UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013 | ||
| OR | ||
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE TRANSITION PERIOD FROM TO | ||
COMMISSION FILE NUMBER: 814-00802
HORIZON TECHNOLOGY FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
| DELAWARE | 27-2114934 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 312 Farmington Avenue | ||
| Farmington, CT | 06032 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (860) 676-8654
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨ .
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer þ | Non-accelerated filer ¨ | Smaller Reporting Company ¨ | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ .
As of May 6, 2013, the Registrant had 9,578,312 shares of common stock, $0.001 par value, outstanding.
HORIZON TECHNOLOGY FINANCE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
| Page | |||
| PART I | |||
| Item 1. | Consolidated Financial Statements | 3 | |
| Consolidated Statements of Assets and Liabilities as of March 31, 2013 and December 31, 2012 (unaudited) | 3 | ||
| Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited) | 4 | ||
| Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2013 and 2012 (unaudited) | 5 | ||
| Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited) | 6 | ||
| Consolidated Schedules of Investments as of March 31, 2013 and December 31, 2012 (unaudited) | 7 | ||
| Notes to the Consolidated Financial Statements (unaudited) | 15 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 | |
| Item 3. | Quantitative And Qualitative Disclosures About Market Risk | 40 | |
| Item 4. | Controls and Procedures | 41 | |
| PART II | |||
| Item 1. | Legal Proceedings | 42 | |
| Item 1A. | Risk Factors | 42 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 42 | |
| Item 3. | Defaults Upon Senior Securities | 42 | |
| Item 4. | Mine Safety Disclosures | 42 | |
| Item 5. | Other Information | 42 | |
| Item 6. | Exhibits | 42 | |
| Signatures | 43 | ||
| EX-31.1 | |||
| EX-31.2 | |||
| EX-32.1 | |||
| EX-32.2 |
| 2 |
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Assets and Liabilities (Unaudited)
(In thousands, except share data)
| March 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Assets | ||||||||
| Non-affiliate investments at fair value (cost of $258,133 and $239,385, respectively) (Note 4) | $ | 247,781 | $ | 228,613 | ||||
| Investment in money market funds | 4,119 | 2,560 | ||||||
| Cash | 478 | 1,048 | ||||||
| Interest receivable | 3,513 | 2,811 | ||||||
| Other assets | 4,244 | 4,626 | ||||||
| Total assets | $ | 260,135 | $ | 239,658 | ||||
| Liabilities | ||||||||
| Borrowings (Note 6) | $ | 110,037 | $ | 89,020 | ||||
| Dividends payable | 3,303 | 3,301 | ||||||
| Base management fee payable (Note 3) | 433 | 402 | ||||||
| Incentive fee payable (Note 3) | 693 | 855 | ||||||
| Other accrued expenses | 909 | 1,108 | ||||||
| Total liabilities | 115,375 | 94,686 | ||||||
| Net assets | ||||||||
| Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2013 and December 31, 2012 | — | — | ||||||
| Common stock, par value $0.001 per share, 100,000,000 shares authorized, 9,574,445 and 9,567,225 shares outstanding as of March 31, 2013 and December 31, 2012, respectively | 10 | 10 | ||||||
| Paid-in capital in excess of par | 154,492 | 154,384 | ||||||
| Accumulated undistributed net investment income | 898 | 1,428 | ||||||
| Net unrealized depreciation on investments | (10,352 | ) | (10,772 | ) | ||||
| Net realized loss on investments | (288 | ) | (78 | ) | ||||
| Total net assets | 144,760 | 144,972 | ||||||
| Total liabilities and net assets | $ | 260,135 | $ | 239,658 | ||||
| Net asset value per common share | $ | 15.12 | $ | 15.15 | ||||
See Notes to Consolidated Financial Statements
| 3 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(In thousands, except share data)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2013 | 2012 | |||||||
| Investment income | ||||||||
| Interest income on non-affiliate investments | $ | 7,346 | $ | 5,910 | ||||
| Fee income on non-affiliate investments | 22 | 715 | ||||||
| Total investment income | 7,368 | 6,625 | ||||||
| Expenses | ||||||||
| Interest expense | 1,773 | 675 | ||||||
| Base management fee (Note 3) | 1,241 | 994 | ||||||
| Performance based incentive fee (Note 3) | 693 | 838 | ||||||
| Administrative fee (Note 3) | 285 | 256 | ||||||
| Professional fees | 382 | 307 | ||||||
| General and administrative | 221 | 203 | ||||||
| Total expenses | 4,595 | 3,273 | ||||||
| Net investment income | 2,773 | 3,352 | ||||||
| Net realized and unrealized gain (loss) on investments | ||||||||
| Net realized loss on investments | (210 | ) | — | |||||
| Net unrealized appreciation (depreciation) on investments | 420 | (813 | ) | |||||
| Net realized and unrealized gain (loss) on investments | 210 | (813 | ) | |||||
| Net increase in net assets resulting from operations | $ | 2,983 | $ | 2,539 | ||||
| Net investment income per common share | $ | 0.29 | $ | 0.44 | ||||
| Net increase in net assets per common share | $ | 0.31 | $ | 0.33 | ||||
| Dividends declared per share | $ | 0.345 | $ | 0.450 | ||||
| Weighted average shares outstanding | 9,570,789 | 7,636,609 | ||||||
See Notes to Consolidated Financial Statements
| 4 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets (Unaudited)
(In thousands, except share data)
| Common | Paid-In Capital in Excess of | Accumulated Undistributed Net Investment | Net Unrealized Depreciation on | Net Realized Gains (Losses) on | Total Net | |||||||||||||||||||||||
| Shares | Stock | Par | Income | Investments | Investments | Assets | ||||||||||||||||||||||
| Balance at December 31, 2011 | 7,636,532 | $ | 8 | $ | 124,512 | $ | 4,965 | $ | (2,659 | ) | $ | 3,058 | $ | 129,884 | ||||||||||||||
| Net increase in net assets resulting from operations | — | — | — | 3,352 | (813 | ) | — | 2,539 | ||||||||||||||||||||
| Issuance of common stock under dividend reinvestment plan | 3,517 | — | 58 | — | — | — | 58 | |||||||||||||||||||||
| Dividends declared | — | — | — | (3,436 | ) | — | — | (3,436 | ) | |||||||||||||||||||
| Balance at March 31, 2012 | 7,640,049 | $ | 8 | $ | 124,570 | $ | 4,881 | $ | (3,472 | ) | $ | 3,058 | $ | 129,045 | ||||||||||||||
| Balance at December 31, 2012 | 9,567,225 | $ | 10 | $ | 154,384 | $ | 1,428 | $ | (10,772 | ) | $ | (78 | ) | $ | 144,972 | |||||||||||||
| Net increase in net assets resulting from operations | — | — | — | 2,773 | 420 | (210 | ) | 2,983 | ||||||||||||||||||||
| Issuance of common stock under dividend reinvestment plan | 7,220 | — | 108 | — | — | — | 108 | |||||||||||||||||||||
| Dividends declared | — | — | — | (3,303 | ) | — | — | (3,303 | ) | |||||||||||||||||||
| Balance at March 31, 2013 | 9,574,445 | $ | 10 | $ | 154,492 | $ | 898 | $ | (10,352 | ) | $ | (288 | ) | $ | 144,760 | |||||||||||||
See Notes to Consolidated Financial Statements
| 5 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2013 | 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net increase in net assets resulting from operations | $ | 2,983 | $ | 2,539 | ||||
| Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities: | ||||||||
| Amortization of debt issuance costs | 183 | 51 | ||||||
| Net realized loss on investments | 18 | — | ||||||
| Net unrealized (appreciation) depreciation on investments | (420 | ) | 813 | |||||
| Purchase of investments | (28,500 | ) | (12,961 | ) | ||||
| Principal payments received on investments | 9,962 | 23,325 | ||||||
| Changes in assets and liabilities: | ||||||||
| Net increase in investments in money market funds | (1,559 | ) | (9,426 | ) | ||||
| (Increase) decrease in interest receivable | (88 | ) | 712 | |||||
| Increase in end-of-term payments | (614 | ) | (229 | ) | ||||
| Decrease in unearned loan income | (228 | ) | (460 | ) | ||||
| Increase in other assets | 199 | 40 | ||||||
| Decrease in other accrued expenses | (199 | ) | (577 | ) | ||||
| Increase in base management fee payable | 31 | 265 | ||||||
| Decrease in incentive fee payable | (162 | ) | (928 | ) | ||||
| Net cash (used in) provided by operating activities | (18,394 | ) | 3,164 | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of senior notes | — | 30,000 | ||||||
| Dividends paid | (3,193 | ) | (3,378 | ) | ||||
| Net increase (decrease) in Credit Facilities | 21,017 | (24,335 | ) | |||||
| Debt issuance costs | — | (1,052 | ) | |||||
| Net cash provided by financing activities | 17,824 | 1,235 | ||||||
| Net (decrease) increase in cash | (570 | ) | 4,399 | |||||
| Cash: | ||||||||
| Beginning of period | 1,048 | 1,298 | ||||||
| End of period | $ | 478 | $ | 5,697 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 1,517 | $ | 581 | ||||
| Supplemental non-cash investing and financing activities: | ||||||||
| Warrant investments received & recorded as unearned loan income | $ | 172 | $ | 185 | ||||
| Dividends Payable | $ | 3,303 | $ | — | ||||
See Notes to Consolidated Financial Statements
| 6 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments (Unaudited)
March 31, 2013
(In thousands)
| Principal | Cost of | Fair | ||||||||||||||
| Portfolio Company (1) | Sector | Type of Investment (3)(4)(7) | Amount | Investments (6) | Value | |||||||||||
| Debt Investments — 164.9% (9) | ||||||||||||||||
| Debt Investments — Life Science — 41.4% (9) | ||||||||||||||||
| ACT Biotech Corporation (8) | Biotechnology | Term Loan (13.10% cash, 8.00% ETP, Due 9/1/14) | $ | 3,947 | $ | 3,905 | $ | 2,811 | ||||||||
| Ambit Biosciences Corporation (2) | Biotechnology | Term Loan (12.25% cash, 3.00% ETP, Due 10/1/13) | 1,568 | 1,564 | 1,564 | |||||||||||
| Anacor Pharmaceuticals, Inc. (2)(5) | Biotechnology | Term Loan (9.41% cash, 5.50% ETP, Due 4/1/15) | 2,412 | 2,391 | 2,391 | |||||||||||
| Term Loan (9.67% cash, 5.50% ETP, Due 4/1/15) | 1,932 | 1,908 | 1,908 | |||||||||||||
| Term Loan (9.47% cash, 5.50% ETP, Due 4/1/15) | 3,397 | 3,354 | 3,354 | |||||||||||||
| Celsion Corporation (2)(5) | Biotechnology | Term Loan (11.75% cash, Due 10/1/15) | 2,500 | 2,482 | 2,482 | |||||||||||
| N30 Pharmaceuticals, LLC (2) | Biotechnology | Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14) | 1,458 | 1,442 | 1,442 | |||||||||||
| Term Loan (11.25% cash, 3.00% ETP, Due 7/1/15) | 2,500 | 2,458 | 2,458 | |||||||||||||
| Sample6 Technologies, Inc. (2) | Biotechnology | Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16) | 2,500 | 2,460 | 2,460 | |||||||||||
| Sunesis Pharmaceuticals, Inc. (2)(5) | Biotechnology | Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15) | 1,944 | 1,931 | 1,931 | |||||||||||
| Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15) | 2,917 | 2,842 | 2,842 | |||||||||||||
| Supernus Pharmaceuticals, Inc. (2)(5) | Biotechnology | Term Loan (11.00% cash, 3.00% ETP, Due 8/1/14) | 1,800 | 1,792 | 1,792 | |||||||||||
| Term Loan (11.00% cash, 2.50% ETP, Due 1/1/15) | 5,316 | 5,280 | 5,280 | |||||||||||||
| Xcovery Holding Company, LLC (2) | Biotechnology | Term Loan (12.50% cash, Due 8/1/15) | 918 | 915 | 915 | |||||||||||
| Term Loan (12.50% cash, Due 8/1/15) | 1,444 | 1,440 | 1,440 | |||||||||||||
| Term Loan (12.50% cash, Due 10/1/15) | 250 | 249 | 249 | |||||||||||||
| Direct Flow Medical, Inc. (2) | Medical Device | Term Loan (11.00% cash, 3.00% ETP, Due 7/1/16) | 5,000 | 4,899 | 4,899 | |||||||||||
| Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16) | 2,500 | 2,444 | 2,444 | |||||||||||||
| Mitralign, Inc. (2) | Medical Device | Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15) | 1,714 | 1,660 | 1,660 | |||||||||||
| Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15) | 1,143 | 1,123 | 1,123 | |||||||||||||
| OraMetrix, Inc. (2) | Medical Device | Term Loan (11.50% cash, 3.00% ETP, Due 4/1/14) | 2,003 | 1,990 | 1,990 | |||||||||||
| Revolver (11.50% (Prime + 8.25%) cash, Due 12/1/15) | 2,000 | 1,970 | 1,970 | |||||||||||||
| PixelOptics, Inc. (2) | Medical Device | Term Loan (10.75% cash, 3.00% ETP, Due 11/1/14) | 6,959 | 6,933 | 6,933 | |||||||||||
| Tengion, Inc. (2)(5) | Medical Device | Term Loan (13.00% cash, Due 5/1/14) | 3,660 | 3,587 | 3,587 | |||||||||||
| Total Debt Investments — Life Science | 61,019 | 59,925 | ||||||||||||||
| Debt Investments — Technology — 81.2% (9) | ||||||||||||||||
| Avalanche Technology, Inc. (2) | Semiconductors | Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16) | 3,758 | 3,630 | 3,630 | |||||||||||
| Luxtera, Inc. (2) | Semiconductors | Term Loan (10.25% cash, 8.00% ETP, Due 12/1/15) | 3,333 | 3,296 | 3,296 | |||||||||||
| Term Loan (10.25% cash, 8.00% ETP, Due 3/1/16) | 1,667 | 1,645 | 1,645 | |||||||||||||
| Newport Media, Inc. (2) | Semiconductors | Term Loan (11.00% cash, 2.14% ETP, Due 1/1/16) | 3,500 | 3,452 | 3,452 | |||||||||||
| Term Loan (11.00% cash, 2.14% ETP, Due 1/1/16) | 3,500 | 3,452 | 3,452 | |||||||||||||
| Xtera Communications, Inc. (2) | Semiconductors | Term Loan (11.50% cash, Due 12/1/14) | 7,294 | 7,228 | 7,228 | |||||||||||
| Term Loan (11.50% cash, Due 7/1/15) | 1,844 | 1,860 | 1,860 | |||||||||||||
| Grab Networks, Inc. (2) | Internet and Media | Term Loan (12.00% cash, Due 1/1/16) | 2,500 | 2,404 | 2,404 | |||||||||||
| Optaros, Inc. (2) | Internet and Media | Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15) | 2,000 | 1,979 | 1,979 | |||||||||||
| Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16) | 500 | 495 | 495 | |||||||||||||
| SimpleTuition, Inc. (2) | Internet and Media | Term Loan (11.75% cash, Due 3/1/16) | 5,000 | 4,918 | 4,918 | |||||||||||
| Construction Software Technologies, Inc. (2) | Software | Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16) | 4,200 | 4,160 | 4,160 | |||||||||||
| Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16) | 4,200 | 4,160 | 4,160 | |||||||||||||
| Courion Corporation (2) | Software | Term Loan (11.45% cash, Due 10/1/15) | 3,500 | 3,484 | 3,484 | |||||||||||
| Term Loan (11.45% cash, Due 10/1/15) | 3,500 | 3,484 | 3,484 | |||||||||||||
| Decisyon, Inc. (2) | Software | Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16) | 4,000 | 3,907 | 3,907 | |||||||||||
| Fiberlink Communications Corporation (2) | Software | Term Loan (11.50% cash, 5.00% ETP, Due 7/1/16) | 5,000 | 4,925 | 4,925 | |||||||||||
| Kontera Technologies, Inc. (2) | Software | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16) | 4,000 | 3,925 | 3,925 | |||||||||||
| Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16) | 4,000 | 3,925 | 3,925 | |||||||||||||
| Lotame Solutions, Inc. | Software | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16) | 4,000 | 3,941 | 3,941 | |||||||||||
| Netuitive, Inc. (2) | Software | Term Loan (11.75% cash, Due 1/1/16) | 3,000 | 2,948 | 2,948 | |||||||||||
| Raydiance, Inc. (2) | Software | Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16) | 5,000 | 4,907 | 4,907 | |||||||||||
| Seapass Solutions, Inc. (2) | Software | Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16) | 5,000 | 4,940 | 4,940 | |||||||||||
| Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16) | 5,000 | 4,940 | 4,940 | |||||||||||||
| StreamBase Systems, Inc. (2) | Software | Term Loan (12.51% cash, Due 3/1/14) | 1,164 | 1,095 | 1,095 | |||||||||||
| Term Loan (12.50% cash, Due 10/1/14) | 512 | 509 | 509 | |||||||||||||
| Term Loan (12.50% cash, Due 3/1/16) | 1,490 | 1,470 | 1,470 | |||||||||||||
| Sys-Tech Solutions, Inc. (2) | Software | Term Loan (11.65% cash, Due 6/1/16) | 7,500 | 7,225 | 7,225 | |||||||||||
| Vidsys, Inc. (2) | Software | Term Loan (11.00% cash, 5.00% ETP, Due 6/1/16) | 3,000 | 2,954 | 2,954 | |||||||||||
| Visage Mobile, Inc. (2) | Software | Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16) | 1,000 | 961 | 961 | |||||||||||
See Notes to Consolidated Financial Statements
| 7 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments (Unaudited)
March 31, 2013
(In thousands)
| Principal | Cost of | Fair | ||||||||||||||
| Portfolio Company (1) | Sector | Type of Investment (3)(4)(7) | Amount | Investments (6) | Value | |||||||||||
| Aquion Energy, Inc. (2) | Power Management | Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16) | 3,333 | 3,315 | 3,315 | |||||||||||
| Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16) | 3,333 | 3,315 | 3,315 | |||||||||||||
| Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16) | 3,333 | 3,312 | 3,312 | |||||||||||||
| Xtreme Power, Inc. (2) | Power Management | Term Loan (10.75% cash, 3.50% ETP, Due 5/1/16) | 6,000 | 5,919 | 5,387 | |||||||||||
| Total Debt Investments — Technology | 118,080 | 117,548 | ||||||||||||||
| Debt Investments — Cleantech — 19.2% (9) | ||||||||||||||||
| Renmatix, Inc. (2) | Alternative Energy | Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16) | 2,500 | 2,477 | 2,477 | |||||||||||
| Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16) | 2,500 | 2,477 | 2,477 | |||||||||||||
| Term Loan (10.25% cash, Due 10/1/16) | 5,000 | 4,933 | 4,933 | |||||||||||||
| Semprius, Inc. (2) | Alternative Energy | Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16) | 3,750 | 3,717 | 3,717 | |||||||||||
| Cereplast, Inc. (5)(8) | Waste Recycling | Term Loan (12.00% cash, Due 8/1/14) | 1,411 | 1,308 | 1,094 | |||||||||||
| Term Loan (12.00% cash, Due 8/1/14) | 1,514 | 1,495 | 1,250 | |||||||||||||
| Term Loan (15.00% cash, Due 8/1/13) | 56 | 56 | 47 | |||||||||||||
| Term Loan (15.00% cash, Due 8/1/13) | 94 | 94 | 78 | |||||||||||||
| Aurora Algae, Inc. (2) | Energy Efficiency | Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15) | 1,883 | 1,873 | 1,873 | |||||||||||
| Satcon Technology Corporation (5)(8) | Energy Efficiency | Term Loan (12.58% cash, Due 1/1/14) | 5,076 | 5,011 | — | |||||||||||
| Solarbridge Technologies, Inc. (2) | Energy Efficiency | Term Loan (11.65% cash, Due 4/1/16) | 7,000 | 6,848 | 6,065 | |||||||||||
| Tigo Energy, Inc. (2) | Energy Efficiency | Term Loan (11.00% cash, Due 8/1/14) | 2,214 | 2,199 | 2,199 | |||||||||||
| Revolver (10.75% (Prime + 7.50%) cash, Due 1/1/14) | 1,698 | 1,675 | 1,675 | |||||||||||||
| Total Debt Investments — Cleantech | 34,163 | 27,885 | ||||||||||||||
| Debt Investments — Healthcare information and services — 23.1% (9) | ||||||||||||||||
| Accumetrics, Inc. (2) | Diagnostics | Term Loan (10.90% cash, 5.00% ETP, Due 6/1/16) | 4,000 | 3,870 | 3,870 | |||||||||||
| BioScale, Inc. (2) | Diagnostics | Term Loan (11.51% cash, Due 1/1/14) | 2,223 | 2,216 | 2,216 | |||||||||||
| Radisphere National Radiology Group, Inc. (2) | Diagnostics | Revolver (11.25% (Prime + 8.00%) cash, Due 10/1/15) | 14,000 | 13,869 | 13,869 | |||||||||||
| Recondo Technology, Inc. (2) | Software | Term Loan (11.50% cash, 3.00% ETP, Due 4/1/15) | 2,000 | 1,943 | 1,943 | |||||||||||
| Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17) | 2,500 | 2,463 | 2,463 | |||||||||||||
| Singulex, Inc. | Other Healthcare | Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14) | 1,299 | 1,293 | 1,293 | |||||||||||
| Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14) | 866 | 863 | 863 | |||||||||||||
| Watermark Medical, Inc. | Other Healthcare | Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17) | 3,500 | 3,437 | 3,437 | |||||||||||
| Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17) | 3,500 | 3,437 | 3,437 | |||||||||||||
| Total Debt Investments — Healthcare information and services | 33,391 | 33,391 | ||||||||||||||
| Total Debt Investments | 246,653 | 238,749 | ||||||||||||||
| Warrant Investments — 4.2% (9) | ||||||||||||||||
| Warrants — Life Science — 1.2% (9) | ||||||||||||||||
| ACT Biotech Corporation | Biotechnology | 1,521,782 Preferred Stock Warrants | — | 83 | — | |||||||||||
| Ambit Biosciences, Inc. (2) | Biotechnology | 1,075,083 Preferred Stock Warrants | — | 143 | 116 | |||||||||||
| Anacor Pharmaceuticals, Inc. (2)(5) | Biotechnology | 84,583 Common Stock Warrants | — | 93 | 95 | |||||||||||
| Celsion Corporation (2)(5) | Biotechnology | 25,685 Common Stock Warrants | — | 15 | — | |||||||||||
| N30 Pharmaceuticals, LLC (2) | Biotechnology | 214,200 Preferred Stock Warrants | — | 122 | 252 | |||||||||||
| Novalar Pharmaceuticals, Inc. | Biotechnology | 84,845 Preferred Stock Warrants | — | 69 | — | |||||||||||
| Revance Therapeutics, Inc. | Biotechnology | 687,091 Preferred Stock Warrants | — | 223 | 552 | |||||||||||
| Sample6 Technologies, Inc. (2) | Biotechnology | 200,582 Preferred Stock Warrants | — | 27 | 28 | |||||||||||
| Sunesis Pharmaceuticals, Inc. (2)(5) | Biotechnology | 116,203 Common Stock Warrants | — | 83 | 390 | |||||||||||
| Supernus Pharmaceuticals, Inc. (2)(5) | Biotechnology | 42,083 Preferred Stock Warrants | — | 94 | 61 | |||||||||||
| Tranzyme, Inc. (2)(5) | Biotechnology | 77,902 Common Stock Warrants | — | 6 | — | |||||||||||
| Direct Flow Medical, Inc. (2) | Medical Device | 176,922 Preferred Stock Warrants | — | 144 | 134 | |||||||||||
| EnteroMedics, Inc. (5) | Medical Device | 141,026 Common Stock Warrants | — | 347 | — | |||||||||||
| Mitralign, Inc. (2) | Medical Device | 295,238 Common Stock Warrants | — | 49 | 43 | |||||||||||
| OraMetrix, Inc. (2) | Medical Device | 812,348 Preferred Stock Warrants | — | 78 | — | |||||||||||
| PixelOptics, Inc. (2) | Medical Device | 381,612 Preferred Stock Warrants | — | 96 | 35 | |||||||||||
| Tengion, Inc. (2)(5) | Medical Device | 1,708,273 Common Stock Warrants | — | 124 | 79 | |||||||||||
| ViOptix, Inc. | Medical Device | 375,763 Preferred Stock Warrants | — | 13 | — | |||||||||||
| Total Warrants — Life Science | 1,809 | 1,785 | ||||||||||||||
See Notes to Consolidated Financial Statements
| 8 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments (Unaudited)
March 31, 2013
(In thousands)
| Principal | Cost of | Fair | ||||||||||||||
| Portfolio Company (1) | Sector | Type of Investment (3)(4)(7) | Amount | Investments (6) | Value | |||||||||||
| Warrants — Technology — 2.0% (9) | ||||||||||||||||
| OpenPeak, Inc. | Communications | 18,997 Preferred Stock Warrants | — | 89 | — | |||||||||||
| Everyday Health, Inc. | Consumer-related Technologies | 65,674 Preferred Stock Warrants | — | 69 | 97 | |||||||||||
| SnagAJob.com, Inc. | Consumer-related Technologies | 365,396 Preferred Stock Warrants | — | 23 | 268 | |||||||||||
| Tagged, Inc. | Consumer-related Technologies | 190,868 Preferred Stock Warrants | — | 27 | 78 | |||||||||||
| Avalanche Technology, Inc. (2) | Semiconductors | 201,835 Preferred Stock Warrants | — | 45 | 39 | |||||||||||
| Impinj, Inc. | Semi-conductor | 1 Preferred Stock Warrants | — | 7 | — | |||||||||||
| Luxtera, Inc. (2) | Semiconductors | 1,827,485 Preferred Stock Warrants | — | 34 | 41 | |||||||||||
| Newport Media, Inc. (2) | Semiconductors | 188,764 Preferred Stock Warrants | — | 40 | 40 | |||||||||||
| Xtera Communications, Inc. (2) | Semiconductors | 983,607 Preferred Stock Warrants | — | 206 | 1 | |||||||||||
| XIOtech, Inc. | Data Storage | 2,217,979 Preferred Stock Warrants | — | 22 | 20 | |||||||||||
| Cartera Commerce, Inc. | Internet and media | 90,909 Preferred Stock Warrants | — | 16 | 162 | |||||||||||
| Grab Networks, Inc. (2) | Internet and media | 1,493,681 Preferred Stock Warrants | — | 194 | 119 | |||||||||||
| Optaros, Inc. (2) | Internet and media | 477,403 Preferred Stock Warrants | — | 20 | 18 | |||||||||||
| SimpleTuition, Inc. (2) | Internet and media | 189,573 Preferred Stock Warrants | — | 63 | 56 | |||||||||||
| IntelePeer, Inc. | Networking | 141,549 Preferred Stock Warrants | — | 39 | 483 | |||||||||||
| Motion Computing, Inc. | Networking | 260,707 Preferred Stock Warrants | — | 7 | 293 | |||||||||||
| Clarabridge, Inc. | Software | 104,503 Preferred Stock Warrants | — | 28 | 25 | |||||||||||
| Construction Software Technologies, Inc. (2) | Software | 386,415 Preferred Stock Warrants | — | 69 | 50 | |||||||||||
| Courion Corporation (2) | Software | 772,543 Preferred Stock Warrants | — | 107 | 98 | |||||||||||
| Decisyon, Inc. (2) | Software | 314,686 Preferred Stock Warrants | — | 45 | 45 | |||||||||||
| DriveCam, Inc. | Software | 71,639 Preferred Stock Warrants | — | 20 | 121 | |||||||||||
| Kontera Technologies, Inc. (2) | Software | 99,476 Preferred Stock Warrants | — | 101 | 101 | |||||||||||
| Lotame Solutions, Inc. | Software | 216,810 Preferred Stock Warrants | — | 4 | 4 | |||||||||||
| Netuitive, Inc. (2) | Software | 748,453 Preferred Stock Warrants | — | 75 | 60 | |||||||||||
| Raydiance, Inc. (2) | Software | 525,560 Preferred Stock Warrants | — | 36 | 36 | |||||||||||
| Seapass Solutions, Inc. (2) | Software | 202,892 Preferred Stock Warrants | — | 113 | 105 | |||||||||||
| StreamBase Systems, Inc. (2) | Software | 306,041 Preferred Stock Warrants | — | 84 | 63 | |||||||||||
| Sys-Tech Solutions, Inc. (2) | Software | 375,000 Preferred Stock Warrants | — | 242 | 254 | |||||||||||
| Vidsys, Inc. (2) | Software | 178,802 Preferred Stock Warrants | — | 23 | 23 | |||||||||||
| Visage Mobile, Inc. (2) | Software | 1,692,047 Preferred Stock Warrants | — | 20 | 20 | |||||||||||
| Aquion Energy, Inc. (2) | Power Management | 115,051 Preferred Stock Warrants | — | 7 | 60 | |||||||||||
| Xtreme Power, Inc. (2) | Power Management | 182,723 Preferred Stock Warrants | — | 76 | 68 | |||||||||||
| Total Warrants — Technology | 1,951 | 2,848 | ||||||||||||||
| Warrants — Cleantech — 0.3% (9) | ||||||||||||||||
| Renmatix, Inc. (2) | Alternative Energy | 52,296 Preferred Stock Warrants | — | 70 | 70 | |||||||||||
| Semprius, Inc. (2) | Alternative Energy | 519,981 Preferred Stock Warrants | — | 25 | 23 | |||||||||||
| Cereplast, Inc. (5) | Waste Recycling | 365,000 Common Stock Warrants | — | 175 | 2 | |||||||||||
| Enphase Energy, Inc. (5) | Energy Efficiency | 161,959 Common Stock Warrants | — | 175 | 123 | |||||||||||
| Satcon Technology Corporation (5) | Energy Efficiency | 493,097 Common Stock Warrants | — | 285 | — | |||||||||||
| Solarbridge Technologies, Inc. (2) | Energy Efficiency | 1,761,051 Preferred Stock Warrants | — | 125 | 113 | |||||||||||
| Tigo Energy, Inc. (2) | Energy Efficiency | 190,901 Preferred Stock Warrants | — | 101 | 72 | |||||||||||
| Total Warrants — Cleantech | 956 | 403 | ||||||||||||||
| Warrants — Healthcare information and services — 0.7% (9) | ||||||||||||||||
| Accumetrics, Inc. (2) | Diagnostics | 1,028,571 Preferred Stock Warrants | — | 107 | 138 | |||||||||||
| BioScale, Inc. (2) | Diagnostics | 315,618 Preferred Stock Warrants | — | 55 | 46 | |||||||||||
| Precision Therapeutics, Inc. | Diagnostics | 561,409 Preferred Stock Warrants | — | 73 | 142 | |||||||||||
| Radisphere National Radiology Group, Inc. (2) | Diagnostics | 519,943 Preferred Stock Warrants | — | 378 | 288 | |||||||||||
| Recondo Technology, Inc. (2) | Software | 360,645 Preferred Stock Warrants | — | 60 | 173 | |||||||||||
| Patientkeeper, Inc. | Other Healthcare | 396,410 Preferred Stock Warrants | — | 269 | 31 | |||||||||||
| Singulex, Inc. | Other Healthcare | 293,632 Preferred Stock Warrants | — | 44 | 71 | |||||||||||
| Talyst, Inc. | Other Healthcare | 300,360 Preferred Stock Warrants | — | 100 | 57 | |||||||||||
| Watermark Medical, Inc. | Other Healthcare | 12,216 Preferred Stock Warrants | — | 66 | 66 | |||||||||||
| Total Warrants — Healthcare information and services | 1,152 | 1,012 | ||||||||||||||
| Total Warrants | 5,868 | 6,048 | ||||||||||||||
| Other Investments — 1.5% (9) | ||||||||||||||||
| Vette Technology, LLC | Data Storage | Royalty Agreement Due 4/18/2019 | — | 4,830 | 2,100 | |||||||||||
| Total Other Investments | 4,830 | 2,100 | ||||||||||||||
See Notes to Consolidated Financial Statements
| 9 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments (Unaudited)
March 31, 2013
(In thousands)
| Principal | Cost of | Fair | ||||||||||||||
| Portfolio Company (1) | Sector | Type of Investment (3)(4)(7) | Amount | Investments (6) | Value | |||||||||||
| Equity — 0.6% (9) | ||||||||||||||||
| Insmed Incorporated (5) | Biotechnology | 33,208 Common Stock | — | 227 | 249 | |||||||||||
| Revance Therapeutics, Inc. | Biotechnology | 72,925 Preferred Stock | — | 73 | 109 | |||||||||||
| Overture Networks Inc. | Communications | 386,191 Preferred Stock | — | 482 | 526 | |||||||||||
| Total Equity | 782 | 884 | ||||||||||||||
| Total Portfolio Investment Assets — 171.2% (9) | $ | 258,133 | $ | 247,781 | ||||||||||||
| Short Term Investments — Money Market Funds — 2.8% (9) | ||||||||||||||||
| Blackrock Liquid Fed Funds Institutional (Fund #30) | $ | 2,997 | $ | 2,997 | ||||||||||||
| Fidelity Prime Money Market (Class I Fund #690) | 91 | 91 | ||||||||||||||
| US Bank Money Market | 1,031 | 1,031 | ||||||||||||||
| Total Short Term Investments — Money Market Funds | $ | 4,119 | $ | 4,119 | ||||||||||||
| (1) | All of the Company’s investments are in entities which are domiciled in the United States and/or have a principal place of business in the United States. |
| (2) | Has been pledged as collateral under the Credit Facilities. |
| (3) | All investments are less than 5% ownership of the class and ownership of the portfolio company. |
| (4) | All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETP and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the loan, unless otherwise indicated. For each debt investment, we have provided the current interest rate in effect as of March 31, 2013. |
| (5) | Portfolio company is a public company. |
| (6) | For debt investments, represents principal balance less unearned income. |
| (7) | Preferred and common stock warrants, equity interests and other investments are non-income producing. |
| (8) | Debt is on non-accrual status at March 31, 2013 and is, therefore, considered non-income producing. |
| (9) | Value as a percent of net assets. |
See Notes to Consolidated Financial Statements
| 10 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments (Unaudited)
December 31, 2012
(In thousands)
| Principal | Cost of | Fair | ||||||||||||||
| Portfolio Company (1) | Sector | Type of Investment (3)(4)(7) | Amount | Investments (6) | Value | |||||||||||
| Debt Investments — 152.0% (9) | ||||||||||||||||
| Debt Investments — Life Science — 42.4% (9) | ||||||||||||||||
| ACT Biotech Corporation (8) | Biotechnology | Term Loan (13.10% cash, 8.00% ETP, Due 9/1/14) | $ | 3,947 | $ | 3,906 | $ | 2,770 | ||||||||
| Ambit Biosciences Corporation (2) | Biotechnology | Term Loan (12.25% cash, 3.00% ETP, Due 10/1/13) | 2,206 | 2,197 | 2,197 | |||||||||||
| Anacor Pharmaceuticals, Inc. (2)(5) | Biotechnology | Term Loan (9.41% cash, 5.50% ETP, Due 4/1/15) | 2,671 | 2,644 | 2,645 | |||||||||||
| Term Loan (9.67% cash, 5.50% ETP, Due 4/1/15) | 2,139 | 2,109 | 2,109 | |||||||||||||
| Term Loan (9.47% cash, 5.50% ETP, Due 4/1/15) | 3,762 | 3,708 | 3,708 | |||||||||||||
| Celsion Corporation (2)(5) | Biotechnology | Term Loan (11.75% cash, Due 10/1/15) | 2,500 | 2,466 | 2,466 | |||||||||||
| N30 Pharmaceuticals, LLC (2) | Biotechnology | Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14) | 1,679 | 1,657 | 1,657 | |||||||||||
| Term Loan (11.25% cash, 3.00% ETP, Due 7/1/15) | 2,500 | 2,450 | 2,450 | |||||||||||||
| Revance Therapeutics, Inc. | Biotechnology | Convertible Note (8.00% ETP, Due 2/10/13) | 71 | 71 | 71 | |||||||||||
| Sample6 Technologies, Inc. (2) | Biotechnology | Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16) | 2,500 | 2,454 | 2,454 | |||||||||||
| Sunesis Pharmaceuticals, Inc. (2)(5) | Biotechnology | Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15) | 2,000 | 1,984 | 1,984 | |||||||||||
| Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15) | 3,000 | 2,911 | 2,911 | |||||||||||||
| Supernus Pharmaceuticals, Inc. (2)(5) | Biotechnology | Term Loan (11.00% cash, 3.00% ETP, Due 8/1/14) | 2,090 | 2,079 | 2,079 | |||||||||||
| Term Loan (11.00% cash, 2.50% ETP, Due 1/1/15) | 5,962 | 5,915 | 5,915 | |||||||||||||
| Xcovery Holding Company, LLC (2) | Biotechnology | Term Loan (12.50% cash, Due 8/1/15) | 918 | 915 | 915 | |||||||||||
| Term Loan (12.50% cash, Due 8/1/15) | 1,444 | 1,439 | 1,439 | |||||||||||||
| Term Loan (12.50% cash, Due 10/1/15) | 250 | 249 | 249 | |||||||||||||
| Direct Flow Medical, Inc. (2) | Medical Device | Term Loan (11.00% cash, 3.00% ETP, Due 7/1/16) | 5,000 | 4,831 | 4,831 | |||||||||||
| Mitralign, Inc. (2) | Medical Device | Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15) | 1,714 | 1,655 | 1,655 | |||||||||||
| Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15) | 1,143 | 1,119 | 1,119 | |||||||||||||
| OraMetrix, Inc. (2) | Medical Device | Term Loan (11.50% cash, 3.00% ETP, Due 4/1/14) | 2,468 | 1,966 | 1,966 | |||||||||||
| Revolver (11.50% (Prime + 8.25%) cash, Due 12/1/15) | 2,000 | 2,449 | 2,449 | |||||||||||||
| PixelOptics, Inc. (2) | Medical Device | Term Loan (10.75% cash, 3.00% ETP, Due 11/1/14) | 7,900 | 7,865 | 7,865 | |||||||||||
| Tengion, Inc. (2)(5) | Medical Device | Term Loan (13.00% cash, Due 5/1/14) | 3,660 | 3,560 | 3,560 | |||||||||||
| Total Debt Investments — Life Science | 62,599 | 61,464 | ||||||||||||||
| Debt Investments — Technology — 72.9% (9) | ||||||||||||||||
| Avalanche Technology, Inc. (2) | Semiconductors | Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16) | 4,000 | 3,866 | 3,866 | |||||||||||
| Luxtera, Inc. (2) | Semiconductors | Term Loan (10.25% cash, 8.00% ETP, Due 12/1/15) | 3,333 | 3,290 | 3,290 | |||||||||||
| Term Loan (10.25% cash, 8.00% ETP, Due 3/1/16) | 1,667 | 1,642 | 1,642 | |||||||||||||
| Newport Media, Inc. (2) | Semiconductors | Term Loan (11.00% cash, 2.14% ETP, Due 1/1/16) | 3,500 | 3,445 | 3,445 | |||||||||||
| Term Loan (11.00% cash, 2.14% ETP, Due 1/1/16) | 3,500 | 3,445 | 3,445 | |||||||||||||
| Xtera Communications, Inc. (2) | Semiconductors | Term Loan (11.50% cash, Due 12/1/14) | 8,222 | 8,136 | 8,136 | |||||||||||
| Term Loan (11.50% cash, Due 7/1/15) | 2,000 | 1,972 | 1,972 | |||||||||||||
| Grab Networks, Inc. (2) | Internet and Media | Term Loan (12.00% cash, Due 1/1/16) | 2,500 | 2,387 | 2,387 | |||||||||||
| Optaros, Inc. (2) | Internet and Media | Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15) | 2,000 | 1,976 | 1,976 | |||||||||||
| Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16) | 500 | 495 | 495 | |||||||||||||
| SimpleTuition, Inc. (2) | Internet and Media | Term Loan (11.75% cash, Due 3/1/16) | 5,000 | 4,905 | 4,905 | |||||||||||
| Construction Software Technologies, Inc. (2) | Software | Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16) | 4,200 | 4,156 | 4,156 | |||||||||||
| Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16) | 4,200 | 4,156 | 4,156 | |||||||||||||
| Courion Corporation (2) | Software | Term Loan (11.45% cash, Due 10/1/15) | 3,500 | 3,481 | 3,481 | |||||||||||
| Term Loan (11.45% cash, Due 10/1/15) | 3,500 | 3,481 | 3,481 | |||||||||||||
| Fiberlink Communications Corporation (2) | Software | Term Loan (11.50% cash, 5.00% ETP, Due 7/1/16) | 5,000 | 4,920 | 4,920 | |||||||||||
| Kontera Technologies, Inc. (2) | Software | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16) | 4,000 | 3,917 | 3,917 | |||||||||||
| Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16) | 4,000 | 3,917 | 3,917 | |||||||||||||
| Netuitive, Inc. (2) | Software | Term Loan (11.75% cash, Due 1/1/16) | 3,000 | 2,939 | 2,939 | |||||||||||
| Seapass Solutions, Inc. (2) | Software | Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16) | 5,000 | 4,933 | 4,933 | |||||||||||
| Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16) | 5,000 | 4,933 | 4,933 | |||||||||||||
| StreamBase Systems, Inc. (2) | Software | Term Loan (12.51% cash, Due 11/1/13) | 1,360 | 1,353 | 1,353 | |||||||||||
| Term Loan (12.50% cash, Due 6/1/14) | 558 | 553 | 553 | |||||||||||||
| Term Loan (12.50% cash, Due 12/1/15) | 1,500 | 1,477 | 1,477 | |||||||||||||
| Sys-Tech Solutions, Inc. (2) | Software | Term Loan (11.65% cash, Due 6/1/16) | 7,500 | 7,193 | 7,193 | |||||||||||
| Vidsys, Inc. (2) | Software | Term Loan (11.00% cash, 5.00% ETP, Due 6/1/16) | 3,000 | 2,948 | 2,948 | |||||||||||
| Aquion Energy, Inc. (2) | Power Management | Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16) | 3,333 | 3,312 | 3,312 | |||||||||||
| Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16) | 3,333 | 3,312 | 3,312 | |||||||||||||
| Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16) | 3,333 | 3,309 | 3,309 | |||||||||||||
| Xtreme Power, Inc. (2) | Power Management | Term Loan (10.75% cash, 3.50% ETP, Due 5/1/16) | 6,000 | 5,859 | 5,859 | |||||||||||
| Total Debt Investments — Technology | 105,708 | 105,708 | ||||||||||||||
See Notes to Consolidated Financial Statements
| 11 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments (Unaudited)
December 31, 2012
(In thousands)
| Principal | Cost of | Fair | ||||||||||||||
| Portfolio Company (1) | Sector | Type of Investment (3)(4)(7) | Amount | Investments (6) | Value | |||||||||||
| Debt Investments — Cleantech — 16.4% (9) | ||||||||||||||||
| Renmatix, Inc. (2) | Alternative Energy | Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16) | 2,500 | 2,402 | 2,402 | |||||||||||
| Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16) | 2,500 | 2,473 | 2,473 | |||||||||||||
| Semprius, Inc. (2) | Alternative Energy | Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16) | 3,750 | 3,712 | 3,712 | |||||||||||
| Cereplast, Inc. (5)(8) | Waste Recycling | Term Loan (12.00% cash, Due 8/1/14) | 1,683 | 1,515 | 890 | |||||||||||
| Term Loan (12.00% cash, Due 8/1/14) | 1,806 | 1,787 | 1,116 | |||||||||||||
| Term Loan (15.00% cash, Due 4/4/13) | 75 | 75 | 47 | |||||||||||||
| Term Loan (15.00% cash, Due 4/4/13) | 125 | 125 | 78 | |||||||||||||
| Aurora Algae, Inc. (2) | Energy Efficiency | Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15) | 2,075 | 2,062 | 2,062 | |||||||||||
| Satcon Technology Corporation (5)(8) | Energy Efficiency | Term Loan (12.58% cash, Due 1/1/14) | 5,278 | 5,278 | — | |||||||||||
| Solarbridge Technologies, Inc. (2) | Energy Efficiency | Term Loan (11.65% cash, Due 4/1/16) | 7,000 | 6,826 | 6,826 | |||||||||||
| Tigo Energy, Inc. (2) | Energy Efficiency | Term Loan (11.00% cash, Due 8/1/14) | 2,326 | 2,306 | 2,306 | |||||||||||
| Revolver (10.75% (Prime + 7.50%) cash, Due 1/1/14) | 1,859 | 1,821 | 1,821 | |||||||||||||
| Total Debt Investments — Cleantech | 30,382 | 23,733 | ||||||||||||||
| Debt Investments — Healthcare information and services — 20.3% (9) | ||||||||||||||||
| Accumetrics, Inc. (2) | Diagnostics | Term Loan (10.90% cash, 5.00% ETP, Due 6/1/16) | 4,000 | 3,853 | 3,853 | |||||||||||
| BioScale, Inc. (2) | Diagnostics | Term Loan (11.51% cash, Due 1/1/14) | 2,643 | 2,630 | 2,630 | |||||||||||
| Radisphere National Radiology Group, Inc. (2) | Diagnostics | Revolver (11.25% (Prime + 8.00%) cash, Due 10/1/15) | 15,000 | 14,856 | 14,856 | |||||||||||
| Recondo Technology, Inc. (2) | Software | Term Loan (11.50% cash, 3.00% ETP, Due 4/1/15) | 2,000 | 1,968 | 1,968 | |||||||||||
| Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17) | 2,500 | 2,460 | 2,460 | |||||||||||||
| Revolver (10.50% (Prime + 7.25%) cash, Due 4/1/15) | 1,000 | 968 | 968 | |||||||||||||
| Singulex, Inc. | Other Healthcare | Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14) | 1,602 | 1,593 | 1,593 | |||||||||||
| Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14) | 1,068 | 1,064 | 1,064 | |||||||||||||
| Total Debt Investments — Healthcare information and services | 29,392 | 29,392 | ||||||||||||||
| Total Debt Investments | 228,081 | 220,297 | ||||||||||||||
| Warrant Investments — 3.8% (9) | ||||||||||||||||
| Warrants — Life Science — 1.1% (9) | ||||||||||||||||
| ACT Biotech Corporation | Biotechnology | 1,390,910 Preferred Stock Warrants | — | 83 | — | |||||||||||
| Ambit Biosciences, Inc. (2) | Biotechnology | 1,075,083 Preferred Stock Warrants | — | 143 | 101 | |||||||||||
| Anacor Pharmaceuticals, Inc. (2)(5) | Biotechnology | 84,583 Common Stock Warrants | — | 93 | 41 | |||||||||||
| Anesiva, Inc. | Biotechnology | 198,898 Common Stock Warrants | — | 18 | — | |||||||||||
| Celsion Corporation (2)(5) | Biotechnology | 25,685 Common Stock Warrants | — | 15 | 136 | |||||||||||
| N30 Pharmaceuticals, LLC (2) | Biotechnology | 214,200 Preferred Stock Warrants | — | 122 | 252 | |||||||||||
| Novalar Pharmaceuticals, Inc. | Biotechnology | 84,845 Preferred Stock Warrants | — | 69 | — | |||||||||||
| Revance Therapeutics, Inc. | Biotechnology | 199,470 Preferred Stock Warrants | — | 224 | 404 | |||||||||||
| Sample6 Technologies, Inc. (2) | Biotechnology | 200,582 Preferred Stock Warrants | — | 27 | 28 | |||||||||||
| Sunesis Pharmaceuticals, Inc. (2)(5) | Biotechnology | 116,203 Common Stock Warrants | — | 83 | 251 | |||||||||||
| Supernus Pharmaceuticals, Inc. (2)(5) | Biotechnology | 42,083 Preferred Stock Warrants | — | 94 | 117 | |||||||||||
| Tranzyme, Inc. (2)(5) | Biotechnology | 77,902 Common Stock Warrants | — | 6 | — | |||||||||||
| Direct Flow Medical, Inc. (2) | Medical Device | 176,922 Preferred Stock Warrants | — | 145 | 145 | |||||||||||
| EnteroMedics, Inc. (5) | Medical Device | 141,026 Common Stock Warrants | — | 347 | 2 | |||||||||||
| Mitralign, Inc. (2) | Medical Device | 295,238 Common Stock Warrants | — | 49 | 43 | |||||||||||
| OraMetrix, Inc. (2) | Medical Device | 812,348 Preferred Stock Warrants | — | 78 | — | |||||||||||
| PixelOptics, Inc. (2) | Medical Device | 381,612 Preferred Stock Warrants | — | 96 | 35 | |||||||||||
| Tengion, Inc. (2)(5) | Medical Device | 1,716,339 Common Stock Warrants | — | 124 | 62 | |||||||||||
| ViOptix, Inc. | Medical Device | 375,763 Preferred Stock Warrants | — | 13 | — | |||||||||||
| Total Warrants — Life Science | 1,829 | 1,617 | ||||||||||||||
| Warrants — Technology — 1.9% (9) | ||||||||||||||||
| OpenPeak, Inc. | Communications | 18,997 Preferred Stock Warrants | — | 89 | — | |||||||||||
| Everyday Health, Inc. | Consumer-related Technologies | 65,674 Preferred Stock Warrants | — | 69 | 97 | |||||||||||
| SnagAJob.com, Inc. | Consumer-related Technologies | 365,396 Preferred Stock Warrants | — | 23 | 269 | |||||||||||
| Tagged, Inc. | Consumer-related Technologies | 190,868 Preferred Stock Warrants | — | 27 | 80 | |||||||||||
| Avalanche Technology, Inc. (2) | Semiconductors | 201,835 Preferred Stock Warrants | — | 45 | 46 | |||||||||||
| Impinj, Inc. | Semi-conductor | 1 Preferred Stock Warrants | — | 7 | — | |||||||||||
| Luxtera, Inc. (2) | Semiconductors | 1,827,485 Preferred Stock Warrants | — | 34 | 30 | |||||||||||
| Newport Media, Inc. (2) | Semiconductors | 188,764 Preferred Stock Warrants | — | 40 | 40 | |||||||||||
| Xtera Communications, Inc. (2) | Semiconductors | 983,607 Preferred Stock Warrants | — | 206 | 1 | |||||||||||
See Notes to Consolidated Financial Statements
| 12 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments (Unaudited)
December 31, 2012
(In thousands)
| Principal | Cost of | Fair | ||||||||||||||
| Portfolio Company (1) | Sector | Type of Investment (3)(4)(7) | Amount | Investments (6) | Value | |||||||||||
| XIOtech, Inc. | Data Storage | 2,217,979 Preferred Stock Warrants | — | 22 | 20 | |||||||||||
| Cartera Commerce, Inc. | Internet and media | 90,909 Preferred Stock Warrants | — | 16 | 162 | |||||||||||
| Grab Networks, Inc. (2) | Internet and media | 1,493,681 Preferred Stock Warrants | — | 194 | 119 | |||||||||||
| Optaros, Inc. (2) | Internet and media | 477,403 Preferred Stock Warrants | — | 20 | 18 | |||||||||||
| SimpleTuition, Inc. (2) | Internet and media | 189,573 Preferred Stock Warrants | — | 63 | 56 | |||||||||||
| IntelePeer, Inc. | Networking | 141,549 Preferred Stock Warrants | — | 39 | 481 | |||||||||||
| Motion Computing, Inc. | Networking | 260,707 Preferred Stock Warrants | — | 7 | 293 | |||||||||||
| Clarabridge, Inc. | Software | 104,503 Preferred Stock Warrants | — | 28 | 17 | |||||||||||
| Construction Software Technologies, Inc. (2) | Software | 386,415 Preferred Stock Warrants | — | 69 | 49 | |||||||||||
| Courion Corporation (2) | Software | 772,543 Preferred Stock Warrants | — | 107 | 98 | |||||||||||
| DriveCam, Inc. | Software | 71,639 Preferred Stock Warrants | — | 19 | 120 | |||||||||||
| Kontera Technologies, Inc. (2) | Software | 99,476 Preferred Stock Warrants | — | 101 | 101 | |||||||||||
| Netuitive, Inc. (2) | Software | 748,453 Preferred Stock Warrants | — | 75 | 61 | |||||||||||
| Seapass Solutions, Inc. (2) | Software | 202,892 Preferred Stock Warrants | — | 113 | 105 | |||||||||||
| StreamBase Systems, Inc. (2) | Software | 306,041 Preferred Stock Warrants | — | 83 | 63 | |||||||||||
| Sys-Tech Solutions, Inc. (2) | Software | 375,000 Preferred Stock Warrants | — | 242 | 242 | |||||||||||
| Vidsys, Inc. (2) | Software | 178,802 Preferred Stock Warrants | — | 23 | 23 | |||||||||||
| Aquion Energy, Inc. (2) | Power Management | 82,644 Preferred Stock Warrants | — | 7 | 4 | |||||||||||
| Xtreme Power, Inc. (2) | Power Management | 182,723 Preferred Stock Warrants | — | 76 | 68 | |||||||||||
| Total Warrants — Technology | 1,844 | 2,663 | ||||||||||||||
| Warrants — Cleantech — 0.2% (9) | ||||||||||||||||
| Renmatix, Inc. (2) | Alternative Energy | 52,296 Preferred Stock Warrants | — | 69 | 70 | |||||||||||
| Semprius, Inc. (2) | Alternative Energy | 519,981 Preferred Stock Warrants | — | 25 | 27 | |||||||||||
| Cereplast, Inc. (5) | Waste Recycling | 365,000 Common Stock Warrants | — | 175 | 2 | |||||||||||
| Enphase Energy, Inc. (5) | Energy Efficiency | 161,959 Common Stock Warrants | — | 176 | 4 | |||||||||||
| Satcon Technology Corporation (5) | Energy Efficiency | 493,097 Common Stock Warrants | — | 285 | — | |||||||||||
| Solarbridge Technologies, Inc. (2) | Energy Efficiency | 1,761,051 Preferred Stock Warrants | — | 125 | 112 | |||||||||||
| Tigo Energy, Inc. (2) | Energy Efficiency | 190,901 Preferred Stock Warrants | — | 101 | 72 | |||||||||||
| Total Warrants — Cleantech | 956 | 287 | ||||||||||||||
| Warrants — Healthcare information and services — 0.6% (9) | ||||||||||||||||
| Accumetrics, Inc. (2) | Diagnostics | 1,028,57 Preferred Stock Warrants | — | 107 | 107 | |||||||||||
| BioScale, Inc. (2) | Diagnostics | 315,618 Preferred Stock Warrants | — | 55 | 46 | |||||||||||
| Precision Therapeutics, Inc. | Diagnostics | 561,409 Preferred Stock Warrants | — | 73 | 142 | |||||||||||
| Radisphere National Radiology Group, Inc. (2) | Diagnostics | 519,943 Preferred Stock Warrants | — | 378 | 288 | |||||||||||
| Recondo Technology, Inc. (2) | Software | 360,645 Preferred Stock Warrants | — | 60 | 144 | |||||||||||
| Patientkeeper, Inc. | Other Healthcare | 396,410 Preferred Stock Warrants | — | 269 | 31 | |||||||||||
| Singulex, Inc. | Other Healthcare | 293,632 Preferred Stock Warrants | — | 44 | 71 | |||||||||||
| Talyst, Inc. | Other Healthcare | 300,360 Preferred Stock Warrants | — | 100 | 72 | |||||||||||
| Total Warrants — Healthcare information and services | 1,086 | 901 | ||||||||||||||
| Total Warrants | 5,715 | 5,468 | ||||||||||||||
| Other Investments — 1.4% (9) | ||||||||||||||||
| Vette Technology, LLC | Data Storage | Royalty Agreement Due 4/18/2019 | 4,880 | 2,100 | ||||||||||||
| Total Other Investments | 4,880 | 2,100 | ||||||||||||||
| Equity — 0.5% (9) | ||||||||||||||||
| Insmed Incorporated (5) | Biotechnology | 33,208 Common Stock | 227 | 222 | ||||||||||||
| Overture Networks Inc. | Communications | 386,191 Preferred Stock | 482 | 526 | ||||||||||||
| Total Equity | 709 | 748 | ||||||||||||||
| Total Portfolio Investment Assets — 157.7% (9) | $ | 239,385 | $ | 228,613 | ||||||||||||
See Notes to Consolidated Financial Statements
| 13 |
Horizon Technology Finance Corporation and Subsidiaries
Consolidated Schedule of Investments (Unaudited)
December 31, 2012
(In thousands)
| Principal | Cost of | Fair | ||||||||||||||
| Portfolio Company (1) | Sector | Type of Investment (3)(4)(7) | Amount | Investments (6) | Value | |||||||||||
| Short Term Investments — Money Market Funds — 1.8% (9) | ||||||||||||||||
| Blackrock Liquid Fed Funds Institutional (Fund #30) | $ | 2,197 | $ | 2,197 | ||||||||||||
| Fidelity Prime Money Market (Class I Fund #690) | 91 | 91 | ||||||||||||||
| US Bank Money Market | 272 | 272 | ||||||||||||||
| Total Short Term Investments — Money Market Funds | $ | 2,560 | $ | 2,560 | ||||||||||||
| (1) | All of the Company’s investments are in entities which are domiciled in the United States and/or have a principal place of business in the United States. |
| (2) | Has been pledged as collateral under the Credit Facilities. |
| (3) | All investments are less than 5% ownership of the class and ownership of the portfolio company. |
| (4) | All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETP and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the loan, unless otherwise indicated. For each debt investment, we have provided the current interest rate in effect as of December 31, 2012. |
| (5) | Portfolio company is a public company. |
| (6) | For debt investments, represents principal balance less unearned income. |
| (7) | Preferred and common stock warrants, equity interests and other investments are non-income producing. |
| (8) | Debt is on non-accrual status at December 31, 2012 and is, therefore, considered non-income producing. |
| (9) | Value as a percent of net assets. |
See Notes to Consolidated Financial Statements
| 14 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
Note 1. Organization
Horizon Technology Finance Corporation (the “Company”) was organized as a Delaware corporation on March 16, 2010 and is an externally managed, non-diversified, closed-end investment company. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). In addition, for tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and capital gains the Company distributes to the stockholders. The Company primarily makes secured loans to development-stage companies in the technology, life science, healthcare information and services and cleantech industries. Substantially all of the Company’s debt investments consisting of loans are secured by all of, or a portion of, the applicable debtor company’s tangible and intangible assets.
On October 28, 2010, the Company completed an initial public offering (“IPO”) and its common stock trades on the NASDAQ Global Select Market under the symbol “HRZN.” The Company was formed to continue and expand the business of Compass Horizon Funding Company LLC (“CHF”), a Delaware limited liability company, which commenced operations in March 2008 and became the Company’s wholly owned subsidiary with the completion of the IPO.
Horizon Credit I LLC (“Credit I”) was formed as a Delaware limited liability company on January 23, 2008, with CHF as the sole equity member. Credit I is a special purpose bankruptcy remote entity and is a separate legal entity from the Company and CHF. There has been no activity in Credit I during the three months ended March 31, 2013.
Horizon Credit II LLC (“Credit II”) was formed as a Delaware limited liability company on June 28, 2011, with the Company as the sole equity member. Credit II is a special purpose bankruptcy remote entity and is a separate legal entity from the Company. Any assets conveyed to Credit II are not available to creditors of the Company or any other entity other than Credit II’s lenders.
Horizon Credit III LLC (“Credit III”) was formed as a Delaware limited liability company on May 30, 2012, with the Company as the sole equity member. Credit III is a special purpose bankruptcy remote entity and is a separate legal entity from the Company. Any assets conveyed to Credit III are not available to creditors of the Company or any other entity other than Credit III’s lenders.
Longview SBIC GP LLC and Longview SBIC LP (collectively, “Horizon SBIC”) were formed as a Delaware limited liability company and Delaware limited partnership, respectively on February 11, 2011. Horizon SBIC are wholly owned subsidiaries of the Company and were formed in anticipation of obtaining a license to operate a small business investment company from the U. S. Small Business Administration. There has been no activity in Horizon SBIC since its inception.
The Company’s investment strategy is to maximize the investment portfolio’s return by generating current income from the debt investments made and the capital appreciation from the warrants received when making such debt investments. The Company has entered into an investment management agreement (the “Investment Management Agreement”) with Horizon Technology Finance Management LLC (“Advisor”), under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.
Note 2. Basis of Presentation and Significant Accounting Policies
Basis of Financial Statement Presentation
The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2012.
| 15 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
Principles of Consolidation
As permitted under Regulation S-X and the AICPA Audit and Accounting Guide for Investment Companies, the Company will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s subsidiaries in its consolidated financial statements.
Use of Estimates
In preparing the consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the balance sheet and income and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the valuation of investments.
Fair Value
The Company applies fair value to substantially all of its investments in accordance with relevant GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. The Company has categorized its investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as more fully described in Note 5. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3.
In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs, (ASU 2011-04). ASU 2011-04 converges the fair value measurement guidance in U.S. GAAP and IFRSs. Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in existing guidance. In addition, ASU 2011-04 requires additional fair value disclosures. The Company has adopted ASU 2011-04 and included additional disclosures in Note 5.
See Note 5 for additional information regarding fair value.
Segments
The Company has determined that it has a single reporting segment and operating unit structure. The Company lends to and invests in portfolio companies in various technology, life science, healthcare information and services and cleantech industries. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these loan and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment.
| 16 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
Investments
Investments are recorded at fair value. The Company’s board of directors (“Board”) determines the fair value of its portfolio investments. The Company has the intent to hold its loans for the foreseeable future or until maturity or payoff.
Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a loan becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the loan is placed on non-accrual status and the recognition of interest income is discontinued. Interest payments received on loans that are on non-accrual status are treated as reductions of principal until the principal is repaid. As of March 31, 2013, there were three investments on non-accrual status with an approximate cost of $11.9 million and approximate fair value of $5.3 million. As of December 31, 2012, there were three investments on non-accrual status with an approximate cost of $12.9 million and approximate fair value of $4.9 million.
The Company receives a variety of fees from borrowers in the ordinary course of conducting its business, including advisory fees, commitment fees, amendment fees, non-utilization fees and prepayment fees. In a limited number of cases, the Company may also receive a non-refundable deposit earned upon the termination of a transaction. Loan origination fees, net of certain direct origination costs, are deferred, and along with unearned income, are amortized as a level yield adjustment over the respective term of the loan. Fees for counterparty loan commitments with multiple loans are allocated to each loan based upon each loan’s relative fair value. When a loan is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the loan is returned to accrual status.
Certain loan agreements also require the borrower to make an end-of-term payment (“ETP”), which is accrued into interest income over the life of the loan to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay all principal and interest due.
In connection with substantially all of the Company’s lending arrangements, the Company receives warrants to purchase shares of stock from the borrower. The warrants are recorded as assets at estimated fair value on the grant date using the Black-Scholes valuation model. The warrants are considered loan fees and are also recorded as unearned loan income on the grant date. The unearned income is recognized as interest income over the contractual life of the related loan in accordance with the Company’s income recognition policy. Subsequent to loan origination, the warrants are also measured at fair value using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss on investments. Gains from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains on investments.
Debt Issuance Costs
Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities. Debt issuance costs are recognized as assets and are amortized as interest expense over the term of the related credit facility. The unamortized balance of debt issuance costs as of March 31, 2013 and December 31, 2012, included in other assets, was $3.5 million and $3.7 million, respectively. The accumulated amortization balances as of March 31, 2013 and December 31, 2012 was $0.7 million and $0.6 million, respectively. The amortization expense for the three months ended March 31, 2013 and 2012 was $0.2 million and $0.1 million, respectively.
Income Taxes
The Company elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes.
| 17 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three months ended March 31, 2013 and 2012, no amount was recorded for U.S. federal excise tax.
The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. There were no material uncertain tax positions at March 31, 2013 and December 31, 2012. The 2011, 2010 and 2009 tax years remain subject to examination by U.S. federal and state tax authorities.
Dividends
Dividends to common stockholders are recorded on the declaration date. The amount to be paid out as a dividend is determined by the Board. Net realized long-term capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.
The Company has adopted a dividend reinvestment plan that provides for reinvestment of cash distributions and other distributions on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board authorizes, and the Company declares, a cash dividend, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividend. The Company may use newly issued shares to implement the plan (especially if the Company’s shares are trading at a premium to net asset value), or the Company may purchase shares in the open market in connection with the obligations under the plan.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company — put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.
Note 3. Related Party Transactions
Investment Management Agreement
On October 28, 2010, the Company entered into the Investment Management Agreement with the Advisor, under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company. Under the terms of the Investment Management Agreement, the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.
The Advisor’s services under the Investment Management Agreement are not exclusive to the Company, and the Advisor is free to furnish similar services to other entities so long as its services to the Company are not impaired. The Advisor is a registered investment adviser with the U.S. Securities and Exchange Commission. The Advisor receives fees for providing services, consisting of two components, a base management fee and an incentive fee.
| 18 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
The base management fee under the Investment Management Agreement is calculated at an annual rate of 2.00% of the Company’s gross assets, payable monthly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. The management fee payable at both March 31, 2013 and December 31, 2012 was $0.4 million. The base management fee expense was $1.2 million and $1.0 million for the three months ended March 31, 2013 and 2012, respectively.
The incentive fee has two parts, as follows:
The first part is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. The incentive fee with respect to the pre-incentive fee net income is 20.00% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 1.75% (which is 7.00% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, the Advisor receives no incentive fee until the net investment income equals the hurdle rate of 1.75%, but then receives, as a “catch-up,” 100.00% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.1875% in any calendar quarter, the Advisor will receive 20.00% of the pre-incentive fee net investment income as if a hurdle rate did not apply.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the 2.00% base management fee. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date), and equals 20.00% of the Company’s aggregate realized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation through the end of such year, less all previous amounts paid in respect of the capital gain incentive fee.
The performance based incentive fee expense was $0.7 million and $0.8 million for the three months ended March 31, 2013 and 2012, respectively. The incentive fee payable as of March 31, 2012 and December 31, 2012 was $0.7 million and $0.9 million, respectively. The entire incentive fee payable as of March 31, 2013 and December 31, 2012 represents part one of the incentive fee.
| 19 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
Administration Agreement
The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief compliance officer and chief financial officer and their respective staffs. For both the three months ended March 31, 2013 and 2012, $0.3 million was charged to operations under the Administration Agreement.
Note 4. Investments
Investments, all of which are with portfolio companies in the United States, consisted of the following:
| March 31, 2013 | December 31, 2012 | |||||||||||||||
| Cost | Fair Value | Cost | Fair Value | |||||||||||||
| Money market funds | $ | 4,119 | $ | 4,119 | $ | 2,560 | $ | 2,560 | ||||||||
| Non-affiliate investments | ||||||||||||||||
| Debt | $ | 246,653 | $ | 238,749 | $ | 228,081 | $ | 220,297 | ||||||||
| Warrants | 5,868 | 6,048 | 5,715 | 5,468 | ||||||||||||
| Other Investments | 4,830 | 2,100 | 4,880 | 2,100 | ||||||||||||
| Equity | 782 | 884 | 709 | 748 | ||||||||||||
| Total non-affiliate investments | $ | 258,133 | $ | 247,781 | $ | 239,385 | $ | 228,613 | ||||||||
The following table shows the Company’s portfolio investments by industry sector:
| March 31, 2013 | December 31, 2012 | |||||||||||||||
| Cost | Fair Value | Cost | Fair Value | |||||||||||||
| Life Science | ||||||||||||||||
| Biotechnology | $ | 37,671 | $ | 37,171 | $ | 40,358 | $ | 39,569 | ||||||||
| Medical Device | 25,457 | 24,897 | 24,296 | 23,733 | ||||||||||||
| Technology | ||||||||||||||||
| Consumer-Related Technologies | 119 | 443 | 118 | 445 | ||||||||||||
| Networking | 46 | 776 | 46 | 774 | ||||||||||||
| Software | 68,827 | 68,865 | 55,220 | 55,237 | ||||||||||||
| Data Storage | 4,852 | 2,120 | 4,901 | 2,121 | ||||||||||||
| Internet and Media | 10,089 | 10,151 | 10,056 | 10,118 | ||||||||||||
| Communications | 571 | 526 | 571 | 526 | ||||||||||||
| Semiconductors | 24,895 | 24,684 | 26,128 | 25,913 | ||||||||||||
| Power Management | 15,944 | 15,457 | 15,875 | 15,864 | ||||||||||||
| Cleantech | ||||||||||||||||
| Energy Efficiency | 18,292 | 12,120 | 18,914 | 13,138 | ||||||||||||
| Waste Recycling | 3,128 | 2,471 | 3,744 | 2,199 | ||||||||||||
| Alternative Energy | 13,699 | 13,697 | 8,680 | 8,683 | ||||||||||||
| Healthcare Information and Services | ||||||||||||||||
| Diagnostics | 20,568 | 20,569 | 21,952 | 21,921 | ||||||||||||
| Other Healthcare Related Services | 9,509 | 9,255 | 3,067 | 2,829 | ||||||||||||
| Software | 4,466 | 4,579 | 5,459 | 5,543 | ||||||||||||
| Total non-affiliate investments | $ | 258,133 | $ | 247,781 | $ | 239,385 | $ | 228,613 | ||||||||
Note 5. Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.
| 20 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment.
The Company’s fair value measurements are classified into a fair value hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three categories within the hierarchy are as follows:
| Level 1 | Quoted prices in active markets for identical assets and liabilities. |
| Level 2 | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, and model-based valuation techniques for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
Investments are valued at fair value as determined in good faith by the Board, based on input of management, the audit committee and independent valuation firms that have been engaged at the direction of the Board to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied valuation process. This valuation process is conducted at the end of each fiscal quarter, with approximately 25% (based on fair value) of the Company’s valuation of portfolio companies without readily available market quotations subject to review by an independent valuation firm.
Cash and interest receivable: The carrying amount is a reasonable estimate of fair value. These financial instruments are not recorded at fair value on a recurring basis and are categorized as Level 1 within the fair value hierarchy described above.
Money Market Funds: The carrying amounts are valued at their net asset value as of the close of business on the day of valuation. These financial instruments are recorded at fair value on a recurring basis and are categorized as Level 2 within the fair value hierarchy described above as these funds can be redeemed daily.
Debt Investments: For variable rate debt investments which re-price frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values. The fair value of fixed rate debt investments is estimated by discounting the expected future cash flows using the year end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the same remaining maturities. At both March 31, 2013 and December 31, 2012, the discount rates used ranged from 9% to 25%. Significant increases (decreases) in this unobservable input would result in a significantly lower (higher) fair value measurement. These assets are recorded at fair value on a recurring basis and are categorized as Level 3 within the fair value hierarchy described above.
Under certain circumstances, the Company may use an alternative technique to value debt investments that better reflects its fair value such as the use of multiple probability weighted cash flow models when the expected future cash flows contain elements of variability.
| 21 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
Warrant Investments: The Company values its warrants using the Black-Scholes valuation model incorporating the following material assumptions:
| • | Underlying asset value of the issuer is estimated based on information available, including any information regarding the most recent rounds of borrower funding. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement. |
| • | Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on guideline publicly traded companies within indices similar in nature to the underlying company issuing the warrant. A total of seven such indices were used. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value investment. |
| • | The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant. |
| • | Other adjustments, including a marketability discount on private company warrants, are estimated based on management’s judgment about the general industry environment. Significant increases (decreases) in this unobservable input would result in significantly lower (higher) fair value measurement. |
| • | Historical portfolio experience on cancellations and exercises of warrants are utilized as the basis for determining the estimated time to exit of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or IPOs, and cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life assumption to be shorter than the contractual term of the warrants. Significant increases (decreases) in this unobservable input would result in significantly higher (lower) fair value measurement. |
Under certain circumstances the Company may use an alternative technique to value warrants that better reflects the warrants fair value, such as an expected settlement of a warrant in the near term or a model that incorporates a put feature associated with the warrant. The fair value may be determined based on the expected proceeds to be received from such settlement or based on the net present value of the expected proceeds from the put option.
The fair value of the Company’s warrants held in publicly traded companies is determined based on inputs that are readily available in public markets or can be derived from information available in public markets. Therefore, the Company has categorized these warrants as Level 2 within the fair value hierarchy described above. The fair value of the Company’s warrants held in private companies is determined using both observable and unobservable inputs and represents management’s best estimate of what market participants would use in pricing the warrants at the measurement date. Therefore, the Company has categorized these warrants as Level 3 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.
Equity Investments: The fair value of an equity investment in a privately held company is initially the face value of the amount invested. The Company adjusts the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing. The Company may make adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in a portfolio company’s financial or operational performance. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement. The Company has categorized these equity investments as Level 3 with the fair value hierarchy described above. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. Therefore, the Company has categorized these equity investments as Level 1 with the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.
Other Investments: Other investments will be valued based on the facts and circumstances of the underlying agreement. The Company currently values one contractual agreement using a multiple probability weighted cash flow model as the contractual future cash flows contain elements of variability. Significant changes in the estimated cash flows and probability weightings would result in a significantly higher or lower fair value measurement. The Company has categorized this other investment as Level 3 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.
| 22 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of investments as of March 31, 2013 and December 31, 2012. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy the Company may also use other valuation techniques and methodologies when determining fair value measurements. The tables below are not intended to be all-inclusive, but rather provide information on the significant Level 3 inputs as they relate to the Company’s fair value measurements:
| March 31, 2013 | ||||||||||||
| Fair | Valuation Techniques/ | Unobservable | ||||||||||
| Investment Type | Value | Methodologies | Input | Range | ||||||||
| Debt investments | $ | 238,749 | Discounted Expected Future Cash Flows | Hypothetical Market Yield | 9% - 25 | % | ||||||
| Multiple Probability Weighted Cash | Discount Rate | 25 | % | |||||||||
| Flow Model | Probability Weighting | 10% - 60 | % | |||||||||
| Warrant investments | 5,378 | Black-Scholes Valuation Model | Price per share | $0.0 – 45.84 | ||||||||
| Average Industry Volatility | 21 | % | ||||||||||
| Marketability Discount | 20 | % | ||||||||||
| Estimated Time to Exit | 1 to 10 years | |||||||||||
| Other investments | 2,100 | Multiple Probability Weighted Cash | Discount Rate | 25 | % | |||||||
| Flow Model | Probability Weighting | 10% - 45 | % | |||||||||
| Equity investments | 635 | Market Comparable Companies | Revenue Multiple | 1.5x – 2.0x | ||||||||
| Total Level 3 investments | $ | 246,862 | ||||||||||
| December 31, 2012 | ||||||||||||
| Fair | Valuation Techniques/ | Unobservable | ||||||||||
| Investment Type | Value | Methodologies | Input | Range | ||||||||
| Debt investments | $ | 220,297 | Discounted Expected Future Cash Flows | Hypothetical Market Yield | 8% - 25 | % | ||||||
| Multiple Probability Weighted Cash | Discount Rate | 25 | % | |||||||||
| Flow Model | Probability Weighting | 10% - 60 | % | |||||||||
| Warrant investments | 4,914 | Black-Scholes Valuation Model | Price per share | $0.0 - 9.56 | ||||||||
| Average Industry Volatility | 21 | % | ||||||||||
| Marketability Discount | 20 | % | ||||||||||
| Estimated Time to Exit | 1 to 10 years | |||||||||||
| Other investments | 2,100 | Multiple Probability Weighted Cash | Discount Rate | 25 | % | |||||||
| Flow Model | Probability Weighting | 10% - 45 | % | |||||||||
| Equity investments | 526 | Market Comparable Companies | Revenue Multiple | 1.5x – 2.0x | ||||||||
| Total Level 3 investments | $ | 227,837 | ||||||||||
Borrowings: The carrying amount of borrowings under the Credit Facilities approximates fair value due to the variable interest rate of the Credit Facilities and are categorized as Level 2 within the fair value hierarchy described above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed rate Senior Notes (See Note 6) is based on the closing public share price on the date of measurement. At March 31, 2013, the Senior Notes were trading on the New York Stock Exchange for $26.00 per note, or $34.3 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. These liabilities are not recorded at fair value on a recurring basis.
Off-Balance-Sheet Instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings. Therefore, the Company has categorized these instruments as Level 3 within the fair value hierarchy described above.
| 23 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
The following tables detail the assets and liabilities that are carried at fair value and measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
| March 31, 2013 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Money market funds | $ | 4,119 | $ | — | $ | 4,119 | $ | — | ||||||||
| Debt investments | $ | 238,749 | $ | — | $ | — | $ | 238,749 | ||||||||
| Warrant investments | $ | 6,048 | $ | — | $ | 670 | $ | 5,378 | ||||||||
| Other investments | $ | 2,100 | $ | — | $ | — | $ | 2,100 | ||||||||
| Equity investments | $ | 884 | $ | 249 | $ | — | $ | 635 | ||||||||
| December 31, 2012 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Money market funds | $ | 2,560 | $ | — | $ | 2,560 | $ | — | ||||||||
| Debt investments | $ | 220,297 | $ | — | $ | — | $ | 220,297 | ||||||||
| Warrant investments | $ | 5,468 | $ | — | $ | 554 | $ | 4,914 | ||||||||
| Other investments | $ | 2,100 | $ | — | $ | — | $ | 2,100 | ||||||||
| Equity investments | $ | 748 | $ | 222 | $ | — | $ | 526 | ||||||||
The following tables show a reconciliation of the beginning and ending balances for Level 3 assets:
| Three Months Ended March 31, 2013 | ||||||||||||||||||||
| Debt Investments | Warrant Investments | Equity Investments | Other Investments | Total | ||||||||||||||||
| Level 3 assets, beginning of period | $ | 220,297 | $ | 4,914 | $ | 526 | $ | 2,100 | $ | 227,837 | ||||||||||
| Purchase of investments | 28,500 | — | — | — | 28,500 | |||||||||||||||
| Warrants and equity received and classified as Level 3 | — | 172 | — | — | 172 | |||||||||||||||
| Principal payments received on investments | (9,962 | ) | — | — | — | (9,962 | ) | |||||||||||||
| Unrealized (depreciation) appreciation included in earnings | (70 | ) | 292 | 36 | — | 258 | ||||||||||||||
| Transfer from debt to equity investments | (73 | ) | — | 73 | — | — | ||||||||||||||
| Other | 57 | — | — | — | 57 | |||||||||||||||
| Level 3 assets, end of period | $ | 238,749 | $ | 5,378 | $ | 635 | $ | 2,100 | $ | 246,862 | ||||||||||
The Company’s transfers between levels are recognized at the end of the reporting period. During the three months ended March 31, 2013, there were no transfers between levels.
| 24 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
| Three Months Ended March 31, 2012 | ||||||||||||||||
| Debt Investments | Warrant Investments | Equity Investments | Total | |||||||||||||
| Level 3 assets, beginning of period | $ | 173,286 | $ | 4,048 | $ | 526 | $ | 177,860 | ||||||||
| Purchase of investments | 12,961 | — | — | 12,961 | ||||||||||||
| Warrants and equity received and classified as Level 3 | — | 180 | — | 180 | ||||||||||||
| Principal payments received on investments | (23,325 | ) | — | — | (23,325 | ) | ||||||||||
| Unrealized (depreciation) appreciation included in earnings | (1,186 | ) | 102 | — | (1,084 | ) | ||||||||||
| Transfer out of Level 3 | — | (111 | ) | — | (111 | ) | ||||||||||
| Other | 273 | — | — | 273 | ||||||||||||
| Level 3 assets, end of period | $ | 162,009 | $ | 4,219 | $ | 526 | $ | 166,754 | ||||||||
During the three months ended March 31, 2012, there were no transfers between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in one portfolio company, with a value of $0.1 million, that were transferred into Level 2 due to the portfolio company becoming a public company during the three months ended March 31, 2012. Because the fair value of the portfolio company’s warrants held are determined based on inputs that are readily available in public markets or can be derived from information available in public markets, the Company has categorized the warrants as Level 2 within the fair value hierarchy described above as of March 31, 2012.
The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at March 31, 2013 includes $0.1 million unrealized depreciation on loans, $0.3 million unrealized appreciation on warrants and $0.04 million unrealized appreciation on equity.
The Company discloses fair value information about financial instruments, whether or not recognized in the statement of assets and liabilities, for which it is practicable to estimate that value. Certain financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value amounts have been measured as of the reporting date, and have not been reevaluated or updated for purposes of these financial statements subsequent to that date. As such, the fair values of these financial instruments subsequent to the reporting date may be different than amounts reported.
As of March 31, 2013 and December 31, 2012, the recorded book balances equaled fair values of all the Company’s financial instruments, except for the Company’s Senior Notes, as previously described.
Off-balance-sheet instruments
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
| 25 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
Note 6. Borrowings
A summary of the Company’s borrowings as of March 31, 2013 and December 31, 2012 is as follows:
| March 31, 2013 | ||||||||||||
| Total Commitment | Balance Outstanding | Unused Commitment | ||||||||||
| Wells Facility | $ | 75,000 | $ | 67,037 | $ | 7,963 | ||||||
| Fortress Facility | 75,000 | 10,000 | 65,000 | |||||||||
| Senior Notes | 33,000 | 33,000 | — | |||||||||
| Total | $ | 183,000 | $ | 110,037 | $ | 72,963 | ||||||
| December 31, 2012 | ||||||||||||
| Total Commitment | Balance Outstanding | Unused Commitment | ||||||||||
| Wells Facility | $ | 75,000 | $ | 46,020 | $ | 28,980 | ||||||
| Fortress Facility | 75,000 | 10,000 | 65,000 | |||||||||
| Senior Notes | 33,000 | 33,000 | — | |||||||||
| Total | $ | 183,000 | $ | 89,020 | $ | 93,980 | ||||||
In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that the asset coverage, as defined in the 1940 Act, is at least 200% after such borrowings. As of March 31, 2013, the asset coverage for borrowed amounts was 225%.
The Company entered into a revolving credit facility (the “Wells Facility”) with Wells Fargo Capital Finance, LLC (“Wells”) effective July 14, 2011. The Wells Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million from the current $75 million commitment provided by Wells. The Wells Facility is collateralized by all loans and warrants held by Credit II and permits an advance rate of up to 50% of eligible loans held by Credit II. The Wells Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the Wells Facility to certain criteria for qualified loans and includes portfolio company concentration limits as defined in the related loan agreement. The Wells Facility has a three-year revolving term followed by a three-year amortization period and matures on July 14, 2017. The interest rate is based upon the one-month LIBOR plus a spread of 4.00%, with a LIBOR floor of 1.00%. The rate at both March 31, 2013 and December 31, 2012 was 5.0%, and the average rate for the three months ended March 31, 2013 and 2012 was 5.0%. The average amounts of borrowings were approximately $49.7 million and $17.0 million for the three months ended March 31, 2013 and 2012, respectively.
On March 23, 2012, the Company issued and sold an aggregate principal amount of $30 million of 7.375% senior unsecured notes due in 2019, and, on April 18, 2012, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $3 million of such notes (collectively, the “Senior Notes”). The Senior Notes will mature on March 15, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after March 15, 2015 at a redemption price of $25 per security plus accrued and unpaid interest. The Senior Notes bear interest at a rate of 7.375% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year. The Senior Notes are the Company’s direct unsecured obligations and rank (i) pari passu with the Company’s future senior unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the Senior Notes; (iii) effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness and (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. As of March 31, 2013, the Company was in material compliance with the terms of the Senior Notes. The Senior Notes are listed on the New York Stock Exchange under the symbol “HTF.”
| 26 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
The Company entered into a term loan credit facility (the “Fortress Facility”) with Fortress Credit Co LLC (“Fortress”) effective August 23, 2012. The Fortress Facility is collateralized by all loans and warrants held by Credit III. The Fortress Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the Fortress Facility to certain criteria for qualified loans and includes portfolio company concentration limits as defined in the related loan agreement. The Fortress Facility, among other things, has a three-year term subject to two one-year extensions with a draw period of up to four years. The Fortress Facility requires the payment of an unused line fee of 1.00% annually beginning October 1, 2012 and has an effective advance rate of approximately 66% against eligible loans. The Fortress Facility generally bears interest based upon the one-month LIBOR plus a spread of 6.00%, with a LIBOR floor of 1.00%. The rate at both March 31, 2013 and December 31, 2012 was 7.00%, and the average rate for the three months ended March 31, 2013 was 7.00%. The average amount of borrowings was approximately $10.0 million for the three months ended March 31, 2013.
Note 7. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its borrowers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statement of assets and liabilities. The Company attempts to limit its credit risk by conducting extensive due diligence and obtaining collateral where appropriate.
The balance of unfunded commitments to extend credit was approximately $12.6 million and $24.6 million as of March 31, 2013 and December 31, 2012, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving credit arrangements or similar transactions. Commitments may also include a financial or non-financial milestone that has to be achieved before the commitment can be drawn. Commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Note 8. Concentrations of Credit Risk
The Company’s debt investments consist primarily of loans to development-stage companies at various stages of development in the technology, life science, healthcare information and services and cleantech industries. Many of these companies may have relatively limited operating histories and also may experience variation in operating results. Many of these companies conduct business in regulated industries and could be affected by changes in government regulations. Most of the Company’s borrowers will need additional capital to satisfy their continuing working capital needs and other requirements, and in many instances, to service the interest and principal payments on the loans.
The largest loans may vary from year to year as new loans are recorded and repaid. The Company’s five largest loans represented approximately 21% and 23% of total loans outstanding as of March 31, 2013 and December 31, 2012, respectively. No single loan represents more than 10% of the total loans as of March 31, 2013 and December 31, 2012. Loan income, consisting of interest and fees, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately 23% and 29% of total interest income and fee income on investments for the three months ended March 31, 2013 and 2012, respectively.
| 27 |
Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
Note 9. Dividends and Distributions
The Company’s dividends and distributions are recorded on the record date. The following table summarizes the Company’s dividend declaration and distribution activity since inception:
| Date Declared | Record Date | Payment Date | Amount Per Share | Cash Distribution | DRIP Shares Issued | DRIP Share Value | ||||||||||||||
| Three Months Ended March 31, 2013 | ||||||||||||||||||||
| 3/8/13 | 5/20/13 | 6/16/13 | $ | 0.115 | $ | — | — | $ | — | |||||||||||
| 3/8/13 | 4/18/13 | 5/15/13 | $ | 0.115 | $ | — | — | $ | — | |||||||||||
| 3/8/13 | 3/20/13 | 4/15/13 | $ | 0.115 | $ | 1,046 | 3,867 | $ | 55 | |||||||||||
| $ | 0.345 | $ | 1,046 | 3,867 | $ | 55 | ||||||||||||||
| Year Ended December 31, 2012 | ||||||||||||||||||||
| 11/27/12 | 2/21/13 | 3/15/13 | $ | 0.115 | $ | 1,050 | 3,392 | $ | 50 | |||||||||||
| 11/27/12 | 1/18/13 | 2/15/13 | $ | 0.115 | $ | 1,087 | 898 | $ | 14 | |||||||||||
| 11/27/12 | 12/20/12 | 1/15/13 | $ | 0.115 | $ | 1,056 | 2,930 | $ | 44 | |||||||||||
| 11/2/12 | 11/16/12 | 11/30/12 | $ | 0.450 | $ | 4,243 | 4,269 | $ | 61 | |||||||||||
| 8/7/12 | 8/17/12 | 8/31/12 | $ | 0.450 | $ | 4,105 | 11,608 | $ | 193 | |||||||||||
| 5/3/12 | 5/17/12 | 5/31/12 | $ | 0.450 | $ | 3,402 | 2,299 | $ | 37 | |||||||||||
| 3/12/12 | 3/23/12 | 3/30/12 | $ | 0.450 | $ | 3,378 | 3,517 | $ | 58 | |||||||||||
| $ | 2.145 | $ | 18,321 | 28,913 | $ | 457 | ||||||||||||||
| Year Ended December 31, 2011 | ||||||||||||||||||||
| 11/8/11 | 11/23/11 | 11/30/11 | $ | 0.450 | $ | 3,281 | 9,814 | $ | 151 | |||||||||||
| 8/9/11 | 8/23/11 | 8/30/11 | $ | 0.400 | $ | 2,836 | 13,193 | $ | 209 | |||||||||||
| 5/10/11 | 5/19/11 | 5/26/11 | $ | 0.330 | $ | 2,190 | 20,104 | $ | 316 | |||||||||||
| $ | 1.180 | $ | 8,307 | 43,111 | $ | 676 | ||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||
| 12/15/10 | 12/28/10 | 12/31/10 | $ | 0.220 | $ | 1,097 | 38,297 | $ | 565 | |||||||||||
On May 3, 2013, the Board declared monthly dividends payable as set forth in the table below.
| Record Dates | Payment Date | Dividends Declared | ||||
| August 19, 2013 | September 16, 2013 | $ | 0.115 | |||
| July 17, 2013 | August 15, 2013 | $ | 0.115 | |||
| June 20, 2013 | July 15, 2013 | $ | 0.115 | |||
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Horizon Technology Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
Note 10. Financial Highlights
The financial highlights for the Company are as follows:
| Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 | |||||||
| Per share data: | ||||||||
| Net asset value at beginning of period | $ | 15.15 | $ | 17.01 | ||||
| Net investment income | 0.29 | 0.44 | ||||||
| Realized loss on investments | (0.02 | ) | — | |||||
| Unrealized appreciation (depreciation) on investments | 0.04 | (0.11 | ) | |||||
| Net increase in net assets resulting from operations | 0.31 | 0.33 | ||||||
| Dividends declared | (0.35 | ) | (0.45 | ) | ||||
| Issuance of common stock under dividend reinvestment plan | 0.01 | — | ||||||
| Net asset value at end of period | $ | 15.12 | $ | 16.89 | ||||
| Per share market value, end of period | $ | 14.61 | $ | 16.61 | ||||
| Total return based on a market value | 0.2 | %(1) | 4.5 | %(1) | ||||
| Shares outstanding at end of period | 9,574,445 | 7,640,049 | ||||||
| Ratios to average net assets: | ||||||||
| Expenses without incentive fees | 10.8 | %(2) | 7.5 | %(2) | ||||
| Incentive fees | 1.9 | %(2) | 2.6 | %(2) | ||||
| Total expenses | 12.7 | %(2) | 10.1 | %(2) | ||||
| Net investment income with incentive fees | 9.6 | %(2) | 10.4 | %(2) | ||||
| Average net asset value | $ | 144,866 | $ | 129,465 | ||||
| Average debt per share | 9.68 | 8.57 | ||||||
| Portfolio turnover ratio | 12.38 | % | 7.55 | % | ||||
____________
| (1) | The total return for the three months ended March 31, 2013 and 2012, equals the change in the ending market value over the beginning of period price per share plus dividends paid per share during the period, divided by the beginning price. |
| (2) | Annualized. |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this quarterly report on Form 10-Q, except where the context suggests otherwise, the terms “we,” “us,” “our” and “Horizon Technology Finance” refer to Horizon Technology Finance Corporation and its consolidated subsidiaries. The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Amounts are stated in thousands, except shares and per share data and where otherwise noted.
Forward-Looking Statements
This quarterly report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to future events or our future performance or financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
| • | our future operating results, including the performance of our existing loans and warrants; |
| • | the introduction, withdrawal, success and timing of business initiatives and strategies; |
| • | changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets; |
| • | the relative and absolute investment performance and operations of our investment advisor, Horizon Technology Management LLC, or the Advisor; |
| • | the impact of increased competition; |
| • | the impact of investments we intend to make and future acquisitions and divestitures; |
| • | the unfavorable resolution of legal proceedings; |
| • | our business prospects and the prospects of our portfolio companies; |
| • | the impact, extent and timing of technological changes and the adequacy of intellectual property protection; |
| • | our regulatory structure and tax status; |
| • | the adequacy of our cash resources and working capital; |
| • | the timing of cash flows, if any, from the operations of our portfolio companies; |
| • | the impact of interest rate volatility on our results, particularly if we use leverage as part of our investment strategy; |
| • | the ability of our portfolio companies to achieve their objective; |
| • | our ability to cause a subsidiary to become a licensed Small Business Investment Company (“SBIC”); |
| • | the impact of legislative and regulatory actions and reforms and regulatory supervisory or enforcement actions of government agencies relating to us or our Advisor; |
| • | our contractual arrangements and relationships with third parties; |
| • | our ability to access capital and any future financings by us; |
| • | the ability of our Advisor to attract and retain highly talented professionals; and |
| • | the impact of changes to tax legislation and, generally, our tax position. |
We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks” and similar expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” in our annual report on Form 10-K, or Form 10-K, and elsewhere in this quarterly report on Form 10-Q.
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We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this quarterly report on Form 10-Q, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission, or the SEC, including, reports on Form 10-Q and current reports on Form 8-K and Form 10-K.
Overview
We are a specialty finance company that lends to and invests in development-stage companies in the technology, life science, healthcare information and services and cleantech industries, which we refer to as our “Target Industries.” Our investment objective is to generate current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured loans, which we refer to as “Venture Loans,” to companies backed by established venture capital and private equity firms in our Target Industries, which we refer to as “Venture Lending.” We also selectively lend to publicly traded companies in our Target Industries.
We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for U.S. federal income tax purposes, we have elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on our assessment of market conditions and other factors at the time of any proposed borrowing.
Compass Horizon Funding Company LLC, or Compass Horizon, our predecessor company, commenced operations in March 2008. We were formed in March 2010 for the purpose of acquiring Compass Horizon and continuing its business as a public entity.
Our investment activities are managed by the Advisor and supervised by our board of directors, or the Board, of which a majority of the members are independent of us. Under an investment management agreement, or the Investment Management Agreement, we have agreed to pay the Advisor a base management fee and an incentive fee for its advisory services to us. We have also entered into an administration agreement, or the Administration Agreement, with the Advisor under which we have agreed to reimburse the Advisor for our allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement.
Portfolio Composition and Investment Activity
The following table shows our portfolio by asset class as of March 31, 2013 and December 31, 2012:
| March 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
| # of Investments | Fair Value | Percentage of Total Portfolio | # of Investments | Fair Value | Percentage of Total Portfolio | |||||||||||||||||||
| Term loans | 46 | $ | 221,262 | 89.3 | % | 41 | $ | 200,685 | 87.8 | % | ||||||||||||||
| Revolving loans | 3 | 17,487 | 7.1 | % | 4 | 19,612 | 8.6 | % | ||||||||||||||||
| Total loans | 49 | 238,749 | 96.4 | % | 45 | 220,297 | 96.4 | % | ||||||||||||||||
| Warrants | 66 | 6,048 | 2.4 | % | 62 | 5,468 | 2.4 | % | ||||||||||||||||
| Other investments | 1 | 2,100 | 0.8 | % | 1 | 2,100 | 0.9 | % | ||||||||||||||||
| Equity | 3 | 884 | 0.4 | % | 2 | 748 | 0.3 | % | ||||||||||||||||
| Total | $ | 247,781 | 100.0 | % | $ | 228,613 | 100.0 | % | ||||||||||||||||
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Total portfolio investment activity as of and for the three months ended March 31, 2013 and 2012 was as follows:
| For the three months Ended March 31, | ||||||||
| 2013 | 2012 | |||||||
| Beginning portfolio | $ | 228,613 | $ | 178,013 | ||||
| New loan funding | 28,500 | 31,700 | ||||||
| Less refinanced balances and participation | — | (18,739 | ) | |||||
| Net new loan funding | 28,500 | 12,961 | ||||||
| Principal payments received on investments | (9,962 | ) | (9,120 | ) | ||||
| Early pay-offs | — | (14,205 | ) | |||||
| Accretion of loan fees | 548 | 642 | ||||||
| New loan fees | (320 | ) | (182 | ) | ||||