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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2022
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
4.875% Notes due 2026
6.25% Notes due 2027
Ticker symbol(s)
HRZN
HTFB
HTFC
Name of each exchange on which registered
The Nasdaq Stock Market LLC
The New York Stock Exchange
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 ☒.
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 ☒.
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 ☒ 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 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 ☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒.
The aggregate market value of common stock held by non-affiliates of the Registrant on June 30, 2022 based on the closing price on that date of $11.54
on the Nasdaq Global Select Market was $282.3 million. For the purposes of calculating this amount only, all directors and executive officers of the Registrant
have been treated as affiliates. There were 28,320,399 shares of the Registrant’s common stock outstanding as of February 27, 2023.
Documents Incorporated by Reference: Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2023 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.
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HORIZON TECHNOLOGY FINANCE CORPORATION
FORM 10‑K
FOR THE YEAR ENDED DECEMBER 31, 2022
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
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
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART III
Item 15.
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;
● “HSLFI” refers to Horizon Secured Loan Fund I, a joint venture formed with Arena Sunset SPV, LLC, or “Arena”. On April 21, 2020, the
Company purchased all of the limited liability company interests of Arena in HSLFI, including, without limitation, undistributed amounts owed to
Arena and interest accrued and unpaid on the debt investments of HSLFI through the date of purchase. As of April 21, 2020, HSLFI and its
subsidiary are consolidated by the Company;
● “HFI” refers to Horizon Funding I, LLC, a Delaware limited liability company, which is a special purpose bankruptcy remote entity and a wholly-
owned subsidiary of HSLFI, our wholly-owned subsidiary;
● “Key” refers to KeyBank National Association and “Key Facility” refers to the revolving credit facility with Key;
● “NYL Noteholders” refers to several entities owned or affiliated with New York Life Insurance Company and “NYL Facility” refers to the credit
facility where the notes are issued to the NYL Noteholders;
● “Credit Facilities” refers to collectively the Key Facility and the NYL Facility;
● “2022 Notes” refers to the $37.4 million aggregate principal amount of our 6.25% unsecured notes due 2022, which were issued by us in
September and October 2017 and redeemed by us on April 24, 2021;
● “2026 Notes” refers to the $57.5 million aggregate principal amount of our 4.875% unsecured notes due 2026, which were issued by us in March
2021;
● “2027 Notes” (collectively with the 2026 Notes, "Debt Securities") refers to the $57.5 million aggregate principal amount of our 6.25% unsecured
notes due 2027, which were issued by us on June 15, 2022 and July 11, 2022;
● “2019‑1 Securitization” refers to the $160.0 million securitization of secured loans we completed on August 13, 2019;
● “2019 Asset-Backed Notes” refers to $100.0 million in aggregate principal amount of fixed rate asset-backed notes that were issued in conjunction
with the 2019‑1 Securitization;
● The “2019‑1 Trust” refers to Horizon Funding Trust 2019‑1, a Delaware trust;
● “2022‑1 Securitization” refers to the $157.8 million securitization of secured loans we completed on November 9, 2022;
● "2022 Asset-Backed Notes" (collectively with the 2019 Asset-Backed Notes, the “Asset-Backed Notes”) refers to $100.00 million in aggregate
principal amount of fixed rate asset-backed notes that were issued in conjunction with the 2022-1 Securitization; and
● The “2022‑1 Trust” refers to Horizon Funding Trust 2022‑1, a Delaware trust.
Some of the statements in this annual report on Form 10‑K constitute forward-looking statements which apply to both us and our consolidated subsidiaries and
relate to future events, future performance or financial condition. The forward-looking statements involve risks and uncertainties for both us and our
consolidated subsidiaries and actual results could differ materially from those projected in the forward-looking statements for any reason, including those
factors described in “Item 1A.—Risk Factors” and elsewhere in this annual report on Form 10‑K.
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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 sustainability industries, which we refer to 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 and private equity backed companies
and publicly traded companies in our Target Industries, which we refer to as “Venture Lending.” Our debt investments are typically secured by first liens or first
liens behind a secured revolving line of credit, or collectively, “Senior Term Loans.” Some of our debt investments may also be subordinated to term debt
provided by third parties. 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 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 our investments through
borrowings subject to a 150% asset coverage agreement. 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. 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 pay 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 Funding Company LLC, or Compass Horizon, our predecessor company, commenced operations in March 2008. We are a Delaware
corporation organized 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, 2022, we funded 248 portfolio companies and
invested $2.2 billion in debt investments. As of December 31, 2022, our debt investment portfolio consisted of 60 debt investments with an aggregate fair value
of $686.5 million. As of December 31, 2022, 90.2%, or $619.5 million, of our debt investment portfolio at fair value consisted of Senior Term Loans. As of
December 31, 2022, 11.0%, or $75.7 million, of our total debt investment portfolio at fair value was held through our 2019‑1 Securitization. As of December 31,
2022, 22.0%, or $150.6 million, of our total debt investment portfolio at fair value was held through our 2022-1 Securitization. As of December 31, 2022, our net
assets were $318.4 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, 2022, our dollar-weighted annualized yield on average debt investments was 14.4%. We calculate the dollar-weighted
yield on average debt investments for any period as (1) total investment income during the period divided by (2) the average of the fair value of debt investments
outstanding on (a) the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar month during the
period. The dollar-weighted 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, 2022, our investment portfolio had an overall total yield of 13.8%. We calculate the overall total yield 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 overall total yield 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, 2022, our debt investments had a dollar-weighted average term of 48.0 months from inception and a dollar-weighted average remaining
term of 38.0 months. As of December 31, 2022, substantially all of our debt investments had an original committed principal amount of between $3 million and
$45 million, repayment terms of between 15 and 60 months and bore current pay interest at annual interest rates of between 10% and 17%.
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For the year ended December 31, 2022, our total return based on market value was (19.3)%. 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, 2022, we held warrants to purchase stock, predominantly preferred stock, in 90 portfolio companies,
equity positions in eight portfolio companies and success fee arrangements in seven portfolio companies.
Our investment activities, and our day-to-day operations, are managed by our Advisor and supervised by our board of directors, or the Board, of which a
majority of the members are independent of our Advisor. Under an investment management agreement dated March 7, 2019, 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. The Investment Management
Agreement was considered and reapproved by our Board, including a majority of our independent directors, on October 28, 2022. 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.
The SEC also maintains a website that contains reports, proxy and information statements and other information we file with the SEC at www.sec.gov.
Copies of these reports, proxy and information statements and other information may also be obtained, after paying a duplicating fee, by electronic request at
publicinfo@sec.gov.
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 six senior managers including Robert D. Pomeroy, Jr., our Chief Executive Officer, Gerald A. Michaud, our President, Daniel R.
Trolio, our Executive Vice President and Chief Financial Officer, John C. Bombara, our Executive Vice President, General Counsel and Chief Compliance
Officer, Daniel S. Devorsetz, our Executive Vice President, Chief Operating Officer and Chief Investment Officer and Diane Earle, our Senior Vice President
and Chief Credit Officer.
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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 in the borrower’s capital structure in the case of insolvency, wind down or bankruptcy. Unlike venture capital and private equity investments,
our investment returns and return of our capital do not require equity investment exits such as mergers and acquisitions or initial public offerings.
Instead, we receive returns on our debt investments primarily through regularly scheduled payments of principal and interest and, if necessary,
liquidation of the collateral supporting the debt investment upon a default. Only the potential gains from warrants depend upon equity investment exits.
● “Enterprise value” lending. We and our Advisor take an enterprise value approach to structuring and underwriting loans. Enterprise value includes the
implied valuation based upon recent equity capital invested as well as the intrinsic value of the applicable portfolio company’s particular technology,
service or customer base. We secure our position against the enterprise value of each portfolio company through a lien on all of the assets of the
portfolio company or through a lien on all assets of the portfolio company except its intellectual property, with a prohibition on any other party taking a
lien on such intellectual property.
● 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
additional returns for our investors.
● Direct origination. We originate transactions directly with technology, life science, healthcare information and services and sustainability 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, portfolio company advisors 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 Credit Facilities, through our 2026 Notes and 2027 Notes and through our
2019‑1 Securitization and 2022-1 Securitization. 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.
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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
sustainability sectors we focus on include alternative energy, power management, energy efficiency, green building materials and waste recycling. We refer to all
of these companies as “technology-related” companies because the companies are developing or offering goods and services to businesses and consumers which
utilize scientific knowledge, including techniques, skills, methods, devices and processes, to solve problems. We intend, under normal market conditions, to
invest at least 80% of the value of our total assets in such companies.
We believe that Venture Lending has the potential to achieve enhanced returns that are attractive notwithstanding the high degree of risk associated with
lending to development-stage companies. Potential benefits include:
● interest rates that typically exceed rates that would be available to portfolio companies if they could borrow in traditional commercial financing
transactions;
● the debt investment support provided by cash proceeds from equity capital invested by venture capital and private equity firms or access to public
equity markets to access capital;
● 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.
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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 $2.6 billion to more than 315 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. Most of 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 315 companies in our Target Industries under the “Horizon
Technology Finance” brand.
Competition
We compete to provide financing to development-stage companies in our Target Industries with a number of investment funds and other BDCs, as well as
traditional financial services companies such as commercial banks and other financing sources. Some of our competitors are larger and have greater financial and
other resources than we do. We believe we compete effectively with these entities primarily on the basis of the experience, industry knowledge and contacts of
our Advisor’s investment professionals, our Advisor’s responsiveness, efficient investment analysis and decision-making processes, its creative financing
products and its customized investment terms. We do not intend to compete primarily on the interest rates we offer and believe that some competitors make loans
with rates that are comparable to or lower than our rates. For additional information concerning our competitive position and competitive risks, see “Item 1A —
Risk Factors — General Risk Factors — 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. We also seek investments in public development
stage 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 continue to 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. We also invest in public companies that we believe will continue to have access to
the public markets for additional equity capital.
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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 for private companies 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. Enterprise value for public companies is the market
capitalization of such company.
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, legally protected intellectual property, superior clinical results or significant market
traction. As part of our investment analysis, we typically also consider potential realization of our private company warrants through merger, acquisition or
initial public offering based upon comparable exits in the company’s Target Industry.
Investment process
Our Board has delegated authority for all investment decisions to our Advisor. Our Advisor, in turn, has created an integrated approach to the loan
origination, underwriting, approval and documentation process that we believe effectively combines the skills of our Advisor’s professionals. This process
allows our Advisor to achieve an efficient and timely closing of an investment from the initial contact with a prospective portfolio company through the
investment decision, close of documentation and funding of the investment, while ensuring that our Advisor’s rigorous underwriting standards are consistently
maintained. We believe that the high level of involvement by our Advisor’s staff in the various phases of the investment process allows us to minimize the credit
risk while delivering superior service to our portfolio companies.
Origination. Our Advisor’s loan origination process begins with its industry-focused regional managing directors who are responsible for identifying,
contacting and screening prospects. These managing directors meet with key decision makers and deal referral sources such as venture capital and private
equity firms and management teams, legal firms, accounting firms, investment banks, portfolio company advisors 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 or the ability of the prospective portfolio company to access
public equity 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.
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A primary element of the due diligence process is interviewing key existing investors of the prospective portfolio company, who are often also members
of the prospective portfolio company’s board of directors. While these board members and/or investors are not independent sources of information, their
support for management and willingness to support the prospective portfolio company’s further development are critical elements of our decision making
process.
Investment memorandum. Upon completion of the due diligence process and review and analysis of all of the information provided by the prospective
portfolio company and obtained externally, our Advisor’s assigned credit officer prepares an investment memorandum for review and approval. The
investment memorandum is reviewed by our Advisor’s Chief Investment Officer and then submitted to our Advisor’s investment committee for approval.
Investment committee. Our Advisor’s investment committee is responsible for overall credit policy, portfolio management, approval of all investments,
portfolio monitoring and reporting and managing of problem accounts. The committee interacts with the entire staff of our Advisor to review potential
transactions and deal flow. This interaction of cross-functional members of our Advisor’s staff assures efficient transaction sourcing, negotiating and
underwriting throughout the transaction process. Portfolio performance and current market conditions are reviewed and discussed by the investment
committee on a regular basis to assure that transaction structures and terms are consistent and current.
Loan closing and funding. Approved investments are documented and closed by our Advisor’s in-house legal and loan administration staff. Loan
documentation is based upon standard templates created by our Advisor and is customized for each transaction to reflect the specific deal terms. The
transaction documents typically include a loan and security agreement, warrant agreement and applicable perfection documents, including applicable
Uniform Commercial Code financing statements and, as applicable, may also include a landlord agreement, patent and trademark security grants, a
subordination agreement, an intercreditor agreement and other standard agreements for commercial loans in the Venture Lending industry. Funding requires
final approval by our Advisor’s General Counsel, Chief Executive Officer or President, Chief Financial Officer and Chief Investment Officer or Chief Credit
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
2
1
The portfolio company has performed in excess of our expectations as demonstrated by exceeding revenue milestones, clinical milestones or other
operating metrics or as a result of raising capital well in excess of our underwriting assumptions. Generally the portfolio company displays one or
more of the following: its enterprise value greatly exceeds our loan balance; it has achieved cash flow positive operations or has sufficient cash
resources to cover the remaining balance of the loan; there is strong potential for warrant gains from our warrants; and there is a high likelihood
that the borrower will receive favorable future financing to support operations. Loans rated 4 are the lowest risk profile in our portfolio and have
no expected risk of principal loss.
The portfolio company has performed to our expectations as demonstrated by meeting revenue milestones, clinical milestones or other operating
metrics. It has raised, or is expected to raise, capital consistent with our underwriting assumptions. Generally the portfolio company displays one
or more of the following: its enterprise value comfortably exceeds our loan balance; it has sufficient cash resources to operate according to its
plan; it is expected to raise additional capital as needed; and there continues to be potential for warrant gains from our warrants. New loans are
typically rated 3 when approved and thereafter 3‑rated loans represent a standard risk profile, with no principal loss currently expected.
The portfolio company has performed below our expectations as demonstrated by missing revenue milestones, delayed clinical progress or
otherwise failing to meet projected operating metrics. It may have raised capital in support of the poorer performance but generally on less
favorable terms than originally contemplated at the time of underwriting. Generally the portfolio company displays one or more of the following:
its enterprise value exceeds our loan balance but at a lower multiple than originally expected; it has sufficient cash to operate according to its plan
but liquidity may be tight; and it is planning to raise additional capital but there is uncertainty and the potential for warrant gains from our
warrants are possible, but unlikely. Loans rated 2 represent an increased level of risk of loss of principal. While no loss is currently anticipated for
a 2‑rated loan, there is potential for future loss of principal.
The portfolio company has performed well below plan as demonstrated by materially missing revenue milestones, delayed or failed clinical
progress or otherwise failing to meet operating metrics. The portfolio company has not raised sufficient capital to operate effectively or retire its
debt obligation to us. Generally the portfolio company displays one or more of the following: its enterprise value may not exceed our loan
balance; it has insufficient cash to operate according to its plan and liquidity may be tight; and there are uncertain plans to raise additional capital
or the portfolio company is being sold under distressed conditions. There is no potential for warrant gains from our warrants. Loans rated 1 are
generally put on non-accrual status and represent a high degree of risk of loss of principal.
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.”
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Managerial assistance
As a BDC, we offer, through our Advisor, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance may
involve monitoring the operations of the portfolio companies, participating in board of directors and management meetings, consulting with and advising officers
of portfolio companies and providing other organizational and financial guidance.
Although we may receive fees for these services, pursuant to the Administration Agreement, we will reimburse our Advisor for its expenses related to
providing such services on our behalf.
Employees
We do not have any employees. Each of our executive officers is an employee of our Advisor. Our day-to-day investment operations are managed by our
Advisor. We reimburse our Advisor for our allocable portion of expenses incurred by it in performing its obligations under the Administration Agreement, as our
Administrator, including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.
Investment Management Agreement
Under the terms of the Investment Management Agreement, our Advisor:
● determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
● identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio
companies); and
● closes, monitors and administers the investments we make, including the exercise of any voting or consent rights.
Our Advisor’s services under the Investment Management Agreement are not exclusive, and it is free to furnish similar services to other entities so long as
its services to us are not impaired.
Investment advisory fees
Pursuant to our Investment Management Agreement, we pay our Advisor a fee for investment advisory and management services consisting of a base
management fee and an incentive fee.
Base management fee. The base management fee 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; 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.
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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.
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, 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.
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
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The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment
Management Agreement, as of the termination date) and equals 20.00% of our realized capital gains, if any, on a cumulative basis from the date of our election
to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis through
the end of such year, less all previous amounts paid in respect of the capital gain incentive fee.
Examples of incentive fee calculation
Example 1: Income related portion of incentive fee before total return requirement calculation for each fiscal quarter
Alternative 1
Assumptions:
Investment income (including interest, distributions, fees, etc.) = 1.25%
Hurdle rate(1) = 1.75%
Management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Net Investment Income (investment income - (management fee + other expenses)) = 0.55%
Pre-Incentive Fee Net Investment Income does not exceed hurdle rate; therefore, there is no income-related incentive fee.
Alternative 2
Assumptions:
Investment income (including interest, distributions, fees, etc.) = 2.80%
Hurdle rate(1) = 1.75%
Management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Net Investment Income (investment income - (management fee + other expenses)) = 2.10%
Incentive fee = 100.00% × Pre-Incentive Fee Net Investment Income (subject to “catch-up”)(4)
= 100.00% × (2.10% - 1.75%)
= 0.35%
Pre-Incentive Fee Net Investment Income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision; therefore, the income related portion
of the incentive fee is 0.35%.
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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.
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%)
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= 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))
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Year 3: $1.4 million capital gains incentive fee(1) ($6.4 million (20% multiplied by $32 million ($35 million cumulative realized capital gains less $3 million
unrealized capital depreciation)) less $5 million capital gains incentive fee received in Year 2
Year 4: None (no sales transaction)
Year 5: None ($5 million (20% multiplied by $25 million (cumulative realized capital gains of $35 million less realized capital losses of $10 million)) less
$6.4 million cumulative capital gains incentive fee paid in Year 2 and Year 3(2)
The hypothetical amounts of returns shown are based on a percentage of our total net assets and assume no leverage. There is no guarantee that positive
returns will be realized and actual returns may vary from those shown in this example.
(1) As illustrated in Year 3 of Alternative 1 above, if the Investment Management Agreement were terminated on a date other than our fiscal year end of
any year, we may have paid aggregate capital gains incentive fees that are more than the amount of such fees that would be payable if the Investment
Management Agreement were terminated on the fiscal year end of such year.
(2) As noted above, it is possible that the cumulative aggregate capital gains fee received by the Advisor ($6.4 million) is effectively greater than $5 million
(20.00% of cumulative aggregate realized capital gains less net realized capital losses or net unrealized depreciation ($25 million)).
Payment of our expenses
All investment professionals and staff of our Advisor, when and to the extent engaged in providing investment advisory and management services, and the
compensation and routine overhead expenses of its personnel allocable to such services, are provided and paid for by our Advisor. We bear all other costs and
expenses of our operations and transactions, including those relating to:
● our organization;
● calculating our net asset value, 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;
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● independent director fees and expenses;
● brokerage commissions;
● costs of preparing and filing reports or other documents with the SEC;
● the costs of any reports, proxy statements or other notices to our stockholders, including printing costs;
● the fidelity bond;
● directors and officers/errors and omissions liability insurance, and any other insurance premiums;
● indemnification payments;
● direct costs and expenses of administration, including audit and legal costs; and
● all other expenses incurred by us or the Administrator in connection with administering our business, such as the allocable portion of overhead under
the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and our allocable portion of the
costs of compensation and related expenses of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.
From time to time, our Advisor may pay amounts owed by us to third party providers of goods or services. We subsequently reimburse our Advisor for such
amounts paid on our behalf. Generally, our expenses are expensed as incurred in accordance with U.S. generally accepted accounting principles, or GAAP. To
the extent we incur costs that should be capitalized and amortized into expense we also do so in accordance with GAAP, which may include amortizing such
amount on a straight line basis over the life of the asset or the life of the services or product being performed or provided.
Limitation of liability and indemnification
The Investment Management Agreement provides that our Advisor and its officers, managers, partners, agents, employees, controlling persons and any
other person or entity affiliated with our Advisor are not liable to us for any act or omission by it in the supervision or management of our investment activities
or for any loss sustained by us except for acts or omissions constituting willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations
under the Investment Management Agreement. The Investment Management Agreement also provides, subject to certain conditions, for indemnification by us of
our Advisor and its officers, managers, partners, agents, employees, controlling persons and any other person or entity affiliated with our Advisor for liabilities
incurred by them in connection with their services to us (including any liabilities associated with an action or suit by or in the right of us or our stockholders), but
excluding liabilities for acts or omissions constituting willful misfeasance, bad faith or gross negligence or reckless disregard of their duties under the Investment
Management Agreement.
Board Recommendation and Approval of the Investment Management Agreement
At a special meeting of the stockholders on October 30, 2018, the stockholders, upon the recommendation of the Board, approved a new Investment
Management Agreement which became effective on March 7, 2019. The Investment Management Agreement was effective for two years from the date of
approval and now must be annually reapproved by our Board for a one-year period. The Investment Management Agreement was considered and reapproved by
our Board, including a majority of our independent directors, on October 28, 2022. When it considered recommending the approval of the Investment
Management Agreement, our Board held a meeting at which it focused on information it 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,
determined that the investment management fee rates payable pursuant to the terms of the Investment Management Agreement were reasonable in relation to the
services to be provided.
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Duration and termination
Unless terminated earlier as described below, it will continue in effect from year to year 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 Advisor and Affiliates — Our Advisor can resign on 60 days’ notice, and we may not be able
to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our business, results of operations or
financial condition.”
Administration Agreement
The Administration Agreement was considered and reapproved by our Board, including a majority of our independent directors, on October 28, 2022. 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 Principals LLC fka 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.
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We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we
may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act of 1933, as amended, or the Securities Act. We do
not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, except for registered
money market funds, we generally cannot acquire more than 3% of the voting stock of any investment company, invest more than 5% of the value of our total
assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of more than one investment
company. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might
subject our stockholders to additional expenses. None of our investment policies are fundamental and any may be changed without stockholder approval.
We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our
directors who are not interested persons and, in some cases, prior approval by the SEC. For example, under the 1940 Act, absent receipt of exemptive relief from
the SEC, we and our affiliates may be precluded from co-investing in transactions for which terms other than price are negotiated by our affiliates. As a result of
one or more of these situations, we may not be able to invest as much as we otherwise would in certain investments or may not be able to liquidate a position as
quickly. On November 27, 2017, the SEC granted us, our Advisor and certain of our affiliates an exemptive relief order permitting us to co-invest with certain
affiliated funds in negotiated investments, subject to the terms and conditions of the order.
We expect to be periodically examined by the SEC for compliance with the 1940 Act.
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement.
Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.
We and our Advisor have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws
and review these policies and procedures annually for their adequacy and the effectiveness of their implementation. We and our Advisor have designated a chief
compliance officer to be responsible for administering the policies and procedures.
Qualifying assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in section 55(a) of the 1940 Act, which are referred to as
qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of
qualifying assets relevant to our proposed business are the following:
● Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited
exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the
1940 Act as any issuer which:
● is organized under the laws of, and has its principal place of business in, the United States;
● 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;
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● is controlled by a BDC or a group of companies including a BDC, the BDC actually exercises a controlling influence over the management or
policies of the eligible portfolio company, and, as a result thereof, the BDC has an affiliated person who is a director of the eligible portfolio
company; or
● is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million.
● Securities of any eligible portfolio company which we control.
● Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in
transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its
securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
● Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we
already own 60% of the outstanding equity of the eligible portfolio company.
● Securities received in exchange for or distributed on or with respect to securities described above, or pursuant to the exercise of warrants or rights
relating to such securities.
● Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment.
The regulations defining qualifying assets may change over time. We may adjust our investment focus as needed to comply with and/or take advantage of
any regulatory, legislative, administrative or judicial actions in this area.
Managerial assistance to portfolio companies
A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments
in the types of securities described in “Qualifying assets.” However, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, the
BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies
described above) significant managerial assistance. Where the BDC purchases such securities in conjunction with one or more other persons acting together, the
BDC will satisfy this test if one of the other persons in the group makes available such managerial assistance. Making available managerial assistance means,
among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide,
significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.
Issuance of additional shares
We are not generally able to issue and sell our common stock at a price below 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 have not sought the approval of our
stockholders in the preceding 12 months but 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.
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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 — General Risk Factors — We borrow money,
which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.”
The 1940 Act also limits the amount of warrants, options and rights to common stock that we may issue and the terms of such securities.
Code of ethics
We and our Advisor have each adopted a code of ethics pursuant to Rule 17j‑1 under the 1940 Act and Rule 204A‑1 under the Investment Advisers Act of
1940, as amended, or the Advisers Act, respectively, that establishes procedures for personal investments and restricts certain personal securities transactions.
Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long
as such investments are made in accordance with the relevant code of ethics’ requirements. Each code of ethics is published on our website at
www.horizontechfinance.com. We intend to disclose any substantive amendments to, or waivers from, the codes of conduct within four business days of the
waiver or amendment through a web site posting.
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.
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Our Advisor’s proxy voting decisions are made by those senior officers who are responsible for monitoring each of our investments. To ensure that a vote is
not the product of a conflict of interest, our Advisor requires that (1) anyone involved in the decision-making process disclose to our Chief Compliance Officer
any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote and (2) employees
involved in the decision-making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any
attempted influence from interested parties.
Proxy voting records
You may obtain information about how we voted proxies by making a written request for proxy voting information to: Chief Compliance Officer, Horizon
Technology Finance Corporation, 312 Farmington Avenue, Farmington, Connecticut 06032 or by calling (860) 676‑8654.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, imposes a wide variety of regulatory requirements on publicly held companies
and their insiders. Many of these requirements affect us. For example:
● pursuant to Rule 13a‑14 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, our principal executive officer and principal
financial officer must certify the accuracy of the financial statements contained in our periodic reports;
● pursuant to Item 307 of Regulation S-K under the Securities Act, our periodic reports must disclose our conclusions about the effectiveness of our
disclosure controls and procedures;
● pursuant to Rule 13a‑15 under the Exchange Act, our management must prepare an annual report regarding its assessment of our internal control over
financial reporting; 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).
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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. For a discussion of the
risks associated with cyber incidents, see “Item 1A — Risk Factors — General Risk Factors — 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.”
Election to be taxed as a RIC
We have elected to be subject to tax, and intend to qualify annually to maintain our election to be subject to tax, as a RIC under Subchapter M of the Code.
To maintain our RIC status, we must, among other requirements, meet certain source-of-income and quarterly asset diversification requirements (as described
below). We also must distribute dividends each tax year of an amount generally at least equal to 90% of the sum of our ordinary income and our realized net
short-term capital gains (i.e., net short-term capital gains in excess of net long term losses), or investment company taxable income, if any, out of the assets
legally available for distribution, which we refer to as the “Annual Distribution Requirement.” Although not required for us to maintain our RIC tax status, in
order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we are required to distribute dividends in respect of each
calendar year of an amount generally at least equal to the sum of (1) 98% of our ordinary income (taking into account certain deferrals and elections) for the
calendar year, (2) 98.2% of the excess of our capital gains over our capital losses, or capital gain net income (adjusted for certain ordinary losses) for the one-
year period ending on October 31 of the calendar year and (3) any ordinary income or net capital gains for preceding years that was not distributed during
such years and on which we previously did not incur any U.S. federal corporate income tax, or the Excise Tax Avoidance Requirement. In addition, although we
may distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually out of the assets legally
available for such distributions, we may decide to retain such net capital gains or ordinary income to provide us with additional liquidity. In order to qualify as a
RIC, we must:
● maintain an election to be treated as a BDC under the 1940 Act at all times during each tax year;
● meet any applicable securities law requirements, including capital structure requirements;
● derive in each tax year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale
of stock or other securities, net income from certain qualified publicly traded partnerships or other income derived with respect to our business of
investing in such stock or securities, or the Qualifying Income Test; and
● diversify our holdings so that at the end of each quarter of the tax year:
● at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if
such other securities of any one issuer neither represents more than 5% of the value of our assets nor more than 10% of the outstanding voting securities
of the issuer; and
● no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer
or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades
or businesses or in certain qualified publicly traded partnerships, or the Diversification Tests.
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 fail to 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.
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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.
Summary Risk Factors
Investing in our securities involves a high degree of risk. The following is a summary of certain of the principal risks that should be carefully considered
before investing in our securities:
● Political, social and economic uncertainty, including uncertainty related to the inflation and the potential global recession, creates and exacerbates risks.
● The capital markets are currently in a period of disruption and economic uncertainty. Such market conditions have materially and adversely affected
debt and equity capital markets, which have had, and may continue to have, a negative impact on our business and operations.
● Our operation as a BDC imposes numerous constraints on us and significantly reduces our operating flexibility. In addition, if we fail to maintain our
status as a BDC, we might be regulated as a closed-end investment company, which would subject us to additional regulatory restrictions.
● We will be subject to corporate-level U.S. federal income tax on all of our income if we are unable to maintain our qualification for tax treatment as a
RIC under Subchapter M of the Code, which would have a material adverse effect on our financial performance.
● We are dependent upon management personnel of our Investment Adviser for our future success.
● Our ability to grow depends on our ability to raise additional capital.
● We borrow money, which may magnify the potential for gain or loss and may increase the risk of investing in us.
● We operate in a highly competitive market for investment opportunities.
● Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval.
● Our Investment Adviser can resign on 60 days’ notice. 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 financial condition, business and results of operations.
● Our ability to enter into transactions with our affiliates is restricted.
● We are exposed to risks associated with changes in interest rates.
● 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.”
● The lack of liquidity in our investments may adversely affect our business.
● Declines in market prices and liquidity in the corporate debt markets can result in significant net unrealized depreciation of our portfolio, which in turn
would affect our results of operations.
● Investing in our common stock involves an above average degree of risk
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Risks Related to our Adviser and Affiliates
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. If any two of the four of Mr. Pomeroy, Mr. Michaud, Mr. Trolio or Mr. Devorsetz, our
Chief Investment Officer, ceases to be actively involved with us, the NYL Noteholders could, absent a waiver or cure, redeem any outstanding obligations under
the NYL 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.
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.
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, our Advisor, subject to
Board oversight, 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 rely on 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.
We cannot predict how new tax legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business.
Legislative or other actions relating to taxes could have a negative effect on us. The rules dealing with U.S. federal income taxation are constantly under
review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. The Biden Administration has
proposed significant changes to the existing U.S. tax rules, and there are a number of proposals in Congress that would similarly modify the existing U.S. tax
rules. The likelihood of any such legislation being enacted is uncertain, but new legislation and any U.S. Treasury regulations, administrative interpretations or
court decisions interpreting such legislation could significantly and negatively affect our ability to qualify for tax treatment as a RIC or the U.S. federal income
tax consequences to us and our stockholders of such qualification, or could have other adverse consequences. Stockholders are urged to consult with their tax
advisor regarding tax legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in our common stock.
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.
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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.
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 continue to 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.
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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.
Most of our portfolio companies will need additional capital, which may not be readily available.
Our portfolio companies typically require substantial additional financing to satisfy their continuing working capital and other capital requirements and
service the interest and principal payments on our investments. We cannot predict the circumstances or market conditions under which our portfolio companies
will seek additional capital. Each round of institutional equity financing is typically intended to provide a company with only enough capital to reach the next
stage of development. It is possible that one or more of our portfolio companies will not be able to raise additional financing or may be able to do so only at a
price or on terms that are unfavorable to the portfolio company, either of which would negatively impact our investment returns. Some of these companies may
be unable to obtain sufficient financing from private investors, public capital markets or lenders, thereby requiring these companies to cease or curtail business
operations. Accordingly, investing in these types of companies generally entails a higher risk of loss than investing in companies that do not have significant
incremental capital raising requirements.
Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.
Following an initial investment in a portfolio company, we may have opportunities to make additional investments in that portfolio company as “follow-on”
investments, in seeking to:
● increase or maintain in whole or in part our position as a creditor or equity ownership percentage in a portfolio company;
● exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or
● preserve or enhance the value of our investment.
We have discretion to make follow-on investments, subject to the availability of capital resources. Failure on our part to make follow-on investments may, in
some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase
our participation in a successful portfolio company. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a
follow-on investment because we may not want to increase our level of risk, because we prefer other opportunities or because of regulatory or other
considerations. Our ability to make follow-on investments may also be limited by our Advisors’ allocation policy.
Further, follow-on investments are subject to burdensome restrictions under the 1940 Act if an affiliated fund is already invested in a portfolio company.
Such restrictions could prevent us from capitalizing on an otherwise attractive opportunity.
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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.
Our investment strategy focuses on investments in development-stage companies in our Target Industries, which are subject to many risks, including
volatility, intense competition, shortened product life cycles and periodic downturns, and would be rated below “investment grade.”
We intend to invest, under normal circumstances, most of the value of our total assets (including the amount of any borrowings for investment purposes) in
development-stage companies, which may have relatively limited operating histories, in our Target Industries. Many of these companies may have narrow
product lines and small market shares, compared to larger established, publicly owned firms, which tend to render them more vulnerable to competitors’ actions
and market conditions, as well as general economic downturns. The revenues, income (or losses) and valuations of development-stage companies in our Target
Industries can and often do fluctuate suddenly and dramatically. For these reasons, investments in our portfolio companies, if rated by one or more ratings
agency, would typically be rated below “investment grade,” which refers to securities rated by ratings agencies below the four highest rating categories. These
companies may also have more limited access to capital and higher funding costs. In addition, development-stage technology markets are generally characterized
by abrupt business cycles and intense competition, and the competitive environment can change abruptly due to rapidly evolving technology. Therefore, our
portfolio companies may face considerably more risk than companies in other industry sectors. Accordingly, these factors could impair their cash flow or result
in other events, such as bankruptcy, which could limit their ability to repay their obligations to us and may materially adversely affect the return on, or the
recovery of, our investments in these businesses.
Because of rapid technological change, the average selling prices of products and some services provided by development-stage companies in our Target
Industries have historically decreased over their productive lives. These decreases could adversely affect their operating results and cash flow, their ability to
meet obligations under their debt securities and the value of their equity securities. This could, in turn, materially adversely affect our business, financial
condition and results of operations.
Any unrealized depreciation we experience on our debt investments may be an indication of future realized losses, which could reduce our income available
for distribution.
As a BDC, we are required to carry our investments at fair value, which is the market value of our investments or, if no market value is ascertainable, at the
fair value as determined in good faith pursuant to procedures approved by our Board in accordance with our valuation policy. We are not permitted to maintain a
reserve for debt investment losses. Decreases in the fair values of our investments, which can occur rapidly based upon developments affecting our portfolio
companies, are recorded as unrealized depreciation. Any unrealized depreciation in our debt investments could be an indication of a portfolio company’s
inability to meet its repayment obligations to us with respect to the affected debt investments. This could result in realized losses in the future and ultimately
reduces our income available for distribution in future periods.
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If the assets securing the debt investments we make decrease in value, we may not have sufficient collateral to cover losses and may experience losses upon
foreclosure.
We believe our portfolio companies generally are and will be able to repay our debt investments from their available capital, from future capital-raising
transactions or from cash flow from operations. However, to mitigate our credit risks, we typically take a security interest in all or a portion of the assets of our
portfolio companies. There is a risk that the collateral securing our debt investments may decrease in value over time, may be difficult to appraise or sell in a
timely manner and may fluctuate in value based upon the business and market conditions, including as a result of an inability of the portfolio company to raise
additional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration of a portfolio company’s
financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration of the value of the collateral for the debt
investment. Consequently, although such debt investment is secured, we may not receive principal and interest payments according to the debt investment’s
terms and the value of the collateral may not be sufficient to recover our investment should we be forced to enforce our remedies.
In addition, because we invest in development-stage companies in our Target Industries, a substantial portion of the assets securing our investment may be
in the form of intellectual property, if any, inventory, equipment, cash and accounts receivables. Intellectual property, if any, which secures a debt investment
could lose value if the company’s rights to the intellectual property are challenged or if the company’s license to the intellectual property is revoked or expires.
In addition, in lieu of a security interest in a portfolio company’s intellectual property we may sometimes obtain a security interest in all assets of the portfolio
company other than intellectual property and also obtain a commitment by the portfolio company not to grant liens to any other creditor on the company’s
intellectual property. In these cases, we may have additional difficulty recovering our principal in the event of a foreclosure. Similarly, any equipment securing
our debt investments may not provide us with the anticipated security if there are changes in technology or advances in new equipment that render the particular
equipment obsolete or of limited value or if the company fails to adequately maintain or repair the equipment. Any one or more of the preceding factors could
materially impair our ability to recover principal in a foreclosure, which may adversely affect our ability to pay distributions in the future.
We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of our
investment in these companies.
We structure the debt investments in our portfolio companies to include business and financial covenants placing affirmative and negative obligations on the
operation of such companies’ business and financial condition. However, from time to time we may elect to waive breaches of these covenants, including our
right to payment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure on collateral, depending upon the financial
condition and prospects of the particular portfolio company. These actions may reduce the likelihood of our receiving the full amount of future payments of
interest or principal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may have limited financial
resources, may be unable to meet future obligations and may go bankrupt. These events could harm our financial condition and operating results.
The lack of liquidity in our investments may adversely affect our business, and if we need to sell any of our investments, we may not be able to do so at a
favorable price. As a result, we may suffer losses.
We plan to generally invest in debt investments with terms of up to four years and hold such investments until maturity, unless earlier prepaid, and we do not
expect that our related holdings of equity securities will provide us with liquidity opportunities in the near-term. We expect to primarily invest in companies
whose securities are not publicly-traded, and whose securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded
securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. We may also face other restrictions on our
ability to liquidate an investment in a public portfolio company to the extent that we possess material non-public information regarding the portfolio company. In
addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously
recorded these investments. As a result, we do not expect to dispose of our investments in the near term. However, we may be required to do so in order to
maintain our qualification as a BDC and as a RIC if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks. Because
most of our investments are illiquid, we may be unable to dispose of them, in which case we could fail to qualify as a RIC and/or BDC, or we may not be able to
dispose of them at favorable prices, and as a result, we may suffer losses.
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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.
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.
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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.
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.
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.
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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.
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.
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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.
Our investments in the sustainability industry are subject to many risks, including volatility, intense competition, unproven technologies, periodic downturns
and potential litigation.
Our investments in sustainability 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 sustainability 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
sustainability companies can and often do fluctuate suddenly and dramatically and the markets in which sustainability companies operate are generally
characterized by abrupt business cycles and intense competition. Demand for sustainability 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.
Sustainability 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 sustainability portfolio companies.
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Sustainability 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 sustainability 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 sustainability companies. Without such regulatory policies,
investments in sustainability companies may not be economical and financing for sustainability 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.
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.
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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.
Generally, 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.
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.
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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.
Federal Income Tax Risks
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.
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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.”
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.
Because we intend to distribute substantially all of our income to our stockholders to maintain our ability to be subject to tax as a RIC, we will need to raise
additional capital to finance our growth. If funds are not available to us, we may need to curtail new investments, and our common stock value could
decline.
In order to satisfy the requirements to be treated as a RIC for federal income tax purposes, we intend to distribute to our stockholders substantially all of our
investment company taxable income and net capital gains each taxable year. However, we may retain all or a portion of our net capital gains and pay applicable
income taxes with respect thereto and elect to treat such retained net capital gains as deemed dividend distributions to our stockholders.
As a BDC, we are required to meet a 150% asset coverage ratio, subject to certain disclosure requirements of total assets to total senior securities, which
includes all of our borrowings, and any preferred stock we may issue in the future. This requirement limits the amount we may borrow. If the value of our assets
declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments or sell additional common stock and,
depending on the nature of our leverage, to repay a portion of our indebtedness at a time when such sales and repayments may be disadvantageous. In addition,
the issuance of additional securities could dilute the percentage ownership of our current stockholders in 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.
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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, 2022, 2021 and 2020 was 11.2%, 9.4% and 10.4%, 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.”
Risks Related to Business Development Companies
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.
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.
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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.
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. 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. On May 24, 2018, the
Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law, 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 January 30, 2020, the Federal Reserve Board released proposed
changes to the Volcker Rule that would loosen compliance requirements for all banks. The effect of these 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.
Over the last several years, there also has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector,
raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. While it cannot be known at this time whether any
regulation will be implemented or what form it will take, increased regulation of non-bank credit extension 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.
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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Risks Related to our Securities
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.
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, 2022 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, 2022(1)
Corresponding return to common stockholder assuming 150% asset
coverage(2)
(32.50)%
(20.44)%
(8.38)%
3.68%
15.74%
(42.45)%
(27.29)%
(12.14)%
3.02%
18.18%
Assumed Return on Portfolio
(Net of Expenses)
-10%
-5%
0%
5%
10%
(1) Assumes $767 million in total assets, $439 million in outstanding debt, $318 million in net assets, and an average cost of borrowed funds of 6.07% at
December 31, 2022.
(2) Assumes $964 million in total assets, $636 million in outstanding debt, $318 million in net assets, and an average cost of borrowed funds of 6.07% at
December 31, 2022.
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Based on our outstanding indebtedness of $439 million as of December 31, 2022 and the average cost of borrowed funds of 6.07% as of that date, our
investment portfolio would have needed to experience an annual return of at least 3.77% to cover annual interest payments on the outstanding debt. Actual
interest payments may be different.
Based on an outstanding indebtedness of $636 million on an assumed 150% asset coverage ratio and an average cost of borrowed funds of 6.07%, our
investment portfolio would need to experience an annual return of at least 5.46% 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 our Credit Facilities or make payments when due thereunder, our business could be
materially adversely affected.
Our Credit Facilities are secured by a lien on the assets of our wholly owned subsidiaries, Credit II and HFI. The breach of certain of the covenants or
restrictions or our failure to make payments when due under the Credit Facilities, unless cured within the applicable grace period, would result in a default under
the Credit Facilities 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, HFI 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 Credit Facilities. 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 Credit Facilities 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 Credit Facilities, if for any reason we are unable
to comply with the terms of the Credit Facilities and we may not be able to refinance the Credit Facilities 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, NYL Facility, 2026 Notes, 2027 Notes, or the Asset-
Backed Notes, in order to obtain funds which may be made available for investments. We may borrow under the Key Facility until June 22, 2024. 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 June 22, 2026, unless such date is extended in accordance with the terms of the Key Facility. We may borrow under the NYL
Facility until June 5, 2023. After such date, we must repay the outstanding advances under the NYL Facility in accordance with its terms and conditions. All
outstanding advances under the NYL Facility are due and payable on June 15, 2028, unless such date is extended in accordance with the terms of the NYL
Facility. All outstanding amounts on our 2026 Notes are due and payable on March 30, 2026 unless redeemed prior to that date. All outstanding amounts on our
2027 Notes are due and payable on June 15, 2027. The 2019 Asset-Backed Notes have a stated maturity of September 15, 2027. The 2022 Asset-Backed Notes
have a stated maturity of November 15, 2030. If we are unable to increase, renew or replace the Credit Facilities 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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We are subject to certain risks as a result of our interests in connection with the 2019‑1 Securitization and 2022-1 Securitization and our equity interest in
the 2019‑1 Trust and 2022-1 Trust.
On August 13, 2019, in connection with the 2019‑1 Securitization and the offering of the 2019 Asset-Backed Notes by the 2019‑1 Trust, we sold and/or
contributed to Horizon Funding 2019‑1, LLC or the 2019 Trust Depositor, certain loans, or the 2019 Trust Loans, which the 2019 Trust Depositor in turn sold
and/or contributed to the 2019‑1 Trust in exchange for 100% of the equity interest in the 2019‑1 Trust, cash proceeds and other consideration. Following these
transfers, the 2019‑1 Trust, and not the 2019 Trust Depositor or us, holds all of the ownership interest in the 2019 Trust Loans.
As a result of the 2019‑1 Securitization, we hold, indirectly through the 2019 Trust Depositor, 100% of the equity interest of the 2019‑1 Trust. As a result,
we consolidate the financial statements of the 2019 Trust Depositor and the 2019‑1 Trust, as well as our other subsidiaries, in our consolidated financial
statements. Because each of the 2019 Trust Depositor and the 2019‑1 Trust is disregarded as an entity separate from its owner for U.S. federal income tax
purposes, the sale or contribution by us to the 2019 Trust Depositor, and by the 2019 Trust Depositor to the 2019‑1 Trust, did not constitute a taxable event for
U.S. federal income tax purposes. If the U.S. Internal Revenue Service were to take a contrary position, there could be a material adverse effect on our business,
financial condition, results of operations or cash flows. Further, a failure of the 2019‑1 Trust to be treated as a disregarded entity for U.S. federal income tax
purposes would constitute an event of default pursuant to the indenture under the 2019‑1 Securitization, upon which the trustee under the 2019‑1 Securitization,
or the Trustee, may, and will at the direction of a supermajority of the holders of the 2019 Asset-Backed Notes (collectively, the “Noteholders”), declare the 2019
Asset-Backed Notes to be immediately due and payable and exercise remedies under the indenture, including (i) institute proceedings for the collection of all
amounts then payable on the 2019 Asset-Backed Notes or under the indenture, enforce any judgment obtained, and collect from the 2019‑1 Trust and any other
obligor upon the 2019 Asset-Backed Notes monies adjudged due; (ii) institute proceedings from time to time for the complete or partial foreclosure of the
indenture with respect to the property of the 2019‑1 Trust; (iii) exercise any remedies as a secured party under the relevant provisions of the applicable
jurisdiction’s UCC and take other appropriate action under applicable law to protect and enforce the rights and remedies of the Trustee and the Noteholders; or
(iv) sell the property of the 2019‑1 Trust or any portion thereof or rights or interest therein at one or more public or private sales called and conducted in any
matter permitted by law. Any such exercise of remedies could have a material adverse effect on our business, financial condition, results of operations or cash
flows.
On November 8, 2022, in connection with the 2022‑1 Securitization and the offering of the 2022 Asset-Backed Notes by the 2022‑1 Trust, we sold and/or
contributed to Horizon Funding 2022‑1, LLC or the 2022 Trust Depositor, certain loans, or the 2022 Trust Loans, which the 2022 Trust Depositor in turn sold
and/or contributed to the 2022‑1 Trust in exchange for 100% of the equity interest in the 2022‑1 Trust, cash proceeds and other consideration. Following these
transfers, the 2022‑1 Trust, and not the 2022 Trust Depositor or us, holds all of the ownership interest in the 2022 Trust Loans.
As a result of the 2022‑1 Securitization, we hold, indirectly through the 2022 Trust Depositor, 100% of the equity interest of the 2022‑1 Trust. As a result,
we consolidate the financial statements of the 2022 Trust Depositor and the 2022‑1 Trust, as well as our other subsidiaries, in our consolidated financial
statements. Because each of the 2022 Trust Depositor and the 2022‑1 Trust is disregarded as an entity separate from its owner for U.S. federal income tax
purposes, the sale or contribution by us to the 2022 Trust Depositor, and by the 2022 Trust Depositor to the 2022‑1 Trust, did not constitute a taxable event for
U.S. federal income tax purposes. If the U.S. Internal Revenue Service were to take a contrary position, there could be a material adverse effect on our business,
financial condition, results of operations or cash flows. Further, a failure of the 2022‑1 Trust to be treated as a disregarded entity for U.S. federal income tax
purposes would constitute an event of default pursuant to the indenture under the 2022‑1 Securitization, upon which the trustee under the 2022‑1 Securitization,
or the Trustee, may, and will at the direction of a supermajority of the holders of the 2022 Asset-Backed Notes (collectively, the “Noteholders”), declare the
2022 Asset-Backed Notes to be immediately due and payable and exercise remedies under the indenture, including (i) institute proceedings for the collection of
all amounts then payable on the 2022 Asset-Backed Notes or under the indenture, enforce any judgment obtained, and collect from the 2022‑1 Trust and any
other obligor upon the 2022 Asset-Backed Notes monies adjudged due; (ii) institute proceedings from time to time for the complete or partial foreclosure of the
indenture with respect to the property of the 2022‑1 Trust; (iii) exercise any remedies as a secured party under the relevant provisions of the applicable
jurisdiction’s UCC and take other appropriate action under applicable law to protect and enforce the rights and remedies of the Trustee and the Noteholders; or
(iv) sell the property of the 2022‑1 Trust or any portion thereof or rights or interest therein at one or more public or private sales called and conducted in any
matter permitted by law. Any such exercise of remedies could have a material adverse effect on our business, financial condition, results of operations or cash
flows.
An event of default in connection with the 2019‑1 Securitization or 2022-1 Securitization could give rise to a cross-default under our other material
indebtedness.
The documents governing our other material indebtedness contain customary cross-default provisions that could be triggered if an event of default occurs in
connection with the 2019‑1 Securitization or the 2022-1 Securitization. An event of default with respect to our other indebtedness could lead to the acceleration
of such indebtedness and the exercise of other remedies as provided in the documents governing such other indebtedness. This could have a material adverse
effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our
status as a RIC.
We may not receive cash distributions in respect of our indirect ownership interest in the 2019‑1 Trust and 2022-1 Trust.
Apart from fees payable to us in connection with our role as servicer of the 2019 Trust Loans and 2022 Trust Loans and the reimbursement of related
amounts under the 2019‑1 Securitization and 2022-1 Securitization documents, we receive cash in connection with the 2019‑1 Securitization and the 2022-1
Securitization only to the extent that the 2019 Trust Depositor and the 2022 Trust Depositor receive payments in respect of its equity interest in the 2019‑1 Trust
and the 2022-1 Trust. The holders of the equity interest in the 2019‑1 Trust and the 2022-1 Trust, respectively, are the residual claimant on distributions, if any,
made by the 2019‑1 Trust and the 2022-1 Trust after the Noteholders and other claimants have been paid in full on each payment date or upon maturity of the
2019 Asset-Backed Notes or the 2022 Asset-Backed Notes, subject to the priority of payment provisions under the 2019‑1 Securitization and the 2022-1
Securitization documents. To the extent that the value of the 2019‑1 Trust’s portfolio of 2019 Trust Loans or the 2022-1 Trust's portfolio of 2022 Trust Loans is
reduced as a result of conditions in the credit markets (relevant in the event of a liquidation event), other macroeconomic factors, distressed or defaulted 2019
Trust Loans and 2022 Trust Loans or the failure of individual portfolio companies to otherwise meet their obligations in respect of the 2019 Trust Loans or the
2022 Trust Loans, or for any other reason, the ability of the 2019‑1 Trust or the 2022-1 Trust to make cash distributions in respect of the 2019 Trust Depositor’s
equity interest or the 2022 Trust Depositor's equity interest would be negatively affected and, consequently, the value of the equity interest in the 2019‑1 Trust or
the 2022-1 Trust would also be reduced. In the event that we fail to receive cash indirectly from the 2019‑1 Trust or the 2022-1 Trust, we could be unable to
make distributions in amounts sufficient to maintain our status as a RIC or at all.
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The interests of the Noteholders may not be aligned with our interests.
The 2019 Asset-Backed Notes and 2022 Asset-Backed Notes are debt obligations ranking senior in right of payment to the rights of the holder of the equity
interest in the 2019‑1 Trust (currently the 2019 Trust Depositor, our wholly owned subsidiary) and the 2022-1 Trust (currently the 2022 Trust Depositor, out
wholly owned subsidiary), as residual claimant in respect of distributions, if any, made by the 2019‑1 Trust and the 2022-1 Trust, respectively. As such, there are
circumstances in which the interests of the Noteholders may not be aligned with the interests of the holder of the equity interests in the 2019‑1 Trust or the 2022-
1 Trust. For example, under the terms of the documents governing the 2019‑1 Securitization and the 2022-1 Securitization, the Noteholders have the right to
receive payments of principal and interest prior to the holder of the equity interest in the 2019‑1 Trust or the 2022-1 Trust.
For as long as the 2019 Asset-Backed Notes or the 2022 Asset-Backed Notes remain outstanding, the Noteholders have the right to act in certain
circumstances with respect to the Trust Loans in ways that may benefit their interests but not the interests of holder of the equity interest in the 2019‑1 Trust or
the 2022-1 Trust, including by exercising remedies under the documents governing the 2019‑1 Securitization and the 2022-1 Securitization.
If an event of default occurs, the Noteholders will be entitled to determine the remedies to be exercised, subject to the terms of the documents governing the
2019‑1 Securitization and the 2022-1 Securitization. For example, upon the occurrence of an event of default with respect to the 2019 Asset-Backed Notes or the
2022 Asset-Backed Notes, the Trustee may, and will at the direction of the holders of a supermajority of the 2019 Asset-Backed Notes or the 2022 Asset-Backed
Notes, declare the principal, together with any accrued interest, of the 2019 Asset-Backed Note or the 2022 Asset-Backed Note to be immediately due and
payable. This would have the effect of accelerating the principal on such 2019 Asset-Backed Note or the 2022 Asset-Backed Notes, triggering a repayment
obligation on the part of the 2019‑1 Trust or the 2022-1 Trust. The 2019 Asset-Backed Notes or the 2022 Asset-Backed Notes then outstanding will be paid in
full before any further payment or distribution is made to the holder of the equity interest in 2019‑1 Trust or the 2022-1 Trust. There can be no assurance that
there will be sufficient funds through collections on the 2019 Trust Loans or the 2022 Trust Loans or through the proceeds of the sale of the 2019 Trust Loans or
the 2022 Trust Loans in the event of a bankruptcy or insolvency to repay in full the obligations under the 2019 Asset-Backed Notes or the 2022 Asset-Backed
Notes, or to make any distribution payment to holder of the equity interest in the 2019‑1 Trust or the 2022-1 Trust.
Remedies pursued by the Noteholders could be adverse to our interests as the indirect holder of the equity interest in the 2019‑1 Trust or the 2022-1 Trust.
The Noteholders have no obligation to consider any possible adverse effect on such other interests. Thus, there can be no assurance that any remedies pursued by
the Noteholders will be consistent with the best interests of the 2019 Trust Depositor or the 2022 Trust Depositor or that we will receive, indirectly through the
2019 Trust Depositor or the 2022 Trust Depositor, any payments or distributions upon an acceleration of the 2019 Asset-Backed Notes or the 2022 Asset-Backed
Notes. Any failure of the 2019‑1 Trust or the 2022-1 Trust to make distributions in respect of the equity interest that we indirectly hold through the 2019 Trust
Depositor or the 2022 Trust Depositor, whether as a result of an event of default and the acceleration of payments on the 2019 Asset-Backed Notes or the 2022
Asset-Backed Notes or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result
in our inability to make distributions sufficient to maintain our status as a RIC.
Certain events related to the performance of 2019 Trust Loans or 2022 Trust Loans could lead to the acceleration of principal payments on the 2019 Asset-
Backed Notes or 2022 Asset-Backed Notes.
The following constitute rapid amortization events, or Rapid Amortization Events, under the documents governing the 2019-1 Securitization: (i) the
aggregate outstanding principal balance of all delinquent 2019 Trust Loans exceeds twenty percent (20%) of the aggregate outstanding principal balance of the
2019 Trust Loans; (ii) the aggregate outstanding principal balance of defaulted 2019 Trust Loans plus the aggregate outstanding principal balance of all
liquidated 2019 Trust Loans exceeds fifteen percent (15%) of the aggregate outstanding principal balance of the 2019 Trust Loans; (iii) the aggregate outstanding
principal balance of the 2019 Asset-Backed Notes exceeds the borrowing base (which is a percentage of the outstanding principal balance of the 2019 Trust
Loans less delinquent 2019 Trust Loans and 2019 Trust Loans to issuers that exceed given thresholds) for a period of sixty consecutive days; (iv) the 2019‑1
Trust’s pool of 2019 Trust Loans contains 2019 Trust Loans to nine or fewer obligors during the amortization period; (v) the occurrence of an event of default
under the documents governing the 2019‑1 Securitization; (vi) the downgrade of the rating of the 2019 Asset-Backed Notes by the rating agency to below “BB”;
and the downgrade of the rating of the 2019 Asset-Backed Notes by the rating agency to below investment-grade and failure to cure such downgrade within
180 days of such downgrade. After a Rapid Amortization Event has occurred, subject to the priority of payment provisions under the documents governing the
2019‑1 Securitization, principal collections on the 2019 Trust Loans will be used to make accelerated payments of principal on the 2019 Asset-Backed
Notes until the payment of principal balance of the 2019 Asset-Backed Notes is reduced to zero. Such an event could delay, reduce or eliminate the ability of the
2019‑1 Trust to make payments or distributions in respect of the equity interest that we indirectly hold, which could have a material adverse effect on our
business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our status as a RIC.
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The following constitute rapid amortization events, or Rapid Amortization Events, under the documents governing the 2022-1 Securitization: (i) the
aggregate outstanding principal balance of all delinquent 2022 Trust Loans exceeds twenty percent (20%) of the aggregate outstanding principal balance of the
2022 Trust Loans; (ii) the aggregate outstanding principal balance of defaulted 2022 Trust Loans plus the aggregate outstanding principal balance of all
liquidated 2022 Trust Loans exceeds fifteen percent (15%) of the aggregate outstanding principal balance of the 2022 Trust Loans; (iii) the aggregate outstanding
principal balance of the 2022 Asset-Backed Notes exceeds the borrowing base (which is a percentage of the outstanding principal balance of the 2022 Trust
Loans less delinquent 2022 Trust Loans and 2022 Trust Loans to issuers that exceed given thresholds) for a period of sixty consecutive days; (iv) the 2022‑1
Trust’s pool of 2022 Trust Loans contains 2022 Trust Loans to nine or fewer obligors during the amortization period; or (v) the occurrence of an event of default
under the documents governing the 2022‑1 Securitization. After a Rapid Amortization Event has occurred, subject to the priority of payment provisions under
the documents governing the 2022‑1 Securitization, principal collections on the 2022 Trust Loans will be used to make accelerated payments of principal on the
2022 Asset-Backed Notes until the payment of principal balance of the 2022 Asset-Backed Notes is reduced to zero. Such an event could delay, reduce or
eliminate the ability of the 2022‑1 Trust to make payments or distributions in respect of the equity interest that we indirectly hold, which could have a material
adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to
maintain our status as a RIC.
We have certain repurchase obligations with respect to the 2019 Trust Loans and the 2022 Trust Loans transferred in connection with the 2019‑1
Securitization and the 2022-1 Securitization.
As part of the 2019‑1 Securitization, we entered into a sale and contribution agreement and a sale and servicing agreement under which we would be
required to repurchase any 2019 Trust Loan (or participation interest therein) which was sold to the 2019‑1 Trust in breach of certain customary representations
and warranties made by us or by the 2019 Trust Depositor with respect to such 2019 Trust Loan or the legal structure of the 2019‑1 Securitization. To the extent
that there is such a breach of such representations and warranties and we fail to satisfy any such repurchase obligation, the Trustee may, on behalf of the 2019‑1
Trust, bring an action against us to enforce these repurchase obligations.
As part of the 2022‑1 Securitization, we entered into a sale and contribution agreement and a sale and servicing agreement under which we would be
required to repurchase any 2022 Trust Loan (or participation interest therein) which was sold to the 2022‑1 Trust in breach of certain customary representations
and warranties made by us or by the 2022 Trust Depositor with respect to such 2022 Trust Loan or the legal structure of the 2022‑1 Securitization. To the extent
that there is such a breach of such representations and warranties and we fail to satisfy any such repurchase obligation, the Trustee may, on behalf of the 2022‑1
Trust, bring an action against us to enforce these repurchase obligations.
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:
● actual or anticipated changes in our earnings or fluctuations in our operating results;
● changes in the value of our portfolio of investments;
● price and volume fluctuations in the overall stock market or in the market for BDCs from time to time;
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● investor demand for our shares of common stock;
● significant volatility in the market price and trading volume of securities of registered closed-end management investment companies, BDCs or other
financial services companies;
● our inability to raise capital, borrow money or deploy or invest our capital;
● fluctuations in interest rates;
● any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
● operating performance of companies comparable to us;
● changes in regulatory policies or tax guidelines with respect to RICs or BDCs;
● losing RIC status;
● general economic conditions, trends and other external factors;
● departures of key personnel; or
● loss of a major source of funding.
We and our Advisor could be the target of litigation.
We or our Advisor could become the target of securities class action litigation or other similar claims if our stock price fluctuates significantly or for other
reasons. The outcome of any such proceedings could materially adversely affect our business, financial condition and/or operating results and could continue
without resolution for long periods of time. Any litigation or other similar claims could consume substantial amounts of our management’s time and attention,
and that time and attention and the devotion of associated resources could, at times, be disproportionate to the amounts at stake. Litigation and other claims are
subject to inherent uncertainties, and a material adverse impact on our financial statements could occur for the period in which the effect of an unfavorable final
outcome in litigation or other similar claims becomes probable and reasonably estimable. In addition, we could incur expenses associated with defending
ourselves against litigation and other similar claims, and these expenses could be material to our earnings in future periods.
Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their NAV, which is separate and distinct from the risk that
our NAV per share may decline.
We cannot predict the price at which our common stock will trade. Shares of closed-end investment companies, including BDCs, frequently trade at a
discount to their NAV and our stock may also be discounted in the market. This characteristic of closed-end investment companies is separate and distinct from
the risk that our NAV per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our NAV. In addition, if our
common stock trades below its NAV, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining the
approval of our stockholders and our independent directors.
Investing in shares of our common stock may involve an above average degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk, volatility or loss of principal than alternative
investment options. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may
not be suitable for investors with lower risk tolerance.
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Anti-takeover provisions in our charter documents and other agreements and certain provisions of the Delaware General Corporation Law, or DGCL, could
deter takeover attempts and have an adverse impact on the price of our common stock.
The DGCL, our certificate of incorporation and our bylaws contain provisions that may have the effect of discouraging a third party from making an
acquisition proposal for us. Among other things, our certificate of incorporation and bylaws:
● provide for a classified board of directors, which may delay the ability of our stockholders to change the membership of a majority of our Board;
● authorize the issuance of “blank check” preferred stock that could be issued by our Board to thwart a takeover attempt;
● do not provide for cumulative voting;
● provide that vacancies on the Board, including newly created directorships, may be filled only by a majority vote of directors then in office;
● limit the calling of special meetings of stockholders;
● provide that our directors may be removed only for cause;
● require supermajority voting to effect certain amendments to our certificate of incorporation and our bylaws; and
● require stockholders to provide advance notice of new business proposals and director nominations under specific procedures.
These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a
premium over the market price of our common stock. It is a default under our Credit Facilities 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 and/or the NYL Noteholders could accelerate our repayment obligations under, and/or terminate, the related Credit 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.
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.
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Investors in offerings of our common stock may incur immediate dilution upon the closing of an offering.
If the public offering price for any offering of shares of our common stock is higher than the book value per share of our outstanding common stock,
investors purchasing shares of common stock in any offering will pay a price per share that exceeds the tangible book value per share after such offering.
If we sell common stock at a discount to our NAV per share, stockholders who do not participate in such sale will experience immediate dilution in an
amount that may be material.
The issuance or sale by us of shares of our common stock at a discount to NAV poses a risk of dilution to our current stockholders. In particular,
stockholders who do not purchase additional shares at or below the discounted price in proportion to their current ownership will experience an immediate
decrease in NAV per share (as well as in the aggregate NAV of their shares if they do not participate at all). These stockholders will also experience a
disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we experience in our assets, potential
earning power and voting interests from such issuance or sale. In addition, such sales may adversely affect the price at which our common stock trades.
Stockholders experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan.
All distributions payable to stockholders that are participants in our dividend reinvestment plan, or DRIP, are automatically reinvested in shares of our
common stock. As a result, stockholders that do not participate in the DRIP will experience dilution in their ownership interest over time.
Stockholders may receive shares of our common stock as dividends, which could result in adverse tax consequences to them.
In order to satisfy the Annual Distribution Requirement, we have the ability to declare a large portion of a dividend in shares of our common stock instead of
in cash. As long as a portion of such dividend is paid in cash (which portion may be as low as 20% of such dividend) and certain requirements are met, the entire
distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, a stockholder generally would be subject to tax on 100% of the fair
market value of the dividend on the date the dividend is received by the stockholder in the same manner as a cash dividend, even though most of the dividend
was paid in shares of our common stock. We currently do not intend to pay dividends in shares of our common stock.
The trading market or market value of our publicly issued Debt Securities that we may issue may fluctuate.
Upon issuance, any publicly issued debt securities that we may issue will not have an established trading market. We cannot assure you that a trading market
for our publicly issued Debt Securities will ever develop or, if developed, will be maintained. In addition to our creditworthiness, many factors may materially
adversely affect the trading market for, and market value of, our publicly issued Debt Securities. These factors include:
● the time remaining to the maturity of these Debt Securities;
● the outstanding principal amount of debt securities with terms identical to 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;
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● 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.
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.
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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.
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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.
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 Credit Facilities, the 2019‑1 Securitization or the 2022-1
Securitization, 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 lenders under the Credit Facilities, the 2019‑1 Securitization or the 2022-1 Securitization 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 lenders under theCredit Facilities, the
2019‑1 Securitization or the 2022-1 Securitization or other debt that we may incur in the future to avoid being in default. If we breach our covenants under the
Credit Facilities, the 2019‑1 Securitization or the 2022-1 Securitization 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 lenders under the Credit Facilities, the 2019‑1
Securitization or the 2022-1 Securitization, could proceed against the collateral securing the debt. Because the Credit Facilities, the 2019‑1 Securitization or the
2022-1 Securitization have, 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.
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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, 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. Holders of our Debt Securities should consult their own tax advisors regarding FATCA and how it may affect their investment in our
Debt Securities.
General Risk Factors
General economic conditions could adversely affect the performance of our investments.
We and our portfolio companies are susceptible to the effects of economic slowdowns or recessions. The global growth cycle is in a mature phase and signs
of slowdown are evident in certain regions around the world, although most economists continue to expect moderate economic growth in the near term, with
limited signals of an imminent recession in the U.S. as consumer and government spending remain healthy. Although the broader outlook remains constructive,
geopolitical instability continues to pose risk. In particular, the current U.S. political environment and the resulting uncertainties regarding actual and potential
shifts in U.S. foreign investment, trade, taxation, economic, environmental and other policies under the current Administration, as well as the impact of
geopolitical tension, such as a deterioration in the bilateral relationship between the U.S. and China or the conflict between Russia and Ukraine, could lead to
disruption, instability and volatility in the global markets. Unfavorable economic conditions would be expected to increase our funding costs, limit our access to
the capital markets or result in a decision by lenders not to extend credit to us. These events may limit our investment originations, and limit our ability to grow
and could have a material negative impact on our operating results, financial condition, results of operations and cash flows and the fair values of our debt and
equity investments. In addition, the outbreak of COVID-19 in many countries, along with more recent COVID-19 variants, has disrupted global travel and
supply chains, and has adversely impacted global commercial activity and a number of industries, such as transportation, hospitality and entertainment. The rapid
development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19, or any future pandemics that may arise,
which may have a continued adverse impact on economic and market conditions.
Certain of our portfolio companies may be affected by global conflict. In particular, on February 24, 2022, Russian troops began a full-scale invasion of
Ukraine and, as of the date hereof, the countries remain in active armed conflict. Around the same time, the U.S., the U.K., the E.U., and several other nations
announced a broad array of new or expanded sanctions, export controls, and other measures against Russia, Russian-backed separatist regions in Ukraine, and
certain banks, companies, government officials, and other individuals in Russia and Belarus, as well as a number of Russian Oligarchs. The U.S. or other
countries could also institute broader sanctions on Russia and others supporting Russia’s economy or military efforts. The ongoing conflict and the rapidly
evolving measures in response could be expected to have a negative impact on the economy and business activity globally, and therefore could adversely affect
the performance of the Company’s portfolio companies. The severity and duration of the conflict and its impact on global economic and market conditions are
impossible to predict, and as a result, could present material uncertainty and risk with respect to the Company and its portfolio companies and operations, and the
ability of the Company to achieve its investment objectives. Similar risks will exist to the extent that any portfolio companies, service providers, vendors or
certain other parties have material operations or assets in Russia, Ukraine, Belarus, or the immediate surrounding areas. Sanctions could also result in Russia
taking counter measures or retaliatory actions which could adversely impact our business or the business of our portfolio companies, including, but not limited
to, cyberattacks targeting private companies, individuals or other infrastructure upon which our business and the business of our portfolio companies rely.
Any deterioration of general economic conditions may lead to significant declines in corporate earnings or loan performance, and the ability of corporate
borrowers to service their debt, any of which could trigger a period of global economic slowdown, and have an adverse impact on the performance and financial
results of the Company, and the value and the liquidity of the shares. In an economic downturn, we may have non-performing assets or non-performing assets
may increase, and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions may also decrease the value of any collateral
securing our loan investments. A severe recession may further decrease the value of such collateral and result in losses of value in our portfolio and a decrease in
our revenues, net income, assets and net worth. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or
result in a decision by lenders not to extend credit to us on favorable terms or at all. These events could prevent us from increasing investments and harm our
operating results.
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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.
Price declines in the U.S. corporate debt market may adversely affect the fair value of our portfolio, reducing our NAV through increased net unrealized
depreciation.
Conditions in the U.S. corporate debt market may deteriorate, as seen during the recent financial crisis, which may cause pricing levels to similarly decline or
be volatile. During the financial crisis, many institutions were forced to raise cash by selling their interests in performing assets in order to satisfy margin
requirements or the equivalent of margin requirements imposed by their lenders and/or, in the case of hedge funds and other investment vehicles, to satisfy
widespread redemption requests. This resulted in a forced deleveraging cycle of price declines, compulsory sales, and further price declines, with falling
underlying credit values, and other constraints resulting from the credit crisis generating further selling pressure. If similar events occurred in the medium-
and large-sized U.S. corporate debt market, our NAV could decline through an increase in unrealized depreciation and incurrence of realized losses in connection
with the sale of our investments, which could have a material adverse impact on our business, financial condition and results of operations.
The capital markets are currently in a period of disruption and economic uncertainty. Such market conditions have materially and adversely affected debt
and equity capital markets, which have had, and may continue to have, a negative impact on our business and operations.
The U.S. capital markets have experienced extreme disruption since the global outbreak of COVID-19. Such disruptions have been evidenced by volatility
in global stock markets as a result of, among other things, uncertainty regarding the COVID-19 pandemic and the fluctuating price of commodities such as oil.
Despite actions of the U.S. federal government and foreign governments, these events have contributed to worsening general economic conditions that are
materially and adversely impacting broader financial and credit markets and reducing the availability of debt and equity capital for the market as a whole. These
conditions could continue for a prolonged period of time or worsen in the future.
Significant changes or volatility in the capital markets may negatively affect the valuations of our investments. While most of our investments are not
publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to
market participants (even if we plan to hold an investment to maturity). Our valuations, and particularly valuations of private investments and private companies,
are inherently uncertain, fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information
that may not reflect the full impact of the COVID-19 pandemic and measures taken in response thereto. Any public health emergency, including the COVID-19
pandemic or an outbreak of other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could
have a significant adverse impact on us and the fair value of our investments and our portfolio companies.
Significant changes in the capital markets, such as the disruption in economic activity caused by the COVID-19 pandemic, have limited and could continue
to limit our investment originations, limit our ability to grow and have a material negative impact on our and our portfolio companies’ operating results and the
fair values of our debt and equity investments. Additionally, the recent disruption in economic activity caused by the COVID-19 pandemic has had, and may
continue to have, a negative effect on the potential for liquidity events involving our investments. The illiquidity of our investments may make it difficult for us
to sell such investments to access capital, if required. As a result, we could realize significantly less than the value at which we have recorded our investments if
we were required to sell them to increase our liquidity. An inability on our part to raise incremental capital, and any required sale of all or a portion of our
investments as a result, could have a material adverse effect on our business, financial condition or results of operations.
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Further, current market conditions may make it difficult to raise equity capital, extend the maturity of or refinance our existing indebtedness or obtain new
indebtedness with similar terms and any failure to do so could have a material adverse effect on our business. The debt capital available to us in the future, if
available at all, may bear a higher interest rate and may be available only on terms and conditions less favorable than those of our existing debt and such debt
may need to be incurred in a rising interest rate environment. If we are unable to raise new debt or refinance our existing debt, then our equity investors will not
benefit from the potential for increased returns on equity resulting from leverage, and we may be unable to make new commitments or to fund existing
commitments to our portfolio companies. Any inability to extend the maturity of or refinance our existing debt, or to obtain new debt, could have a material
adverse effect on our business, financial condition or results of operations.
Terrorist attacks, acts of war, natural disasters, disease outbreaks or pandemics may impact our portfolio companies and harm our business, operating
results and financial condition.
Terrorist acts, acts of war, natural disasters, disease outbreaks, pandemics, or other similar events may disrupt our operations, as well as the operations of our
portfolio companies. Such acts have created, and continue to create, economic and political uncertainties and have contributed to recent global economic
instability. Future terrorist activities, military or security operations, natural disasters, disease outbreaks, pandemics, or other similar events could further weaken
the domestic/global economies and create additional uncertainties, which may negatively impact our portfolio companies and, in turn, could have a material
adverse impact on our business, operating results, and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.
We incur significant costs as a result of being a publicly traded company.
As a publicly traded company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable
to a company whose securities are registered under the Exchange Act as well as additional corporate governance requirements, including requirements under the
Sarbanes-Oxley Act, and other rules implemented by the SEC.
Compliance with Section 404 of the Sarbanes-Oxley Act involves significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act
would adversely affect us and the market price of our common stock.
Under current SEC rules, we are required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and
related rules and regulations of the SEC. As a result, we incur additional expenses that negatively impact our financial performance and our ability to make
distributions. This process also results in a diversion of management’s time and attention. We cannot be certain as to the timing of completion of our annual re-
evaluation, testing and remediation actions or the impact of the same on our operations, and we cannot assure you that our internal control over financial
reporting is or will be effective. In the event that we are unable to maintain compliance with Section 404 of the Sarbanes-Oxley Act and related rules, we and the
market price of our securities may be adversely affected.
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We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the
market price of our common stock and our ability to pay distributions.
Our business is highly dependent on the Advisor and its affiliates’ communications and information systems. Any failure or interruption of those systems,
including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our
financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of
a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:
● sudden electrical or telecommunications outages;
● natural disasters such as earthquakes, floods, tornadoes and hurricanes;
● disease pandemics; and
● events arising from local or larger scale political or social matters, including terrorist acts.
Any of these events, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability
to pay distributions to our stockholders.
In addition, these communications and information systems are subject to potential attacks, including through adverse events that threaten the
confidentiality, integrity or availability of our information resources (i.e., cyber incidents). These attacks could involve gaining unauthorized access to our
information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption and result in
disrupted operations, 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. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided by the Advisor and
third-party service providers. We, along with our Advisor, have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and
cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of the risk of a cyber incident, may be ineffective and do not
guarantee that a cyber incident will not occur or that our financial results, operations or confidential information will not be negatively impacted by such an
incident. In addition, the costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Furthermore,
cybersecurity has become a top priority for regulators around the world, and some jurisdictions have enacted laws requiring companies to notify individuals of
data security breaches involving certain types of personal data. If we fail to comply with the relevant laws and regulations, we could suffer financial losses, a
disruption of our businesses, liability to investors, regulatory intervention or reputational damage.
We are subject to risks associated with an uncertain interest rate environment that may affect our cost of capital and net investment income.
While interest rates have reached their highest levels in the recent past, it is uncertain when and at what pace interest rates will decline.
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 Credit Facilities, 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 the current high 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. See
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 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.
As of the date of this filing, nearly all of our floating rate investments are linked to the prime rate. We expect that substantially all of our future floating rate
investments will be linked to the prime rate. We may need to renegotiate any credit agreements extending beyond June 2023 with our portfolio companies that
utilize LIBOR terms as a factor in determining the interest rate, in order to replace LIBOR with the new standard that is established, which may have an adverse
effect on our overall financial condition or results of operations. As such, some or all of these credit agreements may bear a lower interest rate, which would
adversely impact our financial condition or results of operations.
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.
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We are subject to risks related to corporate social responsibility.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and
reputation if we fail to act responsibly in a number of areas, such as environmental stewardship, corporate governance and transparency and considering ESG
factors in our investment processes. Adverse incidents with respect to ESG activities could impact the value of our brand, the cost of our operations and
relationships with investors, all of which could adversely affect our business and results of operations. Additionally, new regulatory initiatives related to ESG
could adversely affect our business.
The effect of global climate change may impact the operations of our portfolio companies.
There may be evidence of global climate change. Climate change creates physical and financial risk and some of our portfolio companies may be
adversely affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature and
humidity. To the extent weather conditions are affected by climate change, energy use could increase or decrease depending on the duration and magnitude of
any changes. Increases in the cost of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services is
material to their business. A decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition through, for
example, decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system
stresses, including service interruptions.
Inflation may adversely affect the business, results of operations and financial condition of our portfolio companies.
Certain of our portfolio companies may be impacted by inflation. If such portfolio companies are unable to pass any increases in their costs along to their
customers, it could adversely affect their results and impact their ability to pay interest and principal on our loans. In addition, any projected future decreases in
our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our
investments could result in future unrealized losses and therefore reduce our net assets resulting from operations.
Item 1B. Unresolved Staff Comments
None
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
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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 February 27, 2023 was $12.62 per
share, which represented a 10% premium to NAV per share. As of February 27, 2023 we had 21 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, 2022, 2021 and 2020.
Issuer Purchases of Equity Securities
On April 29, 2022, 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, 2023 and the repurchase of $5.0 million of common
stock. During the quarter ended December 31, 2022, we did not repurchase any shares of our common stock. During the years ended December 31, 2022, 2021
and 2020, we did not repurchase any shares of our common stock. From the inception of the stock repurchase program through December 31, 2022, 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.
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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.
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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 MVIS U.S. Business
Development Companies Index, for the period from December 31, 2017 through December 31, 2022. The graph assumes that, on December 31, 2017, a person
invested $100 in each of our common stock, the S&P 500 Index and the MVIS U.S. Business Development Companies 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.
Fees and expenses
The following table is intended to assist you in understanding the costs and expenses that an investor in shares of our common stock will bear directly or
indirectly. However, we caution you that some of the percentages indicated in the table below are estimates and may vary. The following table and example
should not be considered a representation of our future expenses. Actual expenses may be greater or less than shown. Except where the context suggests
otherwise, whenever a reference to fees or expenses paid by “you” or “us” or that “we” will pay fees or expenses is made, stockholders will indirectly bear such
fees or expenses as investors in the Company.
Stockholder Transaction Expenses
Sales Load (as a percentage of offering price)
Offering Expenses (as a percentage of offering price)
Dividend Reinvestment Plan Fees
Total Stockholder Transaction Expenses (as a percentage of offering price)
Annual Expenses (as a Percentage of Net Assets Attributable to Common Stock)(3)
Base Management Fee
Incentive Fee Payable Under the Investment Management Agreement
Interest Payments on Borrowed Funds
Other Expenses (estimated for the current fiscal year)
Acquired Fund Fees and Expenses
Total Annual Expenses (estimated)
—%(1)
—%
— (2)
—%
4.30%(4)
4.87%(5)
8.96%(6)
1.90%(7)
0.00%(8)
(4)
(9)
20.03%
(1) Represents the underwriting discounts and commissions with respect to the shares sold by us.
(2) The expenses associated with the DRIP are included in “Other Expenses” in the table. See “Dividend Reinvestment Plan” in the accompanying prospectus.
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(3) Net Assets Attributable to Common Stock equals estimated average net assets for the current fiscal year and is based on our net assets at December 31,
2022 and includes the net proceeds of the offering estimated to be received by the Company.
(4) Our base management fee under the Investment Management Agreement is based on our gross assets, less cash and cash equivalents, which includes assets
acquired using leverage, including any leverage disclosed in the accompanying prospectus, and is payable monthly in arrears. The management fee
referenced in the table above is based on our gross assets, less cash and cash equivalents, of $736.3 million as of December 31, 2022 and includes net
proceeds of the offering, after the net proceeds have been invested in portfolio companies, and $120 million of assets estimated to be acquired in the current
fiscal year using leverage. See “Investment Management and Administration Agreements - Investment Management Agreement” in the accompanying
prospectus.
(5) Our incentive fee payable under the Investment Management Agreement consists of two parts:
The first part, which is payable quarterly in arrears, subject to a Fee Cap and Deferral Mechanism, equals 20% of the excess, if any, of our Pre-Incentive
Fee Net Investment Income over a 1.75% quarterly (7% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar
quarter. Under this provision, in any calendar quarter, our Advisor receives no incentive fee until our net investment income equals the hurdle rate of
1.75% but then receives, as a “catch-up,” 100% of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net
Investment Income, if any, that exceeds the hurdle rate but is less than 2.1875%. The effect of this provision is that, if Pre-Incentive Fee Net Investment
Income exceeds 2.1875% in any calendar quarter, our Advisor will receive 20% of our Pre-Incentive Fee Net Investment Income as if a hurdle rate did not
apply. The first part of the incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash.
The second part of the incentive fee equals 20% of our Incentive Fee Capital Gains, if any. Incentive Fee Capital Gains are our realized capital gains on a
cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a
cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The second part of the incentive fee is payable, in arrears,
at the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date). For a more detailed
discussion of the calculation of this fee, see “Investment Management and Administration Agreements — Investment Management Agreement” in the
accompanying prospectus.
The incentive payable to our Advisor represents our estimated annual expense incurred under the first part of the incentive fee payable under the
Investment Management Agreement over the next twelve months. As of December 31, 2022, our cumulative realized capital gains and unrealized capital
appreciation did not exceed our cumulative realized capital losses and unrealized capital depreciation. Given our strategy of investing primarily in Venture
Loans, which are fixed-income assets, we believe it is unlikely that our cumulative realized capital gains and unrealized capital appreciation will exceed
our cumulative realized capital losses and unrealized capital depreciation in the next twelve months. Consequently, we do not expect to incur any
Incentive Fee Capital Gains during the next twelve months. As we cannot predict the occurrence of any capital gains from the portfolio, we have assumed
no Incentive Fee Capital Gains.
(6) Interest payments on borrowed funds represent our estimated annual interest payments on borrowed funds based on current debt levels as adjusted for
projected increases in debt levels over the next twelve months. We may issue additional debt securities pursuant to the registration statement of which this
prospectus supplement forms a part. In the event we were to issue additional debt securities, our borrowing costs, and correspondingly our total annual
expenses, including, in the case of such preferred stock, our base management fee as a percentage of our net assets attributable to common stock, would
increase.
(7) “Other Expenses” includes our overhead expenses, including payments under the Administration Agreement, based on our allocable portion of overhead
and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement. See “Investment Management and
Administration Agreements — Administration Agreement” in the accompanying prospectus. “Other expenses” also includes the ongoing administrative
expenses to the independent accountants and legal counsel of the Company and compensation of independent directors.
(8) Amount reflects our estimated expenses of the temporary investment of offering proceeds in money market funds pending our investment of such proceeds
in portfolio companies in accordance with the investment objective and strategies described in this prospectus supplement and the accompanying
prospectus.
(9) “Total Annual Expenses” as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage
would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that the “Total
Annual Expenses” percentage be calculated as a percentage of net assets (defined as total assets less indebtedness and after taking into account any
incentive fees payable during the period), rather than the total assets, including assets that have been funded with borrowed monies.
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Example
The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a
hypothetical investment in our common stock. This example and the expenses in the table above should not be considered a representation of our future
expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown. In calculating the following
expense amounts, we have assumed that our annual operating expenses remain at the levels set forth in the table above.
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return
$
185.25 $
476.40 $
686.61 $
990.72
1 Year
3 Years
5 Years
10 Years
The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater
or lesser than those shown.
While the example assumes, as required by the applicable rules of the SEC, a 5% annual return, our performance will vary and may result in a return greater or
less than 5%. The incentive fee under the Investment Management Agreement is unlikely to be significant assuming a 5% annual return and is not included in
the example. This illustration assumes that we will not realize any capital gains (computed net of all realized capital losses and unrealized capital depreciation) in
any of the indicated time periods. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive
fee of a material amount, our distributions to our common stockholders and our expenses would likely be higher. If the 5% annual return were derived entirely
from capital gains, you would pay expenses on a $1,000 investment of $152.58, $408.56, $610.60 and $948.51 over periods of one year, three years, five years
and ten years, respectively. See “Investment Management and Administration Agreements — Investment Management Agreement — Examples of Incentive Fee
Calculation” in the accompanying prospectus for additional information regarding the calculation of incentive fees.
In addition, while the example assumes reinvestment of all dividends and other distributions at net asset value, or NAV participants in our DRIP receive a
number of shares of our common stock determined by dividing the total dollar amount of the distribution payable to a participant by the market price per share of
our common stock at the close of trading on the valuation date for the distribution. This price may be at, above or below NAV. See “Dividend Reinvestment
Plan” in the accompanying prospectus for additional information regarding our DRIP.
Item 6. [Reserved]
Not applicable.
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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;
● general economic and political trends and other external factors, including continuing supply chain disruptions, increased inflation and a general
slowdown in economic activity;
● 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, including our and their ability to achieve our respective objectives as a result of
the COVID-19 pandemic;
● turmoil in Ukraine and Russia and the potential for volatility in energy prices and its impact on the industries in which we invest;
● the impact, extent and timing of technological changes and the adequacy of intellectual property protection;
● our regulatory structure and tax status;
● changes in the general interest rate environment;
● 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;
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● the ability of our portfolio companies to achieve their objective;
● the impact of legislative and regulatory actions and reforms and regulatory supervisory or enforcement actions of government agencies relating to us or
our Advisor;
● our contractual arrangements and relationships with third parties;
● our ability to access capital and any future financings by us;
● our use of financial leverage;
● 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 periodic 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 quarterly reports we file under the Exchange Act.
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 and private equity backed companies and publicly
traded companies in our Target Industries, which we refer to as “Venture Lending.” Our debt investments are typically secured by first liens or first liens behind
a secured revolving line of credit, or collectively "Senior Term Loans." Some of our debt investments may also be subordinated to term debt provided by third
parties. As of December 31, 2022, 90.2% , or $619.5 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 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 subject to
a 150% asset coverage test. 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. 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.
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We were formed in March 2010 and completed an initial public offering.
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, 2022 and 2021:
Debt investments
Warrants
Other investments
Equity
Total
December 31, 2022
December 31, 2021
Number of
Investments
Fair
Value
Percentage
of
Total
Portfolio
Number of
Investments
Fair
Value
Percentage of
Total
Portfolio
(Dollars in thousands)
60
90
2
8
$
$
686,458
29,712
1,300
2,556
720,026
95.3%
4.1
0.2
0.4
100.0%
45
73
2
3
$
$
437,317
20,200
200
358
458,075
95.5%
4.3
0.1
0.1
100.0%
The following table shows total portfolio investment activity as of and for the years ended December 31, 2022 and 2021:
Beginning portfolio
New debt investments
Less refinanced debt balances
Net new debt investments
Principal payments received on investments
Early pay-offs and principal paydowns
Accretion of debt investment fees
New debt investment fees
Proceeds from sale of investments
Net loss on investments
Net unrealized (depreciation) appreciation on investments
Ending portfolio
For the year ended
December 31,
2022
2021
458,075 $
452,603
(30,625)
421,978
(15,716)
(80,155)
5,684
(5,290)
(49,964)
(9,127)
(5,459)
720,026 $
352,545
344,445
—
344,445
(13,474)
(174,536)
4,556
(3,261)
(52,954)
(2,451)
3,205
458,075
$
$
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.
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The following table shows our debt investments by industry sector as of December 31, 2022 and 2021:
Life Science
Biotechnology
Medical Device
Technology
Communications
Consumer-Related
Networking
Software
Sustainability
Other Sustainability
Healthcare Information and Services
Diagnostics
Other Healthcare
Software
Total
December 31, 2022
December 31, 2021
Debt
Investments at
Fair Value
Percentage of
Total
Portfolio
Debt
Investments at
Fair Value
Percentage of
Total
Portfolio
$
$
189,729
127,839
22,671
108,226
11,467
117,002
83,705
9,804
2,500
13,515
686,458
(Dollars in thousands)
27.6% $
18.6
106,809
82,860
3.3
15.8
1.7
17.0
12.2
1.4
0.4
2.0
100.0% $
22,576
90,678
17,026
58,994
46,092
12,282
—
—
437,317
24.4%
18.9
5.2
20.8
3.9
13.5
10.5
2.8
—
—
100.0%
The largest debt investments in our portfolio may vary from year to year as new debt investments are originated and existing debt investments are repaid.
Our five largest debt investments at cost and fair value represented 23% and 26% of total debt investments outstanding as of December 31, 2022 and 2021,
respectively. No single debt investment represented more than 10% of our total debt investments as of December 31, 2022 or 2021.
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, 2022 and 2021, our debt investments had a weighted average credit rating of 3.1 and 3.2, respectively. The following table shows the classification of our
debt investment portfolio by credit rating as of December 31, 2022 and 2021:
%
%
December 31, 2022
Debt
Investments
Number of
at
Investments Fair Value Investments
Percentage
of Debt
December 31, 2021
Debt
Investments
Number of
at
Investments Fair Value Investments
Percentage
of Debt
Credit Rating
4
3
2
1
Total
(Dollars in thousands)
8 $
47
2
3
60 $
93,832
557,554
26,822
8,250
686,458
13.7%
81.2
3.9
1.2
100.0%
9 $
34
1
1
45 $
104,863
322,084
3,470
6,900
437,317
24.0%
73.6
0.8
1.6
100.0%
As of December 31, 2022, there were three debt investments with an internal credit rating of 1, with an aggregate cost of $20.9 million and an aggregate fair
value of $8.3 million. As of December 31, 2021, there was one debt investment with an internal credit rating of 1, with an aggregate cost of $11.5 million and an
aggregate fair value of $6.9 million.
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Horizon Secured Loan Fund I LLC
On June 1, 2018, we and Arena Sunset SPV, LLC, or Arena, formed a joint venture, Horizon Secured Loan Fund I, or 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 sustainability industries. HSLFI was formed as a Delaware limited liability company and was not consolidated by either the Company or Arena for
financial reporting purposes. On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI, including, without
limitation, undistributed amounts owed to Arena and interest accrued and unpaid on the debt investments of HSLFI through the date of purchase, for $17.1
million. In addition, Arena received 50% of the warrants held by HSLFI or HFI, at closing. As of April 21, 2020, HSLFI is wholly-owned by the Company and
the assets and liabilities of HSLFI and HFI are consolidated with the assets and liabilities of the Company. The transaction is accounted for as an asset
acquisition under GAAP.
During the period January 1, 2020 through April 21, 2020, there were no distributions from HSLFI.
In addition, on June 1, 2018, HSLFI entered into the Sale and Servicing Agreement. 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 NYL 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 NYL Noteholders. The notes issued by HFI were
collateralized by all investments held by HFI and permitted an advance rate of up to 67% of the aggregate principal amount of eligible debt investments. The
notes were issued pursuant to that certain indenture by and between HFI and U.S. Bank National Association, dated as of June 1, 2018 (the “Indenture”). Prior to
June 5, 2020, the interest rate on the notes issued under the NYL Facility was 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.
The following table shows a summary of HSLFI’s investment portfolio for the period January 1, 2020 through April 21, 2020:
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
January 1, 2020
through
April 21, 2020
(Dollars in
thousands)
$
$
—
14.3%
—
—
(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.
Selected Statements of Operations Information
Interest income on investments
Total investment income
Total expenses
Net investment income
Net realized gain on investments
Net unrealized depreciation on investments
Net decrease in net assets resulting from operations
72
For the period
January 1, 2020
through
April 21, 2020
(In thousands)
$
$
$
$
$
$
$
1,353
1,465
1,229
236
120
(392)
(36)
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Consolidated results of operations of Horizon Technology Finance Corporation
As a BDC and a RIC, we are subject to certain constraints on our operations, including limitations imposed by the 1940 Act and the Code. 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, 2022, 2021 and 2020:
Total investment income
Total expenses
Net investment income before excise tax
Provision for excise tax
Net investment income
Net realized loss
Net unrealized (depreciation) appreciation on investments
Net increase in net assets resulting from operations
Average debt investments, at fair value
Average gross assets less cash
Average borrowings outstanding
2022
For the year ended
December 31,
2021
(In thousands)
2020
79,191 $
42,289
36,902
715
36,187
(9,484)
(5,552)
21,151 $
550,403 $
597,864 $
338,676 $
60,015 $
31,394
28,621
401
28,220
(3,643)
3,205
27,782 $
381,483 $
413,552 $
225,746 $
46,035
25,064
20,971
222
20,749
(14,698)
313
6,364
313,478
341,154
174,876
$
$
$
$
$
Net increase in net assets resulting from operations can vary substantially from period to period for various reasons, including, without limitation, 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 $19.2 million, or 32.0%, to $79.2 million for the year ended December 31, 2022 as compared to the year ended
December 31, 2021. For the year ended December 31, 2022, total investment income consisted primarily of $77.4 million in interest income from investments,
which included $15.3 million in income from the accretion of origination fees and ETPs and $1.8 million in fee income. Interest income on debt investments
increased by $23.0 million, or 42.2%, to $77.4 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. Interest income
on investments for the year ended December 31, 2022 as compared to the year ended December 31, 2021 increased primarily due to an increase of
$168.9 million, or 44.3%, in the average size of our debt investment portfolio, offset by interest income received from the settlement of a debt investment
previously on nonaccrual status collected during the year ended December 31, 2021. Fee income, which includes success fee, other fee and prepayment fee
income on debt investments, decreased by $3.8 million, or 67.4%, to $1.8 million for the year ended December 31, 2022 compared to the year ended December
31, 2021 primarily due to a lower aggregate amount of principal prepayments for the year ended December 31, 2022.
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Total investment income increased by $14.0 million, or 30.4%, to $60.0 million for the year ended December 31, 2021 as compared to the year ended
December 31, 2020. For the year ended December 31, 2021, total investment income consisted primarily of $54.4 million in interest income from investments,
which included $13.9 million in income from the accretion of origination fees and ETPs and $5.6 million in fee income. Interest income on debt investments
increased by $12.2 million, or 29.0%, to $54.4 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. Interest income
on investments for the year ended December 31, 2021 as compared to the year ended December 31, 2020 increased primarily due to an increase of $68.0 million,
or 21.7%, in the average size of our debt investment portfolio. Fee income, which includes success fee, other fee and prepayment fee income on debt
investments, increased by $1.9 million, or 50.4%, to $5.6 million for the year ended December 31, 2021 compared to the year ended December 31, 2020
primarily due to a larger aggregate amount of principal payments for the year ended December 31, 2021.
The following table shows our dollar-weighted annualized yield for the years ended December 31, 2022, 2021 and 2020:
Investment type:
Debt investments(1)
Equity interest in HSLFI and debt investments(1)
All investments(1)
For the year ended
December 31,
2021
2022
2020
14.4%
15.7%
—
—
13.8%
15.0%
%
(2)
%
(3)
%
(4)
14.6
14.5
13.9
(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 equity interest in HSLFI through April 21, 2020, warrants, equity and other investments. 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 dividend income from equity interest in HSLFI
through April 21, 2020, interest income and fee income from debt investments.
(4) Includes any yield from equity interest in HSFLI through April 21, 2020, debt investments, warrants, equity and other investments. 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 at cost and fair value in the aggregate accounted for 15%, 17% and 23% of investment income for the
years ended December 31, 2022, 2021 and 2020, respectively.
Expenses
Total expenses increased by $10.9 million, or 34.7%, to $42.3 million for the year ended December 31, 2022 as compared to the year ended December 31,
2021. Total expenses increased by $6.3 million, or 25.3%, to $31.4 million for the year ended December 31, 2021 as compared to the year ended December 31,
2020. Total expenses for each period consisted of interest expense, base management fee, incentive and administrative fees, professional fees and general and
administrative expenses.
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Interest expense increased by $7.2 million, or 59.6%, to $19.2 million for the year ended December 31, 2022 as compared to the year ended December 31,
2021. Interest expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $112.9 million,
or 50.0%, and an increase in our effective cost of debt for the year ended December 31, 2022 compared to the year ended December 31, 2021. Interest expense
increased by $2.4 million, or 24.4%, to $12.0 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. Interest expense,
which includes the amortization of debt issuance costs, primarily due to an increase in average borrowings of $50.9 million, or 29.1%, offset by a reduction in
our effective cost of debt for the year ended December 31, 2021 compared to the year ended December 31, 2020.
Base management fee expense increased by $2.9 million, or 38.7%, to $10.6 million for the year ended December 31, 2022 as compared to the year
ended December 31, 2021. Base management fee expense increased primarily due to an increase of $184.3 million, or 44.6%, in average gross assets less cash
for the year ended December 31, 2022 as compared to the year ended December 31, 2021, partially offset by the lower management fee earned on gross assets
less cash in excess of $250 million. Base management fee expense increased by $1.2 million, or 17.9%, to $7.6 million for the year ended December 31, 2021 as
compared to the year ended December 31, 2020. Base management fee expense increased primarily due to an increase of $72.4 million, or 21.2%, in average
gross assets less cash for the year ended December 31, 2021 as compared to the year ended December 31, 2020, partially offset by the lower management fee
earned on gross assets less cash in excess of $250 million.
Performance based incentive fee expense increased by $0.7 million, or 9.8%, to $7.7 million for the year ended December 31, 2022 as compared to the year
ended December 31, 2021. This increase was due to an increase of $8.6 million, or 24.5%, in Pre-Incentive Fee Net Investment Income offset by an Incentive
Fee Cap calculated based on the incentive fee cap and deferral mechanism in our Investment Management Agreement of $1.0 million for the year ended
December 31, 2022 compared to the year ended December 31, 2021. The Incentive Fee Cap and Deferral Mechanism resulted in $1.0 million of reduced
incentive fee expense and increased net investment income for the year ended December 31, 2022. The incentive fee on pre-incentive fee net investment income
was subject to the Incentive Fee Cap for the year ended December 31, 2022 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 increased by $1.9 million, or
36.0%, to $7.1 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. This increase was due to an increase of $9.3
million, or 36.0%, in Pre-Incentive Fee Net Investment Income for the year ended December 31, 2021 compared to the year ended December 31, 2020.
In 2022 and 2021, 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, 2022 and 2021, we elected to carry forward taxable income in excess of current year distributions of $18.8 million
and $10.8 million, respectively. At December 31, 2022 and 2021, excise tax payable of $0.7 million and $0.4 million, respectively, was recorded.
Administrative fee expense, professional fees and general and administrative expenses were $4.8 million, $4.7 million and $3.7 million for the years ended
December 31, 2022, 2021 and 2020, 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, 2022, we realized net losses on investments totaling $9.5 million primarily due to the settlement of one of our debt
investments and the settlement of one of our other investments. During the year ended December 31, 2021, we realized net losses totaling $3.6 million primarily
due to the realized loss on the settlement of three of our debt investments partially offset by 1) the realized gain from the consideration we received from the
termination of warrants upon the initial public offering of one portfolio company and 2) the realized gain from the consideration we received from exercise and
sale of five of our warrant investments. During the same period, we elected to exercise our option to redeem, in full, our 2022 Notes at par plus accrued and
unpaid interest which resulted in a realized loss on debt extinguishment of $0.4 million.
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During the year ended December 31, 2022, we recorded net unrealized depreciation on investments totaling $5.6 million which was primarily due to the
unrealized depreciation on three of our debt investments partially offset by (1) the unrealized appreciation on our warrant investments and (2) the reversal of
previously recorded unrealized depreciation from the settlement of one our debt investments and the settlement of one of our other investments. During the year
ended December 31, 2021, we recorded net unrealized appreciation on investments totaling $3.2 million which was primarily due to (1) the reversal of
previously recorded unrealized depreciation from the settlement of three of our debt investments and (2) the unrealized appreciation on our warrant investments
partially offset by the unrealized depreciation on one of our equity investments and the unrealized depreciation on one of our debt investments.
Liquidity and capital resources
As of December 31, 2022 and 2021, we had cash and investments in money market funds of $27.7 million and $45.9 million, respectively. Cash and
investments in money market funds are available to fund new investments, reduce borrowings, pay expenses, repurchase common stock and pay distributions. In
addition, as of December 31, 2022 and 2021, we had $2.8 million and $1.4 million, respectively, of restricted investments in money market funds. Restricted
investments in money market funds may be used to make monthly interest and principal payments on our 2019 Asset-Backed Notes, 2022 Asset-Backed Notes
or our NYL Facility. Our primary sources of capital have been from our public and private equity offerings, use of our Credit Facilities and issuance of our
public debt offerings.
On July 30, 2020, we entered into an At-The-Market (“ATM”) sales agreement (the “2020 Equity Distribution Agreement”), with Goldman Sachs & Co.
LLC and B. Riley FBR, Inc., (each a “Sales Agent” and, collectively, the “Sales Agents”). The 2020 Equity Distribution Agreement provided that we may offer
and sell shares of common stock from time to time through the Sales Agents representing up to $100.0 million worth of our common stock, in amounts and at
times to be determined by us.
On August 2, 2021, we terminated the 2020 Equity Distribution Agreement and entered into a new ATM sales agreement (the “2021 Equity Distribution
Agreement”) with the Sales Agents. The remaining shares available under the 2020 Equity Distribution Agreement are no longer available for issuance. The
2021 Equity Distribution Agreement provides that we may offer and sell our shares from time to time through the Sales Agents up to $100.0 million worth of our
common stock, in amounts and at times to be determined by us. Sales of our common stock, if any, may be made in negotiated transactions or transactions that
are deemed to be “at-the-market,” as defined in Rule 415 under the Securities Act, including sales made directly on the NASDAQ or similar securities exchange
or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.
During the year ended December 31, 2022, we sold 3,982,684 shares of common stock under the 2021 Equity Distribution Agreement. For the same period,
we received total accumulated net proceeds of approximately $50.3 million, including $1.0 million of offering expenses, from these sales. During the year ended
December 31, 2021, we sold 1,907,234 shares of common stock under the 2020 Equity Distribution Agreement and the 2021 Equity Distribution Agreement. For
the same period, we received total accumulated net proceeds of approximately $30.1 million, including $0.8 million of offering expenses, from these sales.
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On April 29, 2022, 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, 2023 or the repurchase of $5.0 million of our common stock. During the years ended
December 31, 2022, 2021 and 2020, we did not make any repurchases of our common stock. From the inception of the stock repurchase program in 2015
through December 31, 2022, 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, 2022 and 2021, the outstanding principal balance under the Key Facility was $5.0 million and $53.5 million, respectively. As of December
31, 2022 and 2021, we had borrowing capacity under the Key Facility of $120.0 million and $71.5 million, respectively. At December 31, 2022 and 2021, $40.2
million and $19.8 million, respectively, was available, subject to existing terms and advance rates.
At December 31, 2022 and 2021, the outstanding principal balance under the NYL Facility was $176.8 million and $78.8 million, respectively. As of
December 31, 2022 and 2021, we had borrowing capacity under the NYL Facility of $23.2 million and $21.2 million, respectively. At December 31, 2022 and
2021, $23.2 million and $5.7 million, respectively, was available, subject to existing terms and advance rates.
Our operating activities used cash of $246.3 million for the year ended December 31, 2022, and our financing activities provided cash of $229.5 million for
the same period. Our operating activities used cash primarily to purchase investments in portfolio companies partially offset by principal payments received on
our debt investments. Our financing activities provided cash primarily from the completion of the 2027 Notes, the completion of our 2022 Asset-Backed Notes,
advances on our Credit Facilities, the sale of shares through our ATM for net proceeds of $50.3 million, after deducting underwriting commission and discounts
and other offering expenses and the completion of a follow-on public offering of 2.5 million shares of common stock for net proceeds of $34.3 million, after
deducting underwriting commission and discounts and other offering expenses, partially offset by the use of cash to repay a portion the outstanding principal
under our Key Facility, to repay our 2019 Asset-Backed Notes, and to pay distributions to our stockholders.
Our operating activities used cash of $76.0 million for the year ended December 31, 2021, and our financing activities provided cash of $75.5 million for the
same period. Our operating activities used cash primarily to purchase investments in portfolio companies partially offset by principal payments received on our
debt investments. Our financing activities provided cash primarily from the issuance of the 2026 Notes, advances on our Credit Facilities and the sale of shares
through our ATM for net proceeds of $30.1 million, after deducting underwriting commission and discounts and other offering expenses, partially offset by the
use of cash to repay our Key Facility and 2022 Notes and to pay distributions to our stockholders.
Our operating activities used cash of $25.3 million for the year ended December 31, 2020, and our financing activities provided cash of $55.7 million for the
same period. Our operating activities used cash primarily to purchase investments in portfolio companies partially offset by principal payments received on our
debt investments. Our financing activities provided cash primarily from advances on our credit facilities and the sale of shares through our ATM for net proceeds
of $44.6 million, after deducting underwriting commission and discounts and other offering expenses, partially offset by the use of cash to repay our Key Facility
and to 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 Credit Facilities will be sufficient to meet our working
capital and capital expenditure commitments for at least the next 12 months.
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Current borrowings
The following table shows our borrowings as of December 31, 2022 and 2021:
Total
December 31, 2022
Balance
Unused
Total
December 31, 2021
Balance
Unused
Commitment Outstanding Commitment Commitment Outstanding Commitment
(In thousands)
Key Facility
NYL Facility
2019 Asset-Backed Notes
2022 Asset-Backed Notes
2027 Notes
2026 Notes
Total before debt issuance costs
Unamortized debt issuance costs attributable to term
borrowings
Total borrowings outstanding, net
$
125,000 $
200,000
42,573
100,000
57,500
57,500
582,573
5,000 $
176,750
42,573
100,000
57,500
57,500
439,323
120,000 $
23,250
—
—
—
—
143,250
125,000 $
100,000
70,500
—
—
57,500
353,000
53,500 $
78,750
70,500
—
—
57,500
260,250
—
582,573 $
(5,245)
434,078 $
—
143,250 $
—
353,000 $
(2,637)
257,613 $
$
71,500
21,250
—
—
—
—
92,750
—
92,750
Credit Facilities
Key Facility
We entered into the Key Facility effective November 4, 2013. Through June 21, 2021, the interest rate on the Key Facility was based upon the one-month
LIBOR plus a spread of 3.25%, with a LIBOR floor of 1.00%. From and after June 30, 2021, the interest rate on the Key Facility is based on the rate of interest
published in The Wall Street Journal as the prime rate in the United States plus 0.25%, with a prime rate floor of 4.25%. The prime rate was 7.50% and 3.25% as
of December 31, 2022 and 2021, respectively. The interest rates in effect were 7.75% and 4.25% as of December 31, 2022 and 2021. 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.
The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million. On June 22, 2021, we amended the
Key Facility, among other things, to amend the interest rate applied to the outstanding principal balance and to extend the period during which we may request
advances under the Key Facility (or the “Revolving Period”) to June 22, 2024. The Key Facility is collateralized by debt investments held by Credit II and
permits an advance rate of up to sixty percent (60%) 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. 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 sixty percent (60%) 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 June 22, 2026.
NYL Facility
On April 21, 2020, we purchased all of the limited liability company interests of Arena in HSLFI. HFI is a wholly-owned subsidiary of HSLFI. HFI entered
into the NYL Facility with the NYL 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 NYL Noteholders. On June 1, 2018, HSLFI sold or contributed to HFI certain secured loans made to certain
portfolio companies pursuant to the Sale and Servicing Agreement. Any notes issued by HFI are 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.
On February 25, 2022, we amended the NYL Facility, increasing the commitment by $100 million to enable our wholly-owned subsidiary to issue up to
$200 million of secured notes. The amendment to the facility extends the investment period to June 2023 and the maturity date to June 2028. In addition, the
amendment, among other things, reduces the applicable margin used to calculate the credit facility’s interest rate on our borrowings above $100 million. Such
borrowings will be priced at the three-year USD mid-market swap rate plus 3.00%.
Under the terms of the NYL Facility, we are required to maintain a reserve cash balance, which may be used to pay monthly interest and principal payments
on the NYL Facility. We have segregated these funds and classified them as restricted investments in money market funds. At December 31, 2022 and 2021,
there were approximately $1.0 million and $0.5 million, respectively, of restricted investments.
There were $176.8 million and $78.8 million in notes issued to the NYL Noteholders as of December 31, 2022 and 2021, respectively, at an interest rate
of 5.57% and 4.62%, respectively. As of December 31, 2022 and 2021, we had borrowing capacity under the NYL Facility of $23.2 million and $21.2 million,
respectively. At December 31, 2022 and 2021, $23.2 million and $5.7 million, respectively, was available for borrowing, subject to existing terms and advance
rates.
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Securitizations
2019 Asset-Backed Notes
On August 13, 2019, the 2019 Asset-Backed Notes were issued by the 2019‑1 Trust pursuant to a note purchase agreement, dated as of August 13, 2019, by
and among us and Keybanc Capital Markets Inc. as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of ours and secured
by certain assets of those portfolio companies and are to be serviced by us. Interest on the 2019 Asset-Backed Notes will be paid, to the extent of funds available,
at a fixed rate of 4.21% per annum. The 2019 Asset-Backed Notes had a two-year reinvestment period and a stated maturity of September 15, 2027. The 2019
Asset-Backed Notes were rated A+(sf) by Morningstar Credit Ratings, LLC on August 13, 2019. There has been no change in the rating since August 13, 2019.
At December 31, 2022, and 2021, the 2019 Asset-Backed Notes had an outstanding principal balance of $42.6 million and $70.5 million, respectively.
Under the terms of the 2019 Asset-Backed Notes, we are required to maintain a reserve cash balance, funded through proceeds from the sale of the 2019
Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the 2019 Asset-Backed Notes. The Company has segregated these
funds and classified them as restricted investments in money market funds. At December 31, 2022 and 2021, there were approximately $0.6 million and $0.9
million, respectively, of restricted investments.
2022 Asset-Backed Notes
On November 9, 2022, the 2022 Asset-Backed Notes were issued by the 2022‑1 Trust pursuant to a note purchase agreement, dated as of November 9,
2022, by and among the Company and Keybanc Capital Markets Inc. as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies
of ours and secured by certain assets of those portfolio companies and are to be serviced by us. Interest on the 2022 Asset-Backed Notes will be paid, to the
extent of funds available, at a fixed rate of 7.56% per annum. The 2022 Asset-Backed Notes have a two-year reinvestment period and a stated maturity of
November 15, 2030. The 2022 Asset-Backed Notes were rated A by Morningstar Credit Ratings, LLC on November 9, 2022. There has been no change in the
rating since November 9, 2022.
As of December 31, 2022, the 2022 Asset-Backed Notes had an outstanding principal balance of $100.0 million.
Under the terms of the 2022 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the
2022 Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the 2022 Asset-Backed Notes. The Company has segregated
these funds and classified them as restricted investments in money market funds. At December 31, 2022, there were approximately $1.2 million of restricted
investments.
Unsecured Notes
2022 Notes
On September 29, 2017, we issued and sold an aggregate principal amount of $32.5 million of the 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 had a stated maturity of
September 15, 2022 and could 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 bore 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 were our direct, unsecured obligations and (1) ranked equally in right of payment with our current
and future unsecured indebtedness; (2) were senior in right of payment to any of our future indebtedness that expressly provided it is subordinated to the 2022
Notes; (3) were effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that was initially unsecured to which we
subsequently grant 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 April 24, 2021, or the Redemption Date, we redeemed all of the issued and outstanding 2022
Notes in an aggregate principal amount of $37.4 million and paid accrued interest of $0.3 million. The 2022 Notes were delisted effective on the Redemption
Date.
2026 Notes
On March 30, 2021, we issued and sold an aggregate principal amount of $57.5 million of 4.875% notes due in 2026 (or the “2026 Notes”). The amount of
2026 Notes issued and sold included the full exercise by the underwriters of their option to purchase $7.5 million aggregate principal of additional notes. The
2026 Notes have a stated maturity of March 30, 2026 and may be redeemed in whole or in part at our option at any time or from time to time on or after March
30, 2023 at a redemption price of $25 per security plus accrued and unpaid interest. The 2026 Notes bear interest at a rate of 4.875% per year, payable quarterly
on March 30, June 30, September 30 and December 30 of each year. The 2026 Notes are our direct unsecured obligations and (i) rank equally in right of
payment with our current and future unsecured indebtedness; (ii) are senior in right of payment to any of our future indebtedness that expressly provides it is
subordinated to the 2026 Notes; (iii) are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially
unsecured to which we 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 our subsidiaries. As of December 31, 2022, we were in material compliance with the terms of
the 2026 Notes. The 2026 Notes are listed on the New York Stock Exchange under the symbol “HTFB”.
2027 Notes
On June 15, 2022, we issued and sold an aggregate principal amount of $50.0 million of 6.25% notes due in 2027 and on July 11, 2022, pursuant to the
underwriters’ 30-day option to purchase additional notes, we sold an additional $7.5 million of such notes, or collectively, the 2027 Notes. The 2027 Notes have
a stated maturity of June 15, 2027 and may be redeemed in whole or in part at our option at any time or from time to time on or after June 15, 2024 at a
redemption price of $25 per security plus accrued and unpaid interest. The 2027 Notes bear interest at a rate of 6.25% per year, payable quarterly on March 30,
June 30, September 30 and December 30 of each year, commencing on September 30, 2022. The 2027 Notes are our direct unsecured obligations and (i) rank
equally in right of payment with our current and future unsecured indebtedness; (ii) are senior in right of payment to any of our future indebtedness that
expressly provides it is subordinated to the 2027 Notes; (iii) are effectively subordinated to all of our existing and future secured indebtedness (including
indebtedness that is initially unsecured to which we 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 our subsidiaries. As of December 31, 2022, we were in material
compliance with the terms of the 2027 Notes. The 2027 Notes are listed on the New York Stock Exchange under the symbol “HTFC”.
Other assets
As of December 31, 2022 and 2021, other assets were $2.8 million and $2.5 million, respectively, which is primarily comprised of debt issuance costs and
prepaid expenses.
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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, 2022:
Borrowings
Unfunded commitments
Incentive fee deferral
Total
Total
Less than
1 year
Payments due by period
1 – 3
Years
(In thousands)
3 – 5
Years
After 5
years
$
$
439,323 $
190,000
1,037
630,360 $
13,211 $
152,500
—
165,711 $
234,714 $
37,500
1,037
273,251 $
191,398 $
—
—
191,398 $
—
—
—
—
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, 2022, we had such unfunded commitments of $190.0 million. This
includes no undrawn revolver commitments. 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 borrow 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, 2022, we reasonably believed
that our assets would provide adequate financial resources to satisfy all of our unfunded commitments.
In addition to the Credit Facilities, 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.
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 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 the Incentive Fee Cap and
Deferral Mechanism. The Incentive Fee Cap is equal to (a) 20.00% of Cumulative Pre-Incentive Fee Net Return 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. During the year ended December 31, 2022, the Incentive Fee Cap and Deferral Mechanism resulted in deferral of $1.0
million of incentive fee which may become subject to payment up to three years after the date of deferment.
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, income derived from certain publicly traded
partnerships, or other income derived with respect to our business of investing in stock or other securities. We must also meet certain asset diversification
requirements at the end of each quarter of each tax year. Failure to meet these diversification requirements on the last day of a quarter may result in us having to
dispose of certain investments quickly in order to prevent the loss of RIC status. Any such dispositions could be made at disadvantageous prices or times, and
may cause us to incur substantial losses.
In addition, in order to be 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.
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To the extent our taxable earnings in a tax year fall below the total amount of our distributions made to stockholders in respect of such tax year, a portion of
those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our
stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should review any written disclosure
accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary income or gains.
We have adopted an “opt out” DRIP for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be
automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our DRIP. If a stockholder opts out, that
stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S.
federal, state and local taxes, stockholders participating in our DRIP will not receive any corresponding cash distributions with which to pay any such applicable
taxes. If our common stock is trading above 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, 2022, 2021 and 2020, the Advisor earned $18.3 million, $14.7 million and $11.6 million, respectively, pursuant to the Investment
Management Agreement.
Horizon Technology Finance Principals LLC, f/k/a Horizon Technology Finance, LLC (“HTF Principals”) owns more than seventy percent (70%) of the
Advisor. Our Chief Executive Officer, Robert D. Pomeroy, Jr. and our President, Gerald A. Michaud own one hundred percent (100%) of HTF Principals. By
virtue of their ownership interest in HTF Principals, Mr. Pomeroy and Mr. Michaud 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, 2022, 2021 and 2020, the Advisor earned $1.7 million, $1.3 million and
$1.0 million, respectively, pursuant to the Administration Agreement.
HTF Principals 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.
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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. Prior to July 30, 2022, the Board determined the fair value of our investments. Pursuant to the amended SEC Rule 2a-
5 of the 1940 Act, on July 29, 2022, the Board designated the Advisor as our “valuation designee.” The Board is responsible for oversight of the valuation
designee. The valuation designee has established a Valuation Committee to determine in good faith the fair value of our investments, based on input of our
Advisor’s management and personnel and independent valuation firms which are engaged at the direction of the Valuation Committee to assist in the valuation
of certain portfolio investments lacking a readily available market quotation at least once during a trailing twelve-month period. The Valuation Committee
determines fair values pursuant to a valuation policy approved by the Board and pursuant to 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 our valuation of portfolio companies lacking readily available market
quotations subject to review by an independent valuation firm. 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 we believe market participants would use in pricing the financial instrument at the measurement date.
The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the
type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more
judgment. The three categories within the hierarchy are as follows:
Level 1
Quoted prices in active markets for identical assets and liabilities.
Level 2
Level 3
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets, quoted prices in
markets that are not active and model-based valuation techniques for which all significant inputs are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow
methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management
judgment or estimation.
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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, 2022, we
did not recognize any interest income from debt investments on non-accrual status. For the year ended December 31, 2021, we recognized as interest income
interest payments of $1.3 million received from two portfolio companies whose debt investments were on non-accrual status. For the year ended December 31,
2020, we recognized as interest income interest payments of $0.03 million received from one portfolio company whose debt investment was 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.
Prior to consolidating the investment of HSLFI on and after April 21, 2020, distributions from HSLFI were evaluated at the time of distribution to determine
if the distribution should be recorded as dividend income or a return of capital. Generally, we did not record distributions from HSLFI as dividend income unless
there were sufficient accumulated tax-basis earnings and profit in HSLFI prior to distribution. Distributions that were classified as a return of capital were
recorded as a reduction in the cost basis of the investment. For the period January 1, 2020 through April 21, 2020, there were no distributions from HSLFI.
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.
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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, 2022 and 2021.
Recently adopted accounting pronouncement
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications
and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU
2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. As of December 31, 2022, we adopted ASU 2020-04, and such adoption
did not have an impact on our consolidated financial statements and disclosures.
Recently issued accounting pronouncement
In June 2022, the FASB issues Accounting Standards Update No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale
Restrictions (“ASU 2022-03”). ASU 2022-03 clarifies the guidance when measuring the fair value of an equity security subject to contractual restrictions that
prohibit the sale of the security. The amendments in ASU 2022-03 are effective for public companies for fiscal years beginning after December 15, 2023, and
interim periods within those fiscal years. We are currently assessing the impact of ASU 2022-03 on our consolidated financial statement.
Recent developments
In January 2023, we sold 555,654 shares of common stock under the 2021 Equity Distribution Agreement. For the same period, we received total
accumulated net proceeds of approximately $6.6 million, including $0.1 million of offering expenses, from these sales.
On January 24, 2023, pursuant to the terms of an Asset Purchase Agreement dated August 18, 2022 by and between HESP LLC, our wholly-owned
subsidiary (“HESP”) and Cadrenal Therapeutics, Inc. (“CVKD”), HESP received 600,000 shares of common stock of CVKD upon CVKD’s completion of its
initial public offering.
On February 1, 2023, Canary Medical Inc. prepaid its outstanding principal balance of $7.5 million on its venture loan, plus interest, end-of-term payment
and prepayment fee. The Company continues to hold warrants in Canary Medical Inc.
On February 3, 2023, Unagi Inc. (“Unagi”) prepaid $3.2 million of the outstanding principal of its venture loan. The current outstanding principal balance of
the Unagi’s venture loan as of the date hereof is $2.1 million. We and Unagi also amended the terms of the venture loan to, among other things, provide for
payment in kind (PIK) interest and extend the maturity date of the outstanding principal balance of the loan.
On February 14, 2023, Embody, Inc. prepaid its outstanding principal balance of $2.5 million on its venture loan, plus interest and exit payment.
On February 20, 2023, our Board unanimously approved a new investment advisory agreement with our Advisor, substantially similar to the existing
Investment Management Agreement, subject to stockholder approval and the closing of the sale of our Advisor to an affiliate of Monroe Capital LLC (the
“Transaction”). We do not anticipate the Transaction will substantially or adversely affect us. It is anticipated that all of the officers and investment professionals
at our Advisor will remain at our Advisor and that our Advisor and we will maintain our venture lending-focused investment strategy.
On February 24, 2023, we funded a $5.0 million debt investment to an existing portfolio company, BriteCore Holdings, LLC.
On February 24, 2023, we funded a $20.0 million debt investment to a new portfolio company, Noodle Partners, Inc.
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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, 2022 and 2021, 100% of the outstanding principal amount of our debt investments bore interest at floating rates. New commitments to lend
to our portfolio companies are typically based on the Prime Rate as published in the Wall Street Journal.
Based on our December 31, 2022 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, 2022, 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)
$
$
$
$
$
$
19,590 $
13,147 $
6,638 $
(18,219) $
(12,790) $
(6,360) $
152 $
101 $
51 $
(152) $
(101) $
(51) $
19,438
13,046
6,587
(18,067)
(12,689)
(6,309)
(1) Excludes the impact of incentive fees based on pre-incentive fee net investment income.
While our 2027 Notes, our 2026 Notes, our 2019 Asset-Backed Notes and our 2022 Asset-Backed Notes bear interest at a fixed rate, our Credit Facilities
have a floating interest rate provision. The Key Facility is subject to a floor of 0.25% per annum, based on a prime rate index which resets monthly and the NYL
Facility is based on the three year USD mid-market swap rate plus a margin of between 3.55% and 5.15% with an interest rate floor, depending on the rating of
such notes at the time of issuance. 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. Engaging in commodity interest transactions such as
swap transactions or futures contracts for the Company may cause the Investment Adviser to fall within the definition of “commodity pool operator” under the
Commodity Exchange Act (the “CEA”) and related Commodity Futures Trading Commission (the “CFTC”) regulations. On January 31, 2020, the Investment
Adviser claimed an exclusion from the definition of the term “commodity pool operator” under the CEA and the CFTC regulations in connection with its
management of the Company and, therefore, is not subject to CFTC registration or regulation under the CEA as a commodity pool operator with respect to its
management of the Company.
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.
Inflation and Supply Chain Risk
Economic activity has continued to accelerate across sectors and regions. Nevertheless, due to global supply chain issues, geopolitical events, a rise in
energy prices and strong consumer demand as economies continue to reopen, inflation is showing signs of acceleration in the U.S. and globally. Inflation is
likely to continue in the near to medium-term, particularly in the U.S., with the possibility that monetary policy may tighten in response. Persistent inflationary
pressures could affect our portfolio companies profit margins.
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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 (PCAOB ID - 49)
Consolidated Statements of Assets and Liabilities as of December 31, 2022 and 2021
Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Statements of Changes in Net Assets for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Schedules of Investments as of December 31, 2022 and 2021
Notes to the Consolidated Financial Statements
86
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87
88
90
91
92
93
94
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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, 2022. 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, 2022, the Company’s internal control over financial reporting is effective based
on those criteria.
Pursuant to rules established by the SEC, this annual report does not include an attestation report of our independent registered public accounting firm
regarding internal control over financial reporting.
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To the Stockholders and the Board of Directors of 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 of Horizon Technology Finance Corporation and its subsidiaries (the
Company), including the consolidated schedules of investments, as of December 31, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations, changes in net assets and cash flows for each of the three years in the period ended December 31,
2022, in conformity with accounting principles generally accepted in the United States of America.
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 Public Company Accounting Oversight Board (United States) (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 audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
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 procedures included confirmation of investments owned as of December 31, 2022 and 2021, by correspondence with the custodians, brokers or
the underlying investee, or by other appropriate auditing procedures where replies from custodians, brokers or the underlying investee were not received. 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. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to
be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the
accounts or disclosures to which it relates.
Valuation of Level 3 investments
The fair value of the Company’s Level 3 investments was $716.3 million as of December 31, 2022.
As described in Notes 2 and 6 to the consolidated financial statements, there is not a readily available market value for most of the investments in the Company’s
portfolio. Such investments include debt, warrant, equity and other investments in venture capital and private equity backed companies. The valuation techniques
used in estimating the fair value of these investments may vary based on the specific characteristics of the investments and require the use of certain significant
unobservable inputs, such as the Company’s internally developed credit risk ratings, discounted expected future cash flows, hypothetical market yields, multiple
probability weighted expected cash flow scenarios and portfolio company financial performance, among others.
We identified the valuation of Level 3 investments as a critical audit matter due to the subjective nature of the judgments necessary for management to select
valuation techniques and the use of significant unobservable inputs to estimate the fair value. Auditing the reasonableness of management’s selection of
valuation technique and the related unobservable inputs required a high degree of auditor judgement and increased audit effort, including evaluation of the nature
of audit evidence obtained and the use of internal valuation specialists.
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The primary procedures we performed to address this critical audit matter included the following, among others:
We obtained an understanding of the relevant controls related to management’s internally developed credit risk ratings and tested such controls for
design and operating effectiveness.
We assessed the reasonableness of a sample of management’s credit risk ratings by inspecting underlying source data and comparing to the Company’s
credit risk policy.
We assessed the reasonableness of discounted expected future cash flows, multiple probability weighted scenarios, and portfolio management company
performance used in the Company’s valuation models through comparison to internal and external data.
With the assistance of our internal valuation specialists, we evaluated the reasonableness of the hypothetical market yields and stock price volatilities
used by the Company by comparing to market data for comparable companies.
With the assistance of our internal valuation specialists, we evaluated the appropriateness of the selected valuation techniques, and any changes to
selected valuation techniques from prior periods, used for Level 3 investments.
We evaluated management’s historical ability to estimate fair value through comparison of previous estimates to the transaction price of available
transactions occurring subsequent to the previous valuation date.
/s/ RSM US LLP
We have served as the Company's auditor since 2008.
Hartford, Connecticut
February 28, 2023
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Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Assets and Liabilities
(Dollars in thousands, except share and per share data)
Assets
Non-affiliate investments at fair value (cost of $721,248 and $452,387, respectively)
Controlled affiliate investments at fair value (cost of $0 and $1,450, respectively) (Note 5)
Total investments at fair value (cost of $721,248 and $453,837, respectively) (Note 4)
Cash
Investments in money market funds
Restricted investments in money market funds
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 3, 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, 2022 and December 31, 2021
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 27,920,838 and 21,384,925 shares
issued and 27,753,373 and 21,217,460 shares outstanding as of December 31, 2022 and December 31, 2021,
respectively
Paid-in capital in excess of par
Distributable earnings
Total net assets
Total liabilities and net assets
Net asset value per common share
See Notes to Consolidated Financial Statements
90
December 31,
2022
(Unaudited)
December 31,
2021
720,026 $
—
720,026
20,612
7,066
2,788
13,573
2,761
766,826 $
434,078 $
9,159
1,065
1,392
2,684
448,378
458,075
—
458,075
38,054
7,868
1,359
6,154
2,450
513,960
257,613
6,365
706
2,015
1,926
268,625
—
—
29
385,921
(67,502)
318,448
766,826 $
11.47 $
22
301,359
(56,046)
245,335
513,960
11.56
$
$
$
$
$
Table of Contents
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share and per share data)
Investment income
Interest income on investments
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
Net investment income before excise tax
Provision for excise tax
Net investment income
Net realized and unrealized loss
Net realized loss on non-affiliate investments
Net realized gain (loss) on non-controlled affiliate investments
Net realized loss on controlled affiliate investments
Net realized loss on investments
Net realized loss on extinguishment of debt
Net realized loss
Net unrealized (depreciation) appreciation on non-affiliate investments
Net unrealized depreciation on non-controlled affiliate investments
Net unrealized appreciation (depreciation) on controlled affiliate investments
Net unrealized (depreciation) appreciation on investments
Net realized and unrealized loss
Net increase in net assets resulting from operations
Net investment income per common share
Net increase in net assets resulting from operations per common share
Distributions declared per share
Weighted average shares outstanding
2022
Year ended December 31,
2021
2020
$
$
$
$
$
77,366 $
—
77,366
1,568
257
—
1,825
—
—
79,191
19,202
10,566
7,745
1,667
1,650
1,459
42,289
36,902
715
36,187
(8,364)
30
(1,150)
(9,484)
—
(9,484)
(7,002)
—
1,450
(5,552)
(15,036)
21,151 $
1.46 $
0.86 $
1.28 $
24,726,079
54,159 $
252
54,411
4,111
1,481
12
5,604
—
—
60,015
12,034
7,617
7,055
1,285
1,892
1,511
31,394
28,621
401
28,220
(2,858)
(390)
—
(3,248)
(395)
(3,643)
5,503
(848)
(1,450)
3,205
(438)
27,782 $
1.41 $
1.39 $
1.25 $
20,027,420
41,503
689
42,192
2,345
1,335
45
3,725
118
118
46,035
9,673
6,458
5,187
1,016
1,540
1,190
25,064
20,971
222
20,749
(14,686)
—
(12)
(14,698)
—
(14,698)
1,585
(1,014)
(258)
313
(14,385)
6,364
1.18
0.36
1.25
17,534,528
See Notes to Consolidated Financial Statements
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Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets
(In thousands, except share data)
Balance at December 31, 2019
Issuance of common stock, net of offering costs
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
Distributions declared
Reclassification of permanent tax differences (Note 2)
Balance at December 31, 2020
Issuance of common stock, net of offering costs
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 realized loss on extinguishment of debt
Net unrealized appreciation on investments
Issuance of common stock under dividend reinvestment plan
Distributions declared
Reclassification of permanent tax differences (Note 2)
Balance at December 31, 2021
Issuance of common stock, net of offering costs
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 depreciation on investments
Issuance of common stock under dividend reinvestment plan
Distributions declared
Reclassification of permanent tax differences (Note 2)
Balance at December 31, 2022
Common Stock
Amount
Shares
15,563,290 $
3,702,500
Paid-In
Capital
in Excess of
Par
Distributable
Earnings
Total Net
Assets
16 $
3
226,660 $
44,608
(42,621) $
—
184,055
44,611
—
—
—
20,566
—
—
19,286,356
1,907,234
—
—
—
—
23,870
—
—
21,217,460
6,482,684
—
—
—
53,229
—
—
27,753,373 $
—
—
—
—
—
—
19
3
—
—
—
—
—
—
—
22
7
—
—
—
—
—
—
29 $
—
—
—
241
—
(222)
271,287
30,083
—
—
—
—
390
—
(401)
301,359
84,596
—
—
—
681
—
(715)
385,921 $
20,749
(14,698)
313
—
(22,674)
222
(58,709)
—
28,220
(3,248)
(395)
3,205
—
(25,520)
401
(56,046)
—
36,187
(9,484)
(5,552)
—
(33,322)
715
(67,502) $
20,749
(14,698)
313
241
(22,674)
—
212,597
30,086
28,220
(3,248)
(395)
3,205
390
(25,520)
—
245,335
84,603
36,187
(9,484)
(5,552)
681
(33,322)
—
318,448
See Notes to Consolidated Financial Statements
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Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Cash Flow
(Dollars in thousands)
For the year ended December 31,
2021
2022
2020
$
21,151 $
27,782 $
6,364
Cash flows from operating activities:
Net increase in net assets resulting from operations
Adjustments to reconcile net increase in net assets resulting from operations to net cash
used in operating activities:
Amortization of debt issuance costs
Net realized loss on investments
Net realized loss on extinguishment of debt
Net unrealized depreciation (appreciation) on investments
Purchase of investments
Principal payments received on investments
Proceeds from sale of investments
Dividends from controlled affiliate investment
Equity received in settlement of fee income
Warrants received in settlement of fee income
Changes in assets and liabilities:
(Increase) decrease in interest receivable
Increase in end-of-term payments
Decrease in unearned income
Increase in other assets
Increase in other accrued expenses
Increase in base management fee payable
(Decrease) increase in incentive fee payable
Net cash used in operating activities
Cash flows from financing activities:
Proceeds from issuance of 2027 Notes
Proceeds from issuance of 2026 Notes
Proceeds from 2022 Asset-Backed Notes
Repayment of 2019 Asset-Backed Notes
Repayment of 2022 Notes
Proceeds from issuance of common stock, net of offering costs
Advances on Credit Facilities
Repayment of Credit Facilities
Debt issuance costs
Distributions paid
Net cash provided by financing activities
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash:
Beginning of period
End of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Supplemental non-cash investing and financing activities:
Refinanced debt investment balances
Warrant investments received and recorded as unearned income
Distributions payable
Acquisition of controlled affiliate investment
End-of-term payments receivable
Non-cash income
Cash
Investments in money market funds
Restricted investments in money market funds
Total cash, cash equivalents and restricted cash
1,604
9,484
—
5,552
(421,978)
95,871
49,964
—
—
—
(3,417)
(4,452)
(394)
(156)
758
359
(623)
(246,277)
57,500
—
100,000
(27,930)
—
84,603
199,000
(149,500)
(4,364)
(29,847)
229,462
(16,815)
1,091
3,248
395
(3,205)
(344,445)
188,010
52,954
—
—
—
(173)
(1,652)
(1,295)
(394)
509
143
1,040
(75,992)
—
57,500
—
(29,500)
(37,375)
30,086
127,000
(45,000)
(2,645)
(24,551)
75,515
(477)
1,018
14,698
—
(313)
(198,561)
146,258
8,335
(118)
(45)
(978)
887
(1,066)
(1,408)
(189)
430
44
(638)
(25,282)
—
—
—
—
—
44,611
80,250
(47,000)
(890)
(21,316)
55,655
30,373
17,385
47,758
8,593
—
1,829
5,786
16,498
4,203
5,124
19,502
27,199
1,057
47,758
$
$
$
$
$
$
$
$
$
$
47,281
30,466 $
47,758
47,281 $
17,028 $
10,706 $
30,625 $
5,616 $
9,159 $
— $
9,690 $
6,314 $
— $
3,355 $
6,365 $
— $
5,238 $
4,580 $
2022
Year ended December 31,
2021
2020
20,612 $
7,066
2,788
30,466 $
38,054 $
7,868
1,359
47,281 $
See Notes to Consolidated Financial Statements
93
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2022
(Dollars in thousands)
Type of
Investment
(7)
Cash
Rate (4)
Sector
Index Margin
Floor
Ceiling
ETP (10)
Maturity Date
Principal
Amount
Cost of
Investments
(6)(9)
Fair Value
(9)
Table of Contents
Portfolio Company (1)(3)
Non-Affiliate Investments — 226.1% (8)
Non-Affiliate Debt Investments — 215.5%
(8)
Non-Affiliate Debt Investments — Life
Science — 99.7% (8)
Avalo Therapeutics, Inc. (2)(5)(12)
Castle Creek Biosciences, Inc. (2)(12)
Emalex Biosciences, Inc. (2)(12)
Evelo Biosciences, Inc. (2)(5)(12)
F-Star Therapeutics, Inc. (2)(5)(12)
Greenlight Biosciences, Inc. (2)(5)(12)
IMV Inc. (2)(5)(12)
KSQ Therapeutics, Inc. (2) (12)
Biotechnology Term Loan
Term Loan
Term Loan
13.75%
13.75%
13.75%
Prime
Prime
Prime
6.25%
6.25%
6.25%
9.50%
9.50%
9.50%
Term Loan
13.75%
Prime
6.25%
9.50%
Term Loan
Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
13.75%
13.75%
13.75%
12.50%
12.50%
12.50%
12.50%
12.50%
12.50%
12.07%
12.07%
12.07%
12.07%
11.75%
11.75%
11.75%
11.75%
11.75%
11.75%
13.25%
13.25%
13.25%
13.25%
13.25%
13.25%
13.25%
13.25%
12.25%
12.25%
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Libor
Libor
Libor
Libor
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
6.25%
6.25%
6.25%
6.05%
6.05%
6.05%
6.05%
6.05%
6.05%
7.90%
7.90%
7.90%
7.90%
4.75%
4.75%
4.75%
4.75%
4.75%
4.75%
6.25%
6.25%
5.75%
5.75%
5.75%
5.75%
5.75%
5.75%
4.75%
4.75%
9.50%
9.50%
9.50%
9.55%
9.55%
9.55%
9.55%
9.55%
9.55%
9.75%
9.75%
9.75%
9.75%
11.00%
11.00%
11.00%
11.00%
11.00%
11.00%
9.50%
9.50%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
8.50%
8.50%
Native Microbials, Inc (2) (12)
Biotechnology Term Loan
12.75%
Prime
5.25%
8.50%
Term Loan
12.75%
Prime
5.25%
8.50%
PDS Biotechnology Corporation (2)(5)(12)
Biotechnology Term Loan
13.25%
Prime
5.75%
9.75%
Provivi, Inc. (2)(12)
Biotechnology Term Loan
12.67%
Libor
8.50%
9.50%
Term Loan
13.25%
Prime
5.75%
9.75%
Term Loan
13.25%
Prime
5.75%
9.75%
Term Loan
12.67%
Libor
8.50%
9.50%
Term Loan
12.67%
Libor
8.50%
9.50%
Term Loan
12.67%
Libor
8.50%
9.50%
Term Loan
12.67%
Libor
8.50%
9.50%
Term Loan
12.67%
Libor
8.50%
9.50%
See Notes to Consolidated Financial Statements
94
-
-
-
-
-
-
-
13.50%
13.50%
13.50%
13.50%
13.50%
13.50%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3.00% January 1, 2025 $
3.00% January 1, 2025
3.00% January 1, 2025
3.00%
February 1,
2025
February 1,
2025
3.00%
3.00% April 1, 2025
3.00% April 1, 2025
5.50% May 1, 2026
5.50% May 1, 2026
5.50% May 1, 2026
5.50% May 1, 2026
5.50% May 1, 2026
5.50% May 1, 2026
June 1, 2024
5.00%
June 1, 2024
5.00%
November 1,
2025
5.00%
5.00% May 1, 2026
4.25% January 1, 2028
4.25% January 1, 2028
4.25% January 1, 2028
4.25% January 1, 2028
4.25% January 1, 2028
4.25% January 1, 2028
4.00% April 1, 2025
July 1, 2025
4.00%
July 1, 2025
3.00%
July 1, 2025
3.00%
July 1, 2025
5.00%
5.00%
July 1, 2025
5.00% January 1, 2026
5.00% January 1, 2026
5.50% May 1, 2027
5.50% May 1, 2027
5.00%
5.00%
3.75%
3.75%
3.75%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
November 1,
2026
November 1,
2026
September 1,
2026
September 1,
2026
September 1,
2026
December 1,
2024
December 1,
2024
December 1,
2024
December 1,
2024
December 1,
2024
December 1,
2024
$
2,885
2,885
1,442
2,885
2,885
1,442
1,442
5,000
5,000
3,000
5,000
5,000
3,000
1,979
1,979
5,000
5,000
10,000
15,000
6,000
6,000
4,000
4,000
2,500
2,500
5,000
2,500
5,000
2,500
5,000
5,000
6,250
6,250
3,750
2,500
10,000
3,750
3,750
4,667
4,667
2,333
2,333
2,333
2,333
$
2,853
2,823
1,411
2,821
2,821
1,408
1,408
4,891
4,963
2,978
4,963
4,963
2,978
1,962
1,963
4,923
4,912
9,872
14,808
5,923
5,923
3,949
3,949
2,476
2,473
4,857
2,430
4,946
2,473
4,947
4,947
6,077
6,177
3,630
2,469
9,701
3,697
3,697
4,597
4,597
2,280
2,280
2,274
2,274
2,777
2,750
1,374
2,748
2,748
1,371
1,371
4,891
4,963
2,978
4,963
4,963
2,978
1,962
1,963
4,923
4,912
9,872
14,808
5,923
5,923
3,949
3,949
2,476
2,473
4,857
2,430
4,946
2,473
4,947
4,947
6,077
6,177
3,630
2,469
9,701
3,697
3,697
4,597
4,597
2,280
2,280
2,274
2,274
Table of Contents
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2022
(Dollars in thousands)
Portfolio Company (1)(3)
Sector
Type of
Investment
(7)
Cash
Rate (4)
Index Margin
Floor
Ceiling
ETP (10)
Stealth Biotherapeutics Inc. (2)(12)
Biotechnology Term Loan
13.00%
Prime
5.50%
8.75%
Aerobiotix, LLC (2)(12)
Term Loan
Medical Device Term Loan
Term Loan
13.00%
13.75%
13.75%
Prime
Prime
Prime
5.50%
6.25%
6.25%
8.75%
9.50%
9.50%
Canary Medical Inc. (2)(12)
Medical Device Term Loan
12.75%
Prime
5.75%
9.00%
Term Loan
12.75%
Prime
5.75%
9.00%
Term Loan
12.75%
Prime
5.75%
9.00%
Ceribell, Inc. (2)(12)
Medical Device Term Loan
10.50%
Prime
3.50%
8.25%
Term Loan
10.50%
Prime
3.50%
8.25%
Term Loan
10.50%
Prime
3.50%
8.25%
Cognoa, Inc. (2)(12)
Conventus Orthopaedics, Inc. (2)(12)
Term Loan
Medical Device Term Loan
Term Loan
Medical Device Term Loan
Term Loan
10.50%
13.00%
13.00%
12.17%
12.17%
Prime
Prime
Prime
Libor
Libor
3.50%
5.50%
5.50%
8.00%
8.00%
8.25%
8.75%
8.75%
9.25%
9.25%
Corinth Medtech, Inc. (2)(12)
Medical Device Term Loan
12.25%
Prime
5.25%
8.50%
CSA Medical, Inc. (2)(12)
Embody, Inc. (2)(12)
Term Loan
Medical Device Term Loan
Term Loan
Term Loan
Medical Device Term Loan
InfoBionic, Inc. (2)(12)
Medical Device Term Loan
Term Loan
Magnolia Medical Technologies, Inc. (2)(12) Medical Device Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
12.25%
12.37%
12.37%
12.37%
14.00%
13.25%
13.25%
12.00%
12.00%
12.00%
12.00%
12.50%
12.50%
Prime
Libor
Libor
Libor
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
5.25%
8.20%
8.20%
8.20%
6.50%
6.25%
6.25%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
8.50%
10.00%
10.00%
10.00%
9.75%
9.50%
9.50%
9.75%
9.75%
9.75%
9.75%
9.75%
9.75%
Robin Healthcare, Inc. (2)(12)
Medical Device Term Loan
13.00%
Prime
5.50%
10.25%
Scientia Vascular, Inc. (2)(12)
Sonex Health, Inc. (2)(12)
Spineology, Inc. (2)(12)
Term Loan
Medical Device Term Loan
Term Loan
Medical Device Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
13.00%
11.75%
11.75%
13.50%
13.50%
13.50%
13.50%
13.50%
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Prime
Medical Device Term Loan
Term Loan
14.50%
14.50%
Prime
Prime
5.50%
4.75%
4.75%
6.50%
6.50%
6.50%
6.50%
6.50%
7.00%
7.00%
10.25%
8.50%
8.50%
9.75%
9.75%
9.75%
9.75%
9.75%
10.25%
10.25%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
See Notes to Consolidated Financial Statements
95
6.00%
Maturity Date
October 1,
2025
October 1,
2025
6.00%
6.00% April 1, 2026
6.00% April 1, 2026
7.00%
7.00%
7.00%
5.50%
5.50%
5.50%
November 1,
2024
November 1,
2024
November 1,
2024
October 1,
2024
October 1,
2024
October 1,
2024
October 1,
2024
10.36%
10.36%
5.50%
6.00% August 1, 2026
6.00% August 1, 2026
July 1, 2025
July 1, 2025
September 15,
2022
September 15,
2022
20.00%
20.00%
5.00% January 1, 2024
5.00% January 1, 2024
5.00% March 1, 2024
28.00% August 1, 2026
October 1,
4.00%
2024
June 1, 2025
4.00%
4.00% March 1, 2025
4.00% March 1, 2025
4.00% March 1, 2025
4.00% March 1, 2025
4.00% January 1, 2027
4.00% January 1, 2027
4.00%
November 1,
2026
November 1,
2026
4.00%
5.00% January 1, 2027
5.00% January 1, 2027
June 1, 2025
8.00%
June 1, 2025
8.00%
June 1, 2025
8.00%
8.00% April 1, 2026
8.00% May 1, 2026
October 1,
2025
1.00%
1.00% April 1, 2026
Principal
Amount
Cost of
Investments
(6)(9)
Fair Value
(9)
5,000
2,500
2,500
2,500
2,500
2,500
2,500
5,000
5,000
2,500
2,500
2,500
5,000
3,960
3,960
2,500
2,500
1,625
108
2,000
2,500
3,208
1,000
5,000
5,000
5,000
5,000
5,000
5,000
3,500
3,500
3,750
3,750
2,500
2,500
2,500
2,500
2,500
5,000
2,500
4,914
2,457
2,463
2,463
2,475
2,489
2,473
4,973
4,973
2,478
2,478
2,466
4,932
3,898
3,898
2,500
2,500
1,610
107
1,983
2,482
3,143
974
4,939
4,939
4,933
4,933
4,913
4,913
3,360
3,460
3,597
3,706
2,476
2,476
2,476
2,453
2,455
4,966
2,481
4,914
2,457
2,364
2,364
2,475
2,489
2,473
4,973
4,973
2,478
2,478
2,466
4,932
3,898
3,898
2,500
2,500
1,610
107
1,983
2,482
3,143
974
4,939
4,939
4,933
4,933
4,913
4,913
3,360
3,460
3,597
3,706
2,476
2,476
2,476
2,453
2,455
4,966
2,481
Table of Contents
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2022
(Dollars in thousands)
Portfolio Company (1)(3)
Swift Health Systems Inc. (2)(12)
Type of
Investment
(7)
Cash
Rate (4)
Sector
Index Margin
Floor
Medical Device Term Loan
Term Loan
12.25% Prime
12.25% Prime
5.25%
5.25%
9.00%
9.00%
Ceiling
-
-
ETP (10)
Maturity Date
July 1, 2027
July 1, 2027
5.00%
5.00%
Total Non-Affiliate Debt Investments — Life Science
Non-Affiliate Debt Investments —
Sustainability — 26.3% (8)
Aerofarms, Inc. (2)(12)
Nexii Building Solutions, Inc. (2)(12)
Other
Sustainability
Other
Sustainability
Soli Organic, Inc. (2)(12)
Other
Sustainability
Temperpack Technologies, Inc. (2)(12)
Other
Sustainability
Term Loan
Term Loan
14.25% Prime
14.25% Prime
6.75%
6.75%
10.00%
10.00%
Term Loan
14.50% Prime
7.00%
10.25%
Term Loan
14.50% Prime
7.00%
10.25%
Term Loan
Term Loan
Term Loan
14.50% Prime
14.50% Prime
14.50% Prime
Term Loan
Term Loan
Term Loan
Term Loan
14.25% Prime
14.25% Prime
14.25% Prime
14.25% Prime
7.00%
7.00%
7.00%
6.75%
6.75%
6.75%
6.75%
10.25%
10.25%
10.25%
10.00%
10.00%
10.00%
10.00%
Term Loan
13.00% Prime
5.50%
10.00%
Term Loan
13.00% Prime
5.50%
10.00%
Term Loan
Term Loan
14.25% Prime
14.25% Prime
6.75%
6.75%
10.00%
10.00%
Term Loan
14.25% Prime
6.75%
10.00%
Term Loan
14.25% Prime
6.75%
10.00%
Term Loan
14.25% Prime
6.75%
10.00%
Total Non-Affiliate Debt Investments — Sustainability
Non-Affiliate Debt Investments —
Technology — 81.4% (8)
Axiom Space, Inc. (2)(12)
Communications Term Loan
Term Loan
Term Loan
Convertible
Note
13.00% Prime
13.00% Prime
13.00% Prime
6.00%
6.00%
6.00%
9.25%
9.25%
9.25%
3.00%
Alula Holdings, Inc. (2)(12)
Better Place Forests Co. (2)(12)(13)
CAMP NYC, Inc. (2)(12)
Clara Foods Co. (2)(12)
Consumer-
related
Technologies
Consumer-
related
Technologies
Consumer-
related
Technologies
Consumer-
related
Technologies
Term Loan
13.75% Prime
6.75%
10.00%
Term Loan
13.75% Prime
6.75%
10.00%
Term Loan
13.75% Prime
6.75%
10.00%
Term Loan
13.75% Prime
6.75%
10.00%
Term Loan
13.75% Prime
6.75%
10.00%
Term Loan
13.75% Prime
6.25%
9.50%
Term Loan
13.75% Prime
6.25%
9.50%
Term Loan
14.75% Prime
7.25%
10.50%
Term Loan
Term Loan
12.75% Prime
12.75% Prime
5.75%
5.75%
9.00%
9.00%
See Notes to Consolidated Financial Statements
96
Principal
Amount
3,500
3,500
Cost of
Investments
(6)(9)
3,349
3,454
318,172
Fair Value
(9)
3,349
3,454
317,568
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3.00% April 1, 2026
3.00% April 1, 2026
2.50%
2.50%
2.50%
2.50%
2.50%
September 1,
2025
September 1,
2025
September 1,
2025
July 1, 2026
July 1, 2026
2.75% April 1, 2026
2.75% April 1, 2026
2.75% May 1, 2026
2.75% May 1, 2026
2.75%
2.75%
2.50%
2.50%
2.50%
2.50%
2.50%
December 1,
2026
December 1,
2026
June 1, 2025
June 1, 2025
October 1,
2025
October 1,
2025
October 1,
2025
2.50%
2.50%
2.50%
June 1, 2026
June 1, 2026
June 1, 2026
July 1, 2023
3.00%
3.00%
3.00%
3.00%
3.00%
January 1,
2025
January 1,
2025
January 1,
2025
December 1,
2025
February 1,
2026
1.85%
1.85%
July 1, 2025
October 1,
2025
3,750
3,750
7,500
7,500
7,500
5,000
5,000
2,500
5,000
5,000
2,500
5,000
2,500
3,750
3,750
7,500
3,750
3,750
7,500
7,500
7,500
250
5,000
5,000
3,000
1,000
1,000
5,000
2,500
3,699
3,699
7,371
7,371
7,371
4,903
4,903
2,463
4,927
4,924
2,462
4,900
2,450
3,697
3,717
7,424
3,712
3,699
3,699
7,371
7,371
7,371
4,903
4,903
2,463
4,927
4,924
2,462
4,900
2,450
3,697
3,717
7,424
3,712
3,712
83,705
3,712
83,705
7,455
7,455
7,455
250
4,966
4,966
2,979
976
977
4,951
2,474
7,455
7,455
7,455
306
4,966
4,966
2,979
976
977
3,834
1,916
3.00% May 1, 2026
3,500
3,461
3,461
5.50% August 1, 2025
5.50% August 1, 2025
2,500
2,500
2,482
2,482
2,482
2,482
Table of Contents
Portfolio Company (1)(3)
Divergent Technologies, Inc. (2)(12)
Sector
Consumer-related
Technologies
Havenly, Inc. (2)(12)
Consumer-related
Technologies
Interior Define, Inc. (2)(12)(13)
Lyrical Foods, Inc. (2)(12)
MyForest Foods Co. (2)(12)
NextCar Holding Company, Inc. (2)(12)
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Optoro, Inc. (2)(12)
Primary Kids, Inc. (2)(12)
Unagi, Inc. (2)(12)
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2022
(Dollars in thousands)
Type of
Investment (7)
Cash
Rate (4)
Index Margin
Floor
Ceiling
ETP (10)
Maturity Date
Principal
Amount
Cost of
Investments
(6)(9)
Fair
Value (9)
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
11.25% Prime
11.25% Prime
11.25% Prime
11.25% Prime
11.25% Prime
11.25% Prime
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
9.50%
9.50%
9.50%
9.50%
9.50%
9.50%
11.25%
11.25%
11.25%
11.25%
11.25%
11.25%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
Term Loan
11.25% Prime
6.00%
9.50%
11.25%
3.00%
Term Loan
11.25% Prime
6.00%
9.50%
11.25%
3.00%
July 1, 2027
July 1, 2027
July 1, 2027
July 1, 2027
July 1, 2027
July 1, 2027
January 1,
2028
January 1,
2028
Term Loan
Term Loan
12.50% Prime
12.50% Prime
5.00%
5.00%
5.00%
5.00%
Term Loan
11.00% Prime
3.50%
10.50%
Term Loan
11.00% Prime
3.50%
10.50%
Term Loan
13.50% Prime
6.50%
9.75%
Term Loan
13.50% Prime
6.50%
9.75%
Term Loan
10.00% Prime
6.75%
10.00%
Term Loan
14.25% Prime
6.75%
10.00%
Term Loan
14.25% Prime
6.75%
10.00%
Term Loan
12.75% Prime
5.75%
9.00%
Term Loan
12.75% Prime
5.75%
9.00%
Term Loan
12.75% Prime
5.75%
9.00%
Term Loan
12.75% Prime
5.75%
9.00%
Term Loan
12.75% Prime
5.75%
9.00%
Term Loan
12.75% Prime
5.75%
9.00%
Term Loan
12.75% Prime
5.75%
9.00%
Term Loan
12.75% Prime
5.75%
9.00%
Term Loan
13.25% Prime
6.25%
9.50%
Term Loan
Term Loan
14.25% Prime
14.25% Prime
7.25%
7.25%
10.50%
10.50%
Term Loan
14.25% Prime
7.25%
10.50%
Term Loan
Term Loan
Term Loan
15.25% Prime
15.25% Prime
15.25% Prime
7.75%
7.75%
7.75%
11.00%
11.00%
11.00%
3,750
1,250
3,750
1,250
3,750
1,250
3,750
3,750
2,000
3,000
2,813
2,813
3,210
2,963
2,500
5,000
2,500
5,000
2,000
2,500
3,000
2,500
2,500
5,000
2,500
2,700
2,700
3,000
2,500
1,250
1,250
3,333
3,333
1,667
1,667
1,667
2,500
2,500
3,295
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4.00% March 1, 2027
4.00% March 1, 2027
7.78%
7.78%
4.00%
4.00%
-
3.00%
3.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
February 1,
2028
February 1,
2028
January 1,
2026
January 1,
2026
September 1,
2027
October 1,
2025
October 1,
2025
December 30,
2022
December 30,
2022
December 30,
2022
December 30,
2022
December 30,
2022
December 30,
2022
December 30,
2022
December 30,
2022
3.00% March 1, 2025
3.00% March 1, 2025
3.00%
September 1,
2025
-
-
-
4.00%
4.00%
4.00%
4.00%
July 1, 2025
July 1, 2025
July 1, 2025
September 1,
2024
September 1,
2024
September 1,
2024
September 1,
2024
September 1,
2024
4.00%
5.00% March 1, 2026
5.00% March 1, 2026
50.43%
December 31,
2022
4.00% August 1, 2027
2,500
3,478
1,238
3,715
1,238
3,715
1,238
3,698
3,698
1,082
1,623
2,813
2,813
3,151
2,886
2,588
4,954
2,477
4,943
1,981
2,477
2,971
2,459
2,459
4,914
2,456
2,347
2,673
2,673
2,967
2,473
1,236
1,236
3,286
3,286
1,641
1,641
1,613
2,421
2,487
3,295
3,478
1,238
3,715
1,238
3,715
1,238
3,698
3,698
1,082
1,623
2,813
2,813
—
—
2,279
4,954
2,477
4,715
1,890
2,363
2,835
2,345
2,345
4,688
2,342
2,347
2,673
2,673
2,967
2,473
1,236
1,236
3,286
3,286
1,641
1,641
1,613
2,421
2,487
3,295
Liqid, Inc. (2)(12)
Networking
Term Loan
13.25% Prime
6.25%
9.50%
BriteCore Holdings, Inc. (2)(12)
Software
Term Loan
13.25% Prime
6.25%
9.50%
Term Loan
13.25% Prime
6.25%
9.50%
Term Loan
13.25% Prime
6.25%
9.50%
Term Loan
Term Loan
Term Loan
13.25% Prime
13.75% Prime
13.75% Prime
6.25%
6.75%
6.75%
9.50%
10.00%
10.00%
Decisyon, Inc. (12)
Software
Term Loan
16.93% Prime
9.43%
12.68%
See Notes to Consolidated Financial Statements
97
Table of Contents
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2022
(Dollars in thousands)
Portfolio Company (1)(3)
Dropoff, Inc. (2)(12)
Sector
Software
Engage3, LLC (2)(12)
Software
Type of
Investment
(7)
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Cash
Rate (4)
Index Margin
Floor
ETP (10)
14.00% Prime
14.00% Prime
14.00% Prime
13.25% Prime
13.25% Prime
6.50%
6.50%
6.50%
6.25%
6.25%
Ceiling
-
-
-
-
-
9.75%
9.75%
9.75%
9.75%
9.75%
Groundspeed Analytics, Inc. (2)(12)
Software
Term Loan
13.00% Prime
5.50%
11.00%
18.00%
Kodiak Robotics, Inc. (2)(12)
Software
Lemongrass Holdings, Inc. (2)(12)
Lytics, Inc. (2)(12)
Reputation Institute, Inc. (2)(12)
Slingshot Aerospace, Inc. (2)(12)
Software
Software
Software
Software
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
Term Loan
13.00% Prime
13.00% Prime
13.00% Prime
13.00% Prime
13.00% Prime
14.00% Prime
14.00% Prime
13.00% Prime
13.00% Prime
14.25% Prime
13.25% Prime
13.25% Prime
13.25% Prime
13.25% Prime
5.50%
5.50%
5.50%
5.50%
5.50%
6.50%
6.50%
6.00%
6.00%
7.25%
5.75%
5.75%
5.75%
5.75%
11.00%
10.25%
10.25%
10.25%
10.25%
9.75%
9.75%
9.25%
12.25%
10.50%
9.75%
9.75%
9.75%
9.75%
Supply Network Visiblity Holdings LLC (2)(12)
Software
Term Loan
13.50% Prime
6.50%
9.75%
Term Loan
13.50% Prime
6.50%
9.75%
Term Loan
13.50% Prime
6.50%
9.75%
Term Loan
13.50% Prime
6.50%
9.75%
Total Non-Affiliate Debt Investments — Technology
Non-Affiliate Debt Investments — Healthcare
information and services — 8.1% (8)
Hound Labs inc. (2) (12)
Secure Transfusion Services, Inc. (2)(12)(13)
Diagnostics
Other
Healthcare
Term Loan
Term Loan
Term Loan
13.50% Prime
13.50% Prime
13.50% Prime
6.00%
6.00%
6.00%
9.25%
9.25%
9.25%
Term Loan
13.25% Prime
5.75%
9.00%
BrightInsight, Inc. (2)(12)
Software
Term Loan
Term Loan
Term Loan
Term Loan
13.25% Prime
12.50% Prime
12.50% Prime
12.50% Prime
5.75%
5.50%
5.50%
5.50%
9.00%
9.50%
9.50%
9.50%
Total Non-Affiliate Debt Investments — Healthcare information and services
Total Non- Affiliate Debt Investments
18.00%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
See Notes to Consolidated Financial Statements
98
3.00%
Maturity Date
3.50% April 1, 2026
3.50% April 1, 2026
3.50% August 1, 2026
July 1, 2027
4.50%
July 1, 2027
4.50%
December 1,
2026
December 1,
2026
3.00%
4.00% April 1, 2026
4.00% April 1, 2026
4.00% April 1, 2026
4.00% April 1, 2026
2.50% March 1, 2026
2.50% March 1, 2026
July 1, 2025
3.00%
December 1,
2026
3.00%
3.00% August 1, 2025
5.00% August 1, 2026
5.00% August 1, 2026
5.00% August 1, 2026
5.00% August 1, 2026
February 1,
2025
February 1,
2025
December 1,
2025
December 1,
2025
June 1, 2026
June 1, 2026
June 1, 2026
October 1,
2025
December 31,
2025
4.00%
3.00% August 1, 2027
3.00% August 1, 2027
3.00% August 1, 2027
4.00%
4.00%
4.00%
4.00%
3.50%
3.50%
3.50%
4.00%
Principal
Amount
6,500
6,000
2,500
3,750
3,750
5,000
5,000
10,000
10,000
5,000
5,000
5,000
2,500
2,500
1,250
5,000
5,000
5,000
5,000
5,000
3,500
3,500
2,500
2,500
2,500
2,500
5,000
4,943
2,500
7,000
3,500
3,500
Cost of
Investments
(6)(9)
6,347
5,859
2,436
3,678
3,718
4,798
4,948
9,826
9,826
4,913
4,913
4,947
2,474
2,396
1,231
4,932
4,870
4,933
4,933
4,933
3,472
3,472
2,472
Fair
Value (9)
6,347
5,859
2,436
3,678
3,718
4,798
4,948
9,826
9,826
4,913
4,913
4,947
2,474
2,396
1,231
4,932
4,870
4,933
4,933
4,933
3,472
3,472
2,472
2,472
268,468
2,472
259,366
2,385
2,473
4,946
4,943
2,467
6,619
3,448
3,448
30,729
701,074
2,385
2,473
4,946
1,668
832
6,619
3,448
3,448
25,819
686,458
Table of Contents
Portfolio Company (1)(3)
Non-Affiliate Warrant Investments — 9.4% (8)
Non-Affiliate Warrants — Life Science — 3.1% (8)
Avalo Therapeutics, Inc. (2)(5)(12)
Castle Creek Biosciences, Inc. (2)(12)
Corvium, Inc. (2)(12)
Emalex Biosciences, Inc. (2)(12)
Evelo Biosciences, Inc. (2)(5)(12)
F-Star Therapeutics, Inc. (2)(5)(12)
Greenlight Biosciences, Inc. (2)(5)(12)
Imunon, Inc. (2)(5)(12)
IMV Inc. (2)(5)(12)
KSQ Therapeutics, Inc. (2) (12)
Mustang Bio, Inc. (2)(5)(12)
Native Microbials, Inc (2) (12)
PDS Biotechnology Corporation (2)(5)(12)
Provivi, Inc. (2)(12)
Rocket Pharmaceuticals Corporation (5)(12)
Stealth Biotherapeutics Inc. (2)(12)
vTv Therapeutics Inc. (2)(5)(12)
Xeris Pharmaceuticals, Inc. (2)(5)(12)
AccuVein Inc. (2)(12)
Aerin Medical, Inc. (2)(12)
Aerobiotix, LLC (2)(12)
Canary Medical Inc. (2)(12)
Ceribell, Inc. (2)(12)
Cognoa, Inc. (2)(12)
Conventus Orthopaedics, Inc. (2)(12)
CSA Medical, Inc. (2)(12)
CVRx, Inc. (2)(5)(12)
Infobionic, Inc. (2)(12)
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2022
(Dollars in thousands)
Sector
Type of Investment (7)
Number of Shares
Cost of
Investments (6)(9)
Fair
Value (9)
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
26,442
7,404
661,956
110,402
463,915
21,120
47,452
16,502
39,774
48,077
252,161
103,679
299,848
203,017
7,051
318,181
95,293
126,000
1,175
1,818,183
27,330
12,153
145,483
775,000
7,972,222
1,375,727
47,410
317,647
311
214
53
176
126
35
366
66
67
51
146
64
160
399
17
264
44
72
24
64
48
84
69
148
221
153
76
124
—
335
—
263
125
—
—
—
—
60
—
162
3,024
648
14
37
—
3
—
1,200
31
1,864
209
179
226
150
394
113
See Notes to Consolidated Financial Statements
99
Table of Contents
Portfolio Company (1)(3)
Magnolia Medical Technologies, Inc. (2)(12)
Meditrina, Inc. (2)(12)
Robin Healthcare, Inc. (2)(12)
Scientia Vascular, Inc (2)(12)
Sonex Health, Inc. (2)(12)
VERO Biotech LLC (2)(12)
Swift Health Systems Inc. (2)(12)
Total Non-Affiliate Warrants — Life Science
Non-Affiliate Warrants — Sustainability — 0.6% (8)
Aerofarms, Inc. (2)(12)
LiquiGlide, Inc. (2)(12)
Nexii Building Solutions, Inc. (2)(12)
Soli Organic, Inc. (2)(12)
Temperpack Technologies, Inc. (2)(12)
Total Non-Affiliate Warrants — Sustainability
Non-Affiliate Warrants — Technology — 5.1% (8)
Axiom Space, Inc. (2)(12)
Intelepeer Holdings, Inc. (2)(12)
PebblePost, Inc. (2)(12)
Alula Holdings, Inc. (2)(12)
Aterian, Inc. (2)(5)(12)
Better Place Forests Co. (2)(12)
Caastle, Inc. (2)(12)
CAMP NYC, Inc. (2)(12)
Clara Foods Co. (2)(12)
Divergent Technologies, Inc. (2)(12)
Havenly, Inc. (2)(12)
Interior Define, Inc. (2)(12)
MyForest Foods Co. (2)(12)
NextCar Holding Company, Inc. (2)(12)
Optoro, Inc. (2)(12)
Primary Kids, Inc. (2)(12)
Quip NYC Inc. (2)(12)
Unagi, Inc. (2)(12)
Updater, Inc.(2)(12)
CPG Beyond, Inc. (2)(12)
Silk, Inc. (2)(12)
Global Worldwide LLC (2)(12)
Rocket Lawyer Incorporated (2)(12)
Skillshare, Inc. (2)(12)
Liqid, Inc. (2)(12)
Halio, Inc. (2)(12)
Avalanche Technology, Inc. (2)(12)
BriteCore Holdings, Inc. (2)(12)
Decisyon, Inc. (12)
Dropoff, Inc. (2)(12)
E La Carte, Inc. (2)(5)(12)
Groundspeed Analytics, Inc. (2)(12)
Kodiak Robotics, Inc. (2)(12)
Lemongrass Holdings, Inc. (2)(12)
Lotame Solutions, Inc. (2)(12)
Lytics, Inc. (2)(12)
Reputation Institute, Inc. (2)(12)
Revinate Holdings, Inc. (2)(12)
Riv Data Corp. (2)(12)
SIGNiX, Inc. (12)
Skyword, Inc. (12)
Slingshot Aerospace, Inc. (2)(12)
Supply Network Visiblity Holdings LLC (2)(12)
Topia Mobility, Inc. (2)(12)
xAd, Inc. (2)(12)
Total Non-Affiliate Warrants — Technology
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2022
(Dollars in thousands)
Sector
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Type of Investment (7)
Number of Shares
Cost of
Investments (6)(9)
Fair
Value (9)
809,931
233,993
86,066
19,662
605,313
408
135,484
201,537
61,539
204,832
681
35,906
1,991
2,936,535
598,850
20,000
76,923
10,690
268,591
17,605
46,745
31,966
1,312,500
553,710
143
1,261,253
6,600
553,778
6,191
171,081
108,333
500,000
442,110
245,810
261,721
139,074
344,102
5,002,574
6,081
77,828
82,967
516,732
147,361
86,300
639,918
101,308
288,115
80,197
3,731
682,034
321,428
186,235
301,055
309,208
682
3,049,607
4,343,348
194
83
16
40
98
53
71
4,197
61
39
488
214
126
928
46
139
92
93
195
26
68
20
30
56
2,947
103
29
197
104
57
325
32
34
242
234
75
92
162
364
1,585
56
21
46
455
60
6
273
34
22
40
56
46
12
225
48
123
64
138
177
9,249
385
101
16
46
123
1
83
9,792
74
55
1,061
361
268
1,819
67
3,265
173
64
—
—
1,069
61
125
233
2,947
—
37
17
104
429
534
22
42
909
407
—
357
802
243
2,610
—
69
—
197
3
6
296
41
312
44
39
99
296
—
1
133
83
—
12
16,148
Other Sustainability
Other Sustainability
Other Sustainability
Other Sustainability
Other Sustainability
Preferred Stock Warrant
Common Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Communications
Communications
Communications
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Data Storage
Data Storage
Internet and Media
Internet and Media
Internet and Media
Networking
Power Management
Semiconductors
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred and Common Stock
Warrants
Preferred Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred and Common Stock
Warrants
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
See Notes to Consolidated Financial Statements
100
Table of Contents
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2022
(Dollars in thousands)
Sector
Type of Investment (7)
Number of Shares
Cost of
Investments (6)(9)
Fair
Value (9)
Diagnostics
Other Healthcare
Other Healthcare
Software
Software
Medical Device
Medical Device
Biotechnology
Biotechnology
Consumer-related
Technologies
Consumer-related
Technologies
Medical Device
Other Sustainability
Software
Software
Portfolio Company (1)(3)
Non-Affiliate Warrants — Healthcare information and
services — 0.6% (8)
Hound Labs, Inc (2) (12)
Kate Farms, Inc. (2)(12)
Secure Transfusion Services, Inc. (2)(12)
BrightInsight, Inc. (2)(12)
Medsphere Systems Corporation (2)(12)
Total Non-Affiliate Warrants — Healthcare information and services
Total Non-Affiliate Warrants
Non-Affiliate Other Investments — 0.4% (8)
Lumithera, Inc. (2)
ZetrOZ, Inc. (12)
Total Non-Affiliate Other Investments
Non-Affiliate Equity — 0.8% (8)
Castle Creek Biosciences, Inc. (12)
Emalex Biosciences, Inc. (2)(12)
Getaround, Inc. (2)(5)
SnagAJob.com, Inc. (12)
Lumithera, Inc. (2)
Tigo Energy, Inc. (2)
Branded Online, Inc. (2)(5)
Decisyon, Inc. (12)
Total Non-Affiliate Equity
Total Non-Affiliate Portfolio Investment Assets
Total Portfolio Investment Assets — 226.1% (8)
Short Term Investments — Unrestricted Investments —
2.2% (8)
US Bank Money Market Deposit Account
Total Short Term Investments — Unrestricted Investments
Short Term Investments — Restricted Investments —
0.9% (8)
US Bank Money Market Deposit Account
Total Short Term Investments — Restricted Investments
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Royalty Agreement
Royalty Agreement
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Preferred
Common Stock
Preferred and Common Stock
159,893
82,965
77,690
80,544
7,097,792
1,162
32,831
87,082
82,974
392,651
22,313
108,004
72,638,663
$
$
$
$
$
$
47
102
47
160
60
416
14,790
1,200
—
1,200
250
356
253
8
2,000
8
1,079
230
4,184
721,248
721,248
$
$
7,066
7,066
$
$
2,788
2,788
$
$
54
1,370
—
170
359
1,953
29,712
1,100
200
1,300
250
356
57
83
1,700
27
83
—
2,556
720,026
720,026
7,066
7,066
2,788
2,788
(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 (the “Key Facility”) with KeyBank National Association (“Key”), the Note Funding Agreement (the “NYL
Facility”) with several entities owned or affiliated with New York Life Insurance Company (“NYL Noteholders”), the term debt securitization in connection with which an
affiliate of the Company made an offering of $100.0 million in aggregate principal amount of fixed rate asset-backed notes that were issued in conjunction with the $160.0
million securitization of secured loans the Company completed on August 13, 2019 (the “2019 Asset-Backed Notes”), and/or the term debt securitization in connection with
which an affiliate of the Company made an offering of $100.0 million in aggregate principal amount of fixed rate asset-backed notes that were issued in conjunction with the
$157.8 million securitization of secured loans the Company completed on November 9, 2022 (the “2022 Asset-Backed Notes”).
(3) 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).
(4) All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate
on the debt investment and does not include end-of-term payments (“ETPs”), and any additional fees related to the investments, such as deferred interest, commitment fees or
prepayment fees. 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, 2022 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, 2022, 6.5% and 6.6% of the Company’s total assets on a cost and fair value basis, respectively, are in non-qualifying assets. 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 has a payment-in-kind (“PIK”) feature.
(12) The fair value of the investment was valued using significant unobservable inputs.
(13) Debt investment is on non-accrual status as of December 31, 2022.
See Notes to Consolidated Financial Statements
101
Table of Contents
Portfolio Company (1)(3)
Non-Affiliate Investments — 186.7% (8)
Non-Affiliate Debt Investments — 178.3% (8)
Non-Affiliate Debt Investments — Life
Science — 77.3% (8)
Castle Creek Pharmaceuticals Holdings, Inc. (2)
(12)
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2021
(Dollars in thousands)
Type of
Investment
(7)
Cash
Rate (4)
Sector
Index Margin
Floor
Ceiling
ETP (10)
Maturity
Date
Principal
Amount
Cost of
Investments
(6)(9)
Fair Value
(9)
Biotechnology Term Loan
9.30% Libor
7.50%
9.30%
$
5,000
$
4,957
$
4,957
Avalo Therapeutics, Inc. (2)(5)(12)
Biotechnology Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
9.30% Libor
7.50%
9.30%
Term Loan
9.30% Libor
7.50%
9.30%
Term Loan
9.30% Libor
7.50%
9.30%
Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
Biotechnology Term Loan
Term Loan
Biotechnology Term Loan
9.50% Prime
9.50% Prime
9.50% Prime
9.75% Libor
9.75% Libor
9.75% Libor
9.50% Prime
9.50% Prime
9.50% Prime
9.50% Prime
9.00% Prime
9.00% Prime
8.75% Libor
6.25%
6.25%
6.25%
7.90%
7.90%
7.90%
6.25%
6.25%
6.25%
6.25%
6.25%
6.25%
6.25%
9.50%
9.50%
9.50%
9.75%
9.75%
9.75%
9.50%
9.50%
9.50%
9.50%
9.00%
9.00%
8.75%
Emalex Biosciences, Inc. (2)(12)
F-Star Therapeutics, Inc. (2)(5)(12)
Greenlight Biosciences, Inc. (2)(12)
IMV Inc. (2)(5)(12)
LogicBio, Inc. (2)(5)(12)
Provivi, Inc. (2)(12)
Biotechnology Term Loan
9.50% Libor
8.50%
9.50%
Term Loan
9.50% Libor
8.50%
9.50%
Term Loan
9.50% Libor
8.50%
9.50%
Term Loan
9.50% Libor
8.50%
9.50%
Term Loan
9.50% Libor
8.50%
9.50%
Term Loan
9.50% Libor
8.50%
9.50%
Stealth Biotherapeutics Inc. (2)(5)(12)
Biotechnology Term Loan
8.75% Prime
5.50%
8.75%
Term Loan
8.75% Prime
5.50%
8.75%
Canary Medical Inc. (2)(12)
Medical Device Term Loan
9.00% Prime
5.75%
9.00%
Ceribell, Inc. (2)(12)
Medical Device Term Loan
8.25% Libor
6.70%
8.25%
Term Loan
8.25% Libor
6.70%
8.25%
Term Loan
8.25% Libor
6.70%
8.25%
Conventus Orthopaedics, Inc. (2)(12)
Corinth Medtech, Inc. (2)(12)
Term Loan
Medical Device Term Loan
Term Loan
Medical Device Term Loan
Term Loan
8.25% Libor
9.25% Libor
9.25% Libor
8.50% Prime
8.50% Prime
6.70%
8.00%
8.00%
5.25%
5.25%
8.25%
9.25%
9.25%
8.50%
8.50%
CSA Medical, Inc. (2)(12)
Medical Device Term Loan
10.00% Libor
8.20%
10.00%
Term Loan
10.00% Libor
8.20%
10.00%
Term Loan
10.00% Libor
8.20%
10.00%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5.00%
5.00%
5.00%
5.00%
3.00%
3.00%
3.00%
3.00%
March 1,
2024
March 1,
2024
March 1,
2024
March 1,
2024
January 1,
2025
January 1,
2025
January 1,
2025
February 1,
2025
February 1,
2025
5.50%
5.50%
5.50%
5.50%
3.00%
3.00% April 1, 2025
3.00% April 1, 2025
June 1, 2024
5.00%
June 1, 2024
5.00%
November 1,
2025
5.00%
4.00% April 1, 2025
July 1, 2025
4.00%
July 1, 2025
4.00%
July 1, 2025
4.00%
July 1, 2025
5.00%
July 1, 2025
5.00%
June 1, 2024
4.50%
December 1,
2024
December 1,
2024
December 1,
2024
December 1,
2024
December 1,
2024
December 1,
2024
October 1,
2025
October 1,
2025
November 1,
2024
October 1,
2024
October 1,
2024
October 1,
2024
October 1,
2024
5.50%
July 1, 2025
10.36%
10.36%
July 1, 2025
20.00% April 1, 2022
20.00% April 1, 2022
5.50%
5.50%
5.50%
5.50%
6.00%
6.00%
7.00%
5.50%
5.00%
5.00%
5.00%
January 1,
2024
January 1,
2024
March 1,
2024
5,000
5,000
5,000
5,000
5,000
2,500
5,000
5,000
2,500
2,500
2,500
2,500
5,000
2,500
2,500
5,000
2,500
5,000
2,500
4,028
5,000
5,000
2,500
2,500
2,500
2,500
5,000
2,500
2,500
5,000
5,000
2,500
2,500
4,056
4,056
2,500
2,500
3,125
208
3,600
4,957
4,957
4,957
4,909
4,909
2,454
4,906
4,906
2,451
2,451
2,420
2,472
4,896
2,465
2,463
4,850
2,475
4,799
2,462
4,011
4,935
4,935
2,440
2,440
2,430
2,430
4,631
2,441
2,394
4,926
4,957
2,466
2,466
4,009
4,009
2,495
2,495
3,095
206
3,569
4,957
4,957
4,957
4,909
4,909
2,454
4,906
4,906
2,451
2,451
2,420
2,472
4,896
2,465
2,463
4,850
2,475
4,799
2,462
4,011
4,935
4,935
2,440
2,440
2,430
2,430
4,631
2,441
2,394
4,926
4,957
2,466
2,466
4,009
4,009
2,495
2,495
3,095
206
3,569
See Notes to Consolidated Financial Statements
102
Table of Contents
Portfolio Company (1)(3)
Embody, Inc. (2)(12)
InfoBionic, Inc. (2)(12)
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2021
(Dollars in thousands)
Type of
Investment
(7)
Cash
Rate (4)
Sector
Index Margin
Floor
Medical Device Term Loan
9.75% Prime
6.50%
9.75%
Ceiling
-
ETP (10)
Maturity Date
28.00% August 1, 2026
Principal
Amount
2,500
Medical Device Term Loan
Term Loan
9.50% Prime
9.50% Prime
6.25%
6.25%
9.50%
9.50%
MacuLogix, Inc. (2)(12)(13)
Medical Device Term Loan
10.08% Libor
7.68%
10.08%
Magnolia Medical Technologies, Inc. (2)(12)
Sonex Health, Inc. (2)(12)
Term Loan
Medical Device Term Loan
Term Loan
Term Loan
Term Loan
Medical Device Term Loan
Term Loan
Term Loan
10.08% Libor
9.75% Prime
9.75% Prime
9.75% Prime
9.75% Prime
9.25% Prime
9.25% Prime
9.25% Prime
7.68%
5.00%
5.00%
5.00%
5.00%
6.00%
6.00%
6.00%
10.08%
9.75%
9.75%
9.75%
9.75%
9.25%
9.25%
9.25%
Spineology, Inc. (2)(12)
Total Non-Affiliate Debt Investments — Life Science
Non-Affiliate Debt Investments —
Sustainability — 18.8% (8)
Medical Device Term Loan
10.25% Prime
7.00%
10.25%
LiquiGlide, Inc. (2)(12)
Nexii Building Solutions, Inc. (2)(12)
Temperpack Technologies, Inc. (2)(12)
Other
Sustainability
Other
Sustainability
Other
Sustainability
Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
10.25% Prime
7.00%
10.25%
Term Loan
10.25% Prime
7.00%
10.25%
Term Loan
10.25% Prime
7.00%
10.25%
Term Loan
Term Loan
10.00% Prime
10.00% Prime
6.75%
6.75%
10.00%
10.00%
Term Loan
10.00% Prime
6.75%
10.00%
Term Loan
10.00% Prime
6.75%
10.00%
Term Loan
10.00% Prime
6.75%
10.00%
Total Non-Affiliate Debt Investments — Sustainability
Non-Affiliate Debt Investments — Technology
— 77.2% (8)
Axiom Space, Inc. (2)(12)
Communications Term Loan
Term Loan
Term Loan
Convertible
Note
9.25% Prime
9.25% Prime
9.25% Prime
6.00%
6.00%
6.00%
9.25%
9.25%
9.25%
3.00%
Alula Holdings, Inc. (2)(12)
Better Place Forests Co. (2)(12)
CAMP NYC, Inc. (2)(12)
Clara Foods Co. (2)(12)
Interior Define, Inc. (2)(12)
Consumer-
related
Technologies
Consumer-
related
Technologies
Consumer-
related
Technologies
Consumer-
related
Technologies
Consumer-
related
Technologies
Term Loan
10.00% Prime
6.75%
10.00%
Term Loan
10.00% Prime
6.75%
10.00%
Term Loan
10.00% Prime
6.75%
10.00%
Term Loan
10.00% Prime
6.75%
10.00%
Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
10.50% Prime
7.25%
10.50%
Term Loan
Term Loan
9.00% Prime
9.00% Prime
5.75%
5.75%
9.00%
9.00%
Term Loan
9.75% Prime
6.50%
9.75%
See Notes to Consolidated Financial Statements
103
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4.00%
4.00%
6.00%
October 1,
2024
June 1, 2025
September 1,
2023
September 1,
2023
6.00%
4.00% March 1, 2025
4.00% March 1, 2025
4.00% March 1, 2025
4.00% March 1, 2025
June 1, 2024
5.00%
June 1, 2024
5.00%
June 1, 2024
5.00%
October 1,
2025
1.00%
5.00%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
January 1,
2025
September 1,
2025
September 1,
2025
September 1,
2025
June 1, 2025
June 1, 2025
October 1,
2025
October 1,
2025
October 1,
2025
3,500
1,000
7,500
4,050
5,000
5,000
5,000
5,000
2,500
2,500
2,500
5,000
2,000
7,500
7,500
7,500
3,750
3,750
7,500
3,750
3,750
2.50%
2.50%
2.50%
June 1, 2026
June 1, 2026
June 1, 2026
7,500
7,500
7,500
July 1, 2023
250
3.00%
3.00%
3.00%
3.00%
January 1,
2025
January 1,
2025
January 1,
2025
December 1,
2025
5,000
5,000
3,000
1,000
Cost of
Investments
(6)(9)
2,457
3,397
963
7,447
4,022
4,952
4,952
4,944
4,944
2,391
2,472
2,472
Fair
Value (9)
2,457
3,397
963
4,481
2,420
4,952
4,952
4,944
4,944
2,391
2,472
2,472
4,928
194,237
4,928
189,669
1,928
7,322
7,322
7,322
3,703
3,703
7,396
3,698
1,928
7,322
7,322
7,322
3,703
3,703
7,396
3,698
3,698
46,092
3,698
46,092
7,442
7,442
7,442
250
4,935
4,949
2,969
968
7,442
7,442
7,442
250
4,935
4,949
2,969
968
1.85%
July 1, 2025
5,000
4,928
4,928
3.00% May 1, 2026
3,500
3,430
3,430
5.50% August 1, 2025
5.50% August 1, 2025
2,500
2,500
2,476
2,476
2,476
2,476
4.00%
January 1,
2026
6,500
6,397
6,397
Table of Contents
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2021
(Dollars in thousands)
Portfolio Company (1)(3)
Sector
Type of
Investment
(7)
Cash
Rate (4)
Index Margin
Floor
Ceiling
ETP (10)
Lyrical Foods, Inc. (2)(12)
NextCar Holding Company, Inc. (2)(12)
Primary Kids, Inc. (2)(12)
Quip NYC Inc. (2)(12)
Unagi, Inc. (2)(12)
Updater, Inc. (2)(12)
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Consumer-related
Technologies
Term Loan
9.75% Prime
6.50%
9.75%
Term Loan
10.00% Prime
6.75%
10.00%
Term Loan
9.00% Prime
5.75%
9.00%
Term Loan
9.00% Prime
5.75%
9.00%
Term Loan
Term Loan
10.50% Prime
10.50% Prime
7.25%
7.25%
10.50%
10.50%
Term Loan
10.50% Prime
7.25%
10.50%
Term Loan
11.25% Prime
8.00%
11.25%
Term Loan
Term Loan
11.00% Prime
11.00% Prime
7.75%
7.75%
11.00%
11.00%
-
-
-
-
-
-
-
-
-
-
Term Loan
12.00% Prime
5.75%
12.00%
14.00%
0.56%
Term Loan
12.00% Prime
5.75%
12.00%
14.00%
0.56%
Term Loan
12.00% Prime
5.75%
12.00%
14.00%
0.56%
Liqid, Inc. (2)(12)
Networking
Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
9.50% Prime
6.25%
9.50%
Branded Online, Inc. (2)(12)
Software
Term Loan
9.50% Prime
6.25%
9.50%
Term Loan
Term Loan
9.50% Prime
9.50% Prime
6.25%
6.25%
9.50%
9.50%
BriteCore Holdings, Inc. (2)(12)
Software
Term Loan
10.50% Prime
7.25%
10.50%
Decisyon, Inc. (12)
Dropoff, Inc. (2)(12)
Software
Software
Term Loan
10.50% Prime
7.25%
10.50%
Term Loan
Term Loan
Term Loan
12.68% Prime
9.75% Prime
9.75% Prime
9.23%
6.50%
6.50%
12.68%
9.75%
9.75%
E La Carte, Inc. (2)(12)
Software
Term Loan
9.75% Prime
6.50%
9.75%
Lytics, Inc. (2)(12)
Reputation Institute, Inc. (2)(12)
Supply Network Visiblity Holdings LLC (2)
(12)
Software
Software
Software
Total Non-Affiliate Debt Investments — Technology
Non-Affiliate Debt Investments —
Healthcare information and services —
5.0% (8)
Term Loan
9.75% Prime
6.50%
9.75%
Term Loan
Term Loan
Term Loan
9.75% Prime
9.25% Prime
10.50% Prime
6.50%
6.00%
7.25%
9.75%
9.25%
10.50%
Term Loan
9.75% Prime
6.50%
9.75%
Term Loan
9.75% Prime
6.50%
9.75%
Term Loan
9.75% Prime
6.50%
9.75%
Term Loan
9.75% Prime
6.50%
9.75%
IDbyDNA, Inc. (2)(12)
Diagnostics
Term Loan
9.00% Prime
5.75%
9.00%
Term Loan
9.00% Prime
5.75%
9.00%
Term Loan
9.00% Prime
5.75%
9.00%
Total Non-Affiliate Debt Investments — Healthcare information and services
Total Non- Affiliate Debt Investments
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
See Notes to Consolidated Financial Statements
104
Principal
Amount
Cost of
Investments
(6)(9)
Fair
Value (9)
3.00% April 1, 2026
10,000
Maturity Date
January 1,
2026
January 1,
2024
January 1,
2026
January 1,
2026
4.00%
9.75%
10.10%
10.10%
3.00% March 1, 2025
3.00% March 1, 2025
3.00%
September 1,
2025
-
-
4.00%
4.00%
4.00%
4.00%
4.00%
6.00%
6.00%
-
4.00%
4.00%
50.43%
July 1, 2025
July 1, 2025
December 20,
2024
December 20,
2024
December 20,
2024
September 1,
2024
September 1,
2024
September 1,
2024
September 1,
2024
September 1,
2024
September 1,
2026
November 1,
2026
July 1, 2023
October 1,
2024
October 1,
2024
January 1,
2023
3.50% April 1, 2026
3.50% April 1, 2026
4.00%
4.00%
October 1,
2025
October 1,
2025
October 1,
2025
4.00%
4.00%
July 1, 2025
3.00% August 1, 2025
4.00%
4.00%
4.00%
4.00%
February 1,
2025
February 1,
2025
December 1,
2025
December 1,
2025
5.50%
5.50%
5.50%
January 1,
2025
January 1,
2025
January 1,
2026
6,000
2,500
5,000
2,000
3,000
3,000
3,000
2,500
1,250
5,000
5,000
10,000
5,000
5,000
2,500
2,500
2,500
5,000
2,500
5,000
2,500
2,500
3,470
6,500
6,000
3,000
3,000
1,500
2,500
5,000
3,500
3,500
2,500
2,500
5,000
5,000
2,500
5,775
2,480
4,935
1,920
2,961
2,961
2,955
9,639
2,446
1,234
4,961
4,961
9,922
4,770
4,924
2,459
2,459
2,414
4,719
2,355
5,000
2,481
2,481
3,470
6,087
5,816
2,937
2,958
1,479
2,464
4,905
3,458
3,458
2,463
5,775
2,480
4,935
1,920
2,961
2,961
2,955
9,639
2,446
1,234
4,961
4,961
9,922
4,770
4,924
2,459
2,459
2,414
4,719
2,355
5,000
2,481
2,481
3,470
6,087
5,816
2,937
2,958
1,479
2,464
4,905
3,458
3,458
2,463
2,463
189,274
2,463
189,274
4,902
4,936
4,902
4,936
2,444
12,282
441,885
2,444
12,282
437,317
Table of Contents
Portfolio Company (1)(3)
Non-Affiliate Warrant Investments — 8.2% (8)
Non-Affiliate Warrants — Life Science — 1.0% (8)
Avalo Therapeutics, Inc. (2)(5)(12)
Castle Creek Pharmaceuticals, Inc. (2)(12)
Corvium, Inc. (2)(12)
Emalex Biosciences, Inc. (2)(12)
F-Star Therapeutics, Inc. (2)(5)(12)
Imunon, Inc. (fka Celsion Corporation) (2)(5)(12)
IMV Inc. (2)(5)(12)
LogicBio, Inc. (2)(5)(12)
Mustang Bio, Inc. (2)(5)(12)
Provivi, Inc. (2)(12)
Rocket Pharmaceuticals Corporation (5)(12)
Stealth Biotherapeutics Inc. (2)(5)(12)
Strongbridge U.S. Inc. (2)(5)(12)
vTv Therapeutics Inc. (2)(5)(12)
AccuVein Inc. (2)(12)
Aerin Medical, Inc. (2)(12)
Canary Medical Inc. (2)(12)
Ceribell, Inc. (2)(12)
Conventus Orthopaedics, Inc. (2)(12)
CSA Medical, Inc. (2)(12)
CVRx, Inc. (2)(5)(12)
Infobionic, Inc. (2)(12)
MacuLogix, Inc. (2)(12)
Magnolia Medical Technologies, Inc. (2)(12)
Meditrina, Inc. (2)(12)
Sonex Health, Inc. (2)(12)
VERO Biotech LLC (2)(12)
Total Non-Affiliate Warrants — Life Science
Non-Affiliate Warrants — Sustainability — 0.4% (8)
LiquiGlide, Inc. (2)(12)
Nexii Building Solutions, Inc. (2)(12)
Temperpack Technologies, Inc. (2)(12)
Total Non-Affiliate Warrants — Sustainability
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2021
(Dollars in thousands)
Sector
Type of Investment (7)
Number of Shares
Cost of
Investments (6)(9)
Fair
Value (9)
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Biotechnology
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Medical Device
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Other Sustainability
Other Sustainability
Other Sustainability
Common Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
317,306
2,428
661,956
92,002
21,120
295,053
284,090
7,843
252,161
164,608
7,051
795,455
160,714
95,293
1,175
1,818,183
7,292
134,299
6,361,111
1,375,727
47,410
317,647
454,460
441,780
221,510
484,250
408
61,359
142,405
48,756
311
142
54
139
36
65
64
8
146
278
17
264
72
44
24
66
53
61
149
154
80
124
238
91
83
77
53
2,893
39
356
107
502
27
148
—
162
3
1
64
—
5
519
9
45
110
—
—
463
45
172
169
108
90
121
—
112
122
75
30
2,600
36
331
552
919
See Notes to Consolidated Financial Statements
105
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2021
(Dollars in thousands)
Sector
Type of Investment (7)
Number of Shares
Cost of
Investments (6)(9)
Fair
Value (9)
Table of Contents
Portfolio Company (1)(3)
Non-Affiliate Warrants — Technology — 6.2% (8)
Axiom Space, Inc. (2)(12)
Intelepeer Holdings, Inc. (2)(12)
PebblePost, Inc. (2)(12)
Alula Holdings, Inc. (2)(12)
Aterian, Inc. (2)(5)(12)
Better Place Forests Co. (2)(12)
Caastle, Inc. (2)(12)
CAMP NYC, Inc. (2)(12)
Clara Foods Co. (2)(12)
Getaround, Inc. (2)(12)
Interior Define, Inc. (2)(12)
NextCar Holding Company, Inc. (2)(12)
Primary Kids, Inc. (2)(12)
Quip NYC Inc. (2)(12)
Unagi, Inc. (2)(12)
Updater, Inc. (2)(12)
CPG Beyond, Inc. (2)(12)
Silk, Inc. (2)(12)
Global Worldwide LLC (2)(12)
Rocket Lawyer Incorporated (2)(12)
Skillshare, Inc. (2)(12)
Liqid, Inc. (2)(12)
Kinestral, Inc. (2)(12)
Avalanche Technology, Inc. (2)(12)
Branded Online, Inc. (2)(12)
BriteCore Holdings, Inc. (2)(12)
Decisyon, Inc. (12)
Dropoff, Inc. (2)(12)
E La Carte, Inc. (2)(12)
Lotame Solutions, Inc. (2)(12)
Lytics, Inc. (2)(12)
Reputation Institute, Inc. (2)(12)
Revinate Holdings, Inc. (2)(12)
Riv Data Corp. (2)(12)
SIGNiX, Inc. (12)
Communications
Communications
Communications
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Consumer-related Technologies
Data Storage
Data Storage
Internet and Media
Internet and Media
Internet and Media
Networking
Power Management
Semiconductors
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Software
Diagnostics
Other Healthcare
Other Healthcare
Software
Software
Software
Software
Software
Skyword, Inc. (12)
Supply Network Visiblity Holdings LLC (2)(12)
Topia Mobility, Inc. (2)(12)
xAd, Inc. (2)(12)
Total Non-Affiliate Warrants — Technology
Non-Affiliate Warrants — Healthcare information and services — 0.6% (8)
IDbyDNA, Inc. (2)(12)
Kate Farms, Inc. (2)(12)
Watermark Medical, Inc. (2)(12)
Medsphere Systems Corporation (2)(12)
Total Non-Affiliate Warrants — Healthcare information and services
Total Non-Affiliate Warrants
Non-Affiliate Other Investments — 0.1% (8)
ZetrOZ, Inc. (12)
Total Non-Affiliate Other Investments
Non-Affiliate Equity — 0.1% (8)
SnagAJob.com, Inc. (12)
Zeta Global Holdings Corp. (2)(5)(12)
Decisyon, Inc. (12)
Total Non-Affiliate Equity
Total Non-Affiliate Portfolio Investment Assets
Controlled Affiliate Investments — 0.0% (8)
Controlled Affiliate Other Investments — Biotechnology — 0.0% (8)
HESP LLC (12)(14)
Total Controlled Affiliate Other Investments
Total Controlled Affiliate Portfolio Investment Assets
Total Portfolio Investment Assets — 186.7% (8)
Medical Device
Biotechnology
Consumer-related Technologies
Internet and Media
Software
Short Term Investments — Unrestricted Investments —
3.2% (8)
US Bank Money Market Deposit Account
Total Short Term Investments — Unrestricted Investments
Short Term Investments — Restricted Investments —
0.6% (8)
US Bank Money Market Deposit Account
Total Short Term Investments — Restricted Investments
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred and Common Stock
Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred and Common Stock
Warrant
Common Stock Warrant
Preferred Stock Warrant
Common Stock Warrant
Common Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred and Common Stock
Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Preferred Stock Warrant
Royalty Agreement
Common Stock
Common Stock
Preferred and Common Stock
Other Investment
1,991
2,936,535
598,850
20,000
76,923
9,353
268,591
17,605
46,745
651,040
553,710
310,463
553,778
6,191
134,421
108,333
500,000
44,211,003
245,810
261,721
139,074
344,102
5,002,574
6,753
16,678
55,591
82,967
482,283
181,947
288,115
26,733
3,731
615,475
321,428
186,235
301,055
682
3,049,607
4,343,348
472,006
82,965
27,373
7,097,792
82,974
18,405
72,638,663
$
$
$
$
$
$
$
$
45
140
92
93
195
23
68
22
30
450
103
47
57
324
25
34
242
234
75
92
162
364
1,585
101
370
5
46
397
61
23
12
54
44
12
224
49
64
138
179
6,281
112
101
74
60
347
10,023
—
—
9
240
230
479
452,387
1,450
1,450
1,450
453,837
$
$
$
$
7,868
7,868
$
$
1,359
1,359
$
$
42
3,141
161
70
1
23
823
22
368
367
103
47
51
503
24
31
859
188
6
741
2,403
938
2,609
—
443
37
—
395
53
276
12
52
66
292
—
4
62
—
1
15,214
95
1,177
—
195
1,467
20,200
200
200
83
155
120
358
458,075
—
—
—
458,075
7,868
7,868
1,359
1,359
(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, the NYL Facility and/or the 2019 Asset-Backed Notes.
See Notes to Consolidated Financial Statements
106
Table of Contents
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2021
(Dollars in thousands)
(3) 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).
(4) All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate
on the debt investment and does not include ETPs, and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt
investments are at variable rates for the term of the debt investment, unless otherwise indicated. All debt investments based on the LIBOR are based on one-month LIBOR.
For each debt investment, the current interest rate in effect as of December 31, 2021 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, 2021, 5.8% of the Company's total assets on a cost and fair value basis, respectively, are in non-qualifying assets. 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 has a PIK feature.
(12) The fair value of the investment was valued using significant unobservable inputs.
(13) Debt investment is on non-accrual status as of December 31, 2021.
(14) On July 8, 2020, Espero BioPharma, Inc. and its affiliates, Jacksonville Pharmaceuticals, Inc. and Espero Pharmaceuticals, Inc. (collectively, “Espero”) assigned substantially
all of their assets to their respective assignment estates and respectively appointed PSE (ABC), LLC, PS PJAX (ABC), LLC, and PPSE (ABC), LLC (collectively, “Espero
ABC”) to administer their respective estates and to facilitate the orderly sale and liquidation of their property and assets. On October 6, 2020, the Court of Chancery of the
State of Delaware approved the transfer of the assets of Espero to the Company and Credit II or their designees in consideration for the Company and Credit II’s credit bid at
auction of $7.0 million. On October 22, 2020, Espero ABC transferred the assets of Espero to HESP LLC, a Delaware limited liability company, wholly owned by the
Company.
See Notes to Consolidated Financial Statements
107
Table of Contents
Note 1. Organization
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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 sustainability 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”.
Horizon Credit II LLC (“Credit II”) was formed as a Delaware limited liability company on June 28, 2011, with the Company as its sole equity member.
Credit II is a special purpose bankruptcy-remote entity and is a separate legal entity from the Company. Any assets conveyed to Credit II are not available to
creditors of the Company or any other entity other than Credit II’s lenders.
The Company formed Horizon Funding 2019‑1 LLC (“2019‑1 LLC”) as a Delaware limited liability company on May 2, 2019 and Horizon Funding Trust
2019‑1 on May 15, 2019 (“2019‑1 Trust” and, together with the 2019‑1 LLC, the “2019‑1 Entities”). The 2019‑1 Entities are special purpose bankruptcy remote
entities and are separate legal entities from the Company. The Company formed the 2019‑1 Entities for purposes of securitizing the 2019 Asset-Backed Notes.
The Company and Arena Sunset SPV, LLC ("Arena") formed Horizon Funding I, LLC (“HFI”) as a Delaware limited liability company on May 9, 2018,
with Horizon Secured Loan Fund I LLC, a Delaware limited liability company ("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.
On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI, including, without limitation, undistributed
amounts owed to Arena and interest accrued and unpaid on the debt investments of HSLFI through the date of purchase. As of April 21, 2020, HSLFI and its
subsidiary, HFI, are consolidated by the Company.
The Company formed Horizon Funding 2022‑1 LLC (“2022‑1 LLC”) as a Delaware limited liability company on September 30, 2022 and Horizon Funding
Trust 2022‑1 on October 18, 2022 (“2022‑1 Trust” and, together with the 2022‑1 LLC, the “2022‑1 Entities”). The 2022‑1 Entities are special purpose
bankruptcy remote entities and are separate legal entities from the Company. The Company formed the 2022‑1 Entities for purposes of securitizing the 2022
Asset-Backed Notes.
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.
108
Table of Contents
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, consisting
solely of normal recurring accruals, 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. Although the Company owned more than 25% of the voting securities of
HSLFI through April 21, 2020, the Company did not have sole control over significant actions of HSLFI for purposes of the 1940 Act or otherwise, and thus did
not consolidate its interest prior to April 21, 2020.
Assets related to transactions that do not meet Accounting Standards Codification (“ASC”) Topic 860, Transfers and Servicing requirements for accounting
sale treatment are reflected in the Company’s Consolidated Statements of Assets and Liabilities as investments. Those assets are owned by special purpose
entities, including 2019‑1 Entities and 2022-1 Entities, that are consolidated in the Company’s consolidated 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 affiliate of
the Company).
Use of estimates
In preparing the consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the balance sheet and income and expenses for the
period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the
valuation of investments.
Fair value
The Company records all of its investments at fair value in accordance with relevant GAAP, which establishes a framework used to measure fair value and
requires disclosures for fair value measurements. The Company has categorized its investments carried at fair value, based on the priority of the valuation
technique, into a three-level fair value hierarchy as more fully described in Note 6. Fair value is a market-based measure considered from the perspective of the
market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the
Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the
measurement date.
The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the
type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more
judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3.
See Note 6 for additional information regarding fair value.
Segments
The Company has determined that it has a single reporting segment and operating unit structure. The Company lends to and invests in portfolio companies
in various technology, life science, healthcare information and services and sustainability 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.
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Investments
Investments are recorded at fair value. Pursuant to the amended SEC Rule 2a-5 of the 1940 Act, on July 29, 2022, the Board designated the Advisor as the
Company’s “valuation designee.” The valuation designee determines the fair value of the Company’s portfolio investments and the Company's board of directors
(the “Board”) oversees the valuation designee. 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, 2022, there
were three investments on non-accrual status with a cost of $20.9 million and a fair value of $8.3 million. As of December 31, 2021, there
was one investment on non-accrual status with a cost of $11.5 million and a fair value of $6.9 million. For the year ended December 31, 2022, the Company did
not recognize any interest income from debt investments on non-accrual status. For the year ended December 31, 2021, the Company recognized, as interest
income, payments of $1.3 million received from two portfolio companies whose debt investments were on non-accrual status. For the year ended December 31,
2020, the Company recognized, as interest income, payments of $0.03 million received from one portfolio company whose debt investment was 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.
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, 2022, 2021 and 2020 was 7.4%, 5.9% and 5.8%,
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.
Prior to consolidating the investment in HSLFI on and after April 21, 2020, distributions from HSLFI were 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 did not record distributions from HSLFI as dividend
income unless there was sufficient accumulated tax-basis earnings and profit in HSLFI prior to distribution. Distributions that were classified as a return of
capital were recorded as a reduction in the cost basis of the investment. For the period January 1, 2020 through April 21, 2020, HSLFI made no distributions
classified as dividend income or a return of capital to the Company.
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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, 2022 and 2021 was $7.1 million and $4.3 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, 2022 and 2021 were $4.8 million and $3.2 million, respectively. The amortization expense for the years ended December 31, 2022, 2021 and
2020 was $1.6 million, $1.1 million and $1.0 million, respectively.
Income taxes
As a BDC, the Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment
applicable to RICs. In order to qualify as a RIC and to avoid 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 ASC Topic
946, Financial Services—Investment Companies, as amended, of the Financial Accounting Standards Board (“FASB”), 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 years ended December 31, 2022, 2021 and 2020, the Company reclassified $0.7 million, $0.4 million
and $0.2 million, respectively, to paid-in capital from distributions in excess of net investment income, which related to excise taxes payable.
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, 2022, 2021 and 2020, $0.7 million, $0.4 million and $0.2 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, 2022 and 2021. The Company’s income tax returns for the 2021, 2020 and 2019 tax years remain subject to examination by U.S.
federal and state tax authorities.
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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 issue new shares or purchase shares in the open market to fulfill its obligations under the plan.
Stockholders’ Equity
On August 2, 2019, the Company entered into an At-The-Market (“ATM”) sales agreement (the “2019 Equity Distribution Agreement”), with Goldman
Sachs & Co. LLC and B. Riley FBR, Inc., (each a “Sales Agent” and, collectively, the “Sales Agents”). The 2019 Equity Distribution Agreement provided that
the Company may offer and sell shares of common stock from time to time through the Sales Agents representing up to $50.0 million worth of its common
stock, in amounts and at times to be determined by the Company.
On July 30, 2020, the Company entered into an ATM sales agreement (the “2020 Equity Distribution Agreement”), with the Sales Agents. The 2020 Equity
Distribution Agreement provided that the Company may offer and sell shares of common stock from time to time through the Sales Agents representing up to
$100.0 million worth of its common stock, in amounts and at times to be determined by the Company.
On August 2, 2021, the Company terminated the 2020 Equity Distribution Agreement and entered into a new ATM sales agreement (the “2021 Equity
Distribution Agreement”) with the Sales Agents. The remaining shares available under the 2019 Equity Distribution Agreement and the 2020 Equity Distribution
Agreement are no longer available for issuance. The 2021 Equity Distribution Agreement provides that the Company may offer and sell our shares from time to
time through the Sales Agents up to $100.0 million worth of its common stock, in amounts and at times to be determined by the Company. Sales of its common
stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at-the-market,” as defined in Rule 415 under the Securities Act,
including sales made directly on the NASDAQ or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices
related to the prevailing market prices or at negotiated prices.
On March 14, 2022, the Company completed a follow-on public offering of 2,500,000 shares of its common stock at a public offering price of $14.35 per
share, for total net proceeds to the Company of $34.3 million, after deducting underwriting commission and discounts and other offering expenses.
During the year ended December 31, 2022, the Company sold 3,982,684 shares of common stock under the 2021 Equity Distribution Agreement. For the
same period, the Company received total accumulated net proceeds of approximately $50.3 million, including $1.0 million of offering expenses, from these
sales. During the year ended December 31, 2021, the Company sold 1,907,234 shares of common stock under the 2021 Equity Distribution Agreement and the
2020 Equity Distribution Agreement. For the same period, the Company received total accumulated net proceeds of approximately $30.1 million, including $0.8
million of offering expenses, from these sales. During the year ended December 31, 2020, the Company sold 3,702,500 shares of common stock under the 2019
Equity Distribution Agreement and the 2020 Equity Distribution Agreement. For the same period, the Company received total accumulated net proceeds of
approximately $44.6 million, including $1.0 million of offering expenses, from these sales.
The Company generally uses net proceeds from these offerings to make investments, to pay down liabilities and for general corporate purposes. As of
December 31, 2022, shares representing approximately $31.5 million of its common stock remain available for issuance and sale under the Equity Distribution
Agreement.
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Stock Repurchase Program
On April 29, 2022, 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, 2023 or the repurchase of $5.0 million of the Company’s common stock. During the years ended December 31, 2022, 2021 and 2020, the Company did
not make any repurchases of its common stock. From the inception of the stock repurchase program through December 31, 2022, the Company repurchased
167,465 shares of its common stock at an average price of $11.22 on the open market at a total cost of $1.9 million.
Transfers of financial assets
Assets related to transactions that do not meet the requirements under ASC Topic 860, Transfers and Servicing for sale treatment under GAAP are reflected
in the Company’s consolidated statements of assets and liabilities as investments. Those assets are owned by special purpose entities that are consolidated in the
Company’s financial statements. The creditors of the special purpose entities have received security interests in such assets and such assets are not intended to be
available to the creditors of the Company (or any other affiliate of the Company).
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company — put presumptively beyond the reach of the transferor and its creditors, even in
bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both
entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets,
other than through a cleanup call.
Recently adopted accounting pronouncement
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications
and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU
2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. As of December 31, 2022, the Company adopted ASU 2020-04, and such
adoption did not have an impact on the Company's consolidated financial statements and disclosures.
Recently issued accounting pronouncement
In June 2022, the FASB issues Accounting Standards Update No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale
Restrictions (“ASU 2022-03”). ASU 2022-03 clarifies the guidance when measuring the fair value of an equity security subject to contractual restrictions that
prohibit the sale of the security. The amendments in ASU 2022-03 are effective for public companies for fiscal years beginning after December 15, 2023, and
interim periods within those fiscal years. The Company is currently assessing the impact of ASU 2022-03 on its consolidated financial statements.
Note 3. Related party transactions
Investment Management Agreement
At a special meeting of the stockholders on October 30, 2018, the stockholders approved a new Investment Management Agreement which became effective
on March 7, 2019. The new Investment Management Agreement replaced the previously effective Amended and Restated Investment Management Agreement
dated as of October 28, 2010 and amended effective July 1, 2014. On October 28, 2022, the Board unanimously approved the renewal of the Investment
Management Agreement. 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.
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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, 2022 and 2021 was $1.1 million and $0.7 million, respectively. The base management fee expense was
$10.6 million, $7.6 million and $6.5 million for the years ended December 31, 2022, 2021 and 2020, 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, adjusted
for any share issuances or repurchases during the relevant 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.
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”) 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.
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The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or, upon termination of the Investment
Management Agreement, as of the termination date), and equals 20.00% of the Company’s realized capital gains, if any, on a cumulative basis from the
date of the election to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a
cumulative basis through the end of such year, less all previous amounts paid in respect of the capital gain incentive fee. However, in accordance with
GAAP, the Company is required to include the aggregate unrealized capital appreciation on investments in the calculation and accrue a capital gain
incentive fee on a quarterly basis, as if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted
to be considered in calculating the fee actually payable under the Investment Management Agreement.
The net performance based incentive fee expense was $7.7 million, $7.1 million and $5.2 million for the years ended December 31, 2022, 2021 and 2020,
respectively. The incentive fee on Pre-Incentive Fee Net Investment Income was subject to the Incentive Fee Cap and Deferral Mechanism for the year ended
December 31, 2022, which resulted in $1.0 million of reduced expense and additional net investment income. This deferral represents a contingent future
liability and may be paid up to three years after the date of deferment. The incentive fee on Pre-Incentive Fee Net Investment Income was not subject to the
Incentive Fee Cap and Deferral Mechanism for the years ended December 31, 2021 and 2020. The performance based incentive fee payable at December 31,
2022 and 2021 was $1.4 million and $2.0 million, respectively. The entire incentive fee payable at December 31, 2022 and 2021 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 $1.7 million, $1.3 million and $1.0 million for years ended
December 31, 2022, 2021 and 2020, respectively.
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Note 4. Investments
The following table shows the Company’s investments as of December 31, 2022 and 2021:
Investments
Debt
Warrants
Other
Equity
Total investments
December 31, 2022
December 31, 2021
Cost
Fair Value
Cost
Fair Value
(In thousands)
$
$
701,074 $
14,790
1,200
4,184
721,248 $
686,458 $
29,712
1,300
2,556
720,026 $
441,885 $
10,023
1,450
479
453,837 $
437,317
20,200
200
358
458,075
The following table shows the Company’s investments by industry sector as of December 31, 2022 and 2021:
Life Science
Biotechnology
Medical Device
Technology
Communications
Consumer-Related
Data Storage
Internet and Media
Networking
Power Management
Semiconductors
Software
Sustainability
Energy Efficiency
Other Sustainability
Healthcare Information and Services
Diagnostics
Other
Software
Total investments
Horizon Secured Loan Fund I LLC
December 31, 2022
December 31, 2021
Cost
Fair Value
Cost
Fair Value
(In thousands)
$
193,372 $
132,803
195,006 $
135,960
109,899 $
88,681
107,902
84,567
22,892
121,961
476
329
11,831
1,585
56
120,157
8
84,633
9,851
7,559
13,735
721,248 $
26,176
114,050
1,316
1,159
11,710
2,610
—
118,716
27
85,524
9,858
3,870
14,044
720,026 $
22,853
92,158
476
569
17,390
1,585
101
60,902
—
46,595
12,393
175
60
453,837 $
25,920
93,194
1,047
3,305
17,964
2,609
—
60,807
—
47,011
12,377
1,177
195
458,075
$
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 sustainability industries. HSLFI was
formed as a Delaware limited liability company and was not consolidated by either the Company or Arena for financial reporting purposes. On April 21, 2020,
the Company purchased all of the limited liability company interests of Arena in HSLFI, including, without limitation, undistributed amounts owed to Arena and
interest accrued and unpaid on the debt investments of HSLFI through the date of purchase, for $17.1 million. In addition, Arena received 50% of the warrants
held by HSLFI or HFI at closing. As of April 21, 2020, HSLFI is wholly-owned by the Company and the assets and liabilities of HSLFI and HFI will be
consolidated with the assets and liabilities of the Company. The transaction is accounted for as an asset acquisition under GAAP.
During the period January 1, 2020 through April 21, 2020, there were no distributions from HSLFI.
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HFI entered into the NYL Facility with the NYL 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 NYL Noteholders. On June 1, 2018, HSLFI sold or contributed to HFI certain secured
loans made to certain portfolio companies pursuant to a sale and servicing agreement with HFI, as Issuer, and the Company, as Servicer (the “Sale and Servicing
Agreement”), as amended by that certain Amendment No. 1 to the Sale and Servicing Agreement, dated June 19, 2019 (the “Amendment No. 1”). Any notes
issued by HFI were collateralized by all investments held by HFI and permitted an advance rate of up to 67% of the aggregate principal amount of eligible debt
investments. The notes were issued pursuant to that certain indenture by and between HFI and U.S. Bank National Association, dated as of June 1, 2018 (the
“Indenture”). Prior to June 5, 2020, the interest rate on the notes issued under the NYL Facility was 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.
The following tables show certain summarized financial information for HSLFI for the period January 1, 2020 through April 21, 2020:
Selected Statements of Operations Information
Interest income on investments
Total investment income
Total expenses
Net investment income
Net realized gain on investments
Net unrealized depreciation on investments
Net decrease in net assets resulting from operations
117
For the period
January 1, 2020
through
April 21, 2020
(In thousands)
$
$
$
$
$
$
$
1,353
1,465
1,229
236
120
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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.
For the year ended December 31, 2022, there were no transactions related to investments in non-controlled affiliated companies.
Transactions related to investments in non-controlled affiliated companies for the year ended December 31, 2021 were as follows:
Portfolio
Company
Fair value
at
December
31,
2020
Year ended December 31, 2021
Transfers
Net
Purchases
Principal
Payments
in/(out) at Discount unrealized
fair value
realized
accretion gain/(loss) gain/(loss)
(In thousands)
Net
Fair value
at
December
31,
2021
Interest
income
Decisyon, Inc. (1)
$
MVI (ABC) LLC fka
StereoVision, Inc.
Total non-controlled affiliates
$
1,181
626
227
228
685
276
183
120
2,382
—
—
—
—
1,639
7,547
$
$
—
—
—
—
—
—
—
—
—
250
70
330
150
—
800
$
$
— $
—
—
—
—
—
—
—
(2,783)
(250)
(70)
(330)
(150)
—
(3,583) $
(1,181) $
(638)
(227)
(228)
(685)
(276)
(183)
(120)
—
—
—
—
—
—
(3,538) $
— $
12
—
—
—
—
—
—
—
—
—
—
—
—
12 $
— $
—
—
—
—
—
—
—
—
—
—
—
—
(848)
(848) $
— $
—
—
—
—
—
—
—
401
—
—
—
(791)
(390) $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
41
21
7
7
22
9
6
—
139
—
—
—
—
—
252
(1) As of December 31, 2021 the Company no longer owns 5% or more of the portfolio company.
118
Table of Contents
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, 2022 were as follows:
Year ended December 31, 2022
Portfolio
Company
Fair value
at
December
31,
2021
Transfers
Net
Net
Purchases
Sales
in/(out) at Dividends unrealized
fair value
realized
declared gain/(loss) gain/(loss)
(In thousands)
Fair value
at
December
31,
2022
Dividend
income
HESP LLC
Total controlled affiliates
$
—
—
$
—
—
$
(300)
(300) $
—
— $
—
— $
1,450
1,450 $
(1,150)
(1,150) $
—
— $
—
—
Transactions related to investments in controlled affiliated companies for the year ended December 31, 2021 were as follows:
Year ended December 31, 2021
Portfolio
Company
Fair value
at
December
31,
2020
Transfers
Net
Net
Purchases
Sales
in/(out) at Dividends unrealized
fair value
realized
declared gain/(loss) gain/(loss)
(In thousands)
Fair value
at
December
31,
2021
Dividend
income
HESP LLC
Total controlled affiliates
1,500
1,500
$
$
—
—
$
(50)
(50) $
—
— $
—
— $
(1,450)
(1,450) $
—
— $
—
— $
—
—
Note 6. Fair value
Prior to July 30, 2022, the Board determined the fair value of the Company’s investments. Pursuant to the amended SEC Rule 2a-5 of the 1940 Act, on
July 29, 2022, the Board designated the Advisor as the Company’s “valuation designee.” The Board is responsible for oversight of the valuation designee. The
valuation designee has established a Valuation Committee to determine in good faith the fair value of the Company’s investments, based on input of the
Advisor’s management and personnel and independent valuation firms which are engaged at the direction of the Valuation Committee to assist in the valuation of
certain portfolio investments lacking a readily available market quotation at least once during a trailing twelve-month period. The Valuation Committee
determines fair values pursuant to a valuation policy approved by the Board and pursuant to 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.
The Company uses fair value measurements made by the valuation designee 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.
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Table of Contents
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.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the
Company’s investments may fluctuate from period to period. Additionally, the fair value of the Company’s investments may differ significantly from the values
that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize.
Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If the
Company was required to liquidate a portfolio investment in a forced or liquidation sale, the Company could realize significantly less than the value at which the
Company has recorded such portfolio investment.
Cash and interest receivable: The carrying amount is a reasonable estimate of fair value. These financial instruments are not recorded at fair value on a
recurring basis and are categorized as Level 1 within the fair value hierarchy described above.
Money market funds: The carrying amounts are valued at their net asset value as of the close of business on the day of valuation. These financial instruments
are recorded at fair value on a recurring basis and are categorized as Level 2 within the fair value hierarchy described above as these funds can be redeemed
daily.
Debt investments: 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. 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.
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Table of Contents
Warrant investments: The Company values its warrants using the Black-Scholes valuation model incorporating the following material assumptions:
● Underlying asset value of the issuer is estimated based on information available, including any information regarding the most recent rounds of
borrower funding. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement.
● Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on indices of publicly traded companies
similar in nature to the underlying company issuing the warrant. A total of seven such indices are used. Significant increases (decreases) in this
unobservable input would result in a significantly higher (lower) fair value measurement.
● The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the
risk-free interest rates that correspond closest to the expected remaining life of the warrant.
● Other adjustments, including a marketability discount on private company warrants, are estimated based on management’s judgment about the general
industry environment.
● Historical portfolio experience on cancellations and exercises of the Company’s warrants are utilized as the basis for determining the estimated time to
exit of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or initial public offerings, and
cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life
assumption to be shorter than the contractual term of the warrants. Significant increases (decreases) in this unobservable input would result in
significantly higher (lower) fair value measurement.
Under certain circumstances the Company may use an alternative technique to value warrants that better reflects the warrants’ fair value, such as an
expected settlement of a warrant in the near term or a model that incorporates a put feature associated with the warrant. The fair value may be determined based
on the expected proceeds to be received from such settlement or based on the net present value of the expected proceeds from the put option.
The fair value of the Company’s warrants held in publicly traded companies is determined based on inputs that are readily available in public markets or can
be derived from information available in public markets. Therefore, the Company has categorized these warrants as Level 2 within the fair value hierarchy
described above. The fair value of the Company’s warrants held in private companies is determined using both observable and unobservable inputs and
represents management’s best estimate of what market participants would use in pricing the warrants at the measurement date. Therefore, the Company has
categorized these warrants as Level 3 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.
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 the Company's investments as
of December 31, 2022 and 2021. 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.
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Table of Contents
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, 2022:
Investment Type
Fair
Value
Valuation Techniques/
Methodologies
Unobservable
Input
Range
Weighted
Average(1)
December 31, 2022
Debt investments
$
669,617 Discounted Expected Future Cash Flows
Hypothetical Market Yield
3% – 22%
(Dollars in thousands, except per share data)
Multiple Probability Weighted Cash Flow
Model
16,545
Probability Weighting
10% - 75%
296 Convertible Note Analysis
Price Per Share
$168.93
Warrant investments
26,145 Black-Scholes Valuation Model
Price Per Share
Other investments
Multiple Probability Weighted Cash Flow
Model
1,300
Average Industry Volatility
Marketability Discount
Estimated Time to Exit (in
years)
Discount Rate
Probability Weighting
0.000 –1,89999
28%
20%
1 to 5
25%
100%
14%
31%
$
$
168.93
58.52
28%
20%
3
25%
100%
Equity investments
2,416 Last Equity Financing
Price Per Share
$1.00– $215.03
$
26.93
Total Level 3 investments
$
716,319
(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, 2021:
Investment Type
Fair
Value
Valuation Techniques/
Methodologies
Unobservable
Input
Range
Weighted
Average(1)
Debt investments
$
430,417 Discounted Expected Future Cash Flows
Hypothetical Market Yield
3% – 23%
(Dollars in thousands, except per share data)
December 31, 2021
Multiple Probability Weighted Cash Flow
Model
6,900
Probability Weighting
20% - 50%
12%
33%
Warrant investments
19,837 Black-Scholes Valuation Model
Price Per Share
0.000 –980.0000 $
20.35
Other investments
Multiple Probability Weighted Cash Flow
Model
200
Average Industry Volatility
Marketability Discount
Estimated Time to Exit (in
years)
25%
20%
1 to 4
Discount Rate
Probability Weighting
25%
0% – 100%
25%
20%
2
25%
100%
Equity investments
203 Last Equity Financing
Price Per Share
0.000 –1.0000
$
0.41
Total Level 3 investments
$
457,557
(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 Key Facility and the NYL Facility approximate fair value due to the variable interest rate of the facilities and are categorized as Level 2
within the fair value hierarchy described above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The
fair value of the fixed-rate 2026 Notes (as defined in Note 7) is based on the closing public share price on the date of measurement. On December 31, 2022, the
closing price of the 2026 Notes on the New York Stock Exchange was $23.45 per note and had an aggregate fair value of $53.9 million. Therefore, the Company
has categorized this borrowing as Level 1 within the fair value hierarchy described above. The fair value of the fixed-rate 2027 Notes (as defined in Note 7) is
based on the closing public share price on the date of measurement. On December 31, 2022, the closing price of the 2027 Notes on the New York Stock
Exchange was $23.20 per note and had an aggregate fair value of $53.4 million. Therefore, the Company has categorized this borrowing as Level 1 within the
fair value hierarchy described above. Based on market quotations on December 31, 2022, the 2019 Asset-Backed Notes (as defined in Note 7) were trading at
par value, or $42.6 million, and are categorized as Level 3 within the fair value hierarchy described above. Based on market quotations on December 31, 2022,
the 2022 Asset-Backed Notes (as defined in Note 7) were trading at par value, or $100.0 million, and are categorized as Level 3 within the fair value hierarchy
described above. These borrowings are not recorded at fair value on a recurring basis.
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Table of Contents
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, 2022 and 2021 and
indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
Investments in money market funds
Restricted investments in money market funds
Debt investments
Warrant investments
Other investments
Equity investments
Total investments
Investments in money market funds
Restricted investments in money market funds
Debt investments
Warrant investments
Other investments
Equity investments
Total investments
Level 1
Level 2
Level 3
Total
December 31, 2022
— $
— $
— $
—
—
140
140 $
(In thousands)
7,066 $
2,788 $
— $
3,567
—
—
3,567 $
— $
— $
686,458 $
26,145
1,300
2,416
716,319 $
7,066
2,788
686,458
29,712
1,300
2,556
720,026
Level 1
Level 2
Level 3
Total
December 31, 2021
— $
— $
— $
—
—
155
155 $
(In thousands)
7,868 $
1,359 $
— $
363
—
—
363 $
— $
— $
437,317 $
19,837
200
203
457,557 $
7,868
1,359
437,317
20,200
200
358
458,075
$
$
$
$
$
$
$
$
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, 2022:
Debt
Warrant
Year ended December 31, 2022
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 Level 3
Principal payments received on investments
Proceeds from sale of investments
Net realized (loss) gain on investments
Unrealized (depreciation) appreciation included in earnings
Transfer out of Level 3
Transfer out of debt investments
Other
Level 3 assets, end of period
$
$
437,317 $
421,372
—
(95,558)
(49,371)
(8,221)
(10,044)
—
(3,200)
(5,837)
686,458 $
123
19,837 $
—
5,664
—
(464)
264
2,215
(1,371)
—
—
26,145 $
203 $
606
8
—
—
—
(401)
—
2,000
—
2,416 $
200 $
—
—
(313)
—
(1,137)
1,350
1,200
—
1,300 $
457,557
421,978
5,672
(95,871)
(49,835)
(9,094)
(6,880)
(1,371)
—
(5,837)
716,319
Table of Contents
During the year ended December 31, 2022, there were three transfers out of Level 3. One transfer out of Level 3 related to warrants held in one portfolio
company with an aggregate fair value of $0.04 million that was transferred to Level 2 upon the portfolio company becoming a public company. Two transfers out
of Level 3 related to the conversion of warrants to equity held in two portfolio companies with an aggregate fair value of $1.3 million that were transferred to
Level 1 upon the portfolio companies becoming a public companies. During the year ended December 31, 2022, there was one transfer in to Level 3. The
transfer in related to warrants held in one portfolio company with an aggregate fair value of less than $0.01 million that was transferred to Level 3 upon the
portfolio company becoming a private company.
The change in unrealized depreciation included in the consolidated statement of operations attributable to Level 3 investments still held at December 31,
2022 includes $21.0 million in unrealized depreciation on debt and other investments, $2.6 million in unrealized appreciation on warrant investments, and $0.4
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, 2021:
Debt
Warrant
Year ended December 31, 2021
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 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 out of Level 3
Other
Level 3 assets, end of period
$
$
333,495 $
344,445
—
(188,010)
(47,436)
(5,033)
1,836
—
(1,980)
437,317 $
12,736 $
—
2,681
—
(3,241)
2,514
5,218
(71)
—
19,837 $
2,117 $
—
—
—
—
—
(1,682)
(232)
—
203 $
1,700 $
—
—
—
(13)
—
(1,487)
—
—
200 $
350,048
344,445
2,681
(188,010)
(50,690)
(2,519)
3,885
(303)
(1,980)
457,557
During the year ended December 31, 2021, there were three transfers out of Level 3. One transfer out of Level 3 related to warrants held in one portfolio
company with an aggregate fair value of $0.1 million that was transferred to Level 2 upon the portfolio company becoming a public company. One transfer out
of Level 3 related to equity held in one portfolio company with an aggregate fair value of $0.1 million that was transferred to Level 1 upon the portfolio
company becoming a public company. One transfer out of Level 3 related to equity held in one portfolio company with an aggregate fair value of $0.2 million
that was transferred to Level 1 upon the portfolio company being acquired by a public company.
The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at December 31,
2021 includes $5.6 million in unrealized depreciation on debt and other investments and $6.3 million in unrealized appreciation on warrant 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.
As of December 31, 2022 and 2021, all of the balances of all the Company’s financial instruments were recorded at fair value, except for the Company’s
borrowings, as previously described.
Market risk
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.
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Table of Contents
Note 7. Borrowings
The following table shows the Company’s borrowings as of December 31, 2022 and 2021:
Total
December 31, 2022
Balance
Unused
Total
December 31, 2021
Balance
Unused
Commitment Outstanding Commitment Commitment Outstanding Commitment
(In thousands)
Key Facility
NYL Facility
2019 Asset-Backed Notes
2022 Asset-Backed Notes
2027 Notes
2026 Notes
Total before debt issuance costs
Unamortized debt issuance costs attributable to term
borrowings
Total borrowings outstanding, net
$
125,000 $
200,000
42,573
100,000
57,500
57,500
582,573
5,000 $
176,750
42,573
100,000
57,500
57,500
439,323
120,000 $
23,250
—
—
—
—
143,250
125,000 $
100,000
70,500
—
—
57,500
353,000
53,500 $
78,750
70,500
—
—
57,500
260,250
—
582,573 $
(5,245)
434,078 $
—
143,250 $
—
353,000 $
(2,637)
257,613 $
$
71,500
21,250
—
—
—
—
92,750
—
92,750
As of December 31, 2022, with certain limited exceptions the Company, as a BDC 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, 2022, the asset coverage for borrowed amounts was 172%.
Credit Facilities
Key Facility
The Company entered into the Key Facility with Key effective November 4, 2013. On June 22, 2021, the Company amended the Key Facility, among other
things, to amend the interest rate applied to the outstanding principal balance and to extend the period during which we may request advances under the Key
Facility to June 22, 2024. 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 60% 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 is scheduled to mature on June 22, 2026. Through June 21, 2021, the interest rate on the Key
Facility was based upon the one-month LIBOR plus a spread of 3.25%, with a LIBOR floor of 1.00%. From and after June 30, 2021, the interest rate on the Key
Facility is based on the rate of interest published in The Wall Street Journal as the prime rate in the United States plus 0.25%, with a prime rate floor of 4.25%.
The prime rate was 7.50% and 3.25% on December 31, 2022 and December 31, 2021, respectively. The average interest rate for the years ended December 31,
2022 and 2021 was 5.33% and 4.25%, respectively. The Key Facility requires the payment of an unused line fee in an amount up to 0.50% on an annualized
basis of any unborrowed amount available under the facility. As of December 31, 2022 and 2021, the Company had borrowing capacity under the Key Facility
of $120.0 million and $71.5 million, respectively. At December 31, 2022 and 2021, $40.2 million and $19.8 million, respectively, was available for borrowing,
subject to existing terms and advance rates.
NYL Facility
On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI, which is a party to the NYL Facility. HFI
entered into the NYL Facility with the NYL 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 NYL Noteholders. On June 1, 2018, HSLFI sold or contributed to HFI certain secured loans
made to certain portfolio companies pursuant to the Sale and Servicing Agreement. Any notes issued by HFI are 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 notes were issued pursuant to the Indenture. The
interest rate on the notes issued under the NYL Facility was based on the three year USD mid-market swap rate plus a margin of between 3.55% and 5.15% with
an interest rate floor, depending on the rating of such notes at the time of issuance.
On February 25, 2022, the Company amended its NYL Facility, increasing the commitment by $100.0 million to enable its wholly-owned subsidiary to
issue up to $200.0 million of secured notes. The amendment to the NYL Facility extends the investment period to June 2023 and the maturity date to June
2028. In addition, the amendment, among other things, reduces the applicable margin used to calculate the credit facility’s interest rate on the Company’s
borrowings above $100.0 million. Such borrowings will be priced at the three-year USD mid-market swap rate plus 3.00%.
There were $176.8 million and $78.8 million in advances made by the NYL Noteholders as of December 31, 2022 and 2021, respectively. The interest rate
as of December 31, 2022 and 2021 was 5.57% and 4.62%, respectively. As of December 31, 2022 and December 31, 2021, the Company had borrowing
capacity under the NYL Facility of $23.2 and $21.2 million, respectively. At December 31, 2022 and December 31, 2021, $23.2 and $5.7 million, respectively,
was available for borrowing, subject to existing terms and advance rates.
Under the terms of the NYL Facility, the Company required to maintain a reserve cash balance, which may be used to pay monthly interest and principal
payments on the NYL Facility. The Company has segregated these funds and classified them as restricted investments in money market funds. At December 31,
2022 and 2021, there were approximately $1.0 million and $0.5 million, respectively, of restricted investments..
Securitizations
2019 Asset-Backed Notes
On August 13, 2019, the Company completed a term debt securitization in connection with which an affiliate of the Company made an offering of the 2019
Asset-Backed Notes. The 2019 Asset-Backed Notes were rated A+(sf) by Morningstar Credit Ratings, LLC. There has been no change in the rating since August
13, 2019.
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The 2019 Asset-Backed Notes were issued by the 2019‑1 Trust pursuant to a note purchase agreement, dated as of August 13, 2019, by and among the
Company and Keybanc Capital Markets Inc. as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of the Company and
secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the 2019 Asset-Backed Notes will be paid, to the
extent of funds available, at a fixed rate of 4.21% per annum. The reinvestment period of the 2019 Asset-Backed Notes ended July 15, 2021 and the maturity is
September 15, 2027.
As of December 31, 2022 and 2021, the 2019 Asset-Backed Notes had an outstanding principal balance of $42.6 million and $70.5 million, respectively.
Under the terms of the 2019 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the
2019 Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the 2019 Asset-Backed Notes. The Company has segregated
these funds and classified them as restricted investments in money market funds. At December 31, 2022 and 2021, there were approximately $0.6 million and
$0.9 million of restricted investments, respectively.
2022 Asset-Backed Notes
On November 9, 2022, the Company completed a term debt securitization in connection with which an affiliate of the Company made an offering of the
2022 Asset-Backed Notes. The 2022 Asset-Backed Notes were rated A by DRBS, Inc. There has been no change in the rating since November 9, 2022.
The 2022 Asset-Backed Notes were issued by the 2022‑1 Trust pursuant to a note purchase agreement, dated as of November 9, 2022, by and among the
Company and Keybanc Capital Markets Inc. as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of the Company and
secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the 2022 Asset-Backed Notes will be paid, to the extent
of funds available, at a fixed rate of 7.56% per annum. The reinvestment period of the Asset-Backed Notes ends November 15, 2024 and the maturity is
November 15, 2030.
As of December 31, 2022, the 2022 Asset-Backed Notes had an outstanding principal balance of $100.0 million.
Under the terms of the 2022 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the
2022 Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the 2022 Asset-Backed Notes. The Company has segregated
these funds and classified them as restricted investments in money market funds. At December 31, 2022, there were approximately $1.0 million of restricted
investments.
Unsecured Notes
2022 Notes
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 had a stated maturity of September 15, 2022 and were redeemable 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 bore 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 were the Company’s direct unsecured
obligations and (i) ranked equally in right of payment with the Company’s current and future unsecured indebtedness; (ii) were senior in right of payment to any
of the Company’s future indebtedness that expressly provides it is subordinated to the 2022 Notes; (iii) were 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) were structurally subordinated to all existing and future indebtedness and other obligations of any of
the Company’s subsidiaries. On April 24, 2021 (the “Redemption Date”), the Company redeemed all of the issued and outstanding 2022 Notes in an aggregate
principal amount of $37.4 million and paid accrued interest of $0.3 million. The Company accelerated $0.4 million of unamortized debt issuance costs related to
the 2022 Notes. The 2022 Notes were delisted effective on the Redemption Date.
2026 Notes
On March 30, 2021, the Company issued and sold an aggregate principal amount of $57.5 million of 4.875% notes due in 2026 (the “2026 Notes”). The
amount of 2026 Notes issued and sold included the full exercise by the underwriters of their option to purchase $7.5 million aggregate principal of additional
notes. The 2026 Notes have a stated maturity of March 30, 2026 and may be redeemed in whole or in part at the Company’s option at any time or from time to
time on or after March 30, 2023 at a redemption price of $25 per security plus accrued and unpaid interest. The 2026 Notes bear interest at a rate of 4.875% per
year, payable quarterly on March 30, June 30, September 30 and December 30 of each year. The 2026 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 2026 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, 2022, the Company was in material compliance with the terms of the 2026 Notes. The 2026 Notes are listed on the New York
Stock Exchange under the symbol “HTFB”.
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2027 Notes
On June 15, 2022, the Company issued and sold an aggregate principal amount of $50.0 million of 6.25% notes due in 2027 and on July 11, 2022, pursuant
to the underwriters’ 30-day option to purchase additional notes, the Company sold an additional $7.5 million of such notes (collectively, the “2027 Notes”).
The 2027 Notes have a stated maturity of June 15, 2027 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 June 15, 2024 at a redemption price of $25 per security plus accrued and unpaid interest. The 2027 Notes bear interest at a rate of 6.25% per year,
payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing on September 30, 2022. The 2027 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 2027 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, 2022, the Company was in material compliance with the terms of the 2027 Notes.
The 2027 Notes are listed on the New York Stock Exchange under the symbol “HTFC”.
The following table shows information about our senior securities as of December 31, 2022, 2021, 2020, 2019 and 2018:
Class and Year
Credit facilities
2022
2021
2020
2019
2018
2027 Notes
2022
2026 Notes
2022
2021
2022 Notes
2022
2021
2020
2019
2017
2022-1 Securitization
2022
2019-1 Securitization
2022
2021
2020
2019
Total senior securities
2022
2021
2020
2019
2018
Total Amount
Outstanding
Exclusive of
Treasury
Securities(1)
Involuntary
Liquidation
Preference
per Unit(3)
(In thousands, except unit data)
Asset
Coverage
per Unit(2)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
181,750 $
132,250 $
50,250 $
17,000 $
90,500 $
4,169
3,823
7,965
19,908
2,896
57,500 $
13,179
57,500 $
57,500 $
— $
— $
37,375 $
37,375 $
37,375 $
13,179
8,793
—
—
10,708
9,055
7,014
100,000 $
7,578
42,573 $
70,500 $
100,000 $
100,000 $
439,323 $
260,250 $
187,625 $
154,375 $
127,875 $
17,799
7,171
4,002
3,384
1,725
1,943
2,133
2,192
2,050
—
—
—
—
—
— $
— $
— $
—
—
— $
— $
$
—
—
—
—
—
—
—
—
—
—
Average
Market
Value per
Unit(4)
N/A
N/A
N/A
N/A
N/A
24.09
24.45
25.90
N/A
N/A
24.60
25.53
25.52
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Total amount of senior securities outstanding at the end of the period presented.
(2) Asset coverage per unit is the ratio of the original cost less accumulated depreciation, amortization or impairment of the Company’s total consolidated
assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset
coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
(3) The amount which the holder of such class of senior security would be entitled upon the voluntary liquidation of the applicable issuer in preference to any
security junior to it. The “ — ” in this column indicates that the SEC expressly does not require this information to be disclosed for certain types of
securities.
(4) Not applicable to the Company’s credit facilities, 2019‑1 Securitization and 2022-1 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.
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The following table reconciles net increase in net assets resulting from operations to taxable income:
Net increase 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
2022
Years Ended December 31,
2021
(In thousands)
2020
21,151 $
5,552
3,292
9,484
39,479 $
27,782 $
(3,205)
1,462
3,643
29,682 $
6,364
(313)
782
14,698
21,531
2022
Years Ended December 31,
2021
(In thousands)
31,490 $
31,490 $
25,099 $
25,099 $
2020
21,592
21,592
$
$
$
$
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
2022
As of December 31,
2021
(In thousands)
2020
18,813 $
(73,055)
18,542
(19,771)
11,875
(43,596) $
10,825 $
(63,571)
12,973
(8,738)
7,465
(41,046) $
6,242
(59,928)
9,578
(8,545)
5,983
(46,670)
$
$
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, 2022 and 2021, the Company
elected to carry forward taxable income in excess of current year distributions of $18.8 million and $10.8 million, respectively. At December 31, 2022 and 2021,
a provision for excise tax of $0.7 million and $0.4 million, respectively was recorded.
Capital losses in excess of capital gains earned in a tax year may generally be carried forward, without expiration, and used to offset capital gains, subject to
certain limitations. During the years ended December 31, 2022, 2021 and 2020, the Company did not use any material capital loss carry forwards to offset
capital gains.
For federal income tax purposes, the tax cost of investments at December 31, 2022 and 2021 was $721.2 million and $453.8 million, respectively. The gross
unrealized appreciation on investments at December 31, 2022 and 2021 was $18.5 million and $13.0 million, respectively. The gross unrealized depreciation on
investments at December 31, 2022 and 2021 was $19.8 million and $8.7 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.
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The balance of unfunded commitments to extend credit was $190.0 million and $114.5 million as of December 31, 2022 and 2021, respectively.
Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, 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, 2022:
BrightInsight, Inc.
Britecore Holdings, Inc.
Castle Creek Biosciences
Divergent Technologies, Inc.
Engage3, LLC
Groundspeed Analytics, Inc.
Hound Labs, Inc.
KSQ Therapeutics, Inc.
Lytics, Inc.
Native Microbials, Inc.
Optoro, Inc.
PDS Biotechnology Corporation
Robin Healthcare, Inc.
Scientia Vascular, Inc.
Slingshot Aerospace, Inc.
Swift Health Systems Inc.
Temperpack Technologies, Inc.
Total
December 31, 2022
Principal
Balance
Fair Value of
Unfunded
Commitment
Liability
(In thousands)
21,000 $
5,000
4,000
22,500
8,000
15,000
7,500
10,000
5,000
7,500
15,000
10,000
10,000
10,000
5,000
25,500
9,000
190,000 $
278
66
72
236
40
150
88
100
65
72
38
158
100
110
64
105
19
1,761
$
$
The table above also provides the fair value of the Company’s unfunded commitment liability as of December 31, 2022 which totaled $1.8 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 sustainability 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 and fair value, represented 23% and 26% of total debt investments outstanding as of December 31, 2022 and
2021, respectively. No single debt investment represented more than 10% of the total debt investments at cost or fair value as of December 31, 2022 or 2021.
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 15%, 17% and 23% of total interest and fee income on investments for the years ended December 31, 2022, 2021 and 2020,
respectively.
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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, 2022 and 2021:
Date
Declared
Record
Date
Payment
Date
Amount
Cash
DRIP
Shares
Per Share Distribution
Issued
DRIP
Share
Value
(In thousands, except share and per share data)
Year Ended December 31, 2022
10/28/2022
10/28/2022
10/28/2022
10/28/2022
7/29/2022
7/29/2022
7/29/2022
4/29/2022
4/29/2022
4/29/2022
2/25/2022
2/25/2022
2/25/2022
Year Ended December 31, 2021
10/22/21
10/22/21
10/22/21
10/22/21
7/23/21
7/23/21
7/23/21
4/23/21
4/23/21
4/23/21
2/26/21
2/26/21
2/26/21
2/17/23
1/18/23
12/19/22
11/17/22
11/17/22
10/18/22
9/19/22
8/18/22
7/19/22
6/17/22
5/18/22
4/19/22
3/18/22
2/18/22
1/19/22
12/17/21
11/18/21
11/18/21
10/19/21
9/17/21
8/18/21
7/20/21
6/17/21
5/18/21
4/20/21
3/18/21
3/15/23
2/15/23
1/13/23
12/15/22
12/15/22
11/15/22
10/14/22
9/15/22
8/16/22
7/15/22
6/15/22
5/16/22
4/14/22
3/16/22
2/16/22
1/14/22
12/15/21
12/15/21
11/16/21
10/15/21
9/15/21
8/16/21
7/16/21
6/15/21
5/14/21
4/16/21
$
$
$
$
0.11 $
0.11
0.11
0.05
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
1.28 $
0.10 $
0.10
0.10
0.05
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
1.25 $
—
3,021
2,978
1,319
2,638
2,580
2,558
2,528
2,484
2,434
2,378
2,349
2,352
29,619
2,100
2,096
2,031
1,013
2,027
2,010
2,008
1,996
1,983
1,964
1,964
1,937
1,938
25,067
— $
5,754
5,618
2,171
4,341
4,621
7,703
4,925
3,939
4,286
4,428
4,088
3,221
55,095 $
3,409 $
2,680
3,417
1,197
2,395
1,907
2,068
2,041
1,937
1,888
1,671
1,794
1,653
28,057 $
—
74
69
27
57
60
81
60
55
51
50
49
46
679
46
43
56
20
38
34
36
34
34
33
29
29
28
460
On February 23, 2023, the Board declared monthly distributions per share, payable as set forth in the following table:
Ex-Dividend Date
March 16, 2023
April 17, 2023
May 17, 2023
Record Date
March 17, 2023
April 18, 2023
May 18, 2023
Payment Date
April 14, 2023
May 16, 2023
June 14, 2023
Distributions
Declared
$
$
$
0.11
0.11
0.11
After paying distributions of $1.25 per share deemed paid for tax purposes in 2022, declaring on October 28, 2022 a distribution of $0.11 per share payable
January 13, 2023, and taxable earnings of $1.60 per share in 2022, the Company’s undistributed spillover income as of December 31, 2022 was $0.68 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.
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Note 12. Subsequent events
In January 2023, the Company sold 555,654 shares of common stock under the 2021 Equity Distribution Agreement. For the same period, the Company
received total accumulated net proceeds of approximately $6.6 million, including $0.1 million of offering expenses, from these sales.
On January 24, 2023, pursuant to the terms of an Asset Purchase Agreement dated August 18, 2022 by and between HESP LLC, the Company’s wholly-
owned subsidiary (“HESP”) and Cadrenal Therapeutics, Inc. (“CVKD”), HESP received 600,000 shares of common stock of CVKD upon CVKD’s completion
of its initial public offering.
On February 1, 2023, Canary Medical Inc. prepaid its outstanding principal balance of $7.5 million on its venture loan, plus interest, end-of-term payment
and prepayment fee. The Company continues to hold warrants in Canary Medical Inc.
On February 3, 2023, Unagi Inc. (“Unagi”) prepaid $3.2 million of the outstanding principal of its venture loan. The current outstanding principal balance of
the Unagi’s venture loan as of the date hereof is $2.1 million. The Company and Unagi also amended the terms of the venture loan to, among other things,
provide for payment in kind (PIK) interest and extend the maturity date of the outstanding principal balance of the loan.
On February 14, 2023, Embody, Inc. prepaid its outstanding principal balance of $2.5 million on its venture loan, plus interest and end-of-term payment.
On February 20, 2023, the Board unanimously approved a new investment advisory agreement with the Advisor, substantially similar to the existing
Investment Management Agreement, subject to stockholder approval and the closing of the sale of the Advisor to an affiliate of Monroe Capital LLC (the
“Transaction”). The Company does not anticipate the Transaction will substantially or adversely affect the Company. It is anticipated that all of the officers and
investment professionals at the Advisor will remain at the Advisor and that the Advisor and the Company will maintain their venture lending-focused investment
strategy.
On February 24, 2023, the Company funded a $5.0 million debt investment to an existing portfolio company, BriteCore Holdings, LLC.
On February 24, 2023, the Company funded a $20.0 million debt investment to a new portfolio company, Noodle Partners, Inc.
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Note 13. Financial highlights
The following table shows financial highlights for the Company:
2022
Year ended December 31,
2020
(In thousands, except share and per share data)
2019
2021
2018
Per share data:
Net asset value at beginning of period
Net investment income
Realized loss (gain)
Unrealized (depreciation) appreciation on investments
Net increase in net assets resulting from operations
Distributions declared (1)
From net investment income
From net realized gain on investments
Return of capital
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 to average net assets:
Expenses without incentive value
Incentive fees
Net expenses
Net investment income with incentive fees
Ratios, without waivers, to average net assets:
Expenses without incentive value (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
$
$
$
$
$
11.56
1.46
(0.38)
(0.22)
0.86
(1.28)
(1.28)
—
—
0.33
$
11.47
$
15.92
11.60
$
(19.3)%
11.02
1.41
(0.18)
0.16
1.39
(1.25)
(1.25)
—
—
0.40
11.56
13.24
15.92
$
$
$
11.83
1.18
(0.84)
0.02
0.36
(1.25)
(1.25)
—
—
0.08
11.02
12.93
13.24
$
$
$
11.64
1.52
(0.31)
0.24
1.45
(1.20)
(1.20)
—
—
(0.06)
11.83
11.25
12.93
$
$
$
29.7%
12.1%
25.6%
11.72
1.20
0.06
(0.13)
1.13
(1.20)
(1.20)
—
—
(0.01)
11.64
11.22
11.25
11.0%
27,753,373
21,217,460
19,286,356
15,563,290
11,535,129
11.5%
2.6%
14.1%
12.1%
10.5%
3.1%
13.6%
12.2%
10.0%
2.6%
12.6%
10.4%
10.8%
3.2%
14.0%
12.8%
11.5%
2.6%
14.1%
12.1%
$
$
$
14.6% (5)
318,448
299,182
13.70
10.5%
3.1%
13.6%
12.2%
$
245,335
$
231,215
11.27
$
45.4%(5)
10.0%
2.6%
12.6%
10.4%
$
212,597
$
199,302
9.97
$
38.7%(5)
10.8%
4.4%
15.2%
11.6%
$
$
$
82.0%(6)
184,055
160,008
10.05
$
$
$
10.4%
2.4%
12.8%
10.3%
10.4%
3.3%
13.7%
9.4%
134,257
134,364
8.62
50.4%(6)
(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. The issuance of common stock on a per share basis
reflects the incremental net asset value changes as a result of the issuance of common stock in the Company’s continuous public offering and pursuant to the
Company’s distribution reinvestment plan. The issuance of common stock at an offering price, net of sales commissions and dealer manager fees, that is
greater than the net asset value per share results in an increase in net asset value per share.
(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, 2019 and 2018, the Advisor waived $1.8 million and $1.2 million, respectively, of incentive fee.
(5) Calculated by dividing the lesser of purchases or the sum of (1) principal prepayments and (2) maturities by the monthly average debt investment balance
(6) Calculated by dividing net debt investment purchases by the monthly average debt investment balance.
132
Table of Contents
Note 14. Summarized financial information for HSLFI
Horizon Secured Loan Fund I
Statements of Operations
(Dollars in thousands)
Investment income
Interest income
Prepayment fee income
Total investment income
Expenses
Interest expense
General and administrative
Total expenses
Net investment income
Net realized and unrealized loss on investments
Net realized gain on investments
Net realized gain on investments
Net unrealized depreciation on investments
Net unrealized depreciation on investments
Net realized and unrealized loss on investments
Net decrease in net assets resulting from operations
For the period
January 1, 2020
through
April 21
2021
$
$
1,353
112
1,465
1,165
64
1,229
236
120
120
(392)
(392)
(272)
(36)
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, 2022, 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 is 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.
133
Table of Contents
Item 9B. Other Information
None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
We will file a definitive Proxy Statement for our 2023 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 2023 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 2023 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 2023 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 2023 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 2023 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.
134
Table of Contents
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial statements
(1) Financial statements — Refer to Item 8 starting on page 86.
(2) Financial statement schedules — None
(3) Exhibits
Exhibit No.
3.1
Description
Amended and Restated Certificate of Incorporation (Incorporated by reference to exhibit (a) of the Company’s Pre-effective Amendment No. 2
to the Registration Statement on Form N‑2, filed on July 2, 2010)
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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% Notes due 2022 (included as part of Exhibit 4.3)
Third Supplemental Indenture, dated as of September 29, 2017, between the Company and U.S. Bank National Association (Incorporated by
reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K, filed on March 30, 2021)
Form of 4.875% Notes due 2026 (included as part of Exhibit 4.5)
Fourth Supplemental Indenture, dated as of June 15, 2022, between the Company and U.S. Bank Trust Company, National Association
(Incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K, filed on June 15, 2022)
Form of 6.25% Notes due 2027 (included as part of Exhibit 4.7)
Description of Securities
Investment Management Agreement (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8‑K, filed on
March 8, 2019)
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)
135
Table of Contents
Exhibit No.
10.8
Description
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)
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
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 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) to 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 (Incorporated by
reference to Exhibit 10.13 of the Company’s Annual Report on Form 10‑K, filed on March 5, 2019)
Underwriting Agreement, dated as of March 21, 2019, by and among the Company, Horizon Technology Finance Management LLC, and
Morgan Stanley & Co. LLC, as representative of the several underwriters named therein (Incorporated by reference to Exhibit (h)(3) of the
Company’s Post-Effective Amendment No. 1, filed on March 26, 2019)
Equity Distribution Agreement, dated as of August 2, 2019, by and among the Company, Horizon Technology Management LLC, Goldman
Sachs & Co. LLC and B. Riley FBR, Inc. (Incorporated by reference to Exhibit 1.1 of the Company’s Current Report on Form 8‑K, filed on
August 2, 2019)
Note Purchase Agreement, dated as of August 6, 2019, by and among the Company, Horizon Funding Trust 2019‑1, the Issuer, Horizon Funding
2019‑1 LLC, the Trust Depositor, and KeyBanc Capital Markets Inc., as Initial Purchaser (Incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8‑K, filed on August 13, 2019)
Indenture, dated as of August 13, 2019, by and between Horizon Funding Trust 2019‑1, as the Issuer, and US Bank National Association, as the
Trustee (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8‑K, filed on August 13, 2019).
Sale and Contribution Agreement, dated as of August 13, 2019, by and between the Company, as the Seller, and Horizon Funding 2019‑1 LLC,
as the Trust Depositor (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8‑K, filed on August 13, 2019).
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Exhibit No.
10.19
Description
Sale and Servicing Agreement, dated as of August 13, 2019, by and among the Company, as the Seller and as the Servicer, Horizon Funding
Trust 2019‑1, as the Issuer, Horizon Funding 2019‑1 LLC, as the Trust Depositor, and US Bank National Association, as the Trustee, Backup
Servicer, Custodian and Securities Intermediary (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8‑K, filed
on August 13, 2019).
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
Administration Agreement, dated as of August 13, 2019, among Horizon Funding Trust 2019‑1, as Issuer, the Company, as Administrator,
Wilmington Trust, National Association, as Owner Trustee, and US Bank National Association, as Trustee (Incorporated by reference to
Exhibit 10.5 of the Company’s Current Report on Form 8‑K, filed on August 13, 2019).
Amended and Restated Trust Agreement, dated as of August 13, 2019, Horizon Funding 2019‑1 LLC, as the Trust Depositor, and Wilmington
Trust, National Association, as the Owner Trustee (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8‑K,
filed on August 13, 2019).
Sale and Servicing Agreement, dated as of June 1, 2018, by and among Horizon Funding I, LLC, the issuer, Horizon Secured Lending Fund I
LLC, as originator and seller, Horizon Technology Finance Corporation, the servicer, and U.S. Bank National Association (Incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8 K, filed on June 26, 2020)
Amendment No. 1 to Sale and Servicing Agreement, dated as of June 19, 2019, by and among Horizon Funding I, LLC, the issuer, Horizon
Secured Lending Fund I LLC, as originator and seller, Horizon Technology Finance Corporation, the servicer, and U.S. Bank National
Association (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8 K, filed on June 26, 2020)
Amendment No. 2 to Sale and Servicing Agreement, dated as of June 5, 2020, by and among Horizon Funding I, LLC, the issuer, Horizon
Secured Lending Fund I LLC, as originator and seller, Horizon Technology Finance Corporation, the servicer, and U.S. Bank National
Association (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8 K, filed on June 26, 2020)
Amended and Restated Note Funding Agreement, dated as of June 5, 2020, between Horizon Funding I, LLC, the issuer, and the Initial
Purchasers (as defined therein) (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8 K, filed on June 26,
2020)
Indenture, dated as of June 1, 2018, by and between Horizon Funding I, LLC, the issuer, and U.S. Bank National Association (Incorporated by
reference to Exhibit 10.5 of the Company’s Current Report on Form 8 K, filed on June 26, 2020).
Supplemental Indenture, dated as of June 5, 2020, by and between Horizon Funding I, LLC, the issuer, and U.S. Bank National Association
(Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8 K, filed on June 26, 2020)
Seventh Amendment to the Amended and Restated Loan and Security Agreement, dated as of June 29, 2020, among Horizon Credit II LLC, as
borrower, the Lenders party thereto, and KeyBank National Association, as arranger and agent (Incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8 K, filed on June 30, 2020)
Equity Distribution Agreement, dated as of June 30, 2020, by and among the Company, Horizon Technology Management LLC, Goldman Sachs
& Co. LLC and B. Riley FBR, Inc. (Incorporated by reference to Exhibit 1.1 of the Company’s Current Report on Form 8 K, filed on July 30,
2020)
Underwriting Agreement, dated as of March 23, 2021, by and among the Company, Horizon Technology Finance Management LLC, and Keefe,
Bruyette & Woods, Inc., as representative of the several underwriters named therein (Incorporated by reference to Exhibit 1.1 of the Company’s
Current Report on Form 8-K, filed on March 25, 2021)
Second Amended and Restated Loan and Security Agreement, dated as of June 22, 2021, among Horizon Credit II LLC, as borrower, the
Lenders party thereto, and KeyBank National Association, as arranger and agent (Incorporated by reference to Exhibit 1.1 of the Company’s
Current Report on Form 8-K, filed on June 23, 2021)
Second Amended and Restated Sale and Servicing Agreement, dated as of June 22, 2021, 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 KeyBank National Association, as the agent
(Incorporated by reference to Exhibit 1.2 of the Company’s Current Report on Form 8-K, filed on June 23, 2021)
Amendment No. 3 to Sale and Servicing Agreement, dated as of February 25, 2022, by and among Horizon Funding I, LLC, the issuer, Horizon
Secured Lending Fund I LLC, as originator and seller, Horizon Technology Finance Corporation, the servicer, and U.S. Bank Trust Company,
National Association (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed on February 28, 2022).
Second Amended and Restated Note Funding Agreement, dated as of February 25, 2022, between Horizon Funding I, LLC, the issuer, and the
Initial Purchasers (as defined therein) (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed on
February 28, 2022).
137
Table of Contents
Exhibit No.
10.35
Description
Second Supplemental Indenture, dated as of February 25, 2022, by and between Horizon Funding I, LLC, the issuer, and U.S. Bank Trust
Company, National Association (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K, filed on February 28,
2022).
10.36
10.37
10.38
10.39
10.40
10.41
10.42
Underwriting Agreement, dated March 9, 2022, among Horizon Technology Finance Corporation, Horizon Technology Finance Management
LLC and Morgan Stanley & Co. LLC, as representative of the several underwriters named on Schedule A thereto (Incorporated by reference to
Exhibit 1.1 of the Company’s Current Report on Form 8-K, filed on March 14, 2022).
Underwriting Agreement, dated as of June 8, 2022, by and among the Company, Horizon Technology Finance Management LLC, and Keefe,
Bruyette & Woods, Inc., as representative of the several underwriters named therein (Incorporated by reference to Exhibit 1.1 of the Company’s
Current Report on Form 8-K, filed on June 13, 2022).
Note Purchase Agreement, dated as of October 26, 2022, by and among the Company, Horizon Funding Trust 2022-1, the issuer, Horizon
Funding 2022-1 LLC, the trust depositor, and KeyBanc Capital Markets Inc., as initial purchaser (Incorporated by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K, filed on November 14, 2022).
Indenture, dated as of November 9, 2022, by and among Horizon Funding Trust 2022-1, as the issuer, U.S. Bank National Association, as the
trustee, and U.S. Bank National Association, as the securities intermediary (Incorporated by reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K, filed on November 14, 2022).
Sale and Contribution Agreement, dated as of November 9, 2022, by and among the Company, as the seller, and Horizon Funding 2022-1 LLC,
as the trust depositor (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed on November 14, 2022).
Sale and Servicing Agreement, dated as of November 9, 2022, by and among the Company, as the seller and as the servicer, Horizon Funding
Trust 2022-1, as the issuer, Horizon Funding 2022-1 LLC, as the trust depositor, U.S. Bank Trust Company, National Association, as the trustee,
and U.S. Bank National Association, as backup servicer, custodian and securities intermediary (Incorporated by reference to Exhibit 10.4 of the
Company’s Current Report on Form 8-K, filed on November 14, 2022).
Administration Agreement, dated as of November 9, 2022, by and among Horizon Funding Trust 2022-1, as issuer, the Company, as
administrator, Wilmington Trust, National Association, as owner trustee, and U.S. Bank Trust Company, National Association, as
trustee(Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K, filed on November 14, 2022).
14.1*
Code of Ethics of the Company
21*
23*
24
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Power of Attorney (included on signature page hereto)
31.1*
Certificate of the Principal Executive Officer Pursuant to Exchange Act Rule 13a‑14(a) and 15d‑14(a)
31.2*
Certificate of the Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a‑14(a) and 15d‑14(a)
32.1*
32.2*
99.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
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
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)
101.INS
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith
138
Table of Contents
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: February 28, 2023
HORIZON TECHNOLOGY FINANCE CORPORATION
/s/ Robert D. Pomeroy, Jr.
By:
Name: Robert D. Pomeroy, Jr.
Title: Chief Executive Officer and Chairman of the Board of Directors
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert D. Pomeroy, Jr., Daniel R.
Trolio and Gerald A. Michaud as his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10‑K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities
and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10‑K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Robert D. Pomeroy, Jr.
Robert D. Pomeroy, Jr.
/s/ Daniel R. Trolio
Daniel R. Trolio
/s/ Lynn D. Dombrowski
Lynn D. Dombrowski
/s/ Gerald A. Michaud
Gerald A. Michaud
/s/ James J. Bottiglieri
James J. Bottiglieri
/s/ Edmund V. Mahoney
Edmund V. Mahoney
/s/ Elaine A. Sarsynski
Elaine A. Sarsynski
/s/ Joseph J. Savage
Joseph J. Savage
Chairman of the Board of Directors and Chief
Executive Officer (Principal Executive Officer)
Chief Financial Officer and
Treasurer (Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
February 28, 2023
February 28, 2023
February 28, 2023
President and Director
February 28, 2023
Director
Director
Director
Director
139
February 28, 2023
February 28, 2023
February 28, 2023
February 28, 2023
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934
EXHIBIT 4.9
As of December 31, 2022, Horizon Technology Finance Corporation had the following three classes of securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”): (i) its common stock, $0.001 par value per share (“common stock”), (ii) its 4.875% Notes
due 2026 and (iii) its 6.25% Notes due 2027.
DESCRIPTION OF COMMON STOCK
The following is a description of some of the terms of our common stock, our amended and restated certificate of incorporation (the “certificate of
incorporation”), our amended and restated bylaws (the “bylaws”) and certain provisions of the Delaware General Corporation Law (the “DGCL”). The following
description is not complete and is subject to, and qualified in its entirety by reference to, our charter and bylaws, each of which is filed or incorporated by
reference as an exhibit to our Annual Report on Form 10-K of which this Exhibit is a part, and the DGCL. You should read our charter and bylaws and the
applicable provisions of the DGCL for a complete statement of the provisions described under this caption “Description of Common Stock” and for other
provisions that may be important to you.
Under the terms of our certificate of incorporation, our authorized common stock consists solely of 100,000,000 shares, par value $0.001 per share. Our
common stock is traded on Nasdaq under the symbol “HRZN”. There are no outstanding options or warrants to purchase our stock. No stock has been authorized
for issuance under any equity compensation plans. Under the DGCL, our stockholders generally are not personally liable for our debts or obligations.
Under the terms of our certificate of incorporation, all shares of our common stock have equal rights as to earnings, assets, distributions and voting. When
they are issued, shares of our common stock will be duly authorized, validly issued, fully paid and non-assessable. Distributions may be paid to the holders of
our common stock if, as and when declared by our Board out of assets legally available therefor, subject to any preferential dividend rights of outstanding
preferred stock. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders, including the election of
directors, and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors
may elect all of the directors standing for election. Upon our liquidation, dissolution or winding up, the holders of common stock are entitled to receive ratably
our net assets available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common
stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to the
rights of the holders of any series of preferred stock which we may designate and issue in the future. In addition, holders of our common stock may participate in
our DRIP.
Anti-takeover effects of provisions of our certificate of incorporation, bylaws, the DGCL and other arrangements.
Certain provisions of our certificate of incorporation and bylaws, applicable provisions of the DGCL and certain other agreements to which we are a party
may make it more difficult for or prevent an unsolicited third party from acquiring control of us or changing our Board and management. These provisions may
have the effect of deterring hostile takeovers or delaying changes in our control or in our management. These provisions are intended to enhance the likelihood
of continued stability in the composition of our Board and in the policies furnished by them and to discourage certain types of transactions that may involve an
actual or threatened change in our control. The provisions also are intended to discourage certain tactics that may be used in proxy fights. These provisions,
however, could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the
market price of our shares that could result from actual or rumored takeover attempts.
Election of directors. Our certificate of incorporation and bylaws provide that the affirmative vote of a plurality of all votes cast at a meeting of
stockholders duly called at which a quorum is present shall be sufficient to elect a director. Under our certificate of incorporation, our Board may amend the
bylaws to alter the vote required to elect directors.
Classified board of directors. The classification of our Board and the limitations on removal of directors and filling of vacancies could have the effect of
making it more difficult for a third party to acquire us, or of discouraging a third party from acquiring us. Our Board is divided into three classes, with the term
of one class expiring at each annual meeting of stockholders. At each annual meeting, one class of directors is elected to a three-year term. This provision could
delay for up to two years the replacement of a majority of our Board.
Number of directors; vacancies; removal. Our certificate of incorporation provides that, by amendment to our bylaws, our Board is authorized to change
the number of directors without the consent of stockholders to any number between three and nine.
Our certificate of incorporation provides that, subject to the rights of any holders of preferred stock, any vacancy on our Board, however the vacancy
occurs, including a vacancy due to an enlargement of our Board, may only be filled by vote of a majority of the directors then in office.
Subject to the rights of any holders of preferred stock, a director may be removed at any time at a meeting called for that purpose, but only for cause and
only by the affirmative vote of the holders of at least 75% of the shares then entitled to vote for the election of the respective director.
The limitations on the ability of our stockholders to remove directors and fill vacancies could make it more difficult for a third party to acquire, or
discourage a third party from seeking to acquire, control of us.
Action by stockholders. Under our certificate of incorporation and bylaws, stockholder action can only be taken at an annual meeting or special meeting
and not by written action in lieu of a meeting. This may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.
Advance notice requirements for stockholder proposals and director nominations. Our bylaws provide that with respect to an annual meeting of
stockholders, nominations of persons for election to our Board and the proposal of business to be considered by stockholders may be made only (1) by or at the
direction of our Board, (2) pursuant to our notice of meeting or (3) by a stockholder who is entitled to vote at the meeting and who has complied with the
advance notice procedures of the bylaws. Nominations of persons for election to our Board at a special meeting may be made only (1) by or at the direction of
our Board, or (2) provided that our Board has determined that directors will be elected at the meeting, by a stockholder who is entitled to vote at the meeting and
who has complied with the advance notice provisions of the bylaws. The purpose of requiring stockholders to give us advance notice of nominations and other
business is to afford our Board a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed
business and, to the extent deemed necessary or desirable by our Board, to inform our stockholders and make recommendations about such qualifications or
business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our Board any power to
disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for
the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from
conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to us and our stockholders.
Amendments to certificate of incorporation and bylaws. The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote
on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless a corporation’s certificate of incorporation or bylaws requires a
greater percentage. Our certificate of incorporation provides that the affirmative vote of 75% of the then outstanding shares entitled to vote generally in the
election of directors voting together as a single class is required to amend provisions of our certificate of incorporation relating to the classification, size and
vacancies of our Board, as well as the removal of directors. However, if 66 2/3% of the continuing directors have approved such amendment or repeal, the
affirmative vote for such amendment or repeal shall be a majority of such shares. The affirmative vote of 75% of the then outstanding shares voting together as a
single class is required to amend provisions of our certificate of incorporation relating to the calling of a special meeting of stockholders or the ability to amend
or repeal the bylaws. Our certificate of incorporation permits our Board to amend or repeal our bylaws, provided that any amendment or repeal shall require
the approval of at least 66 2/3% of the continuing directors. The stockholders do not have the right to adopt or repeal the bylaws.
Stockholder meetings. Our certificate of incorporation and bylaws provide that any action required or permitted to be taken by stockholders at an annual
meeting may only be taken if it is properly brought before such meeting. For business to be properly brought before an annual meeting by a stockholder, the
stockholder must provide timely notice to our Secretary. Notice is timely if it is delivered by a nationally recognized courier service or mailed by first class
United States mail and received not earlier than 90 days nor more than 120 days in advance of the anniversary of the date our proxy statement was released to
stockholders in connection with the previous year’s annual meeting. Action taken at a special meeting of stockholders is limited to the purposes stated in the
properly provided notice of meeting. These provisions could have the effect of delaying until the next stockholder meeting actions that are favored by the holders
of a majority of our outstanding voting securities.
Calling of special meetings by stockholders. Our certificate of incorporation and bylaws provide that special meetings of the stockholders may only be
called by our Board, Chairman, Chief Executive Officer or President.
Section 203 of the DGCL. We are subject to the provisions of Section 203 of the DGCL. In general, these provisions prohibit a Delaware corporation from
engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested
stockholder, unless:
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prior to such time, the board of directors approved either the business combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or
on or after the date the business combination is approved by the board of directors and authorized at a meeting of stockholders, by at least
two-thirds of the outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines “business combination” to include the following:
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any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge or other disposition (in one transaction or a series of transactions) of 10% or more of either the aggregate market
value of all the assets of the corporation or the aggregate market value of all the outstanding stock of the corporation involving the interested
stockholder;
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder;
any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the
corporation owned by the interested stockholder; or
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons.
The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.
Conflict with 1940 Act. Our bylaws provide that, if and to the extent that any provision of the DGCL or our bylaws conflict with any provision of the 1940
Act, the applicable provision of the 1940 Act will control.
Approval of certain transactions. To convert us to an open-end investment company, to merge or consolidate us with any entity in a transaction as a result
of which the governing documents of the surviving entity do not contain substantially the same anti-takeover provisions as are provided in our certificate of
incorporation, to liquidate and
dissolve us, or to amend any of the anti-takeover provisions discussed herein, our certificate of incorporation requires the affirmative vote of a majority of our
continuing directors followed by the favorable vote of the holders of at least 75% of each affected class or series of our shares, voting separately as a class or
series, unless such amendment has been approved by the holders of at least 80% of the then outstanding shares of our capital stock, voting together as a single
class. If approved in the foregoing manner, our conversion to an open-end investment company could not occur until 90 days after the stockholders meeting at
which such conversion was approved and would also require at least 30 days’ prior notice to all stockholders. As part of any such conversion to an open-end
investment company, substantially all of our investment policies and strategies and portfolio would have to be modified to assure the degree of portfolio liquidity
required for open-end investment companies. In the event of conversion, the common shares would cease to be listed on any national securities exchange or
market system. Stockholders of an open-end investment company may require the company to redeem their shares at any time, except in certain circumstances
as authorized by or under the 1940 Act, at their net asset value, less such redemption charge, if any, as might be in effect at the time of a redemption. You should
assume that it is not likely that our Board would vote to convert us to an open-end fund.
The 1940 Act defines “a majority of the outstanding voting securities” as the lesser of a majority of the outstanding shares and 67% of a quorum of a
majority of the outstanding shares. For the purposes of calculating “a majority of the outstanding voting securities” under our certificate of incorporation, each
class and series of our shares vote together as a single class, except to the extent required by the 1940 Act or our certificate of incorporation, with respect to any
class or series of shares. If a separate class vote is required, the applicable proportion of shares of the class or series, voting as a separate class or series, also will
be required.
Our Board has determined that provisions with respect to our Board and the stockholder voting requirements described above, which voting requirements
are greater than the minimum requirements under the DGCL or the 1940 Act, are in the best interest of stockholders generally.
Limitations of liability and indemnification
The indemnification of our officers and directors is governed by Section 145 of the DGCL, and our certificate of incorporation and bylaws. Subsection (a)
of Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation)
by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if (1) such
person acted in good faith, (2) in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and (3) with respect to
any criminal action or proceeding, such person had no reasonable cause to believe the person’s conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is
or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner the person reasonably believed to be
in, or not opposed to, the best interests of the corporation, and except that no indemnification may be made in respect of any claim, issue or matter as to which
such person has been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action
or suit was brought determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court deems proper.
Section 145 of the DGCL further provides that to the extent that a present or former director or officer is successful, on the merits or otherwise, in the
defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 of the DGCL, or in defense of any claim, issue or matter therein,
such person will be indemnified
against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with such action, suit or proceeding. In all cases in
which indemnification is permitted under subsections (a) and (b) of Section 145 of the DGCL (unless ordered by a court), it will be made by the corporation only
as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the
circumstances because the applicable standard of conduct has been met by the party to be indemnified. Such determination must be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding,
even though less than a quorum, (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, (3) if there
are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (4) by the stockholders. The statute authorizes the
corporation to pay expenses incurred by an officer or director in advance of the final disposition of a proceeding upon receipt of an undertaking by or on behalf
of the person to whom the advance will be made, to repay the advances if it is ultimately determined that he or she was not entitled to indemnification. Section
145 of the DGCL also provides that indemnification and advancement of expenses permitted under such Section are not to be exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors, or
otherwise. Section 145 of the DGCL also authorizes the corporation to purchase and maintain liability insurance on behalf of its directors, officers, employees
and agents regardless of whether the corporation would have the statutory power to indemnify such persons against the liabilities insured.
Our certificate of incorporation provides that our directors will not be liable to us or our stockholders for monetary damages for breach of fiduciary duty as
a director to the fullest extent permitted by the DGCL. Section 102(b)(7) of the DGCL provides that the personal liability of a director to a corporation or its
stockholders for breach of fiduciary duty as a director may be eliminated except for liability (1) for any breach of the director’s duty of loyalty to the corporation
or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of
the DGCL, relating to unlawful payment of distributions or unlawful stock purchases or redemption of stock or (4) for any transaction from which the director
derives an improper personal benefit.
Under our certificate of incorporation, we fully indemnify any person who was or is involved in any actual or threatened action, suit or proceeding by
reason of the fact that such person is or was one of our directors or officers. So long as we are regulated under the 1940 Act, the above indemnification and
limitation of liability is limited by the 1940 Act or by any valid rule, regulation or order of the SEC thereunder. The 1940 Act provides, among other things, that
a company may not indemnify any director or officer against liability to it or its security holders to which he or she might otherwise be subject by reason of his
or her willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office unless a determination is
made by final decision of a court, by vote of a majority of a quorum of directors who are disinterested, non-party directors or by independent legal counsel that
the liability for which indemnification is sought did not arise out of the foregoing conduct.
We have obtained liability insurance for our directors and officers. In addition, we have entered into indemnification agreements with each of our directors
and officers in order to effect the foregoing except to the extent that such indemnification would exceed the limitations on indemnification under Section 17(h)
of the 1940 Act.
DESCRIPTION OF NOTES
Our 4.875% Notes due 2026 (the “2026 Notes”) were issued under an indenture dated as of March 23, 2012 (the “Base Indenture”), as amended and
supplemented by a Third Supplemental Indenture dated as of March 30, 2021 (the “Third Supplemental Indenture;” the Base Indenture, as amended and
supplemented by the Third Supplemental Indenture, is hereinafter called the “2026 Notes Indenture”), each between us and U.S. Bank National Association, as
trustee.
Our 6.25% Notes due 2027 (the “2027 Notes,” together with the 2026 Notes, the “Notes”) were issued under the Base Indenture, as amended and
supplemented by a Fourth Supplemental Indenture dated as of June 15, 2027 (the “Fourth Supplemental Indenture;” the Base Indenture, as amended and
supplemented by the Fourth Supplemental Indenture, is hereinafter called the “2027 Notes Indenture,” and together with the 2026 Notes Indenture, the
“Indenture”), each between us and U.S. Bank Trust Company, National Association, as trustee.
We may issue our debt securities under the Indenture from time to time in one or more series. The 2026 Notes and 2027 Notes are each a separate series of
our debt securities issued and outstanding under the Indenture, which means that, for purposes of giving any consent, notice or waiver or taking any other action
under the Indenture, the registered holders of the Notes will act separately from the registered holders of each other series of our debt securities that may be
outstanding under the Indenture from time to time. Unless otherwise expressly stated or the context otherwise requires, references to “debt securities” under this
caption “Description of Notes” and the caption “Description of Indenture” below shall include the Notes.
The description of some of the terms of the Notes and the Indenture contained under this caption “Description of Notes” are not complete and are subject
to, and qualified in their entirety by reference to, the Indenture and the forms of the Notes, which are incorporated by reference as exhibits to the Annual Report
on Form 10-K of which this Exhibit is a part. You should read the Indenture and the forms of the Notes for a complete statement of the provisions described
under this caption “Description of Notes” and other provisions that may be important to you.
General
The 2026 Notes:
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were issued in an initial principal amount of $57,500,000;
will mature on March 30, 2026, unless redeemed prior to maturity;
were issued in denominations of $25 and integral multiples of $25 in excess thereof;
are redeemable in whole or in part at any time or from time to time on and after March 30, 2023, at a redemption price of $25 per Note plus
accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for
redemption as described under “- Redemption and Repayment” below;
are listed on NYSE under the symbol “HTFB”.
The 2027 Notes:
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were issued in an initial principal amount of $57,500,000, after exercise of over-allotment option;
will mature on June 15, 2027, unless redeemed prior to maturity;
were issued in denominations of $25 and integral multiples of $25 in excess thereof;
are redeemable in whole or in part at any time or from time to time on and after June 15, 2024, at a redemption price of $25 per Note plus
accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for
redemption as described under “- Redemption and Repayment” below;
are listed on NYSE under the symbol “HTFC”.
The Notes are our direct unsecured obligations and rank:
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pari passu with current and future unsecured unsubordinated indebtedness;
senior to any of our future indebtedness that expressly provides it is subordinated to the Notes;
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
structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles or similar
facilities.
Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due on the Notes or to make
any funds available for payment on the Notes, whether by dividends, loans or other payments. In addition, the payment of dividends and the making of loans and
advances to us by our subsidiaries may be subject to statutory, contractual or other restrictions, may depend on the earnings or financial condition of all of the
foregoing and are subject to various business considerations. As a result, we may be unable to gain significant, if any, access to the cash flow or assets of our
subsidiaries.
The Indenture does not limit the amount of debt (secured and unsecured) that we and our subsidiaries may incur or our ability to pay dividends, sell assets,
enter into transactions with affiliates or make investments. In addition, the Indenture does not contain any provisions that would necessarily protect holders of
Notes if we become involved in a highly leveraged transaction, reorganization, merger or other similar transaction that adversely affects us or them.
The Notes are issuable in fully registered form only, without coupons, in minimum denominations of $25 and integral multiples thereof. The Notes are
represented by one or more global notes deposited with or on behalf of DTC, or a nominee thereof. Except as otherwise provided in the Indenture, the Notes are
registered in the name of that depositary or its nominee. We will make payments on a global security in accordance with the applicable policies of the depositary
as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own
beneficial interests in the global security. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its
participants.
We are permitted, under specified conditions, to issue multiple classes of indebtedness 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 indebtedness and senior securities remain outstanding, we must make provisions to prohibit
the distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the
distribution or repurchase. Specifically, we may be precluded from declaring dividends or repurchasing
shares of our common stock unless our asset coverage is at least 150%. We may also borrow amounts up to 5% of the value of our total assets for temporary or
emergency purposes without regard to asset coverage.
Interest Provisions Related to the Notes
Interest on the 2026 Notes accrues at the rate of 4.875% per annum and is payable quarterly on each March 30, June 30, September 30, and December 30.
The interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date,
as the case may be. We will pay interest to those persons who were holders of record of such Notes on the first day of the month during which each interest
payment date occurs: each March 30, June 30, September 30, and December 30, which commenced June 30, 2021.
Interest on the 2027 Notes accrues at the rate of 6.25% per annum and is payable quarterly on each March 30, June 30, September 30, and December 30.
The interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date,
as the case may be. We will pay interest to those persons who were holders of record of such Notes on the first day of the month during which each interest
payment date occurs: each March 30, June 30, September 30, and December 30, which commenced September 30, 2022.
Interest on the Notes accrues from the date of original issuance and is computed on the basis of a 360-day year comprised of twelve 30-day months. The
notes are not entitled to the benefit of any sinking fund.
Interest payments are made only on a business day, defined in the Indenture as each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day
on which banking institutions in New York City and Chicago are authorized or required by law or executive order to close. If any interest payment is due on a
non-business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated
under the Indenture as if they were made on the original due date. Such payment will not result in a default under the Notes or the Indenture, and no interest will
accrue on the payment amount from the original due date to the next day that is a business day.
Redemption and Repayment
The 2026 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after March 30, 2023, upon not less than 30 days
nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of $25 per Note plus accrued and unpaid
interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption.
The 2027 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after June 15, 2024, upon not less than 30 days
nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of $25 per Note plus accrued and unpaid
interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption.
Holders may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part
only, the redemption notice will provide that, upon surrender of such Note, a holder will receive, without a charge, a new Note or Notes of authorized
denominations representing the principal amount of a holder’s remaining unredeemed Notes.
Any exercise of our option to redeem the Notes will be done in compliance with the 1940 Act, to the extent applicable.
If we redeem only a portion of the Notes, the Trustee will determine the method for selection of the particular Notes to be redeemed in compliance with the
requirements of the NYSE (or such other principal national securities exchange on which the Notes are then listed), or, if the Notes are not then listed on any
national securities exchange, on a pro rata basis, by lot, or by such method as the trustee deems fair and appropriate, in accordance with the 1940 Act to the
extent applicable and in accordance with any applicable depositary procedures. Unless we default in payment of the redemption price, on and after the date of
redemption, interest will cease to accrue on the Notes called for redemption.
Holders do not have the option to have the Notes repaid prior to the stated maturity date.
Trading Characteristics
We expect the Notes to trade at a price that takes into account the value, if any, of accrued and unpaid interest. This means that purchasers will not pay, and
sellers will not receive, accrued and unpaid interest on the Notes that is not included in their trading price. Any portion of the trading price of a Note that is
attributable to accrued and unpaid interest will be treated as a payment of interest for U.S. federal income tax purposes and will not be treated as part of the
amount realized for purposes of determining gain or loss on the disposition of the Notes.
Certain Covenants
In addition to standard covenants relating to payment of principal and interest, maintaining an office where payments may be made or securities
surrendered for payment, payment of taxes and related matters, the following covenants apply to the Notes.
Reporting
We have agreed to provide to holders of the Notes and the trustee (if at any time when Notes are outstanding we are not subject to the reporting
requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC), our audited annual consolidated financial statements, within
90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal
quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting
principles.
1940 Act Compliance
We have agreed that, for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by Section 61(a)(1)
of the 1940 Act or any successor provisions.
We have agreed that, for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(B) as modified by (i) Section 61(a)
(1) of the 1940 Act, the definitional provisions of the 1940 Act or any successor provisions and after giving effect to any exemptive relief granted to us by the
SEC and (ii) the two other exceptions set forth below. These statutory provisions of the 1940 Act are not currently applicable to us and will not be applicable to
us as a result of this offering. However, if Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act were currently applicable to us in connection with
this offering, these provisions would generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any
such capital stock if our asset coverage, as defined for purposes of Section 18(a)(1)(B) in the 1940 Act, were below 200% at the time of the declaration of the
dividend or distribution or purchase and after deducting the amount of such dividend, distribution, or purchase. Under the covenant, we will be permitted to
declare a cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, but
only up to such amount as is necessary for us to maintain our status as a regulated investment company under Subchapter M of the Internal Revenue Code of
1986. Furthermore, the covenant will not be triggered unless and until such time as our asset coverage has not been in compliance with the minimum asset
coverage required by Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act (after giving effect to any exemptive relief granted to us by the SEC)
for more than six consecutive months.
Events of Default
A holder will have rights if an Event of Default occurs in respect of the Notes and is not cured, as described later in this subsection.
The term “Event of Default” in respect of the Notes means any of the following:
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We do not pay the principal of, or any premium on, the Notes when due, whether at maturity, upon redemption or otherwise.
We do not pay interest on the Notes when due, and such default is not cured within 30 days.
We remain in breach of a covenant in respect of the Notes for 60 days after we receive a written notice of default stating we are in breach.
The notice must be sent by either the trustee, if such default is known to a responsible officer of the trustee or a responsible officer of the
trustee has received written notice of such default, or holders of at least 25% of the principal amount of the Notes.
The acceleration of our or our subsidiaries’ indebtedness for money borrowed in aggregate principal amount of $10 million or more so that it
becomes due and payable before the date on which it would otherwise have become due and payable, if such acceleration is not rescinded
within 30 days after we
receive a written notice of default stating we are in breach. The notice must be sent by either the trustee or holders of at least 25% of the
principal amount of the Notes.
We or any of our subsidiaries fail, within 30 days, to pay, bond or otherwise discharge any final, non-appealable judgments or orders for the
payment of money the total uninsured amount of which for us or any of our subsidiaries exceeds $10 million, which are not stayed on
appeal.
We or any of our subsidiaries that is a “significant subsidiary” (as defined in Regulation S-X under the Exchange Act) or any group of our
subsidiaries that in the aggregate would constitute a “significant subsidiary” file for bankruptcy, or certain other events of bankruptcy,
insolvency or reorganization occur and in the case of certain orders or decrees entered against us under bankruptcy law, such order or decree
remains undischarged or unstayed for a period of 60 days.
On the last business day of each of twenty-four consecutive calendar months, we have an asset coverage of less than 100%.
The trustee may withhold notice to the holders of the Notes any default, except in the payment of principal, premium or interest, if it considers the
withholding of notice to be in the best interests of the holders.
Remedies if an Event of Default Occurs
If an Event of Default, other than an Event of Default referred to in the second to last bullet point above with respect to us (but including an Event of
Default referred to in that bullet point solely with respect to a significant subsidiary, or group of subsidiaries that in the aggregate would constitute a significant
subsidiary of ours), has occurred and has not been cured, the trustee, if such event of default is known to a responsible officer of the trustee or a responsible
officer of the trustee has received written notice of such event of default, or the holders of at least 25% in principal amount of Notes may declare the entire
principal amount of all the Notes to be due and immediately payable. If an Event of Default referred to in the second to last bullet point above with respect to us
(and not solely with respect to a significant subsidiary, or group of subsidiaries that in the aggregate would constitute a significant subsidiary of ours) has
occurred, the entire principal amount of all the Notes will automatically become due and immediately payable. This is called a declaration of acceleration of
maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the Notes.
The trustee is not required to take any action under the Indenture at the request of any holders unless the holders offer the trustee reasonable protection
from expenses and liability (called an “indemnity”) (Section 315 of the Trust Indenture Act of 1939). If reasonable indemnity is provided, the holders of a
majority in principal amount of the Notes may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy
available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will
be treated as a waiver of that right, remedy or Event of Default.
Before a holder is allowed to bypass the trustee and bring their own lawsuit or other formal legal action or take other steps to enforce their rights or protect
their interests relating to the Notes, the following must occur:
●
●
●
●
A holder must give the trustee written notice that an Event of Default has occurred and remains uncured.
The holders of at least 25% in principal amount of all outstanding Notes must make a written request that the trustee take action because of
the default and must offer reasonable indemnity to the trustee against the cost and other liabilities of taking that action.
The trustee must not have taken action for 60 calendar days after receipt of the above notice and offer of indemnity.
The holders of a majority in principal amount of the Notes must not have given the trustee a direction inconsistent with the above notice
during that 60 calendar day period.
However, a holder is entitled at any time to bring a lawsuit for the payment of money due on Notes on or after the due date.
Holders of a majority in principal amount of the Notes may waive any past defaults other than:
●
the payment of principal, any premium or interest; or
●
in respect of a covenant that cannot be modified or amended without the consent of each holder.
Each year, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the
Indenture, or else specifying any default.
Merger or Consolidation
Under the terms of the Indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially
all of our assets to another entity. However, we may not consolidate with or into any other corporation or convey or transfer all or substantially all of our
property or assets to any person unless all the following conditions are met:
●
●
●
Where we merge out of existence or sell our assets, the resulting entity must agree to be legally responsible for all of our obligations under
the Notes and the Indenture.
Immediately after giving effect to such transaction, no Default or Event of Default shall have happened and be continuing.
We must deliver certain certificates and documents to the trustee.
Modification or Waiver
There are three types of changes we can make to the Indenture and the Notes.
Changes Requiring Approval of Holders
First, there are changes that we cannot make to the Notes without the specific approval of the holders. The following is a list of those types of changes:
●
●
●
●
●
●
●
●
●
●
change the stated maturity of the principal of or interest on the Notes;
reduce any amounts due on the Notes;
reduce the amount of principal payable upon acceleration of the maturity of the Notes following a default;
adversely affect any right of repayment at the holder’s option;
change the place (except as otherwise described in the accompanying prospectus or prospectus supplement) or currency of payment on the
Notes;
impair a holder’s right to sue for payment;
reduce the percentage of holders of Notes whose consent is needed to modify or amend the Indenture;
reduce the percentage of holders of Notes whose consent is needed to waive compliance with certain provisions of the Indenture or to waive
certain defaults;
modify any other aspect of the provisions of the Indenture dealing with supplemental indentures, modification and waiver of past defaults,
changes to the quorum or voting requirements or the waiver of certain covenants; and
change any obligation we have to pay additional amounts.
Changes Not Requiring Approval
The second type of change does not require any vote by the holders of the Notes. This type is limited to clarifications and certain other changes that would
not adversely affect holders of the Notes in any material respect. We also do not need any approval to make any change that affects only debt securities to be
issued under the indenture after the change takes effect.
Changes Requiring Majority Approval
Any other change to the Indenture and the Notes would require the following approval:
●
●
If the change affects only the Notes, it must be approved by the holders of a majority in principal amount of the Notes outstanding at such
time.
If the change affects more than one series of debt securities issued under the indenture, it must be approved by the holders of a majority in
principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.
The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for this purpose,
may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters
covered by the bullet points included above under “- Changes Requiring Approval of Holders.”
Defeasance
Covenant Defeasance
Under current United States federal tax law, we can make the deposit described below and be released from some of the restrictive covenants in the
Indenture under which the Notes were issued. This is called “covenant defeasance.” In that event, a holder would lose the protection of those restrictive
covenants but would gain the protection of having money and government securities set aside in trust to repay a holder’s Notes. In order to achieve covenant
defeasance, we must do the following:
We must irrevocably deposit in trust for the benefit of all holders of such Notes a combination of money and United States government or
United States government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the
Notes on their various due dates. No Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date
of such deposit, or in the case of a bankruptcy Event of Default, at any time during the period ending on the 91st day after the date of such
deposit.
We must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the
above deposit without causing holders to be taxed on the Notes any differently than if we did not make the deposit and just repaid the Notes
ourselves at maturity.
●
●
We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act and a
legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with.
If we accomplish covenant defeasance, a holder can still look to us for repayment of the Notes if there were a shortfall in the trust deposit or the trustee is
prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the Notes became immediately
due and payable, there might be a shortfall. Depending on the event causing the default, a holder may not be able to obtain payment of the shortfall.
Full Defeasance
If there is a change in U.S. federal tax law, as described below, we can legally release ourselves from all payment and other obligations on the Notes (called
“full defeasance”) if we put in place the following other arrangements for a holder to be repaid:
We must deposit in trust for the benefit of all holders of such Notes a combination of money and United States government or United States
government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes and for
payment of amounts due to the trustee. No Default or Event of Default with respect to the Notes shall have occurred and be continuing on
the date of such deposit, or in the case of a bankruptcy Event of Default, at any time during the period ending on the 91st day after the date
of such deposit.
We must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or a ruling issued by
the Internal Revenue Service, or IRS, that allows us to make the above deposit without causing holders to be taxed on the Notes any
differently than if we did not make
●
●
the deposit and just repaid the Notes ourselves at maturity. Under current U.S. federal tax law, the deposit and our legal release from the
Notes would be treated as though we paid holders their share of the cash and notes or bonds at the time the cash and notes or bonds were
deposited in trust in exchange for their Notes and holders would recognize gain or loss on the Notes at the time of the deposit.
●
We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940
Act and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been complied with.
If we ever did accomplish full defeasance, as described above, holders would have to rely solely on the trust deposit for repayment of the Notes. Holders
could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders
and other creditors if we ever became bankrupt or insolvent.
No service charge will be made for any registration of transfer or any exchange of Notes, but we may require payment of a sum sufficient to cover any
transfer tax or similar governmental charge payable in connection therewith.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect with respect to the Notes when either:
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●
all the Notes that have been authenticated have been delivered to the trustee for cancellation; or
all the Notes that have not been delivered to the trustee for cancellation:
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●
●
●
●
have become due and payable,
will become due and payable at their stated maturity within one year, or
are to be called for redemption within one year, and we, in the case of the first, second and third sub-bullets above, have irrevocably
deposited or caused to be deposited with the trustee as trust funds in trust solely for the benefit of the holders of the Notes, in amounts as
will be sufficient, without consideration of any reinvestment of interest, to pay and discharge the entire indebtedness (including all principal,
premium, if any, and interest) on such Notes delivered to the trustee for cancellation (in the case of Notes that have become due and payable
on or prior to the date of such deposit) or to the stated maturity or redemption date, as the case may be,
we have paid or caused to be paid all other sums payable by us under the Indenture with respect to the Notes; and
we have delivered to the trustee an officers’ certificate and legal opinion, each stating that all conditions precedent provided for in the
Indenture, including amounts payable to the trustee, relating to the satisfaction and discharge of the Indenture and the Notes have been
complied with.
Additional Notes and Additional Series of Notes
We may from time to time, without notice to or the consent of the registered holders of the Notes, create and issue further notes ranking equally and ratably
with the Notes in all respects, including having the same CUSIP number, so that such further notes shall be consolidated and form a single series of notes and
shall have the same terms as to status or otherwise as the Notes. No additional notes may be issued if an event of default has occurred and is continuing with
respect to the Notes. The indenture also allows for the issuance of additional series of debt securities from time to time.
The Trustee Under the Indenture
U.S. Bank National Association serves as the trustee under the Indenture.
Payment, Paying Agent, Registrar and Transfer Agent
The principal amount of each Note is payable on the stated maturity date at the office of the Paying Agent, Registrar and Transfer Agent for the Notes or at
such other office in New York City as we may designate. The trustee acts as Paying Agent, Registrar and Transfer Agent for the Notes.
Governing Law
The Indenture and the Notes are governed by the laws of the State of New York.
Book-Entry Debt Securities
DTC acts as securities depository for the Notes. The Notes are issued as fully registered securities registered in the name of Cede & Co. (DTC’s
partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate is issued for the Notes, in
the aggregate principal amount of such issue, and is deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a
“clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for issues of U.S. and non-
U.S. equity issues, corporate and municipal debt issues, and money market instruments that DTC’s participants (“Direct Participants”) deposit with DTC. DTC
also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic
computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates.
Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations.
DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”).
DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered
clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S.
securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly (“Indirect Participants”).
Purchases of debt securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the debt securities on
DTC’s records. The ownership interest of each actual purchaser of each security (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect
Participants’ records. Beneficial Owners do not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive
written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which
the Beneficial Owner entered into the transaction. Transfers of ownership interests in the debt securities are to be accomplished by entries made on the books of
Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners do not receive certificates representing their ownership interests in
debt securities, except in the event that use of the book-entry system for the debt securities is discontinued.
To facilitate subsequent transfers, all debt securities deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee,
Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of debt securities with DTC and their registration in
the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners
of the debt securities; DTC’s records reflect only the identity of the Direct Participants to whose accounts such debt securities are credited, which may or may
not be the Beneficial Owners. The Direct and Indirect Participants are responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants
and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Redemption notices shall be sent to DTC. If less than all of the debt securities within an issue are being redeemed, DTC’s practice is to determine by lot the
amount of the interest of each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Notes unless authorized by a Direct Participant in
accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to us as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
Redemption proceeds, distributions, and dividend payments on the Notes will be made to Cede & Co., or such other nominee as may be requested by an
authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon. DTC’s receipt of funds and corresponding detail information
from us or the trustee on the payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in
“street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the trustee, or us, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other
nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the trustee, but disbursement of such payments to Direct
Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect
Participants.
DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to us or to the trustee.
Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide
to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, certificates will be printed and
delivered to DTC.
The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take
no responsibility for the accuracy thereof.
Exhibit 14.1
HORIZON TECHNOLOGY FINANCE CORPORATION
HORIZON TECHNOLOGY FINANCE MANAGEMENT LLC
CODE OF ETHICS AND PERSONAL TRADING POLICY
(INVESTMENT ADVISERS ACT OF 1940)
(INVESTMENT COMPANY ACT OF 1940)
Introduction and Policy Statement:
This Code of Ethics and Personal Trading Policy (the “Code”) has been adopted by each of Horizon Technology Finance Corporation (“HRZN”) and
Horizon Technology Finance Management LLC (“HTFM”), in compliance with Rule 17j-1 of the Investment Company Act of 1940, as amended (the
“Company Act”), and, in the case of the HTFM, Section 204A-1 of the Investment Advisers Act of 1940, as amended (the “Adviser Act”). The Code is based
on the principles that (i) directors and officers of HRZN and the managers, officers and employees of HTFM, who provide services to HRZN, owe a fiduciary
duty to HRZN to conduct their personal securities transactions in a manner that does not interfere with HRZN’s transactions or otherwise take unfair advantage
of their relationship with HRZN and (ii) managers, officers and employees of HTFM owe a fiduciary duty to its clients (including HRZN) to act with the utmost
integrity in all of their dealings with clients.
Purposes of the Code:
The purposes of the Code are to (i) establish standards of conduct and procedures relating to personal securities transactions and related accounts that
reflect the fiduciary duties HTFM owes to its clients, (ii) establish policies and procedures reasonable designed to detect and prevent activities that are or could
be perceived as violating a fiduciary duty, breaching confidentiality obligations or creating a conflict of interest and (iii) require Covered Persons to comply with
all applicable securities laws and regulations. All Covered Persons are subject to the Code and must comply with its requirements, including, without limitation,
the restrictions on personal securities transactions, and certify that they have read the Code and agree to comply with it.
ARTICLE I – General Policies
The Code does not address every possible conflict of interest that may arise. As such, each Covered Person is responsible for exercising good judgment,
acting ethically and bring violations or potential violations of the Code to the attention of the Chief Compliance Officer (“CCO”) of HRZN and HTFM, or
designee of the CCO. Technical compliance with the Code will not shield a Covered Person from scrutiny of actions that show a pattern of abuse or conduct that
is illegal or violates HTFM’s fiduciary duties to HRZN and its other clients.
1 Certain capitalized terms used herein are defined in Article V – Definitions.
1
The following are specific policies that govern the personal trading of Covered Persons as well as personal trading done by Immediate Family Members
of such Covered Person and in any account where a Covered Person or Immediate Family Member has a Beneficial Interest or Investment Control. Unless
otherwise stated herein, Independent Directors are only required to comply with Article III – General Policies for Independent Directors.
1.
Standards of Conduct
The Code consists of the following core principles:
(i)
The interests of clients (including HRZN) will be placed ahead of HTFM’s or any Covered Person’s own investment interests at all times.
(ii)
Covered Persons are expected to conduct their personal securities transactions in accordance with the Code and must avoid any actual or
perceived conflict of interest with clients (including HRZN). Anyone with questions regarding the appearance of a conflict of interest with
a client should consult with the CCO, or designee of the CCO, before taking action that may result in an actual conflict.
(iii) Covered Persons will avoid any abuse of their position of trust and responsibility.
(iv) No Covered Person will take inappropriate advantage of his/her position within HRZN or HTFM. Covered Persons are expected to act in
the best interests of all clients of HTFM (including HRZN).
(v)
The fiduciary principle that independence in the investment decision-making process is paramount.
(vi) Covered Persons are expected to comply with federal and all other applicable securities laws and regulations. Strict adherence to the Code
and other policies and procedures of HRZN and HTFM will assist everyone in complying with this important requirement.
(vii)
Information concerning the identity of security holdings and financial circumstances of all clients is confidential.
As part of the required standards of conduct, Covered Persons are not permitted in connection with the purchase, acquisition, sale or disposal, directly
or indirectly, by such Covered Person of a Security Held or to be Acquired by a client (including HRZN):
(A)
to employ any device, scheme or artifice to defraud such client in any manner;
2
(B)
to make any untrue statement of a material fact to such client or to omit to state to such client a material fact necessary in order to make
the statement made, in light of the circumstances under which it is made, not misleading;
(C)
to engage in any act, practice or course of conduct which operates or would operate as a fraud or deceit upon such client;
(D)
to engage in any manipulative practice with respect to such client; or
(E)
to engage in any manipulative practice with respect to securities, including price manipulation.
Compliance with this fiduciary duty can be achieved by trying to avoid conflicts of interest and by fully disclosing all material facts concerning any
conflict that does arise with respect to any client (including HRZN).
Failure to comply with the Code may result in disciplinary action, up to and including termination of employment, see Article II, Section 2 – Sanctions
below.
Covered Persons are expected to maintain a high level of ethics, integrity and Professionalism in business and personal dealings. “Professionalism”
means integrity, objectivity, independence where required, adherence to professional standards and applicable laws and regulations, and a demonstrated will to
maintain and improve the quality of professional services and to withstand pressures, competitive and otherwise, to compromise on principles, standards and
quality.
HTFM is entrusted by its clients with their assets and confidential information. To meet its obligations with that trust, HTFM shall abide by the
“prudent investor rule” which requires a fiduciary to exercise reasonable care, skill and caution applied to investments in a portfolio not in isolation, but in the
context of the portfolio as a whole and as part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the
client. In making and implementing investment decisions, the fiduciary has a duty to diversify investments of the client unless, under the circumstances, it is not
prudent to do so.
2.
Conflicts of Interest
Conflicts Among Client Interests: Conflicts of interest may arise where HTFM or its Covered Persons have reason to favor the interests of one client
over another client (e.g., larger accounts over smaller accounts; accounts compensated by performance fees over accounts compensated differently; accounts in
which employees have made material personal investments; or accounts of close friends or relatives of Covered Persons). Favoritism of one group of clients over
another is prohibited under the Code.
Competing with Client Trades: The Code prohibits Covered Persons from using knowledge about pending or currently considered securities
transactions for clients to profit personally (directly or indirectly) as a result of such transactions, including by purchasing or selling such securities for their own,
their family’s or their friends’ accounts or by relaying such information to others for their use.
3
Disclosure of Personal Interest: Covered Persons are prohibited from recommending, implementing or considering any securities transaction for a client
without first disclosing any material beneficial ownership, business or personal relationship, or other material interest in the issuer or its affiliates, to the CCO, or
designee of the CCO. If the CCO, or designee of the CCO, deems the disclosed interest to present a material conflict, the Covered Person may not participate in
any decision-making process regarding the securities of that issuer.
3.
Confidentiality
All information concerning the identity of security holdings and financial circumstances of all clients (both current and former) or prospective clients is
confidential.
All information about clients (including HRZN) must be kept in strict confidence, including the client’s identity (unless the client consents), the client’s
financial situation, the client’s security holdings and advice furnished to the client by HTFM.
4.
Protection of Material Non-Public Information; Prevention of Misuse of Material Non-Public Information
Covered Persons are expected to exercise diligence and care in maintaining and protecting HTFM’s clients’ (including HRZN’s) Material Non-Public
Information.
Covered Persons who are in possession of any Material, Non-Public Information are prohibited from:
(i)
purchasing or selling such securities for their own accounts or for accounts in which they have a beneficial interest or over which they have the
power, directly or indirectly, to make investment decisions;
(ii)
soliciting customers’ orders to purchase or sell the securities;
(iii)
issuing research reports, recommendations or comments which could be construed as recommendations; and
(iv)
disclosing such information or any conclusions based thereon to any other person in or outside HTFM, except as set forth herein.
4
Covered Persons are also expected not to divulge information regarding HTFM’s securities recommendations or client securities holdings to any
individual outside of HTFM, except:
(A)
as necessary to complete transactions or account changes (for example, communications with brokers and custodians);
(B)
as necessary to maintain or service a client or a client’s account;
(C) with various service providers providing administrative functions for HTFM (such as technology service providers), only after HTFM has
entered into a contractual agreement that prohibits the service provider from disclosing or using confidential information except as necessary to
carry out its assigned responsibilities and only for that purpose; or
(D)
as permitted by law.
Given the potential liability to which HTFM, HRZN and Covered Persons are subject, it is critical that all Covered Persons familiarize themselves with
the Insider Trading Policy.
5.
Personal Conduct
As noted above, Covered Persons are expected to conduct themselves with the utmost integrity and to avoid any actual or perceived conflicts of interest
with HTFM’s clients (including HRZN). In this spirit, the following are required of Covered Persons:
(a) Gifts and Entertainment
The overriding principle concerning gifts and entertainment is: Covered Persons should not accept inappropriate gifts, favors, entertainment, special
accommodations or other things of material value that could influence their decision-making or make them feel beholden to a person or firm.
Covered Persons are generally prohibited from receiving any gift, gratuity, hospitality or other offering of more than de minimis value from any person
or entity doing business with HTFM or HRZN (de minimis is described as $100). Covered Persons may accept gifts or entertainment (other than those prohibited
by this subsection (a)) provided (i) each gift or entertainment valued under $100 is promptly self-reported through the Compliance Platform after acceptance of
such gift or entertainment and (ii) each gift or entertainment valued over $100 is pre-cleared through the Compliance Platform prior to acceptance of such gift or
entertainment. Attendance at an outing or dinner with a representative of another firm does not require pre-clearance or self-reporting through the Compliance
Platform after acceptance unless an overnight stay is involved, in which case the Covered Person must pre-clear such outing through the Compliance Platform in
advance.
Any Covered Person who intends to give, directly or indirectly, a gift or entertainment to any person or entity that does business with or on behalf of
HRZN or HTFM must (x) self-report through the Compliance Platform any such gift or entertainment valued under $100 after giving such gift or entertainment
and (y) pre-clear through the Compliance Platform any such gift or entertainment valued over $100 prior to giving such gift or entertainment.
5
(b)
Service as Director or Officer of an Outside Company
Any Covered Person wishing to serve as a director or an officer for an outside company (public or private) must pre-clear such directorship or
officership through the Compliance Platform in advance of accepting any such directorship or officership. In reviewing the request, the CCO, or designee of the
CCO, will determine whether such directorship or officership is consistent with the interest of HTFM and its clients (including HRZN).
All directorships and officerships held with an outside company (public or private), including any directorships or officership held with clients of
HTFM, must be reported through the Compliance Platform.
(c)
Outside Business Activities
Any Covered Person wishing to engage in business activities outside of HRZN’s or HTFM’s business, regardless of the nature or type of business and
regardless of the level of compensation, must pre-clear such outside business activity through the Compliance Platform in advance of engaging in such outside
business activity. If requested by the CCO, or designee of the CCO, the Covered Person will provide periodic reports to the Chief Executive Officer (“CEO”) or
President and the CCO summarizing those outside business activities.
All outside business activities must be reported through the Compliance Platform.
(d)
Political Contributions
Covered Persons are prohibited from making a political contribution to gain, or to attempt to gain, an engagement for HTFM, HRZN or any affiliate. A
Covered Person who intends to make a political contribution, regardless of the amount of the contribution, to any federal, state or local government entity,
official, candidate, political party or political action committee in which such person or committee has the ability to make investment decisions must pre-clear
through the Compliance Platform such political contribution prior to the making of such political contribution.
Any other political contribution made by a Covered Person does not requirement pre-clearance through the Compliance Platform before making the
contribution or self-reporting through the Compliance Platform after the contribution is made.
6.
Specific Policies
(a)
Personal Trading and Requirement to Pre-Clear Transactions
Covered Persons are expected to purchase, sell or otherwise acquire or dispose of a Covered Security for their personal accounts only after determining
there is no conflict of interest with client accounts trading in the same Covered Security.
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Transactions complying with Article I, Section 6(f) – Acceptable Personal Trades and Exempt Transactions and other transactions not subject to Article
I, Section 6(e) – Initial Public Offering and Limited or Private Offering or Article I, Section 6(g) – Transactions Generally Denied Pre-Clearance do not require
pre-clearance through the Compliance Platform, but must be self-reported after execution of the transaction in accordance with Article I, Section 7 – Reportable
Accounts, Holdings Reports, Trade Confirmations, Account Statements and Certifications.
To help prevent personal trading that (i) violates, or could be perceived to violate, a fiduciary duty or applicable securities laws and regulations, (ii)
breaches a confidentiality obligation or (iii) creates, or could be perceived to create, a conflict of interest, no Covered Person will be able to purchase, sell or
otherwise acquire or dispose of, directly or indirectly, any Covered Security subject to Article I, Section 6(e) – Initial Public Offering and Limited or Private
Offering or Article I, Section 6(g) – Transactions Generally Denied Pre-Clearance unless such Covered Person has obtained pre-clearance through the
Compliance Platform prior to engaging in such transaction.
(b)
Use of the Compliance Platform
Covered Persons are required to use the Compliance Platform for all self-reporting and pre-clearance purposes. The Compliance Platform is available
twenty-four (24) hours a day, seven (7) days a week for pre-clearance and self-reporting needs, including certifications and disclosures. HTFM and HRZN will
provide each Covered Person with a username and password to access the Compliance Platform portal via the internet or mobile app.
Covered Persons who are unable to self-report and pre-clear through the Compliance Platform (e.g., due to internet or mobile app connectivity issues)
should contact the CCO, or designee of the CCO, for assistance. Please keep in mind that assistance with self-reporting and pre-clearance requests may be
limited or delayed on days or during hours when HTFM’s or HRZN’s Farmington office is closed.
(c) Matters to Consider Before Obtaining Pre-Clearance
Prior to submitting a pre-clearance request, a Covered Person should consider the following matters:
(i) Whether the investment opportunity should be directed to a client’s account?
(ii) Will the amount or nature of the transaction affect the price or market for the security?
(iii) Will the Covered Person benefit from the purchases or sales being made for any client?
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(iv) Will the Covered Person’s transaction harm any client?
(v)
Is there an appearance or suggestion of impropriety?
If there is a chance the answer to any of the above questions is “yes”, the Covered Person must include such information in the pre-clearance request
made through the Compliance Platform.
(d) How to Obtain Pre-Clearance
Prior to conducting or entering into a transaction that requires pre-clearance (i.e., a transaction subject to Article I, Section 6(e) – Initial Public Offering
and Limited or Private Offering or Article I, Section 6(g) – Transactions Generally Denied Pre-Clearance), a Covered Person must submit a pre-clearance
request through the Compliance Platform. The minimum transaction information that is required to be disclosed is included within the applicable pre-clearance
request in the Compliance Platform (i.e., “Trade”, “IPO” or “Private Investment”).
If pre-clearance is granted, such pre-clearance approval will be valid for one (1) business day from the day that such approval is granted and the
relevant transaction must be made during such period.
If pre-clearance is not granted, a Covered Person will not be permitted to engage in the proposed transaction. Questions regarding the denial of a pre-
clearance request may be directed to the CCO, or designee of the CCO.
(e)
Initial Public Offering and Limited or Private Offering
For the avoidance of doubt, a Covered Person is required to obtain pre-clearance through the Compliance Platform before investing in an initial public
offering (IPO) or a limited or private offering (i.e., limited or private partnership), or otherwise investing, purchasing or acquiring an equity interest in a non-
public company.
(f)
Acceptable Personal Trades and Exempt Transactions
The following types of securities are considered safest from a regulatory perspective for a Covered Person to purchase, acquire, sell, trade, dispose of
and/or hold and, therefore, may be freely held, purchased, acquired, sold, traded and/or disposed of by a Covered Person without obtaining pre-clearance
approval as set forth in Article I, Section 6(a) – Personal Trading and Requirement to Pre-Clear Transactions. Covered Persons are therefore encouraged to
conduct their personal transactions within the following types of acceptable securities and exempt transactions:
(i)
shares of open-end mutual funds not managed by HTFM (note: trades in closed-end mutual funds require pre-clearance);
(ii)
shares of money market funds;
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(iii)
direct obligations of the United States Government;
(iv) money market instruments, including bankers’ acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high
quality short-term debt;
(v)
any purchase, acquisition, sale or disposal of securities held in accounts over which the Covered Person has no direct or indirect influence or
control (i.e., accounts managed by an outside investment advisor on a discretionary basis); and
(vi)
transactions effected pursuant to an automatic investment plan (including dividend reinvestment plans).
(g)
Transactions Generally Denied Pre-Clearance
The following types of transactions will generally be denied pre-clearance:
(i)
relating to any security that HTFM or HRZN is currently considering for purchase or sale;
(ii)
relating to any security that HTFM or HRZN has purchased or sold on the same business day as the pre-clearance request was made;
(iii)
relating to any security listed on the Restricted List; and
(iv)
relating to any security that falls within a “blackout period”.
Questions regarding the denial of a pre-clearance request may be directed to the CCO, or designee of the CCO.
7.
Reportable Accounts, Holdings Reports, Trade Confirmations, Account Statements and Certifications
Covered Persons are required to report securities transactions and holdings for all accounts in which such Covered Person has a direct or indirect
Beneficial Interest or has Investment Control through the Compliance Platform. This includes personal securities transactions and holdings of any Immediate
Family Member living within the same household as such Covered Person. Personal securities reporting requirements do not include other individuals living in
such Covered Person’s household but such Covered Person should be cognizant of the confidentiality of the business of HTFM and HRZN.
Transactions and holdings information and reports, trade confirmations and brokerage statements provided by, or on behalf of, a Covered Person will be
maintained in confidence by HTFM and HRZN, except to the extent necessary to implement and enforce the provisions of the Code, to comply with a request for
information from a government agency or to otherwise comply with applicable law or an order of a court of competent jurisdiction.
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(a)
Initial Holdings Reports and Certifications
No later than ten (10) calendar days after becoming a Covered Person, each new Covered Person must submit initial holdings reports through the
Compliance Platform (i) for each security in which such new Covered Person has a direct or indirect Beneficial Interest or has Investment Control and (ii) for
each account in which securities are held for the direct or indirect benefit of such Covered Person. For any security held within a reportable account, a Covered
Person does not need to individually disclose each public security held within such reportable account, provided the Covered Person has submitted a “Broker
Account” pre-clearance request for such reportable account and such reportable account is listed on the Covered Person’s initial accounts report. For the
avoidance of doubt, a Covered Person must submit a “Private Investment” pre-clearance request for each private or non-public security held by such Covered
Person and such security must be listed on the Covered Person’s initial holdings report.
The minimum information that a Covered Person is required to disclosed for each initial security holding or account is included within the applicable
pre-clearance request in the Compliance Platform (i.e., “Private Investment” or “Broker Account”).
When submitting initial holdings reports, the Covered Person will provide certifications that such Covered Person has reported all securities accounts
and all reportable securities in which such Covered Person has a Beneficial Interest or Investment Control. Information included in the initial holdings reports
must be current as of a date no more than forty-five (45) calendar days prior to becoming a Covered Person.
All Covered Persons are required to submit initial holdings reports even if such Covered Person has no reportable accounts and/or reportable securities
at the time of submission.
Personal trading by a new Covered Person is restricted until the initial holdings reports have been submitted through the Compliance Platform.
(b) Quarterly Holdings Reports and Certifications
No later than thirty (30) calendar days after the end of each calendar quarter, each Covered Person must submit quarterly holdings reports through the
Compliance Platform reporting (i) all transactions occurring during the quarter for a reportable security in which such Covered Person had a direct or indirect
Beneficial Interest or had Investment Control and (ii) each account in which securities are held for the direct or indirect benefit of such Covered Person. All
transactions must be listed on a Covered Person’s quarterly holdings report and all reportable accounts must be listed on a Covered Person’s quarterly accounts
report.
When submitting quarterly holdings reports, such Covered Person will provide certifications that such Covered Person has reported all securities
accounts and all reportable securities in which such Covered Person had a Beneficial Interest or Investment Control. Information included in the quarterly
holdings reports must be current as of a date no more than forty-five (45) calendar days prior to the date the applicable report was submitted.
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All Covered Persons are required to file quarterly holdings reports even if such Covered Person has no reportable accounts and/or reportable securities
at the time of submission.
(c)
Annual Holdings Reports and Certifications
No later than thirty (30) calendar days after the end of each calendar year, each Covered Person must submit annual holdings reports through the
Compliance Platform (i) for each security in which such Covered Person has a direct or indirect Beneficial Interest or has Investment Control and (ii) for each
account in which securities are held for the direct or indirect benefit of such Covered Person. All reportable securities must be listed on a Covered Person’s
annual holdings report and all reportable accounts must be listed on a Covered Person’s annual accounts report.
When submitting the annual holdings reports, such Covered Person will provide certifications that such Covered Person has reported all securities
accounts and all reportable securities in which such Covered Person had a Beneficial Interest or Investment Control. Information included in the annual holdings
reports must be current as of a date no more than forty-five (45) calendar days prior to the date the applicable report was submitted.
All Covered Persons are required to submit annual holdings reports even if such Covered Person had no reportable accounts and/or reportable securities
at the time of submission.
(d)
Trade Confirmations and Account Statements
Covered Persons must share copies of all reportable security trade confirmations and periodic account statements for any accounts maintain by such
Covered Person (or any other accounts in which such Covered Person has a Beneficial Interest or Investment Control) with HTFM and HRZN through the
Compliance Platform.
Covered Persons are encouraged to conduct personal trading with brokers that offer direct data feeds to the Compliance Platform (“Approved
Brokers”). When using an Approved Broker, trade confirmations, holdings and account statements are delivered to the Compliance Platform on such Covered
Person’s behalf. A list of Approved Brokers is available upon request by contacting the CCO, or designee of the CCO.
If a Covered Person’s broker does not offer a direct data feed to the Compliance Platform, the Covered Person will be required to upload electronic
copies of trade confirmations to the Compliance Platform at the same time such confirmation is provided to the Covered Person and periodic account statements
to the Compliance Platform no more than thirty (30) calendar days after the end of each calendar quarter.
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If a Covered Person’s broker is not included on the list of Approved Brokers, such Covered Person should contact the CCO, or designee of the CCO, for
additional information.
(e)
Establishing New Reportable Accounts
Covered Persons must promptly report any newly established reportable account through the Compliance Platform by submitting a “Broker Account”
pre-clearance request. Personal trading in such newly established reportable account is restricted until such account has been approved through the Compliance
Platform by the CCO, or designee of the CCO.
(f)
New Employee Acknowledgement and Certification
No later than ten (10) calendar days after becoming an employee of HTFM, each new employee must submit a new employee acknowledgement of the
Code through the Compliance Platform certifying that such new employee (i) has received, read, understands and will comply with the Code and (i) is subject to
the sanctions described in the Code.
(g)
Annual and Amendment Acknowledgement and Certification
Annually, and when amendments to the Code are made, all Covered Persons must submit an acknowledgement of the Code through the Compliance
Platform certifying that such Covered Person (i) has received, read, understands and will comply with the Code, (ii) is subject to the sanctions described in the
Code and (iii) if an annual certification, has complied with the Code during the preceding calendar year.
ARTICLE II – Violations and Enforcement of the Code
1.
Code Violations
All Covered Persons are required to report promptly any apparent or suspected violations of the Code to the CCO, or designee of the CCO (including
the discovery of any violation committed by another Covered Person). Examples of items that should be reported include, but are not limited to, non-compliance
with federal securities laws, conduct that is harmful to clients and purchasing securities contrary to the Code. Such violations must be reported to the CCO, or
designee of the CCO, on a timely basis. If the possible violation involves the CCO, a Covered Person should report it directly to the CFO. It is a violation of the
Code to intentionally fail to report a violation or withhold pertinent information.
Such reports by Covered Persons will not be viewed negatively by HRZN and/or HTFM management, even if the suspected violation, upon further
review, is determined to not be a violation and the CCO determined the Covered Person reported such apparent violation in good faith.
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All reports will be treated with the utmost level of confidentiality. Retaliation by HRZN, HTFM and/or any Covered Person against anyone who reports
a suspected violation is prohibited. Such attempted retaliation would be treated as a further violation of the Code.
2.
Sanctions
Violations of the Code will be subject to the imposition of such sanctions by HRZN and/or HTFM as may be deemed appropriate under the
circumstances to achieve the purpose of the Code. Violations of the Code may result in disciplinary action against the Covered Person. The disciplinary action
may be whatever the CEO or the President and the CCO deem appropriate given the situation, and may include, but are not limited to, a written warning, fines,
bans on personal trading, disgorgement of profits and/or losses avoided, suspension, demotion, or termination of employment. Violations may also be referred to
civil or criminal authorities where appropriate.
Disciplinary actions for violations of the Code by an Independent Director will be determined by the chairman of the board of directors and/or the lead
independent director and the CCO.
3.
Training and Education
HRZN and HTFM have designated the CCO as the individual responsible for training and educating Covered Persons regarding the Code. Training will
occur periodically and all Covered Persons are required to attend any training and/or read all applicable materials.
4.
Conflict Resolution and Escalation Process
The CCO, or designee of the CCO, will review each report submitted by a Covered Person of any apparent or suspected violation of the Code as
promptly as practicable. The CFO will review any such report submitted by the CCO. In no case should a Covered Person review his/her own report. The CCO,
or designee of the CCO, will review the matter and determine whether the issue is an actual violation and whether to grant an exception and/or the appropriate
course of action. When making such a determination, the CCO, or designee of the CCO, may, as part of his/her review, discuss the matter with the relevant
business unit manager, members of the senior management team or other parties (i.e. legal counsel, auditors, etc.).
ARTICLE III – General Policies for Independent Directors
1.
Standards of Conduct
The core principles that govern an Independent Director’s personal trading consist of the following:
(i)
The affirmative duties of care, loyalty, honesty and good faith to act in the best interests of HRZN.
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(ii)
The requirement that all personal trading must be in compliance with the Code, all applicable laws, rules and regulations and such Independent
Director’s fiduciary duty to HRZN.
(iii) An Independent Director should not take inappropriate advantage of his/her position.
2.
Personal Trading Restrictions
An Independent Director may not purchase or acquire direct or indirect Beneficial Ownership of any Covered Security, and may not sell or dispose of
any Covered Security in which the Independent Director has direct or indirect Beneficial Ownership, if the Independent Director knows or should know at the
time of entering into the transaction that: (1) HRZN has purchased, acquired, sold or disposed of the Covered Security within the last fifteen (15) calendar days,
or is purchasing, acquiring, selling or disposing of or intends to purchase, acquire, sell or dispose of the Covered Security in the next fifteen (15) calendar days;
or (2) HTFM has within the last fifteen (15) calendar days considered purchasing, acquiring, selling or disposing of the Covered Security for HTFM or within
the next fifteen (15) calendar days intends to consider purchasing, acquiring, selling or disposing of the Covered Security for HRZN.
3.
Reporting Exemptions
(a) Holdings Reports
An Independent Director is exempt from filing initial holdings reports as described in Article I, Section 7(a) – Initial Holdings Reports and
Certifications and annual holdings reports as described in Article I, Section 7(c) – Annual Holdings Reports and Certifications. An Independent Director is
exempt from filing quarterly holdings reports as described in Article I, Section 7(b) – Quarterly Holdings Reports and Certifications, unless such Independent
Director knew or should have known that during the fifteen (15) calendar days immediately before or after the transaction in a Covered Security that HRZN
purchased, acquired, sold or disposed of the Covered Security or HRZN considered the purchase, acquisition, sale or disposition of the Covered Security. If an
Independent Director is required to make a holdings report, the Independent Director should contact the CCO, or designee of the CCO, for assistance in making
such holdings report. Independent Directors are not provided access to the Compliance Platform.
(b)
Brokerage Accounts; Trade Confirmations and Account Statements
An Independent Director is exempt from delivering trade confirmations and periodic account statements as described in Article I, Section 7(d) – Trade
Confirmations and Account Statements and disclosing newly established reportable accounts as described in Article I, Section 7(e) – Establishing New
Reportable Accounts.
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4.
Serving on Other Boards of Directors and Officerships
An Independent Director is required to notify the CCO, or designee of the CCO, of any service on or resignation or termination from a business-related
or non-business-related board of directors, board of trustees, officership or other similar position.
ARTICLE IV – Duties of the Chief Compliance Officer
Each of HRZN and HTFM have designated a CCO who has the authority and responsibility to administer the Code. The CCO can designate persons to
act on his/her behalf including, without limitation, reviewing and approving pre-clearance requests, reviewing transaction and holding reports submitted by
Covered Persons, granting exceptions to the Code, and reviewing reports of apparent or suspected violations of the Code, as appropriate.
1.
Prevention of Violations
The CCO shall be familiar with the Code. The CCO is responsible for ensuring that the Code is reasonably designed to detect and prevent violations of
the Code and the federal securities laws relating to the prevention of insider trading. The CCO is responsible for reporting any material inadequacy to the CEO
of HTFM or his/her designee and/or the board of directors of HRZN.
2.
Duty to Enforce the Code
The CCO, or designee of the CCO, is responsible for the following:
(i)
(ii)
furnishing all Covered Persons with a copy of the Code and any amendments thereto and periodically informing Covered Persons of their duties
and obligations thereunder;
obtaining signed certifications from each Covered Person stating that: (a) such Covered Person has received a copy of the Code; (b) has read it;
(c) understands it; and (d) will comply with it;
(iii)
conducting periodic educational programs to explain and reinforce the terms of the Code and applicable securities laws, regulations and cases;
(iv)
answering questions regarding the Code, and keeping abreast of changes in applicable laws and regulations;
(v)
interpreting the Code consistent with the objectives of applicable laws, regulations and industry practices;
(vi)
consistent with the Code and applicable SEC rules, promptly reviewing, and either approving or denying, as applicable, in the Compliance
Platform each request of Covered Persons for clearance to trade for their personal account;
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(vii)
conducting audits, inspections and investigations as necessary or appropriate to prevent or detect possible violations of the Code;
(viii) conducting periodic reviews of personal securities transactions effected by Covered Persons;
(ix) maintaining confidential information regarding personal securities transactions and holdings and only disclosing such information to persons
with a clear need to know, including state and federal regulators, when required or deemed necessary or appropriate by the CCO, or designee of
the CCO, in conformance with the provisions of the Code;
(x)
developing policies and procedures designed to implement, maintain and enforce the Code; and
(xi)
reviewing the Code on a regular basis and recommending to the CEO of HTFM and/or the board of directors of HRZN such amendments as may
be necessary or appropriate.
3.
Detection of Violations of the Code
To prevent and detect violations of the Code, the CCO, or designee of the CCO, shall:
(i)
review the trading activity and holdings reports filed by each Covered Person through the Compliance Platform; and
(ii)
coordinate the review of such reports with other appropriate officers, directors or employees of HRZN or HTFM.
4.
Material Violations of the Code
The CCO, or designee of the CCO, shall report to HTFM’s senior management and/or HRZN’s board of directors any material violation of the Code or
any activity that may potentially result in a material violation of the Code.
5.
Annual Review of the Code
The CCO, or designee of the CCO, must review at least annually the adequacy of the Code as well as the effectiveness of its implementation. A report
will be delivered to HTFM’s senior management and HRZN’s board of directors, including the chairman. All material violations should be brought to the
attention of HTFM’s senior management and/or HRZN’s board of directors in a timely manner.
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6.
Reports of the CCO
The CCO, or designee of the CCO, will:
(a) Quarterly Reports. If there were any material violations of the Code, prepare a quarterly report containing descriptions of any material
violations requiring significant remedial action during the past quarter and any other significant information concerning the application of the Code, and a
summary of any determinations made by the CCO, or designee of the CCO. The CCO shall submit the report to HTFM’s senior management and/or HRZN’s
board of directors.
(b) Annual Reports. Prepare a written report, at least annually, (i) summarizing any exceptions or exemptions concerning personal investing made
during the past year, listing any violations requiring significant remedial action, and identifying any recommended changes to the Code or the procedures
thereunder and (ii) certifying that HRZN and/or HTFM, as applicable, has adopted procedures reasonably necessary to prevent Covered Persons from violating
the Code. The report should include any violations that are material, any sanctions imposed in connection with such material violations in the aggregate and any
significant conflicts of interest that arose involving the personal investment policies of HTFM and/or HRZN, even if the conflicts have not resulted in a violation
of the Code. The CCO shall submit the report to HTFM’s senior management and/or HRZN’s board of directors.
More frequent reports may be appropriate in certain circumstances, such as when there have been significant violations of the Code or procedures or
significant conflicts of interest arising under the Code or procedures.
ARTICLE V – Definitions
“Advisory Person” means (i) any director, officer, general partner or employee of HRZN or HTFM, or any company in a Control relationship to HRZN
or HTFM, who in connection with his/her regular functions or duties makes, participates in, or obtains information regarding the purchase or sale of any Covered
Security by HRZN, or whose functions relate to the making of any recommendation with respect to such purchases or sales; and (ii) any natural person in a
Control relationship to HRZN or HTFM, who obtains information concerning recommendations made to HRZN with regard to the purchase or sale of any
Covered Security to HRZN.
“Beneficial Interest” means any instance where a Covered Person or any Immediate Family Member can directly or indirectly derive a monetary or
financial interest from the purchase, sale, disposition or ownership of a security. A Covered Person is considered to have a Beneficial Interest in a security if
such security is: (a) owned by the Covered Person solely in his/her name or jointly with another; (b) owned through an account or investment vehicle for his/her
benefit (such as an IRA, trust, partnership, etc.); or (c) owned directly, indirectly or jointly by an Immediate Family Member.
“Beneficial Ownership” of a security means if the person, directly or indirectly, through any contract, arrangement, understanding, relationship, or
otherwise has or shares: (1) voting power which includes the power to vote, or to direct the voting of, such security; and/or (2) investment power which includes
the power to dispose, or to direct the disposition of, such security.
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“Compliance Platform” means the web-based compliance monitoring platform used by HTFM to assist in the administration of the Code.
“Control” shall have the same meaning as that set forth in Section 2(a)(9) of the Company Act.
“Covered Person” means (a) any director, officer, or partner of HTFM (or any other person occupying a similar status or performing similar functions);
(b) any employee of HTFM; (c) any other person who provides advice on behalf of HTFM and is subject to HTFM’s supervision and control; (d) any director,
officer, general partner or Advisory Person of HRZN or HTFM; and (e) any person who (i) has access to nonpublic information regarding any clients’ purchase
or sale of securities, or nonpublic information regarding the portfolio holdings of any fund managed by HTFM or its control affiliates or (ii) is involved in
making securities recommendations to clients, or has access to such recommendations that are nonpublic.
“Covered Security” means a “security” as defined in Section 2(a)(36) of the Company Act and Section 202(a)(18) of the Advisers Act, which includes:
any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a
security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of
deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered
into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of
interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
Except that “Covered Security” does not include: (i) direct obligations of the government of the United States; (ii) bankers’ acceptances, bank
certificates of deposit, commercial paper and high-quality short-term debt instruments, including repurchase agreements; and (iii) shares issued by open-end
investment companies registered under the Company Act. References to a Covered Security in the Code (e.g., a prohibition or requirement applicable to the
purchase or sale of a Covered Security) shall be deemed to refer to and to include any warrant for, option in, or security immediately convertible into that
Covered Security, and shall also include any instrument that has an investment return or value that is based, in whole or in part, on that Covered Security
(collectively, “Derivatives”). Therefore, except as otherwise specifically provided by the Code: (a) any prohibition or requirement of the Code applicable to the
purchase or sale of a Covered Security shall also be applicable to the purchase or sale of a Derivative relating to that Covered Security; and (b) any prohibition or
requirement of the Code applicable to the purchase or sale of a Derivative shall also be applicable to the purchase or sale of a Covered Security relating to that
Derivative.
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“Immediate Family Member” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law, and shall include adoptive relationships.
“Independent Director” means a member of the board of directors of HRZN who is not an “interested person” of HRZN within the meaning of
Section 2(a)(19) of the Company Act.
“Insider Trading Policy” means the HTFM Insider Trading Policy, the HRZN Statement of Policy on Insider Trading and any amendments,
restatements, supplements, modifications or replacements to such existing policies.
“Investment Control” means any instance where a Covered Person, or an Immediate Family Member, exercises direct or indirect influence or control
over the purchase, sale, disposition or ownership of a security.
“Material, Non-Public Information” means any information which has not been publicly disseminated and which a reasonable investor might
consider important in making an investment decision. Examples of the types of information that is likely to be deemed “material” include, but are not limited to,
the following: (i) dividend increases or decreases; (ii) earnings estimates or material changes in previously released earnings estimates; (iii) significant expansion
or curtailment of operations; (iv) significant increase or decline in revenue; (v) significant merger or acquisition proposals or agreements, including tender offers;
(vi) significant new products or discoveries; (vii) extraordinary borrowing; (viii) major litigation; (ix) liquidity problems; (x) extraordinary management
developments; and (xi) purchase and sale of substantial assets.
“Restricted List” means a list or lists periodically updated by the CCO, or designee of the CCO, which lists issuers of Covered Securities in which (i)
any Covered Person (other than the Independent Directors) is in possession of Material Non-Public Information or (ii) trading by Covered Persons is generally
prohibited.
“Security Held or to be Acquired” means (i) any Covered Security which, within the most recent fifteen (15) calendar days (a) is or has been held by
HRZN or (b) is being or has been considered by HRZN or HTFM for purchase by HRZN and (ii) any option to purchase or sell, and any security convertible into
or exchangeable for, a Covered Security described in clause (i).
ARTICLE VI – Recordkeeping Policy
HRZN and HTFM are subject to extensive recordkeeping requirements. The following records shall be maintained for the required document retention
period:
(i)
A copy of the Code that is in effect, or at any time within the past five (5) years was in effect, will be maintained in an easily accessible place.
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(ii)
A record of any violation of the Code and any action taken as a result of such violation will be maintained in an easily accessible place for at
least five (5) years from the end of the fiscal year in which the violation occurred.
(iii) A record of all written acknowledgements of receipt of the Code and amendments for each person who is currently, or within the past five (5)
years was, a Covered Person for five (5) years after such Covered Person ceases to be a Covered Person.
(iv)
Pre-clearance requests, holdings and transaction reports made pursuant to the Code, including any brokerage confirmation and account
statements made in lieu of these reports, will be maintained for at least five (5) years after the end of the fiscal year in which the report was made
or the information was provided, the first two (2) years in an easily accessible place.
(v)
A record of all persons who are, or within the past five (5) years were, required to make holdings and transaction reports pursuant to the Code,
will be maintained in an easily accessible place.
(vi) A record of any decision and supporting reasons for approving the acquisition of securities by Covered Persons in limited offerings for at least
five (5) years after the end of the fiscal year in which approval was granted.
(vii) A record of any decisions and supporting reasons that grant Covered Persons or Covered Persons a waiver from or exception to the Code for a
period of at least five (5) years after the end of the fiscal year in which waiver or exception was granted.
(viii) Copies of all reports provided to HTFM’s senior management or HRZN’s board of directors regarding the annual review of the Code, including a
listing of any material violations, will be maintained for at last five (5) years after the end of the fiscal year in which such report was made, the
first two (2) years in an easily accessible place.
(ix) A record of all persons who are, or within the past five (5) years were, responsible for reviewing holdings and transaction reports, will be
maintained in an easily accessible place.
ARTICLE VII – Amendments to the Code
Material amendments to the Code of HTFM will be approved by HTFM’s CCO and will be provided to HTFM’s senior management team for review
following such amendment.
Material amendments to the Code of HRZN and its investment adviser, HTFM, must be approved by HRZN’s board of directors, including a majority
of Independent Directors, within six (6) months of the adoption of the material amendments in accordance with Rule 17j-1.
20
ARTICLE VIII – Further Information
For further information regarding the Code, please contact the CCO:
John C. Bombara
312 Farmington Avenue
Farmington, CT 06032
jay@horizontechfinance.com
(860) 676-8657
Adopted: October 25, 2010
Last Updated: October 11, 2022
21
LIST OF SUBSIDIARIES OF
HORIZON TECHNOLOGY FINANCE CORPORATION
AS OF 12/31/2022
EXHIBIT 21
Compass Horizon Funding Company LLC — Delaware Limited Liability Company
Horizon Credit II LLC — Delaware Limited Liability Company
Horizon Funding 2019-1 LLC — Delaware Limited Liability Company
Horizon Funding Trust 2019-1 – Delaware Trust
Horizon Secured Loan Fund I LLC – Delaware Limited Liability Company
Horizon Funding I, LLC – Delaware Limited Liability Company
HESP LLC – Delaware Limited Liability Company
Horizon Funding 2022-1 LLC — Delaware Limited Liability Company
Horizon Funding Trust 2022-1 – Delaware Trust
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23
We consent to the incorporation by reference in the Registration Statement on Form N-2 of Horizon Technology Finance Corporation and its subsidiaries (the
Company) of our report dated February 28, 2023, relating to the consolidated financial statements appearing in the Annual Report on Form 10-K of the
Company for the year ended December 31, 2022.
We also consent to the reference to our firm under the headings “Senior Securities” and “Independent Registered Public Accounting Firm” in such Registration
Statement on Form N-2.
/s/ RSM US LLP
Hartford, Connecticut
February 28, 2023
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: February 28, 2023
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: February 28, 2023
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, 2022 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: February 28, 2023
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, 2022 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: February 28, 2023