculated at an annual rate of 2.00% of the Company’s gross assets (less cash and cash equivalents)
including any assets acquired with the proceeds of leverage. From and after October 31, 2018, the first date on which the reduced asset coverage requirements in
Section 61(a)(2) of the 1940 Act apply to the Company, the base management fee was and will be calculated at an annual rate of 2.00% of the Company’s gross
assets (less cash and cash equivalents) including any assets acquired with the proceeds of leverage; provided, that, to the extent the Company’s gross assets (less
cash and cash equivalents) exceed $250 million, the base management fee on the amount of such excess over $250 million will be calculated at an annual rate of
1.60% of the Company’s gross assets (less cash and cash equivalents) including any assets acquired with the proceeds of leverage. The base management fee is
payable monthly in arrears and is prorated for any partial month.
The base management fee payable at December 31, 2018 and 2017 was $0.4 million. The base management fee expense was $4.6 million, $3.8 million and
$4.7 million for the years ended December 31, 2018, 2017 and 2016, 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 PIK
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.
102
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.
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 are
not subject to recoupment. During the years ended December 31, 2018 and 2017, the Advisor waived performance based incentive fees of $1.2 million and $0.1
million, respectively, which the Advisor would have otherwise earned.
The net performance based incentive fee expense was $3.2 million, $1.6 million and $2.1 million for the years ended December 31, 2018, 2017 and 2016,
respectively. The incentive fee on Pre-Incentive Fee Net Investment Income was subject to the Incentive Fee Cap and Deferral Mechanism for the years ended
December 31, 2018, 2017 and 2016, which resulted in $0.2 million, $1.1 million and $1.7 million, respectively, of reduced expense and additional net investment
income. The performance based incentive fee payable at December 31, 2018 and 2017 was $1.0 million and $0.5 million, respectively. The entire incentive fee
payable at December 31, 2018 and 2017 represented part one of the incentive fee.
Administration Agreement
The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the
Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s allocable portion of overhead and other
expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with
performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s Chief Financial
Officer and Chief Compliance Officer and their respective staffs. The administrative fee expense was $0.7 million, $0.7 million and $0.9 million for the years
ended December 31, 2018, 2017 and 2016, respectively.
103
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, 2018 and 2017:
Investments
Debt
Warrants
Other
Equity
Equity interest in HSLFI
Total investments
December 31, 2018
December 31, 2017
Cost
Fair Value
Cost
Fair Value
$
$
217,093 $
7,032
11,815
1,719
13,262
250,921 $
(In thousands)
216,401 $
9,324
7,640
1,833
13,243
248,441 $
204,235 $
6,182
12,031
629
—
223,077 $
203,793
9,090
7,700
1,516
—
222,099
The following table shows the Company’s investments by industry sector as of December 31, 2018 and 2017:
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
Healthcare Information and Services
Diagnostics
Other
Software
Investment funds
HSLFI
Total investments
Horizon Secured Loan Fund I LLC
$
December 31, 2018
December 31, 2017
Cost
Fair Value
Cost
Fair Value
(In thousands)
25,770 $
1,590
47,504
11,219
21,094
14,132
38,200
8,679
—
545
3,807
40,942
68
100
71
218
23,720
25,426 $
1,584
47,869
10,754
22,061
10,036
38,132
9,013
—
512
4,636
40,912
—
112
2
172
23,977
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
83
218
8,713
22,694
6,860
37,306
19,773
12,314
100
39,763
9,772
—
1,260
4,256
58,744
—
117
2
165
8,973
$
13,262
250,921 $
13,243
248,441 $
—
223,077 $
—
222,099
On June, 1 2018, the Company and Arena formed a joint venture, HSLFI, to make investments, either directly or indirectly through subsidiaries, primarily in
secured loans to development-stage companies in the technology, life science, healthcare information and services and cleantech industries. HSLFI was formed
as a Delaware limited liability company and is not consolidated by either the Company or Arena for financial reporting purposes. Investments held by HSLFI are
measured at fair value using the same valuation methodology as described in Note 6. As of December 31, 2018, HSLFI had total assets of $26.4 million.
HSLFI’s portfolio consisted of debt investments in four portfolio companies as of December 31, 2018. As of December 31, 2018, the largest investment in a
single portfolio company in the HSLFI’s portfolio in aggregate principal amount was $8.3 million and the four largest investments in portfolio companies in the
HSLFI totaled $25.0 million. As of December 31, 2018, HSLFI had no investments on non-accrual status. HSLFI invests in portfolio companies in the same
industries in which the Company may directly invest.
104
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The Company invests cash or securities in portfolio companies in HSLFI in exchange for limited liability company equity interests in HSLFI. As of
December 31, 2018, the Company and Arena each owned 50.0% of the equity interests of HSLFI. The Company had an original commitment to fund $25.0
million of equity interests in HSLFI. As of December 31, 2018, $11.7 million was unfunded. The Company’s investment in HSLFI consisted of an equity
contribution of $13.3 million as of December 31, 2018.
The Company and Arena each appointed two members to HSLFI’s four-person board of managers. All material decisions with respect to HSLFI, including
those involving its investment portfolio, require unanimous approval of a quorum of the board of managers. Quorum is defined as (i) the presence of two
members of the board of managers; provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of
three members of the board of managers, provided that the individual that was elected, designated or appointed by the member with only one individual present
will be entitled to cast two votes on each matter; or (iii) the presence of all four members of the board of managers.
Horizon Funding I, LLC (“HFI”) was formed as a Delaware limited liability company on May 9, 2018, with HSLFI as its sole member. HFI is a special
purpose bankruptcy-remote entity and is a separate legal entity from HSLFI. Any assets conveyed to HFI are not available to creditors of HSLFI or any other
entity other than HFI’s lenders.
In addition, on June 1, 2018, HSLFI entered into a sale and servicing agreement with HFI, as Issuer, and the Company, as Servicer, pursuant to which
HSLFI will sell or contribute to HFI certain secured loans made to certain portfolio companies. HFI entered into a Note Funding Agreement (the “NYL
Facility”) with several entities owned or affiliated with New York Life Insurance Company (“Noteholders”) for an aggregate purchase price of up to $100.0
million, with an accordion feature of up to $200.0 million at the mutual discretion and agreement of HSLFI and the Noteholders. The Note Funding Agreement
has an investment period that ends on June 1, 2020, if not extended, followed by a five year amortization period and a scheduled final payment date of June 10,
2025, subject to any extension of the investment period. Any notes issued by HFI will be collateralized by all investments held by HFI and permit an advance
rate of up to 67% of the aggregate principal amount of eligible debt investments. The interest rate on the notes issued under the NYL Facility is based on the
three year USD mid-market swap rate plus a margin of between 2.75% and 3.25% depending on the rating of such notes at the time of issuance. There were no
advances made by the Noteholders as of December 31, 2018.
105
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table shows HSLFI’s individual investments as of December 31, 2018:
Portfolio Company (1)
Sector
Debt Investments — Life science
Celsion Corporation (6)(7)(8)
Biotechnology
Total Debt Investments — Life science
Debt Investments — Technology
Intelepeer Holdings, Inc. (6)(7)
Communications
New Signature US, Inc. (6)(7)(9)
Software
Total Debt Investments — Technology
Debt Investments — Healthcare information and services
HealthEdge Software, Inc. (6)(7)
Software
Total Debt Investments — Healthcare information and services
Total Debt Investments
Type of Investment (2)(3)(4)
(Dollars in thousands)
Term Loan (9.98% cash (Libor + 7.63%; Floor
9.63%), 4.00% ETP, Due 7/1/22)
Term Loan (9.98% cash (Libor + 7.63%; Floor
9.63%), 4.00% ETP, Due 7/1/22)
Term Loan (12.30% cash (Libor + 9.95%; Floor
11.25%), 2.50% ETP, Due 7/1/21)
Term Loan (12.30% cash (Libor + 9.95%; Floor
11.25%), 2.50% ETP, Due 7/1/21)
Term Loan (10.85% cash (Libor + 8.50%; Floor
10.50%), 3.50% ETP, Due 7/1/22)
Term Loan (10.60% cash (Libor + 8.25%; Floor
9.25%), 3.00% ETP, Due 10/1/23)
Biotechnology
Warrant Investments — Life science
Celsion Corporation (6)(7)(8)
Total Warrant Investments — Life science
Warrant Investments — Technology
Intelepeer Holdings, Inc. (6)(7)
BSI Platform Holdings, LLC (6)(7)(9)
Total Warrant Investments — Technology
Warrant Investments — Healthcare information and services
HealthEdge Software, Inc. (6)(7)
Total Warrant Investments — Healthcare information and services
Total Warrant Investments
Communications
Software
Software
Total Portfolio Investment Assets
Short Term Investments — Money Market Funds
US Bank Money Market Deposit Account (6)
Total Short Term Investments — Money Market Funds
95,057 Common Stock Warrants
1,280,000 Preferred Stock Warrants
412,500 Preferred Stock Warrants
47,418 Preferred Stock Warrants
Principal
Amount
Cost of
Investments(5)
Fair
Value
$
2,500
$
2,449
$
2,500
4,000
4,000
8,250
3,750
2,449
4,898
3,948
3,948
8,098
15,994
3,699
3,699
24,591
58
58
49
57
106
16
16
180
2,449
2,449
4,898
3,948
3,948
8,098
15,994
3,699
3,699
24,591
1
1
70
56
126
16
16
143
$
$
$
24,771
$
24,734
74
74
$
$
74
74
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
All investments of HSLFI are in entities which are organized under the laws of the United States and have a principal place of business in the United
States.
All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to HSLFI’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. Debt investments are at variable 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, 2018 is
provided.
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.
Warrants are non-income producing.
For debt investments, represents principal balance less unearned income.
Has been pledged as collateral under the NYL Facility.
The fair value of the investment was valued using significant unobservable inputs.
Portfolio company is a public company.
New Signature US, Inc. is a subsidiary of BSI Platform Holdings, LLC.
106
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table provides HSLFI’s unfunded commitments by portfolio company as of December 31, 2018:
New Signature US, Inc.
Total
December 31, 2018
Principal
Balance
Fair Value of
Unfunded
Commitment
Liability
$
$
(In thousands)
3,000 $
3,000 $
30
30
The following tables show certain summarized financial information for HSLFI as of December 31, 2018 and for the period June 1, 2018 through December
31, 2018:
Selected Statement of Assets and Liabilities Information
Total investments at fair value (cost of $24,771)
Cash and cash equivalents
Investments in money market funds
Interest receivable
Other assets
Total assets
Other liabilities
Total liabilities
Members’ equity
Total liabilities and members’ equity
Selected Statements of Operations Information
Interest income on investments
Total expenses
Net investment income
Net unrealized depreciation on investments
Net increase in net assets resulting from operations
107
December 31,
2018
(In thousands)
$
$
$
$
24,734
76
74
252
1,306
26,442
81
81
26,361
26,442
For the period
June 1, 2018
through
December 31, 2018
(In thousands)
$
$
$
$
$
689
180
509
(37)
472
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Transactions with affiliated companies
A non-controlled affiliated company is generally a portfolio company in which the Company owns 5% or more of such portfolio company’s voting
securities but not more than 25% of such portfolio company’s voting securities. Transactions related to investments in non-controlled affiliated companies for the
year ended December 31, 2018 were as follows:
Portfolio
Company
Fair value at
December 31,
2017
Purchases
Sales
Transfers
in/(out) at
fair value
Discount
accretion
Net
unrealized
gain/(loss)
Fair value at
December 31,
2018
Net realized
gain/(loss)
Interest
income
Year ended December 31, 2018
Decisyon, Inc.
$
StereoVision, Inc.
Total non-controlled affiliates
$
1,449
735
238
238
714
—
—
125
—
—
3,499
$
$
—
—
—
—
—
300
200
—
2,798
791
4,089
$
$
—
—
—
—
—
—
—
—
—
—
—
$
$
(In thousands)
—
$
23
—
—
—
—
—
—
—
—
23
$
—
—
—
—
—
—
—
—
—
—
—
$
$
$
15
6
2
2
7
(11)
(8)
(50)
—
—
(37) $
1,464
764
240
240
721
289
192
75
2,798
791
7,574
$
$
—
—
—
—
—
—
—
—
—
—
—
$
$
265
140
35
34
104
20
8
—
119
—
725
Transactions related to investments in non-controlled affiliated companies for the year ended December 31, 2017 were as follows:
Year ended December 31, 2017
Portfolio
Company
Fair value at
December 31,
2016
Purchases
Sales
Decisyon, Inc. (1)
$
Total non-controlled affiliates
$
—
—
—
—
—
—
—
$
$
—
—
—
—
750
—
750
$
$
Transfers
in at fair
value
—
—
—
—
—
—
—
$
$
1,440
715
237
237
—
125
2,754
Discount
accretion
(In thousands)
—
$
16
—
—
—
—
16
$
Net
unrealized
gain (loss)
Fair value at
December 31,
2017
Net realized
gain (loss)
Interest
income
$
$
$
9
4
1
1
(36)
—
(21) $
1,449
735
238
238
714
125
3,499
$
$
—
—
—
—
—
—
—
$
$
122
63
8
8
24
—
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.
108
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
A controlled affiliated company is generally a portfolio company in which the Company owns more than 25% of such portfolio company’s voting securities
or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Transactions related
to investments in controlled affiliated companies for the year ended December 31, 2018 were as follows:
Year ended December 31, 2018
Portfolio
Company
Fair value at
December 31,
2017
Purchases
Distributions
Transfers
in/(out) at
fair value
HSLFI(1)
Total controlled affiliates
$
$
—
—
$
$
13,262
13,262
$
$
255
255
$
$
—
—
Dividends
declared
(In thousands)
$
$
(255) $
(255) $
Net
unrealized
gain/(loss)
Fair value at
December 31,
2018
Net
realized
gain/(loss)
Dividend
income
(19) $
(19) $
13,243
13,243
$
$
—
—
$
$
255
255
(1) The Company and Arena are the members of HSLFI, a joint venture formed as a Delaware limited liability company that is not consolidated by either
member for financial reporting purposes. The members provide cash or securities in portfolio companies to HSLFI in exchange for limited liability company
equity interests. All portfolio and other material decisions regarding HSLFI must be submitted to HSLFI’s board of managers which is comprised of an
equal number of managers appointed by each of the Company and Arena. Because management of HSLFI is shared equally between the Company and
Arena, the Company does not believe it controls HSLFI for purposes of the 1940 Act or otherwise.
There were no transactions related to investments in controlled affiliated companies for the year ended December 31, 2017.
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.
109
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Investments are valued at fair value as determined in good faith by the Board, based on input of management, the audit committee and independent
valuation firms which are engaged at the direction of the Board to assist in the valuation of each portfolio investment lacking a readily available market
quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied valuation process. This valuation process is
conducted at the end of each fiscal quarter, with at least 25% (based on fair value) of the Company’s valuation of portfolio companies lacking readily available
market quotations subject to review by an independent valuation firm.
Because there is not a readily available market value for most of the investments in its portfolio, the Company values substantially all of its portfolio
investments at fair value as determined in good faith by the Board, as described herein. Due to the inherent uncertainty of determining the fair value of
investments that do not have a readily available market value, the fair value of the Company's investments may fluctuate from period to period. Additionally, the
fair value of the Company's investments may differ significantly from the values that would have been used had a ready market existed for such investments and
may differ materially from the values that the Company may ultimately realize. Further, such investments are generally subject to legal and other restrictions on
resale or otherwise are less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment in a forced or liquidation sale,
the Company could realize significantly less than the value at which the Company has recorded such portfolio investment.
Cash and interest receivable: The carrying amount is a reasonable estimate of fair value. These financial instruments are not recorded at fair value on a
recurring basis and are categorized as Level 1 within the fair value hierarchy described above.
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, 2018 and 2017, the
hypothetical market yields used ranged from 11% to 25% and 10% 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.
110
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Under certain circumstances the Company may use an alternative technique to value warrants that better reflects the warrants’ fair value, such as an
expected settlement of a warrant in the near term or a model that incorporates a put feature associated with the warrant. The fair value may be determined based
on the expected proceeds to be received from such settlement or based on the net present value of the expected proceeds from the put option.
The fair value of the Company’s warrants held in publicly traded companies is determined based on inputs that are readily available in public markets or can
be derived from information available in public markets. Therefore, the Company has categorized these warrants as Level 2 within the fair value hierarchy
described above. The fair value of the Company’s warrants held in private companies is determined using both observable and unobservable inputs and
represents management’s best estimate of what market participants would use in pricing the warrants at the measurement date. Therefore, the Company has
categorized these warrants as Level 3 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.
Equity investments: The fair value of an equity investment in a privately held company is initially the face value of the amount invested. The Company
adjusts the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing. The Company may make
adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in a portfolio company’s financial or operational
performance. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement. The Company
has categorized these equity investments as Level 3 within the fair value hierarchy described above. The fair value of an equity investment in a publicly traded
company is based upon the closing public share price on the date of measurement. Therefore, the Company has categorized these equity investments as Level 1
within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.
Other investments: Other investments are valued based on the facts and circumstances of the underlying 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, 2018 and 2017. 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.
111
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, 2018:
Investment Type
Fair
Value
December 31, 2018
Valuation Techniques/
Methodologies
Unobservable
Input
(Dollars in thousands, except per share data)
Debt investments
$
216,401
Discounted Expected Future Cash Flows
Hypothetical Market Yield
Warrant investments
7,888
Black-Scholes Valuation Model
Price Per Share
Average Industry Volatility
Marketability Discount
Estimated Time to Exit
Other investments
7,640
Multiple Probability Weighted Cash
Flow Model
Discount Rate
Probability Weighting
744
Estimated Proceeds
Price Per Share
Range
11% – 25%
$0.00 – $980.00
20%
20%
1 to 5 years
$0.21
0% – 25%
10% – 100%
Equity investments
Total Level 3 investments
$
1,289
233,962
Last Equity Financing
Price Per Share
$0.00 – $2.24
$
Weighted
Average(1)
13%
$44.76
20%
20%
2 years
$0.21
19%
36%
0.80
(1) Weighted average is calculated by multiplying (a) the unobservable input for each investment in the investment type by (b) (1) the fair value of the related
investment in the investment type divided by (2) the total fair value of the investment type.
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
Fair
Value
December 31, 2017
Valuation Techniques/
Methodologies
Unobservable
Input
(Dollars in thousands, except per share data)
Debt investments
$
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(1)
13%
18%
20%
20%
$3.69
20%
20%
3 years
$0.001
19%
36%
0.54
(1) Weighted average is calculated by multiplying (a) the unobservable input for each investment in the investment type by (b) (1) the fair value of the related
investment in the investment type divided by (2) the total fair value of the investment type.
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 (as
defined in Note 7) is based on the closing public share price on the date of measurement. On December 31, 2018, the closing price of the 2022 Notes on the New
York Stock Exchange was $24.90 per note, or $37.2 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy
described above.
112
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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, 2018 and 2017 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
Equity interest in HSLFI(1)
Total investments
December 31, 2018
Level 1
Level 2
Level 3
Total
$
$
— $
—
—
544
—
544 $
(In thousands)
— $
692
—
—
—
692 $
216,401 $
8,632
7,640
1,289
—
233,962 $
216,401
9,324
7,640
1,833
13,243
248,441
(1) The fair value of Company’s equity interest in HSLFI is determined using the net asset value of the Company’s ownership
interest in member’s capital.
Debt investments
Warrant investments
Other investments
Equity investments
Total investments
December 31, 2017
Level 1
Level 2
Level 3
Total
$
$
— $
—
—
1,267
1,267 $
(In thousands)
— $
1,717
—
—
1,717 $
203,793 $
7,373
7,700
249
219,115 $
203,793
9,090
7,700
1,516
222,099
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, 2018:
Debt
Warrant
December 31, 2018
Equity
Other
Investments
Investments
Investments
Investments
Total
(In thousands)
Level 3 assets, beginning of period
Purchase of investments
Warrants and equity received and classified as
$
203,793 $
101,257
Level 3
Principal payments received on investments
Proceeds from sale of investments
Net realized (loss) gain on investments
Unrealized (depreciation) appreciation included in
earnings
Other
Level 3 assets, end of period
$
—
(84,224)
(3,064)
(32)
(248)
(1,081)
216,401 $
7,373 $
—
1,479
—
(1,241)
578
443
—
8,632 $
249 $
—
1,090
—
—
—
(50)
—
1,289 $
7,700 $
—
219,115
101,257
—
(215)
—
—
155
—
7,640 $
2,569
(84,439)
(4,305)
546
300
(1,081)
233,962
During the year ended December 31, 2018, there were no transfers in or out of Level 3 assets.
113
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at December 31,
2018 includes $0.2 million in unrealized depreciation on debt and other investments, $0.2 million in unrealized appreciation on warrant investments and $0.05
million in unrealized depreciation 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, 2017:
Debt
Warrant
December 31, 2017
Equity
Other
Investments
Investments
Investments
Investments
Total
Level 3 assets, beginning of period
Purchase of investments
Warrants and equity received and classified as
$
186,186 $
135,556
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
—
(103,659)
—
(21,219)
(In thousands)
5,857 $
—
2,355
—
(1,804)
766
268 $
—
41
—
—
—
600 $
—
192,911
135,556
—
(152)
—
—
2,396
(103,811)
(1,804)
(20,453)
16,427
199
(60)
(248)
16,318
investments
Other
Level 3 assets, end of period
(7,500)
(1,998)
203,793 $
$
—
—
7,373 $
—
—
249 $
7,500
—
7,700 $
—
(1,998)
219,115
During the year ended December 31, 2017, there were no transfers in or out of Level 3 assets.
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 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 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, 2018 and 2017, all of the balances of all the Company’s financial instruments were recorded at fair value, except for the Company’s
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.
114
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 7. Borrowings
The following table shows the Company’s borrowings as of December 31, 2018 and 2017:
Total
Commitment
December 31, 2018
Balance
Outstanding
Unused
Commitment
Total
Commitment
December 31, 2017
Balance
Outstanding
Unused
Commitment
Key Facility
2022 Notes
Total before debt issuance costs
Unamortized debt issuance costs attributable to term
borrowings
Total borrowings outstanding, net
$
$
125,000 $
37,375
162,375
90,500 $
37,375
127,875
(In thousands)
34,500 $
—
34,500
95,000 $
37,375
132,375
58,000 $
37,375
95,375
—
162,375 $
(1,022)
126,853 $
—
34,500 $
—
132,375 $
(1,300)
94,075 $
37,000
—
37,000
—
37,000
Currently, with certain limited exceptions, as a BDC, the Company is only allowed to borrow amounts such that the Company’s asset coverage, as defined in
the 1940 Act, is at least 150% after such borrowings. As of December 31, 2018, the asset coverage for borrowed amounts was 205%.
On March 23, 2018, President Trump signed into law the Small Business Credit Availability Act as part of an omnibus spending bill, which, among other
things, amends the 1940 Act to reduce the minimum required asset coverage applicable to BDCs under the 1940 Act from 200% to 150% if certain approval and
disclosure requirements are met. Before such reduced asset coverage requirement can apply to the Company, such reduced asset coverage requirement must be
approved by either (a) a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Board, in which case such reduced asset coverage requirement
would take effect on the first anniversary of the date of such Board approval, or (b) a majority of votes cast by the stockholders of the Company at a special or
annual meeting at which a quorum is present, in which case such reduced asset coverage requirement shall take effect on the day after such approval. On June 7,
2018, a “required majority” of the Board approved the reduced asset coverage requirements and separately recommended that the Company’s stockholders
approve the reduced asset coverage requirements at a special meeting of the Company’s stockholders. The Company held a special meeting on October 30, 2018
during which the reduced asset coverage requirements were approved by stockholders. The reduced asset coverage requirements took effect October 31, 2018.
The Company entered into the Key Facility with Key effective November 4, 2013. On December 28, 2018, the Company amended the Key Facility,
increasing the aggregate commitments under the Key Facility by $25 million to $125 million. The Key Facility has an accordion feature which allows for an
increase in the total loan commitment to $150 million from the $125 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 revolving period that extends
to April 6, 2021, followed by a two-year amortization period and is scheduled to mature on April 6, 2023. The interest rate is based upon the one-month LIBOR,
plus a spread of 3.25%, with a LIBOR floor of 0.75%. The LIBOR rate was 2.50% and 1.56% on December 31, 2018 and 2017, respectively. The average
interest rate for the years ended December 31, 2018 and 2017 was 5.23% and 4.33%, 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, 2018 and 2017, the Company had borrowing
capacity under the Key Facility of $34.5 million and $37.0 million, respectively. At December 31, 2018 and 2017, $0.9 million and $23.6 million, respectively,
was available, subject to existing terms and advance rates.
115
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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, 2018, 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”.
116
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table shows information about our senior securities as of December 31, 2018, 2017, 2016, 2015 and 2014:
Class and Year
Credit facilities
2018
2017
2016
2015
2014
2022 Notes
2018
2017
2019 Notes
2018
2017
2016
2015
2014
2013-1 Securitization
2018
2017
2016
2015
2014
Total senior securities
2018
2017
2016
2015
2014
Total Amount
Outstanding
Exclusive of
Treasury
Securities(1)
Involuntary
Liquidation
Preference
Asset Coverage
per Unit(2)
per Unit(3)
(In thousands, except unit data)
Average
Market
Value per
Unit(4)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
90,500 $
58,000 $
63,000 $
68,000 $
10,000 $
37,375 $
37,375 $
—
—
33,000 $
33,000 $
33,000 $
—
—
—
14,546 $
38,753 $
127,875 $
95,375 $
96,000 $
115,546 $
81,753 $
2,896
3,973
3,733
4,048
22,000
7,014
6,166
—
—
7,127
8,342
6,667
—
—
—
18,926
5,677
2,050
2,416
2,450
2,383
2,691
—
—
—
—
—
— $
— $
—
—
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
N/A
N/A
N/A
N/A
N/A
25.52
25.66
—
—
25.42
25.26
25.64
—
—
—
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.
117
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 depreciation (appreciation) on investments
Other book-tax differences
Change in 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
2018
Years Ended December 31,
2017
(In thousands)
2016
13,010 $
1,501
199
(645)
14,065 $
9,591 $
(18,485)
806
21,191
13,103 $
(4,913)
14,236
(844)
7,776
16,255
2018
Years Ended December 31,
2017
(In thousands)
2016
13,834 $
13,834 $
13,818 $
13,818 $
15,759
15,759
2018
As of December 31,
2017
(In thousands)
2016
1,269 $
(41,057)
5,237
(7,717)
3,123
(39,145) $
1,036 $
(41,702)
6,049
(7,027)
2,955
(38,689) $
1,753
(20,511)
3,830
(23,293)
2,169
(36,052)
$
$
$
$
$
$
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, 2018 and 2017, the Company
elected to carry forward taxable income in excess of current year distributions of $1.3 million and $1.0 million, respectively. At December 31, 2018 and 2017, a
provision for excise tax of $0.03 million 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 year ended December 31, 2018, the Company used $0.6 million of its capital loss carry forward to offset capital gains. During the
years ended December 31, 2017 and 2016, 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, 2018 and 2017 was $250.9 million and $223.1 million, respectively. The gross
unrealized appreciation on investments at December 31, 2018 and 2017 was $5.2 million and $6.0 million, respectively. The gross unrealized depreciation on
investments at December 31, 2018 and 2017 was $7.7 million and $7.0 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.
118
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The balance of unfunded commitments to extend credit was $27.5 million and $33.3 million as of December 31, 2018 and 2017, 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, 2018:
Aerin Medical, Inc.
CSA Medical, Inc.
Espero Biopharma, Inc.
New Signature US, Inc.(1)
StereoVision Imaging, Inc.
Total
December 31, 2018
Fair Value of
Unfunded
Commitment
Liability
Principal
Balance
$
$
(In thousands)
5,000 $
9,000
10,000
2,500
1,000
27,500 $
63
128
100
10
—
301
(1)
Includes the Company’s portion of HSLFI’s commitment.
The table above also provides the fair value of the Company’s unfunded commitment liability as of December 31, 2018 which totaled $0.3 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 32% and 29% of total debt investments outstanding as of December 31, 2018 and 2017,
respectively. No single debt investment represented more than 10% of the total debt investments as of December 31, 2018 or 2017. 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 25%, 14% and 17% of total interest and fee income on investments for the years ended December 31, 2018, 2017 and 2016, respectively.
119
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, 2018 and 2017:
Date
Declared
Record Date
Payment Date
Year Ended December 31, 2018
DRIP
Shares
Amount
Per Share
Issued
(In thousands, except share and per share data)
Distribution
Cash
DRIP
Share
Value
10/26/18
10/26/18
10/26/18
7/27/18
7/27/18
7/27/18
4/27/18
4/27/18
4/27/18
3/1/18
3/1/18
3/1/18
Year Ended December 31, 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
2/20/19
1/17/19
12/18/18
11/19/18
10/18/18
9/18/18
8/17/18
7/19/18
6/19/18
5/17/18
4/19/18
3/19/18
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
3/15/19 $
2/15/19
1/15/19
12/14/18
11/15/18
10/16/18
9/14/18
8/15/18
7/17/18
6/15/18
5/15/18
4/17/18
$
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
$
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
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
1.20 $
—
1,139
1,140
1,139
1,138
1,138
1,139
1,139
1,140
1,140
1,140
1,139
12,531
1,138
1,139
1,139
1,139
1,139
1,138
1,140
1,140
1,138
1,137
1,137
1,134
13,658
—
1,166
1,125
1,222
1,255
1,253
1,212
1,202
1,221
1,271
1,287
1,255
13,469
1,241
1,185
1,119
1,227
1,195
1,205
1,199
1,159
1,164
1,202
1,287
1,510
14,693
On March 1, 2019, the Board declared monthly distributions per share, payable as set forth in the following table:
Ex-Dividend Date
May 16, 2019
April 17, 2019
March 18, 2019
Record Date
Payment Date
Distributions Declared
May 17, 2019
April 18, 2019
March 19, 2019
June 17, 2019
May 15, 2019
April 16, 2019
$
$
$
$—
15
13
14
15
15
14
14
13
13
13
13
$152
$14
13
13
13
13
14
13
12
13
14
15
18
$165
0.10
0.10
0.10
After paying distributions of $1.10 per share deemed paid for tax purposes in 2018, declaring on October 26, 2018 a distribution of $0.10 per share payable
January 15, 2019, and taxable earnings of $1.22 per share in 2018, the Company’s undistributed spillover income as of December 31, 2018 was $0.11 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.
120
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Subsequent event
On March 5, 2019, 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, 2019 and ending on December 31, 2019. Such waived incentive fees
will not be subject to recoupment.
Note 13. Financial highlights
The following table shows financial highlights for the Company:
2018
Years Ended December 31,
2016
(In thousands, except share and per share data)
2017
2015
Per share data:
Net asset value at beginning of period
Net investment income
Realized gain (loss) on investments
Unrealized (depreciation) appreciation 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
$
$
$
$
$
$
$
11.72
1.20
0.06
$
12.09
1.07
(1.84)
$
13.85
1.48
(0.67)
(0.13)
1.60
(1.24)
1.13
—
(1.20)
(1.20)
—
—
—
(0.01)
$
11.64
11.22
$
11.25
11.0%
0.83
—
(1.20)
(1.20)
—
—
—
—
11.72
10.53
11.22
17.9%
$
$
(0.43)
—
(1.34)
(1.34)
—
—
0.01
—
12.09
11.73
10.53
$
$
1.5%
2014
14.14
1.11
(0.37)
0.86
1.60
—
(1.38)
(1.38)
—
—
—
—
14.36
14.21
13.99
$
$
$
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)%
8.2%
11,535,129
11,520,406
11,510,424
11,535,212
9,628,124
10.4%
2.4%
12.8%
10.3%
10.4%
3.3%
13.7%
9.4%
$
134,257
$
134,364
8.62
$
50.4%
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%
138,248
137,848
10.68
46.5%
(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.
(2) 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.
(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, 2018, 2017 and 2014, the Advisor waived $1.2 million, $0.1 million and $0.1 million of incentive fee. During the
years ended December 31, 2015 and 2014, the Advisor waived $0.3 million and $0.2 million, respectively, of base management fee.
121
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Summarized financial information for HSLFI
Horizon Secured Loan Fund I
Statements of Assets and Liabilities
(Dollars in thousands)
Assets
Investments at fair value (cost of $24,771)
Cash and cash equivalents
Investments in money market funds
Interest receivable
Other assets
Total assets
Liabilities
Other liabilities
Total liabilities
Commitments and contingencies
Members’ Capital
Members’ capital
Total members’ capital
Total liabilities and members’ capital
122
December 31,
2018
$
$
$
$
24,734
76
74
252
1,306
26,442
81
81
26,361
26,361
26,442
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Horizon Secured Loan Fund I
Statements of Assets and Liabilities
(Dollars in thousands)
Investment income
Interest income
Total investment income
Expenses
Interest expense
General and administrative
Total expenses
Net investment income
Net unrealized depreciation on investments
Net unrealized depreciation on investments
Net unrealized depreciation on investments
Net increase in net assets resulting from operations
Commitments and contingencies
The following table provides HSLFI’s unfunded commitments by portfolio company as of December 31, 2018:
For the period
June 1, 2018
through
December 31,
2018
$
$
689
689
140
40
180
509
(37)
(37)
472
December 31, 2018
Principal
Balance
Fair Value of
Unfunded
Commitment
Liability
$
$
(In thousands)
3,000 $
3,000 $
30
30
New Signature US, Inc.
Total
Note 15. Selected quarterly financial data (unaudited)
Total investment income
Net investment income
Net realized and unrealized (loss) gain
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)
December 31,
2018
September 30,
2018
June 30,
2018
March 31,
2018
(In thousands, except per share data)
8,805 $
3,964 $
(746) $
3,218 $
0.34 $
0.28 $
11.64 $
7,797 $
3,402 $
857 $
4,259 $
0.30 $
0.37 $
11.66 $
7,313 $
3,290 $
(360) $
2,930 $
0.29 $
0.25 $
11.60 $
7,175
3,210
(607)
2,603
0.28
0.23
11.65
$
$
$
$
$
$
$
123
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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)
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
(1) Based on weighted average shares outstanding for the respective period.
(2) Based on shares outstanding at the end of the respective period.
124
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, 2018, 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
125
PART III
We will file a definitive Proxy Statement for our 2019 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 2019 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 2019 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 2019 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 2019 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 2019 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.
126
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial statements
(1) Financial statements — Refer to Item 8 starting on page 77.
(2) Financial statement schedules — None
(3) Exhibits
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
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)
Description
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)
Form of 6.25% 2022 Notes due 2022 (included as part of Exhibit 4.3)
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)
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)
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)
Form of Trademark License Agreement by and between the Company and Horizon Technology Finance Management, 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)
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)
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)
127
10.9
10.10
10.11
10.12
10.13*
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)
Amendment No. 2 to Amended and Restated Loan Agreement, dated as of April 6, 2018, by and among Horizon Credit II LLC, as the
borrower, State Bank and Trust Company (successor by merger to AloStar Bank of Commerce), as lender, MUFG Union Bank, N.A., as
lender, and KeyBank National Association (successor by merger to Key Equipment Finance Inc.) as lender, arranger, and agent (Incorporated
by reference to Exhibit 10.01 of the Quarterly Report on Form 10-Q of the Company, filed on May 1, 2018)
Horizon Secured Loan Fund I LLC Limited Liability Company Agreement dated June 1, 2018 by and between the Company and Arena
Sunset SPV, LLC (Incorporated by reference to Exhibit (k)(9) of the Company’s Registration Statement on Form N-2, File No. 333-225698,
filed on June 18, 2018)
Amendment No. 3 to Amended and Restated Loan Agreement, dated as of December 28, 2018, by and among Horizon Credit II LLC, as the
borrower, State Bank and Trust Company (successor by merger to AloStar Bank of Commerce), as lender, MUFG Union Bank, N.A., as
lender, and KeyBank National Association (successor by merger to Key Equipment Finance Inc.) as lender, arranger, and agent.
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,
21*
24
31.1*
31.2*
32.1*
2017)
List of Subsidiaries
Power of Attorney (included on signature page hereto)
Certificate of the Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a)
Certificate of the Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a)
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
128
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.
SIGNATURES
Date: March 5, 2019
HORIZON TECHNOLOGY FINANCE CORPORATION
By:
Name:
Title:
/s/ Robert D. Pomeroy, Jr.
Robert D. Pomeroy, Jr.
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
Chairman of the Board of Directors and Chief
Executive Officer (Principal Executive Officer)
Chief Financial Officer and Treasurer (Principal
Financial and Accounting Officer)
Date
March 5, 2019
March 5, 2019
/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
President and Director
March 5, 2019
Director
Director
Director
Director
129
March 5, 2019
March 5, 2019
March 5, 2019
March 5, 2019
AMENDMENT NO. 3
TO
AMENDED AND RESTATED LOAN AGREEMENT
Exhibit 10.13
THIS AMENDMENT NO. 3 TO AMENDED AND RESTATED LOAN AGREEMENT (this “Amendment”) dated as of December 28, 2018, is entered
into by and among HORIZON CREDIT II LLC (the “Borrower”), STATE BANK AND TRUST COMPANY, a Georgia banking corporation (successor by
merger to AloStar Bank of Commerce), as a Lender, MUFG UNION BANK, N.A., as a Lender, and KEYBANK NATIONAL ASSOCIATION (successor by
merger to Key Equipment Finance Inc.) as a Lender and as Arranger and Agent (in such capacity, the “Agent”). Capitalized terms used and not otherwise
defined herein are used with the meanings set forth or incorporated by reference in the Loan Agreement (as defined below).
PRELIMINARY STATEMENTS
A. Reference is made to that certain Amended and Restated Loan and Security Agreement dated as of November 4, 2013 by and among the Borrower,
the Lenders and the Agent (as amended, modified, supplemented or otherwise modified prior to the date hereof, the “Loan Agreement”).
B. The parties hereto have agreed to amend certain provisions of the Loan Agreement upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set forth above, and other good and valuable consideration the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
Article I. Amendments to the Loan Agreement. Upon satisfaction of the conditions precedent set forth in Section 4 hereof the Loan Agreement is
hereby amended as follows:
Section 1.01 Additions to Section 1.1. The following defined terms shall be added to Section 1.1 in alphabetical order as follows:
(a) “Amendment No. 3 Effective Date” means December 28, 2018.
Section 1.02 Amendments to Existing Definitions. The following defined terms are amended as follows:
(a) The definition of “Facility Amount” is deleted in its entirety, and the following substituted therefor:
“Facility Amount” means, at any time and as reduced or increased from time to time, pursuant to the terms of this Agreement the
aggregate dollar amount of Commitments of all the Lenders; provided, however, that on the Termination Date and on each date
thereafter, the Facility Amount shall be equal to the outstanding Advances as of such date. As of the Amendment No. 3 Effective
Date, the Facility Amount is $125,000,000. The Facility Amount may be increased up to a total of $150,000,000 in accordance with
the provisions of Section 2.13.
Section 1.03 Amendments to Schedule C-1. Schedule C-1 to the Loan Agreement is deleted in its entirety, and the following substituted therefor:
Schedule C-1
Commitments
(as of Amendment No. 2 Effective Date)
Lender
KeyBank National Association
State Bank and Trust Company (successor by merger
to AloStar Bank of Commerce)
MUFG Union Bank, N.A.
Commitment
$75,000,000
$20,000,000
$30,000,000
All Lenders
$125,000,000
Article II. Representations and Warranties. The Borrower hereby represents and warrants to each of the other parties hereto (and the parties hereto agree
that the following representations and warranties shall be deemed to have been made pursuant to the Loan Agreement for purposes of Section 8.5 thereof), that:
(a) this Amendment constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms; and
(b) on the date hereof, before and after giving effect to this Amendment, other than as amended or waived pursuant to this Amendment, no Early
Termination Event or Unmatured Termination Event has occurred and is continuing.
Article III. Conditions Precedent. This Amendment shall become effective on the first Business Day (the “Effective Date”) on which the Agent or its
counsel has received:
(a) counterpart signature pages of this Amendment, executed by each of the parties hereto;
(b) confirmation by each Lender and the Agent of payment by the Borrower of the fees described in the “Fee Letter” between the Borrower and
KeyBank National Association, dated the date hereof; and
(c) certificate from the Secretary (or equivalent) of the Borrower, in form and substance satisfactory to the Agent, certifying as to incumbency,
corporate authorization and authority to enter into and perform this Amendment and to perform Loan Agreement as amended hereby and other customary
matters.
2
Article IV. Miscellaneous.
Section 4.01 Reference to and Effect on the Loan Documents.
(a) Upon the effectiveness of this Amendment, (i) each reference in the Loan Agreement to “this Loan Agreement”, “this Agreement”,
“hereunder”, “hereof”, “herein” or words of like import shall mean and be a reference to the Loan Agreement as amended or otherwise modified
hereby, and (ii) each reference to the Loan Agreement in any other Loan Document or any other document, instrument or agreement executed and/or
delivered in connection therewith, shall mean and be a reference to the Loan Agreement as amended or otherwise modified hereby.
(b) Except as specifically amended, terminated or otherwise modified above, the terms and conditions of the Loan Agreement, of all other
Loan Documents and any other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force
and effect and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Agent
or any Lender under the Loan Agreement or any other Loan Document or any other document, instrument or agreement executed in connection
therewith, nor constitute a waiver of any provision contained therein, in each case except as specifically set forth herein.
Section 4.02 Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one
and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment.
Section 4.03 Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.
Section 4.04 Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose.
[Signature Pages Follow]
3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers as of the date first above
written.
HORIZON CREDIT II LLC
By:
Name:
Title:
Signature Page to Amendment No. 3
KEYBANK NATIONAL ASSOCIATION, as Agent
By:
Name:
Title:
KEYBANK NATIONAL ASSOCIATION, as a Lender
By:
Name:
Title:
Signature Page to Amendment No. 3
STATE BANK AND TRUST COMPANY, as a Lender
By:
Name:
Title:
Signature Page to Amendment No. 3
MUFG UNION BANK, N.A., as a Lender
By:
Name:
Title:
Signature Page to Amendment No. 3
LIST OF SUBSIDIARIES OF
HORIZON TECHNOLOGY FINANCE CORPORATION
AS OF 12/31/2018
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 5, 2019
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 5, 2019
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, 2018 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 5, 2019
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, 2018 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 5, 2019