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Horizon Technology Finance Corp - Quarter Report: 2020 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

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)

(860) 676-8654

(Registrant’s telephone number, including area code)


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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

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

The number of shares of the registrant’s common stock traded under the symbol “HRZN” on the Nasdaq Global Select Market, $0.001 par value per share, outstanding as of November 3, 2020 was 18,367,587.

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Ticker symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.001 per share

HRZN

The Nasdaq Stock Market LLC

6.25% Notes due 2022

HTFA

The New York Stock Exchange


Table of Contents

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 September 30, 2020 (unaudited) and December 31, 2019

3

Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)

4

Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2020 and 2019 (unaudited)

5

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

6

Consolidated Schedules of Investments as of September 30, 2020 (unaudited) and December 31, 2019

7

Notes to the Consolidated Financial Statements (unaudited)

18

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

46

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

67

Item 4.

Controls and Procedures

68

PART II

68

Item 1.

Legal Proceedings

68

Item 1A.

Risk Factors

69

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

71

Item 3.

Defaults Upon Senior Securities

71

Item 4.

Mine Safety Disclosures

71

Item 5.

Other Information

71

Item 6.

Exhibits

71

Signatures

72

EX-31.1

EX-31.2

EX-32.1

EX-32.2

2


Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Assets and Liabilities

(Dollars in thousands, except share and per share data)

September 30, 

December 31, 

    

2020

    

2019

Assets

 

(Unaudited)

 

  

Non-affiliate investments at fair value (cost of $321,034 and $295,256, respectively)

$

304,359

$

294,304

Non-controlled affiliate investments at fair value (cost of $6,822 and $6,891, respectively) (Note 5)

 

7,391

 

8,597

Controlled affiliate investments at fair value (cost of $16,684) (Note 5)

 

 

16,650

Total investments at fair value (cost of $327,856 and $318,831, respectively) (Note 4)

 

311,750

 

319,551

Cash

 

34,130

 

6,465

Investments in money market funds

 

22,735

 

9,787

Restricted investments in money market funds

 

801

 

1,133

Interest receivable

 

6,229

 

5,530

Other assets

 

1,913

 

1,535

Total assets

$

377,558

$

344,001

Liabilities

 

  

 

  

Borrowings (Note 7)

$

163,689

$

152,050

Distributions payable

 

5,510

 

4,669

Base management fee payable (Note 3)

 

510

 

519

Incentive fee payable (Note 3)

 

1,465

 

1,613

Other accrued expenses

 

1,213

 

1,095

Total liabilities

 

172,387

 

159,946

Commitments and contingencies (Note 8)

 

  

 

  

Net assets

 

  

 

  

Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of September 30, 2020 and December 31, 2019

 

 

Common stock, par value $0.001 per share, 100,000,000 shares authorized, 18,533,378 and 15,730,755 shares issued and 18,365,913 and 15,563,290 shares outstanding as of September 30, 2020 and December 31, 2019, respectively

 

19

 

16

Paid-in capital in excess of par

 

260,649

 

226,660

Distributable earnings

 

(55,497)

 

(42,621)

Total net assets

 

205,171

 

184,055

Total liabilities and net assets

$

377,558

$

344,001

Net asset value per common share

$

11.17

$

11.83

See Notes to Consolidated Financial Statements

3


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except share and per share data)

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

    

Investment income

 

  

 

  

 

  

 

  

 

Interest income on investments

 

  

 

  

 

  

 

  

 

Interest income on non-affiliate investments

$

10,974

$

8,974

$

32,286

$

25,429

Interest income on affiliate investments

 

175

 

210

 

532

 

645

Total interest income on investments

 

11,149

 

9,184

 

32,818

 

26,074

Fee income

 

  

 

  

 

  

 

  

Prepayment fee income on non-affiliate investments

1,156

639

1,911

1,373

Revenue based payments on non-affiliate investments(1)

1,050

1,080

Fee income on non-affiliate investments

 

23

 

37

 

1,112

 

382

Fee income on affiliate investments

 

3

 

4

 

10

 

18

Total fee income

 

1,182

 

1,730

 

3,033

 

2,853

Dividend income

 

  

 

  

 

  

 

  

Dividend income on controlled affiliate investments

 

 

461

 

118

 

1,223

Total dividend income

 

 

461

 

118

 

1,223

Total investment income

 

12,331

 

11,375

 

35,969

 

30,150

Expenses

 

  

 

  

 

  

 

  

Interest expense

 

2,607

 

2,046

 

7,331

 

6,209

Base management fee (Note 3)

 

1,616

 

1,394

 

4,865

 

4,055

Performance based incentive fee (Note 3)

 

1,465

 

1,443

 

4,212

 

5,352

Administrative fee (Note 3)

 

234

 

212

 

740

 

631

Professional fees

 

247

 

279

 

1,095

 

1,045

General and administrative

 

302

 

228

 

877

 

688

Total expenses

 

6,471

 

5,602

 

19,120

 

17,980

Performance based incentive fee waived (Note 3)

 

 

 

 

(1,848)

Net expenses

 

6,471

 

5,602

 

19,120

 

16,132

Net investment income

 

5,860

 

5,773

 

16,849

 

14,018

Net realized and unrealized loss on investments

 

  

 

  

 

  

 

  

Net realized gain (loss) on non-affiliate investments

 

1,178

 

(424)

 

3,957

 

(3,871)

Net realized loss on controlled affiliate investments

(12)

Net realized gain (loss) on investments

 

1,178

 

(424)

 

3,945

 

(3,871)

Net unrealized (depreciation) appreciation on non-affiliate investments

 

(10,629)

 

(129)

 

(15,435)

 

620

Net unrealized appreciation (depreciation) on non-controlled affiliate investments

 

341

 

 

(1,134)

 

2,019

Net unrealized depreciation on controlled affiliate investments

 

 

(14)

 

(258)

 

(17)

Net unrealized (depreciation) appreciation on investments

 

(10,288)

 

(143)

 

(16,827)

 

2,622

Net realized and unrealized loss on investments

 

(9,110)

 

(567)

 

(12,882)

 

(1,249)

Net (decrease) increase in net assets resulting from operations

$

(3,250)

$

5,206

$

3,967

$

12,769

Net investment income per common share

$

0.34

$

0.42

$

0.98

$

1.08

Net (decrease) increase in net assets per common share

$

(0.19)

$

0.38

$

0.23

$

0.98

Distributions declared per share

$

0.30

$

0.30

$

0.95

$

0.90

Weighted average shares outstanding

 

17,245,662

 

13,816,082

 

17,111,359

 

13,016,839


(1)

Revenue Based Payments consist of payments made to the Company by a portfolio company based upon a percentage of such portfolio company’s revenue. Such payments were made in addition to the portfolio company’s regularly scheduled payments of principal and interest.

See Notes to Consolidated Financial Statements

4


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Changes in Net Assets (Unaudited)

(Dollars in thousands, except share data)

Paid-In Capital

Common Stock

in Excess of

Distributable

Total Net

    

Shares

    

Amount

    

Par

    

Earnings

    

Assets

Balance at June 30, 2019

 

13,542,873

$

14

$

202,855

(45,733)

$

157,136

Issuance of common stock, net of offering costs

865,728

1

10,106

10,107

Net increase in net assets resulting from operations, net of excise tax:

 

  

 

  

 

  

 

  

 

  

Net investment income, net of excise tax

 

 

 

 

5,773

 

5,773

Net realized loss on investments

 

 

 

 

(424)

 

(424)

Net unrealized depreciation on investments

 

 

 

 

(143)

 

(143)

Issuance of common stock under dividend reinvestment plan

 

3,874

 

 

46

 

 

46

Distributions declared

 

 

 

 

(4,351)

 

(4,351)

Balance at September 30, 2019

 

14,412,475

15

213,007

(44,878)

168,144

Balance at June 30, 2020

17,291,770

17

247,924

(46,709)

201,232

Issuance of common stock, net of offering costs

 

1,069,259

 

2

 

12,666

 

 

12,668

Net decrease in net assets resulting from operations, net of excise tax:

 

  

 

  

 

  

 

  

 

  

Net investment income, net of excise tax

 

5,860

5,860

Net realized gain on investments

 

 

 

 

1,178

 

1,178

Net unrealized depreciation on investments

 

 

 

 

(10,288)

 

(10,288)

Issuance of common stock under dividend reinvestment plan

 

4,884

 

 

59

 

 

59

Distributions declared

 

 

 

 

(5,538)

 

(5,538)

Balance at September 30, 2020

 

18,365,913

$

19

$

260,649

$

(55,497)

$

205,171

Paid-In Capital

Common Stock

in Excess of

Distributable

Total Net

    

Shares

    

Amount

    

Par

    

Earnings

    

Assets

Balance at December 31, 2018

 

11,535,129

$

12

$

179,616

$

(45,371)

$

134,257

Issuance of common stock, net of offering costs

 

2,865,728

 

3

 

33,251

 

 

33,254

Net increase in net assets resulting from operations, net of excise tax:

 

  

 

  

 

  

 

  

 

  

Net investment income, net of excise tax

 

 

 

 

14,018

 

14,018

Net realized loss on investments

 

 

 

 

(3,871)

 

(3,871)

Net unrealized appreciation on investments

 

 

 

 

2,622

 

2,622

Issuance of common stock under dividend reinvestment plan

 

11,618

 

 

140

 

 

140

Distributions declared

 

 

 

 

(12,276)

 

(12,276)

Balance at September 30, 2019

 

14,412,475

15

213,007

(44,878)

168,144

Balance at December 31, 2019

15,563,290

16

226,660

(42,621)

184,055

Issuance of common stock, net of offering costs

 

2,787,160

 

3

 

33,813

 

 

33,816

Net increase in net assets resulting from operations, net of excise tax:

 

  

 

  

 

  

 

  

 

  

Net investment income, net of excise tax

 

16,849

16,849

Net realized gain on investments

 

 

 

 

3,945

 

3,945

Net unrealized depreciation on investments

 

 

 

 

(16,827)

 

(16,827)

Issuance of common stock under dividend reinvestment plan

 

15,463

 

 

176

 

 

176

Distributions declared

 

 

 

 

(16,843)

 

(16,843)

Balance at September 30, 2020

 

18,365,913

$

19

$

260,649

$

(55,497)

$

205,171

See Notes to Consolidated Financial Statements

5


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

For the nine months ended September 30, 

    

2020

    

2019

Cash flows from operating activities:

 

  

 

  

Net increase in net assets resulting from operations

$

3,967

$

12,769

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:

 

 

Amortization of debt issuance costs

 

782

 

522

Net realized (gain) loss on investments

 

(3,945)

 

3,871

Net unrealized depreciation (appreciation) on investments

 

16,827

 

(2,622)

Purchase of investments

 

(121,648)

 

(135,284)

Principal payments received on investments

 

111,129

 

101,117

Proceeds from sale of investments

8,200

2,439

Investment in controlled affiliate investments

 

 

(589)

Distributions from controlled affiliate investment

 

 

715

Dividends from controlled affiliate investment

 

(118)

 

(1,223)

Warrants received in settlement of fee income

 

(978)

 

Changes in assets and liabilities:

 

  

 

  

Decrease (increase) in interest receivable

 

519

 

(507)

Increase in end-of-term payments

 

(1,218)

 

(493)

Decrease in unearned income

 

(1,666)

 

(1,491)

Decrease (increase) in other assets

 

119

 

(516)

Increase (decrease) in other accrued expenses

 

118

 

(115)

(Decrease) increase in base management fee payable

 

(9)

 

48

(Decrease) increase in incentive fee payable

 

(148)

 

452

Net cash provided by (used in) operating activities

 

11,931

 

(20,907)

Cash flows from financing activities:

 

  

 

  

Proceeds from issuance of common stock, net of offering costs

 

33,816

 

33,254

Proceeds from Asset- Backed Notes

 

 

100,000

Advances on credit facilities

 

58,250

 

49,500

Repayment of credit facilities

 

(47,000)

 

(125,000)

Debt issuance costs

(890)

(1,808)

Distributions paid

 

(15,826)

 

(11,272)

Net cash provided by financing activities

 

28,350

 

44,674

Net increase in cash, cash equivalents and restricted cash

 

40,281

 

23,767

Cash, cash equivalents and restricted cash:

 

  

 

  

Beginning of period

 

17,385

 

12,591

End of period

$

57,666

$

36,358

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

6,296

$

5,801

Supplemental non-cash investing and financing activities:

 

  

 

  

Warrant investments received and recorded as unearned income

$

893

$

1,675

Distributions payable

$

5,510

$

4,324

Acquisition of controlled affiliate investment

$

16,498

$

End-of-term payments receivable

$

5,118

$

3,508

Non-cash income

$

4,701

$

2,798

Receivable resulting from sale of investment

$

$

500

Nine months ended September 30, 

    

2020

    

2019

Cash

$

34,130

$

16,958

Investments in money market funds

 

22,735

 

18,199

Restricted investments in money market funds

 

801

 

1,201

Total cash, cash equivalents and restricted cash

$

57,666

$

36,358

See Notes to Consolidated Financial Statements

6


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2020

(Dollars in thousands)

    

    

    

Principal

    

Cost of

    

Fair

Portfolio Company (1)(3)

Sector

Type of Investment (4)(7)(9)(10)

    

Amount

    

Investments (6)

    

Value

Non-Affiliate Investments — 148.4% (8)

 

  

 

  

 

  

 

  

 

  

Non-Affiliate Debt Investments — 142.9% (8)

 

  

 

  

 

  

 

  

Non-Affiliate Debt Investments — Life Science — 72.0% (8)

 

  

 

  

 

  

 

  

Castle Creek Pharmaceuticals Holdings, Inc.(2)(12)

Biotechnology

Term Loan (9.30% cash (Libor + 7.50%; Floor 9.30%), 5.00% ETP, Due 3/1/24)

$

5,000

$

4,879

$

4,879

Term Loan (9.30% cash (Libor + 7.50%; Floor 9.30%), 5.00% ETP, Due 3/1/24)

5,000

4,933

4,933

Term Loan (9.30% cash (Libor + 7.50%; Floor 9.30%), 5.00% ETP, Due 3/1/24)

5,000

4,933

4,933

Term Loan (9.30% cash (Libor + 7.50%; Floor 9.30%), 5.00% ETP, Due 3/1/24)

5,000

4,933

4,933

Celsion Corporation (2)(5)(12)

 

Biotechnology

 

Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 5.50% ETP, Due 4/1/23)

2,500

 

2,474

2,474

 

 

Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 5.50% ETP, Due 4/1/23)

 

2,500

2,523

2,482

Emalex Biosciences, Inc. (2)(12)

Biotechnology

Term Loan (9.75% cash (Libor + 7.90%; Floor 9.75%), 5.00% ETP, Due 12/1/23)

2,500

2,350

2,350

Term Loan (9.75% cash (Libor + 7.90%; Floor 9.75%), 5.00% ETP, Due 12/1/23)

2,500

2,453

2,453

Encore Dermatology, Inc. (2)(12)(13)

Biotechnology

Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 4.00% ETP, Due 4/1/23)

5,078

5,034

2,402

Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 4.00% ETP, Due 4/1/23)

5,000

4,957

2,403

Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 4.00% ETP, Due 4/1/23)

5,000

4,943

2,395

Espero BioPharma, Inc. (2)(12)(13)

 

Biotechnology

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), 5.10% ETP, Due 8/15/20) (11)

 

5,053

 

5,053

2,322

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), 5.10% ETP, Due 8/15/20) (11)

4,914

4,914

2,257

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)

200

200

91

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)

100

100

46

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)

100

100

46

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)

100

100

46

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)

150

150

69

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)

100

100

46

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)

50

50

22

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)

485

485

223

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 10/31/20)

70

70

32

LogicBio, Inc.(2)(5)(12)

Biotechnology

Term Loan (8.75% cash (Libor + 6.25%; Floor 8.75%), 4.50% ETP, Due 6/1/24)

5,000

4,975

4,975

Provivi, Inc. (2)(12)

Biotechnology

Term Loan (9.50% cash (Libor + 8.50%; Floor 9.50%), 5.50% ETP, Due 12/1/24)

5,000

4,757

4,757

Term Loan (9.50% cash (Libor + 8.50%; Floor 9.50%), 5.50% ETP, Due 12/1/24)

5,000

4,907

4,907

vTv Therapeutics Inc. (2)(5)(12)

 

Biotechnology

 

Term Loan (10.50% cash (Libor + 10.00%; Floor 10.50%), 10.17% ETP, Due 1/1/21)

 

656

 

653

653

Titan Pharmaceuticals, Inc. (2)(5)(12)

 

Drug Delivery

 

Term Loan (9.50% cash (Libor + 8.40%; Floor 9.50%), 5.00% ETP, Due 6/1/22)

 

1,600

 

1,554

 

1,400

Bardy Diagnostics, Inc. (2)(12)

Medical Device

Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)

5,000

4,939

4,939

Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)

5,000

4,939

4,939

Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)

1,000

988

988

Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)

1,000

988

988

Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)

1,000

988

988

Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)

1,000

988

988

Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)

1,000

988

988

See Notes to Consolidated Financial Statements

7


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2020

(Dollars in thousands)

    

    

    

Principal

    

Cost of

    

Fair

Portfolio Company (1)(3)

Sector

Type of Investment (4)(7)(9)(10)

    

Amount

Investments (6)

Value

Ceribell, Inc. (2)(12)

Medical Device

Term Loan (8.25% cash (Libor + 6.70%; Floor 8.25%), 5.50% ETP, Due 10/1/24)

5,000

4,874

4,874

Term Loan (8.25% cash (Libor + 6.70%; Floor 8.25%), 5.50% ETP, Due 10/1/24)

5,000

4,939

4,939

Conventus Orthopaedics, Inc. (2)(12)

 

Medical Device

 

Term Loan (9.25% cash (Libor + 8.00%; Floor 9.25%), 9.17% ETP, Due 7/1/25)

 

5,198

 

5,134

 

5,134

 

 

Term Loan (9.25% cash (Libor + 8.00%; Floor 9.25%), 9.17% ETP, Due 7/1/25)

 

5,198

 

5,134

5,134

CSA Medical, Inc. (2)(12)

 

Medical Device

 

Term Loan (10.00% cash (Libor + 8.20%; Floor 10.00%), 5.00% ETP, Due 1/1/24)

 

3,750

 

3,701

 

3,701

Term Loan (10.00% cash (Libor + 8.20%; Floor 10.00%), 5.00% ETP, Due 1/1/24)

250

247

247

Term Loan (10.00% cash (Libor + 8.20%; Floor 10.00%), 5.00% ETP, Due 3/1/24)

4,000

3,952

3,952

CVRx, Inc. (2)(12)

Medical Device

Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 10/1/24)

5,000

4,944

4,944

Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 10/1/24)

5,000

4,944

4,944

Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 10/1/24)

5,000

4,944

4,944

Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 10/1/24)

5,000

4,944

4,944

Lantos Technologies, Inc. (2)(12)(13)

 

Medical Device

 

Term Loan (10.00% cash (Libor + 8.43%; Floor 10.00%), 10.00% ETP, Due 9/30/20)

 

1,879

 

1,660

 

475

Term Loan (10.00% cash (Libor + 8.43%; Floor 10.00%), Due 9/30/20)

436

436

125

MacuLogix, Inc. (2)(12)

 

Medical Device

 

Term Loan (10.08% cash (Libor + 7.68%; Floor 10.08%), 5.50% ETP, Due 10/1/23)

 

7,500

 

7,415

 

7,158

 

 

Term Loan (10.08% cash (Libor + 7.68%; Floor 10.08%), 5.50% ETP, Due 10/1/23)

 

4,050

 

3,967

3,829

Magnolia Medical Technologies, Inc. (2)(12)

Medical Device

Term Loan (9.75% cash (Prime + 5.00%; Floor 9.75%), 4.00% ETP, Due 3/1/25)

5,000

4,862

4,862

Term Loan (9.75% cash (Prime + 5.00%; Floor 9.75%), 4.00% ETP, Due 3/1/25)

5,000

4,934

4,934

VERO Biotech LLC (2)(12)

 

Medical Device

 

Term Loan (9.25% cash (Libor + 8.00%; Floor 9.25%), 5.00% ETP, Due 1/1/22)

 

2,667

 

2,646

 

2,646

 

 

Term Loan (9.25% cash (Libor + 8.00%; Floor 9.25%), 5.00% ETP, Due 1/1/22)

 

2,667

 

2,646

2,646

Total Non-Affiliate Debt Investments — Life Science

 

  

 

163,721

 

147,779

Non-Affiliate Debt Investments — Technology — 63.7% (8)

Betabrand Corporation (2)(12)

Consumer-related Technologies

Term Loan (10.05% cash (Libor + 7.50%; Floor 10.05%), 5.75% ETP, Due 9/1/23)

4,250

4,164

4,164

Term Loan (10.05% cash (Libor + 7.50%; Floor 10.05%), 5.75% ETP, Due 9/1/23)

4,250

4,196

4,196

Term Loan (10.05% cash (Libor + 7.50%; Floor 10.05%), 5.75% ETP, Due 9/1/23)

1,125

1,095

1,095

Mohawk Group Holdings, Inc. (2)(5)(12)

    

Consumer-related Technologies

    

Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)

    

4,667

    

4,602

    

4,602

Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)

4,667

4,602

4,602

 

 

Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)

 

4,667

4,602

4,602

Updater, Inc.(2)(12)

Consumer-related Technologies

Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%),0.56% ETP, Due 12/20/24)

5,000

4,945

4,945

Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%), 0.56% ETP, Due 12/20/24)

5,000

4,945

4,945

Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%), 0.56% ETP, Due 12/20/24)

10,000

9,890

9,890

Canara, Inc. (2)(12)

Data Storage

Term Loan (11.00% cash (Libor + 8.60%; Floor 11.00%), 2.00% ETP, Due 8/1/23)

5,000

4,900

4,900

Term Loan (11.00% cash (Libor + 8.60%; Floor 11.00%), 2.00% ETP, Due 8/1/23)

5,000

4,899

4,899

Silk, Inc. (2)(12)

 

Data Storage

 

Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 4.00% ETP, Due 1/1/23)

 

4,667

 

4,620

 

4,620

 

 

Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 4.00% ETP, Due 1/1/23)

 

4,667

 

4,620

4,620

Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 4.00% ETP, Due 7/1/23)

5,000

4,874

4,874

IgnitionOne, Inc. (2)(12)(13)

 

Internet and Media

 

Term Loan (10.39% cash (Libor + 10.23%; Floor 10.23%), 6.00% ETP, Due 4/1/22)

 

1,874

 

1,789

 

1,789

 

 

Term Loan (10.39% cash (Libor + 10.23%; Floor 10.23%), 6.00% ETP, Due 4/1/22)

 

1,874

 

1,789

 

1,789

See Notes to Consolidated Financial Statements

8


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2020

(Dollars in thousands)

    

    

    

Principal

    

Cost of

    

Fair

Portfolio Company (1)(3)

Sector

Type of Investment (4)(7)(9)(10)

    

Amount

Investments (6)

Value

 

 

Term Loan (10.39% cash (Libor + 10.23%; Floor 10.23%), 6.00% ETP, Due 4/1/22)

 

1,987

 

1,708

 

1,708

 

 

Term Loan (10.39% cash (Libor + 10.23%; Floor 10.23%), 6.00% ETP, Due 4/1/22)

 

1,874

 

1,789

 

1,789

The NanoSteel Company, Inc. (2)(12)

 

Materials

 

Term Loan (11.00% cash (Libor + 8.50%; Floor 11.00%), 14.88% ETP, Due 6/1/22)

 

4,250

 

4,210

 

2,500

 

 

Term Loan (11.00% cash (Libor + 8.50%; Floor 11.00%), 14.88% ETP, Due 6/1/22)

 

4,250

 

4,210

2,500

BriteCore Holdings, Inc. (2)(12)

Software

Term Loan (10.50% cash (Prime + 7.25%; Floor 10.50%), 4.00% ETP, Due 10/1/24)

2,500

2,472

2,472

Term Loan (10.50% cash (Prime + 7.25%; Floor 10.50%), 4.00% ETP, Due 10/1/24)

2,500

2,472

2,472

Keypath Education, LLC (2)(12)

Software

Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 2.50% ETP, Due 10/1/24)

3,750

3,579

3,579

Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 2.50% ETP, Due 10/1/24)

3,750

3,681

3,681

Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 2.50% ETP, Due 10/1/24)

2,500

2,454

2,454

OutboundEngine, Inc. (2)(12)

Software

Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.36% ETP, Due 7/1/23)

4,000

3,944

3,944

Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.36% ETP, Due 7/1/23)

3,500

3,451

3,451

Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.36% ETP, Due 7/1/23)

500

503

495

Revinate, Inc. (2)(12)

Software

Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 4.00% ETP, Due 11/1/23)

4,000

4,030

3,813

Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 4.00% ETP, Due 11/1/23)

1,000

929

893

Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 4.00% ETP, Due 11/1/23)

5,000

4,942

4,751

Topia Mobility, Inc. (2)(12)

Software

Term Loan (10.00% cash (Prime + 6.75%; Floor 10.00%), 4.00% ETP, Due 9/1/24)

5,000

4,817

4,817

Term Loan (10.00% cash (Prime + 6.75%; Floor 10.00%), 4.00% ETP, Due 9/1/24)

5,000

4,895

4,895

xAd, Inc. (2)(12)

 

Software

 

Term Loan (10.00% cash (Libor + 8.70%; Floor 10.00%), 5.0% ETP, Due 1/1/22)

 

3,333

 

3,296

 

3,296

 

 

Term Loan (10.00% cash (Libor + 8.70%; Floor 10.00%), 5.0% ETP, Due 1/1/22)

 

3,333

 

3,296

3,296

Term Loan (10.00% cash (Libor + 8.70%; Floor 10.00%), 5.0% ETP, Due 1/1/22)

2,000

1,978

1,978

Term Loan (10.00% cash (Libor + 8.70%; Floor 10.00%), 5.0% ETP, Due 1/1/22)

 

1,333

 

1,318

1,318

Total Non-Affiliate Debt Investments — Technology

 

 

 

134,506

130,634

Non-Affiliate Debt Investments — Healthcare information and services — 7.2% (8)

 

  

 

  

 

  

Kate Farms, Inc. (2)(12)

 

Other Healthcare

 

Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)

 

5,000

 

4,935

 

4,935

Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)

5,000

4,935

4,935

Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)

2,500

2,463

2,463

 

 

Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)

 

2,500

 

2,463

2,463

Total Non-Affiliate Debt Investments — Healthcare information and services

 

  

 

14,796

 

14,796

Total Non- Affiliate Debt Investments

 

 

  

 

313,023

 

293,209

Non-Affiliate Warrant Investments — 5.2% (8)

 

  

 

  

 

  

 

  

Non-Affiliate Warrants — Life Science — 1.0% (8)

 

  

 

  

 

  

 

  

Alpine Immune Sciences, Inc. (5)(12)

 

Biotechnology

 

4,632 Common Stock Warrants

 

 

122

 

Castle Creek Pharmaceuticals, Inc. (2)(12)

Biotechnology

2,428 Preferred Stock Warrants

144

142

Celsion Corporation (2)(5)(12)

 

Biotechnology

 

295,053 Common Stock Warrants

 

 

65

 

9

Corvium, Inc. (2)(12)

Biotechnology

661,956 Preferred Stock Warrants

53

19

Emalex Biosciences, Inc. (2)(12)

Biotechnology

73,602 Preferred Stock Warrants

107

107

Encore Dermatology, Inc. (2)(12)

Biotechnology

1,511 Preferred Stock Warrants

113

Espero BioPharma, Inc. (2)(12)

 

Biotechnology

 

1,507,917 Common Stock Warrants

 

 

184

 

LogicBio, Inc. (2)(5)(12)

Biotechnology

7,843 Common Stock Warrants

8

3

Mustang Bio, Inc. (2)(5)(12)

Biotechnology

252,161 Common Stock Warrants

146

91

Rocket Pharmaceuticals Corporation (5)(12)

 

Biotechnology

 

7,051 Common Stock Warrants

 

 

17

 

15

Provivi, Inc. (2)(12)

Biotechnology

123,457 Preferred Stock Warrants

147

336

Strongbridge U.S. Inc. (2)(5)(12)

 

Biotechnology

 

160,714 Common Stock Warrants

 

 

72

 

23

See Notes to Consolidated Financial Statements

9


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2020

(Dollars in thousands)

    

    

    

    

Cost of

    

Fair

Portfolio Company (1)(3)

Sector

Type of Investment (4)(7)(9)(10)

    

Investments (6)

Value

vTv Therapeutics Inc. (2)(5)(12)

 

Biotechnology

 

95,293 Common Stock Warrants

 

 

44

 

Titan Pharmaceuticals, Inc. (2)(5)(12)

 

Drug Delivery

 

373,333 Common Stock Warrants

 

 

95

 

AccuVein Inc. (2)(12)

 

Medical Device

 

1,174,881 Preferred Stock Warrants

 

 

21

 

25

Aerin Medical, Inc. (2)(12)

 

Medical Device

 

1,818,183 Preferred Stock Warrants

 

 

66

 

458

Bardy Diagnostics, Inc. (2)(12)

Medical Device

346,154 Preferred Stock Warrants

56

54

Ceribell, Inc. (2)(12)

Medical Device

117,521 Preferred Stock Warrants

50

50

Conventus Orthopaedics, Inc. (2)(12)

 

Medical Device

 

6,313,826 Preferred Stock Warrants

 

 

149

 

139

CSA Medical, Inc. (2)(12)

 

Medical Device

 

1,375,727 Preferred Stock Warrants

 

 

153

 

115

CVRx, Inc.(2)(12)

Medical Device

750,000 Preferred Stock Warrants

76

74

Lantos Technologies, Inc. (2)(12)

 

Medical Device

 

560,832 Preferred Stock Warrants

 

 

253

 

MacuLogix, Inc. (2)(12)

 

Medical Device

 

454,460 Preferred Stock Warrants

 

 

238

 

91

Magnolia Medical Technologies, Inc. (2)(12)

Medical Device

283,772 Preferred Stock Warrants

64

64

Meditrina, Inc. (2)(12)

Medical Device

221,510 Preferred Stock Warrants

83

78

VERO Biotech LLC (2)(12)

    

Medical Device

    

408 Common Stock Warrants

    

    

53

    

49

Total Non-Affiliate Warrants — Life Science

2,579

1,942

Non-Affiliate Warrants — Technology — 3.4% (8)

Intelepeer Holdings, Inc. (2)(12)

 

Communications

 

3,078,084 Preferred Stock Warrants

 

 

178

 

147

PebblePost, Inc. (2)(12)

 

Communications

 

598,850 Preferred Stock Warrants

 

 

92

 

142

Betabrand Corporation (2)(12)

Consumer-related Technologies

261,198 Preferred Stock Warrants

106

79

Caastle, Inc. (2)(12)

Consumer-related Technologies

268,591 Preferred Stock Warrants

68

820

Mohawk Group Holdings, Inc. (2)(5)(12)

 

Consumer-related Technologies

76,923 Common Stock Warrants

 

 

192

 

13

Updater, Inc.(2)(12)

Consumer-related Technologies

108,333 Common Stock Warrants

34

35

Canara, Inc. (2)(12)

Data Storage

500,000 Preferred Stock Warrants

243

702

Silk, Inc. (2)(12)

 

Data Storage

 

26,816,363 Preferred Stock Warrants

 

 

234

 

216

Global Worldwide LLC (2)(12)

Internet and Media

245,810 Preferred Stock Warrants

75

7

Rocket Lawyer Incorporated (2)(12)

 

Internet and Media

 

261,721 Preferred Stock Warrants

 

 

90

 

70

Skillshare, Inc. (2)(12)

Internet and Media

139,073 Preferred Stock Warrants

162

2,406

The NanoSteel Company, Inc. (2)(12)

 

Materials

 

818,807 Preferred Stock Warrants

 

 

234

 

Kinestral, Inc. (2)(12)

 

Power Management

 

5,002,574 Preferred Stock Warrants

 

 

1,585

 

1,315

Avalanche Technology, Inc. (2)(12)

 

Semiconductors

 

6,753 Preferred Stock Warrants

 

 

101

 

Soraa, Inc. (2)(12)

 

Semiconductors

 

203,616 Preferred Stock Warrants

 

 

80

 

BriteCore Holdings, Inc. (2)(12)

Software

12,857 Preferred Stock Warrants

5

5

Education Elements, Inc. (2)(12)

 

Software

 

238,121 Preferred Stock Warrants

 

 

30

 

22

Keypath Education, Inc.(2)(12)

Software

900,000 Preferred Stock Warrants

160

157

Lotame Solutions, Inc. (2)(12)

 

Software

 

288,115 Preferred Stock Warrants

 

 

24

 

268

OutboundEngine, Inc. (2)(12)

 

Software

 

620,000 Preferred Stock Warrants

 

 

80

 

10

Revinate, Inc. (2)(12)

Software

615,475 Preferred Stock Warrants

44

42

Riv Data Corp. (2)(12)

 

Software

 

321,428 Preferred Stock Warrants

 

 

12

 

291

ShopKeep.com, Inc. (2)(12)

 

Software

 

193,962 Preferred Stock Warrants

 

 

118

 

105

SIGNiX, Inc. (12)

 

Software

 

133,560 Preferred Stock Warrants

 

 

225

 

Skyword, Inc. (12)

 

Software

 

301,055 Preferred Stock Warrants

 

 

48

 

3

Topia Mobility, Inc. (2)(12)

Software

3,049,607 Preferred Stock Warrants

138

138

Weblinc Corporation (2)(12)

 

Software

 

195,122 Preferred Stock Warrants

 

 

42

 

xAd, Inc. (2)(12)

 

Software

 

4,343,348 Preferred Stock Warrants

 

 

177

 

Total Non-Affiliate Warrants — Technology

 

 

4,577

 

6,993

Non-Affiliate Warrants — Sustainability — 0.0% (8)

 

  

 

 

  

 

  

Tigo Energy, Inc. (2)(12)

 

Energy Efficiency

 

804,604 Preferred Stock Warrants

 

 

100

 

Total Non-Affiliate Warrants — Sustainability

 

 

 

100

 

Non-Affiliate Warrants — Healthcare information and services — 0.8% (8)

ProterixBio, Inc. (2)(12)

Diagnostics

2,676 Common Stock Warrants

42

  

Kate Farms, Inc. (2)(12)

Other Healthcare

82,965 Preferred Stock Warrants

101

1,011

Watermark Medical, Inc. (2)(12)

 

Other Healthcare

 

27,373 Preferred Stock Warrants

 

 

74

 

Ontrak, Inc. (2)(5)(12)

Software

10,906 Common Stock Warrants

44

455

Medsphere Systems Corporation (2)(12)

 

Software

 

7,097,792 Preferred Stock Warrants

 

 

60

 

189

Total Non-Affiliate Warrants — Healthcare information and services

 

 

321

 

1,655

Total Non-Affiliate Warrants

 

 

 

7,577

 

10,590

Non-Affiliate Other Investments — 0.1% (8)

 

  

 

  

 

 

  

 

  

ZetrOZ, Inc. (12)

 

Medical Device

 

Royalty Agreement

 

 

14

 

200

Total Non-Affiliate Other Investments

 

 

 

 

14

 

200

See Notes to Consolidated Financial Statements

10


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2020

(Dollars in thousands)

    

    

    

Principal

    

Cost of

    

Fair

Portfolio Company (1)(3)

Sector

Type of Investment (4)(7)(9)(10)

    

Amount

Investments (6)

Value

Non-Affiliate Equity — 0.2% (8)

 

  

 

  

 

 

  

 

  

Sunesis Pharmaceuticals, Inc. (5)

 

Biotechnology

 

1,308 Common Stock

 

 

84

 

2

SnagAJob.com, Inc. (12)

 

Consumer-related Technologies

 

82,974 Common Stock

 

 

9

 

82

Zeta Global Holdings Corp. (2)(12)

Internet and Media

18,405 Common Stock

240

240

Formetrix, Inc. (2)(12)

 

Materials

 

74,286 Common Stock

 

 

74

 

Clarabridge, Inc. (12)

 

Software

 

17,142 Common Stock

 

 

13

 

36

Total Non-Affiliate Equity

 

 

 

420

 

360

Total Non-Affiliate Portfolio Investment Assets

 

 

 

$

321,034

 

$

304,359

Non-controlled Affiliate Investments — 3.6% (8)

 

  

 

  

 

  

 

 

Non-controlled Affiliate Debt Investments — Technology — 2.8% (8)

 

  

 

  

 

  

Decisyon, Inc. (12)

 

Software

 

Term Loan (12.50% cash (Libor + 12.308%; Floor 12.50%), 12.00% ETP, Due 6/1/21)

$

1,182

$

1,182

$

1,139

 

 

Term Loan (12.50% cash (Libor + 12.308%; Floor 12.50%), 12.00% ETP, Due 6/1/21)

 

646

 

636

614

 

Term Loan (12.02% cash, Due 6/1/21)

227

227

219

 

 

Term Loan (12.03% cash, Due 6/1/21)

 

227

 

227

219

 

 

Term Loan (12.24% cash, Due 6/1/21)

 

685

 

685

661

 

 

Term Loan (13.08% cash, Due 6/1/21)

 

277

 

277

266

 

 

Term Loan (13.10% cash, Due 6/1/21)

 

184

 

184

177

StereoVision Imaging, Inc. (2)(12)

 

Software

 

Term Loan (8.50% Cash (Libor + 7.03%; Floor 8.50%), 14.06% ETP, Due 1/1/22)

 

2,783

 

2,382

 

2,382

Total Non-controlled Affiliate Debt Investments — Technology

 

 

  

 

5,800

 

5,677

Non-controlled Affiliate Warrants — Technology — 0.0% (8)

 

  

 

  

 

  

 

  

Decisyon, Inc. (12)

 

Software

 

82,967 Common Stock Warrants

 

 

46

 

Total Non-controlled Affiliate Warrants — Technology

 

 

  

 

46

 

Non-controlled Affiliate Equity — Technology — 0.8% (8)

  

  

  

  

Decisyon, Inc. (12)

 

Software

45,365,936 Common Stock

 

185

 

75

StereoVision Imaging, Inc. (2)(12)

 

Software

1,943,572 Common Stock

 

791

 

1,639

Total Non-controlled Affiliate Equity

 

 

 

976

 

1,714

Total Non-controlled Affiliate Portfolio Investment Assets

 

$

6,822

 

$

7,391

Total Portfolio Investment Assets — 152.0% (8)

 

$

327,856

 

$

311,750

Short Term Investments — Unrestricted Investments — 11.1% (8)

US Bank Money Market Deposit Account

$

22,735

$

22,735

Total Short Term Investments —Unrestricted Investments

$

22,735

 

$

22,735

Short Term Investments — Restricted Investments—0.4% (8)

US Bank Money Market Deposit Account

$

801

$

801

Total Short Term Investments —Restricted Investments

$

801

 

$

801


(1)All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States.

(2)Has been pledged as collateral under the revolving credit facility (the “Key Facility”) with KeyBank National Association (“Key”), the Note Funding Agreement (the “NYL Facility”) with several entities owned or affiliated with New York Life Insurance Company (“Noteholders”) and/or the term debt securitization in connection with which an affiliate of the Company made an offering of $100.0 million in aggregate principal amount of fixed rate asset-backed notes that were issued in conjunction with the $160.0 million securitization of secured loans the Company completed on August 13, 2019 (“the Asset-Backed Notes”).

(3)All non-affiliate investments are investments in which the Company owns less than 5% of the voting securities of the portfolio company. All non-controlled affiliate investments are investments in which the Company owns 5% or more of the voting securities of the portfolio company but not more than 25% of the voting securities of the portfolio company. All controlled affiliate investments are investments in which the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement).

(4)All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include end-of-term payments (“ETPs”), and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt investments are at variable rates for the term of the debt investment, unless otherwise indicated. All debt investments based on the London InterBank Offered Rate (“LIBOR”) are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of September 30, 2020 is provided.

(5)Portfolio company is a public company.

(6)For debt investments, represents principal balance less unearned income.

(7)Warrants, Equity and Other Investments are non-income producing.

(8)Value as a percent of net assets.

See Notes to Consolidated Financial Statements

11


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2020

(Dollars in thousands)

(9)The Company did not have any non-qualifying assets under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act) as of September 30, 2020. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.

(10)ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee the Company may pay its Advisor will be based on income that the Company has not yet received in cash.

(11)Debt investment has a payment-in-kind (“PIK”) feature.

(12)The fair value of the investment was valued using significant unobservable inputs.

(13)Debt investment is on non-accrual status as of September 30, 2020.

See Notes to Consolidated Financial Statements

12


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2019

(Dollars in thousands)

    

    

    

Principal

    

Cost of

    

Fair

Portfolio Company (1)(3)

    

Sector

    

Type of Investment (4)(7)(9)(10)

    

Amount

    

Investments (6)

    

Value

Non-Affiliate Investments — 160.0% (8)

 

  

 

  

 

  

 

  

 

  

Non-Affiliate Debt Investments — 153.5% (8)

 

  

 

  

 

  

 

  

 

  

Non-Affiliate Debt Investments — Life Science — 55.9% (8)

 

  

 

  

 

  

 

  

Celsion Corporation (2)(5)(12)

 

Biotechnology

 

Term Loan (9.98% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)

$

2,500

$

2,464

$

2,464

 

 

Term Loan (9.98% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)

 

2,500

 

2,464

2,464

Encore Dermatology, Inc. (2)(12)

Biotechnology

Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 3.00% ETP, Due 4/1/23)

5,000

4,929

4,929

Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 3.00% ETP, Due 4/1/23)

5,000

4,929

4,929

Espero BioPharma, Inc. (2)(12)

 

Biotechnology

 

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), 5.10% ETP, Due 3/31/20) (11)

 

5,053

 

5,053

 

5,053

Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), 5.10% ETP, Due 3/31/20) (11)

4,802

4,802

4,802

LogicBio, Inc.(2)(5)(12)

Biotechnology

Term Loan (8.75 % cash (Libor + 6.25%; Floor 8.75%), 4.50% ETP, Due 6/1/24

5,000

4,970

4,970

Mustang Bio, Inc. (2)(5)(12)

Biotechnology

Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)

5,000

4,827

4,827

Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)

5,000

4,924

4,924

vTv Therapeutics Inc. (2)(5)(12)

 

Biotechnology

 

Term Loan (11.69% cash (Libor + 10.00%; Floor 10.50%), 6.00% ETP, Due 5/1/20)

 

1,042

 

1,034

 

1,034

 

 

Term Loan (11.69% cash (Libor + 10.00%; Floor 10.50%), 6.00% ETP, Due 10/1/20)

 

1,406

 

1,393

1,393

Titan Pharmaceuticals, Inc. (2)(5)(12)

 

Drug Delivery

 

Term Loan (10.09% cash (Libor + 8.40%; Floor 9.50%), 5.00% ETP, Due 6/1/22)

 

1,600

 

1,533

 

1,533

Conventus Orthopaedics, Inc. (2)(12)

 

Medical Device

 

Term Loan (9.69% cash (Libor + 8.00%; Floor 9.25%), 8.33% ETP, Due 7/1/23)

 

5,311

 

5,233

 

5,233

 

 

Term Loan (9.69% cash (Libor + 8.00%; Floor 9.25%), 8.33% ETP, Due 7/1/23)

 

5,311

 

5,233

5,233

CSA Medical, Inc. (2)(12)

 

Medical Device

 

Term Loan (10.00% cash (Libor + 8.20%; Floor 10.00%), 5.00% ETP, Due 1/1/24)

 

3,750

 

3,637

 

3,637

Term Loan (10.00% cash (Libor + 8.20%; Floor 10.00%), 5.00% ETP, Due 1/1/24)

250

246

246

CVRx, Inc. (2)(12)

Medical Device

Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 4/1/24)

5,000

4,934

4,934

Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 4/1/24)

5,000

4,934

4,934

Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 4/1/24)

5,000

4,934

4,934

Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 4/1/24)

5,000

4,934

4,934

Lantos Technologies, Inc. (2)(12)

 

Medical Device

 

Term Loan (10.12% cash (Libor + 8.43%; Floor 10.00%), 10.00% ETP, Due 4/1/21)

 

3,433

 

3,143

 

3,143

MacuLogix, Inc. (2)(12)

 

Medical Device

 

Term Loan (10.08% cash (Libor + 7.68%; Floor 10.08%), 4.00% ETP, Due 10/1/23)

 

7,500

 

7,356

 

7,356

 

 

Term Loan (10.08% cash (Libor + 7.68%; Floor 10.08%), 4.00% ETP, Due 10/1/23)

 

4,050

 

3,993

3,993

Meditrina, Inc. (2)(12)

Medical Device

Term Loan (9.70% cash (Libor + 7.10%; Floor 9.70%), 4.00% ETP, Due 5/1/20)

3,000

2,966

2,966

VERO Biotech LLC (2)(12)

 

Medical Device

 

Term Loan (9.69% cash (Libor + 8.00%; Floor 9.25%), 5.00% ETP, Due 1/1/22)

 

4,000

 

3,967

 

3,967

 

 

Term Loan (10.35% cash (Libor + 8.00%; Floor 9.25%), 5.00% ETP, Due 1/1/22)

 

4,000

 

3,967

3,967

Total Non-Affiliate Debt Investments — Life Science

 

 

  

 

102,799

 

102,799

Non-Affiliate Debt Investments — Technology — 84.8% (8)

Audacy Corporation (2)(12)(15)

 

Communications

 

Term Loan (9.59% cash (Libor + 7.90%; Floor 9.50%), 5.00% ETP, Due 7/1/22)

 

3,641

 

3,580

 

1,300

Term Loan (9.59% cash (Libor + 7.90%; Floor 9.50%), Due 2/1/20)

550

550

200

Betabrand Corporation (2)(12)

Consumer-related Technologies

Term Loan (10.05% cash (Libor + 7.50%; Floor 10.05%), 4.50% ETP, Due 9/1/23)

4,250

4,115

4,115

Term Loan (10.05% cash (Libor + 7.50%; Floor 10.05%), 4.50% ETP, Due 9/1/23)

4,250

4,182

4,182

Mohawk Group Holdings, Inc. (2)(5)(12)

    

Consumer-related Technologies

    

Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)

    

5,000

    

4,914

    

4,914

Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)

5,000

4,914

4,914

 

 

Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)

 

5,000

4,914

4,914

Updater, Inc.(2)(12)

Consumer-related Technologies

Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%),0.56% ETP, Due 12/20/24)

5,000

4,935

4,935

Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%), 0.56% ETP, Due 12/20/24)

5,000

4,935

4,935

See Notes to Consolidated Financial Statements

13


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2019

(Dollars in thousands)

    

    

    

Principal

    

Cost of

    

Fair

Portfolio Company (1)(3)

Sector

Type of Investment (4)(7)(9)(10)

    

Amount

Investments (6)

Value

Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%), 0.56% ETP, Due 12/20/24)

10,000

9,870

9,870

Canara, Inc. (2)(12)

Data Storage

Term Loan (11.00% cash (Libor + 8.60%; Floor 11.00%), 1.00% ETP, Due 2/1/23)

5,000

4,868

4,868

Term Loan (11.00% cash (Libor + 8.60%; Floor 11.00%), 1.00% ETP, Due 2/1/23)

5,000

4,868

4,868

Kaminario, Inc. (2)(12)

 

Data Storage

 

Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 3.00% ETP, Due 1/1/23)

 

5,000

 

4,938

 

4,938

 

 

Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 3.00% ETP, Due 1/1/23)

 

5,000

 

4,938

4,938

Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 3.00% ETP, Due 1/1/23)

5,000

4,840

4,840

IgnitionOne, Inc. (2)(12)

 

Internet and Media

 

Term Loan (11.92% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)

 

3,000

 

2,911

 

2,911

 

 

Term Loan (11.92% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)

 

3,000

 

2,911

 

2,911

 

 

Term Loan (11.92% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)

 

3,000

 

2,812

 

2,812

 

 

Term Loan (11.92% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)

 

3,000

 

2,911

 

2,911

Skillshare, Inc.(2)(12)

Internet and Media

Term Loan (9.50% cash (Libor + 7.50%; Floor 9.50%), 5.00% ETP, Due 1/1/25)

3,000

2,747

2,747

Term Loan (9.50% cash (Libor + 7.50%; Floor 9.50%), 5.00% ETP, Due 1/1/25)

3,000

2,946

2,946

Term Loan (9.50% cash (Libor + 7.50%; Floor 9.50%), 5.00% ETP, Due 1/1/25)

3,000

2,946

2,946

Verve Wireless, Inc. (2)(12)

 

Internet and Media

 

Term Loan (15.80% cash (Libor + 8.80%; Floor 10.80%), 3.33% ETP, Due 9/1/21)

 

2,400

 

2,320

 

2,320

The NanoSteel Company, Inc. (2)(12)

 

Materials

 

Term Loan (11.00% cash (Libor + 8.50%; Floor 11.00%), 4.00% ETP, Due 6/1/22)

 

4,250

 

4,205

 

4,205

 

 

Term Loan (11.00% cash (Libor + 8.50%; Floor 11.00%), 4.00% ETP, Due 6/1/22)

 

4,250

 

4,205

4,205

Kinestral Technologies, Inc.(2)(12)

Power Management

Term Loan (9.95% cash (Libor + 7.75%; Floor 9.95%), 5.00% ETP, Due 12/1/22)

6,000

5,442

5,442

Term Loan (9.95% cash (Libor + 7.75%; Floor 9.95%), 5.00% ETP, Due 12/1/22)

6,000

5,765

5,765

Bridge2 Solutions, LLC. (2)(12)

 

Software

 

Term Loan (11.00% cash (Libor + 8.40%; Floor 11.00%), 2.00% ETP, Due 6/1/23)

 

6,250

 

6,120

 

6,120

 

 

Term Loan (11.00% cash (Libor + 8.40%; Floor 11.00%), 2.00% ETP, Due 6/1/23)

 

6,250

 

6,120

6,120

Term Loan (11.00% cash (Libor + 8.40%; Floor 11.00%), 2.00% ETP, Due 9/1/23)

2,000

1,926

1,926

New Signature US, Inc. (2)(12)(13)

 

Software

 

Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 7/1/22)

 

2,750

 

2,721

 

2,721

Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 2/1/23)

1,000

987

987

OutboundEngine, Inc. (2)(12)

Software

Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)

4,000

3,929

3,929

Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)

3,500

3,438

3,438

Revinate, Inc. (2)(12)

Software

Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 4.00% ETP, Due 6/1/23)

1,000

928

928

Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 4.00% ETP, Due 11/1/23)

5,000

4,932

4,932

SIGNiX, Inc. (12)(15)

 

Software

 

Term Loan (12.69% cash (Libor + 11.00%; Floor 11.50%), 8.67% ETP, Due 2/1/20)

 

1,571

 

1,569

 

500

xAd, Inc. (2)(12)

 

Software

 

Term Loan (10.39% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21)

 

4,583

 

4,533

 

4,533

 

 

Term Loan (10.39% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21)

 

4,583

 

4,533

4,533

Term Loan (10.39% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21)

2,750

2,720

2,720

Term Loan (10.39% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21)

 

1,833

 

1,813

1,813

Total Non-Affiliate Debt Investments — Technology

 

 

 

 

159,751

156,052

Non-Affiliate Debt Investments — Healthcare information and services — 12.8% (8)

 

  

 

  

 

  

Kate Farms, Inc. (2)(12)

 

Other Healthcare

 

Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)

 

5,000

 

4,852

 

4,852

 

 

Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)

 

5,000

 

4,919

4,919

See Notes to Consolidated Financial Statements

14


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2019

(Dollars in thousands)

    

    

    

Principal

    

Cost of

    

Fair

Portfolio Company (1)(3)

Sector

Type of Investment (4)(7)(9)(10)

Amount

Investments (6)

Value

HealthEdge Software, Inc. (2)(12)

 

Software

 

Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 7/1/22)

 

3,571

 

3,533

 

3,533

 

 

Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 1/1/23)

 

3,214

 

3,180

3,180

 

 

Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 4/1/23)

 

3,482

 

3,444

3,444

 

 

Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 1/1/24)

 

3,750

 

3,707

3,707

Total Non-Affiliate Debt Investments — Healthcare information and services

 

  

 

23,635

 

23,635

Total Non- Affiliate Debt Investments

 

 

  

 

286,185

 

282,486

Non-Affiliate Warrant Investments — 5.9% (8)

 

  

 

  

 

  

 

  

 

  

Non-Affiliate Warrants — Life Science — 0.7% (8)

 

  

 

  

 

  

 

  

 

  

Alpine Immune Sciences, Inc. (5)(12)

 

Biotechnology

 

4,632 Common Stock Warrants

 

 

122

 

Celsion Corporation (2)(5)(12)

 

Biotechnology

 

95,057 Common Stock Warrants

 

 

65

 

6

Corvium, Inc. (2)(12)

Biotechnology

661,956 Preferred Stock Warrants

52

20

Encore Dermatology, Inc. (2)(12)

Biotechnology

1,510,878 Preferred Stock Warrants

113

Espero BioPharma, Inc. (2)(5)(12)

 

Biotechnology

 

1,507,917 Common Stock Warrants

 

 

184

 

LogicBio, Inc. (2)(5)(12)

Biotechnology

7,843 Common Stock Warrants

8

3

Mustang Bio, Inc. (2)(5)(12)

Biotechnology

216,138 Common Stock Warrants

140

222

Rocket Pharmaceuticals Corporation (5)(12)

 

Biotechnology

 

7,051 Common Stock Warrants

 

 

17

 

16

Palatin Technologies, Inc. (2)(5)(12)

 

Biotechnology

 

274,725 Common Stock Warrants

 

 

20

 

16

Revance Therapeutics, Inc. (5)(12)

 

Biotechnology

 

34,113 Common Stock Warrants

 

 

68

 

77

Strongbridge U.S. Inc. (2)(5)(12)

 

Biotechnology

 

160,714 Common Stock Warrants

 

 

72

 

25

Sunesis Pharmaceuticals, Inc. (5)(12)

 

Biotechnology

 

2,050 Common Stock Warrants

 

 

5

 

vTv Therapeutics Inc. (2)(5)(12)

 

Biotechnology

 

95,293 Common Stock Warrants

 

 

44

 

Titan Pharmaceuticals, Inc. (2)(5)(12)

 

Drug Delivery

 

373,333 Common Stock Warrants

 

 

95

 

AccuVein Inc. (2)(12)

 

Medical Device

 

1,174,881 Preferred Stock Warrants

 

 

24

 

29

Aerin Medical, Inc. (2)(12)

 

Medical Device

 

1,818,183 Preferred Stock Warrants

 

 

66

 

69

Conventus Orthopaedics, Inc. (2)(12)

 

Medical Device

 

1,145,000 Preferred Stock Warrants

 

 

149

 

158

CSA Medical, Inc. (12)

 

Medical Device

 

1,260,345 Preferred Stock Warrants

 

 

147

 

146

CVRx, Inc.(2)(12)

Medical Device

750,000 Preferred Stock Warrants

76

84

Lantos Technologies, Inc. (2)(12)

 

Medical Device

 

560,832 Preferred Stock Warrants

 

 

253

 

44

MacuLogix, Inc. (2)(12)

 

Medical Device

 

454,460 Preferred Stock Warrants

 

 

238

 

154

Meditrina, Inc. (2)(12)

Medical Device

221,510 Preferred Stock Warrants

83

85

NinePoint Medical, Inc. (2)(12)

 

Medical Device

 

29,102 Preferred Stock Warrants

 

 

33

 

6

VERO Biotech LLC (2)(12)

    

Medical Device

    

408 Common Stock Warrants

    

    

53

    

55

Total Non-Affiliate Warrants — Life Science

2,127

1,215

Non-Affiliate Warrants — Technology — 4.8% (8)

Audacy Corporation (2)(12)

 

Communications

 

1,545,575 Preferred Stock Warrants

 

 

193

 

Intelepeer Holdings, Inc. (2)(12)

 

Communications

 

2,134,617 Preferred Stock Warrants

 

 

145

 

75

PebblePost, Inc. (2)(12)

 

Communications

 

598,850 Preferred Stock Warrants

 

 

93

 

159

Betabrand Corporation (2)(12)

Consumer-related Technologies

248,210 Preferred Stock Warrants

101

104

Caastle, Inc. (2)(12)

Consumer-related Technologies

268,591 Preferred Stock Warrants

67

832

Le Tote, Inc. (2)(12)

 

Consumer-related Technologies

202,974 Preferred Stock Warrants

 

 

63

 

361

Mohawk Group Holdings, Inc. (2)(12)

 

Consumer-related Technologies

76,923 Common Stock Warrants

 

 

195

 

2

Rhapsody International Inc. (2)(12)

 

Consumer-related Technologies

852,273 Common Stock Warrants

 

 

164

 

Updater, Inc.(2)(12)

Consumer-related Technologies

108,333 Common Stock Warrants

34

34

Canara, Inc. (2)(12)

Data Storage

500,000 Preferred Stock Warrants

242

288

Kaminario, Inc. (2)(12)

 

Data Storage

 

18,616,925 Preferred Stock Warrants

 

 

234

 

272

Global Worldwide LLC (2)(12)

Internet and Media

245,810 Preferred Stock Warrants

75

9

IgnitionOne, Inc. (2)(12)

 

Internet and Media

 

262,910 Preferred Stock Warrants

 

 

672

 

Rocket Lawyer Incorporated (2)(12)

 

Internet and Media

 

261,721 Preferred Stock Warrants

 

 

91

 

77

Skillshare, Inc. (2)(12)

Internet and Media

173,717 Preferred Stock Warrants

162

162

Verve Wireless, Inc. (2)(12)

 

Internet and Media

 

112,805 Common Stock Warrants

 

 

121

 

The NanoSteel Company, Inc. (2)(12)

 

Materials

 

467,277 Preferred Stock Warrants

 

 

233

 

7

Kinestral, Inc. (2)(12)

 

Power Management

 

3,454,774 Preferred Stock Warrants

 

 

606

 

606

Avalanche Technology, Inc. (2)(12)

 

Semiconductors

 

202,602 Preferred Stock Warrants

 

 

101

 

170

Soraa, Inc. (2)(12)

 

Semiconductors

 

203,616 Preferred Stock Warrants

 

 

80

 

Bridge2 Solutions, Inc. (2)(12)

 

Software

 

172,958 Common Stock Warrants

 

 

768

 

2,230

BSI Platform Holdings, LLC (2)(12)(13)

 

Software

 

187,500 Preferred Stock Warrants

 

 

26

 

20

Clarabridge, Inc. (12)

 

Software

 

53,486 Preferred Stock Warrants

 

 

17

 

106

Education Elements, Inc. (2)(12)

 

Software

 

238,121 Preferred Stock Warrants

 

 

28

 

23

Lotame Solutions, Inc. (2)(12)

 

Software

 

288,115 Preferred Stock Warrants

 

 

22

 

280

OutboundEngine, Inc. (2)(12)

 

Software

 

600,000 Preferred Stock Warrants

 

 

77

 

83

Revinate, Inc. (2)(12)

Software

459,770 Preferred Stock Warrants

36

38

Riv Data Corp. (2)(12)

 

Software

 

321,428 Preferred Stock Warrants

 

 

12

 

253

See Notes to Consolidated Financial Statements

15


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2019

(Dollars in thousands)

    

    

    

Principal

    

Cost of

    

Fair

Portfolio Company (1)(3)

Sector

Type of Investment (4)(7)(9)(10)

Amount

Investments (6)

Value

ShopKeep.com, Inc. (2)(12)

 

Software

 

193,962 Preferred Stock Warrants

 

 

118

 

116

SIGNiX, Inc. (12)

 

Software

 

133,560 Preferred Stock Warrants

 

 

225

 

Skyword, Inc. (12)

 

Software

 

301,056 Preferred Stock Warrants

 

 

48

 

4

Sys-Tech Solutions, Inc. (2)(12)

 

Software

 

375,000 Preferred Stock Warrants

 

 

242

 

2,331

Weblinc Corporation (2)(12)

 

Software

 

195,122 Preferred Stock Warrants

 

 

42

 

xAd, Inc. (2)(12)

 

Software

 

4,343,348 Preferred Stock Warrants

 

 

177

 

249

Total Non-Affiliate Warrants — Technology

 

 

5,510

 

8,891

Non-Affiliate Warrants — Sustainability — 0.1% (8)

 

  

 

 

  

 

  

Tigo Energy, Inc. (2)(12)

 

Energy Efficiency

 

804,604 Preferred Stock Warrants

 

 

100

 

Total Non-Affiliate Warrants — Sustainability

 

 

 

100

 

Non-Affiliate Warrants — Healthcare information and services — 0.4% (8)

ProterixBio, Inc. (2)(12)

Diagnostics

2,676 Common Stock Warrants

42

  

Kate Farms, Inc. (2)(12)

Other Healthcare

69,137 Preferred Stock Warrants

86

86

Watermark Medical, Inc. (2)(12)

 

Other Healthcare

 

27,373 Preferred Stock Warrants

 

 

74

 

63

Catasys, Inc. (2)(5)(12)

Software

51,185 Common Stock Warrants

193

304

HealthEdge Software, Inc. (2)(12)

 

Software

 

205,481 Preferred Stock Warrants

 

 

84

 

73

Medsphere Systems Corporation (2)(12)

 

Software

 

7,097,792 Preferred Stock Warrants

 

 

60

 

197

Total Non-Affiliate Warrants — Healthcare information and services

 

 

539

 

723

Total Non-Affiliate Warrants

 

 

 

8,276

 

10,829

Non-Affiliate Other Investments — 0.3% (8)

 

  

 

  

 

 

  

 

  

ZetrOZ, Inc. (12)

 

Medical Device

 

Royalty Agreement

 

 

61

 

500

Total Non-Affiliate Other Investments

 

 

 

 

61

 

500

Non-Affiliate Equity — 0.3% (8)

 

  

 

  

 

 

  

 

  

Palatin Technologies, Inc. (2)(5)

 

Biotechnology

 

5,249 Common Stock

 

 

31

 

4

Revance Therapeutics, Inc.(5)

 

Biotechnology

 

5,125 Common Stock

 

 

73

 

83

Sunesis Pharmaceuticals, Inc. (5)

 

Biotechnology

 

13,082 Common Stock

 

 

83

 

4

SnagAJob.com, Inc. (12)

 

Consumer-related Technologies

 

82,974 Common Stock

 

 

9

 

84

Verve Wireless, Inc. (2)(12)

 

Internet and Media

 

100,598 Preferred Stock

 

 

224

 

Zeta Global Holdings Corp. (2)(12)

Internet and Media

18,405 Common Stock

240

240

Formetrix, Inc. (2)(12)

 

Materials

 

74,286 Common Stock

 

 

74

 

74

Total Non-Affiliate Equity

 

 

 

734

 

489

Total Non-Affiliate Portfolio Investment Assets

 

 

 

$

295,256

 

$

294,304

Non-controlled Affiliate Investments — 4.7% (8)

 

  

 

  

 

  

 

 

  

Non-controlled Affiliate Debt Investments — Technology — 3.2% (8)

 

  

 

  

 

  

Decisyon, Inc. (12)

 

Software

 

Term Loan (13.998% cash (Libor + 12.31%; Floor 12.50%), 12.00% ETP, Due 6/1/21)

$

1,206

$

1,206

$

1,206

 

 

Term Loan (14.41% cash (Libor + 12.31%; Floor 12.50%), 12.00% ETP, Due 6/1/21)

 

660

 

639

639

 

Term Loan (12.02% cash, Due 6/1/21)

234

234

234

 

 

Term Loan (12.03% cash, Due 6/1/21)

 

234

 

234

234

 

 

Term Loan (12.24% cash, Due 6/1/21)

 

704

 

704

704

 

 

Term Loan (13.08% cash, Due 6/1/21)

 

283

 

283

283

 

 

Term Loan (13.10% cash, Due 6/1/21)

 

187

 

187

187

StereoVision Imaging, Inc. (12)

 

Software

 

Term Loan (8.72% Cash (Libor + 7.03%; Floor 8.50%), 8.50% ETP, Due 9/1/21) (11)

 

2,783

 

2,382

 

2,382

Total Non-controlled Affiliate Debt Investments — Technology

 

 

  

 

5,869

 

5,869

Non-controlled Affiliate Warrants — Technology — 0.0% (8)

 

  

 

  

 

  

 

  

Decisyon, Inc. (12)

 

Software

 

82,967 Common Stock Warrants

 

 

46

 

Total Non-controlled Affiliate Warrants — Technology

 

 

  

 

46

 

Non-controlled Affiliate Equity — Technology — 1.5% (8)

  

  

  

Decisyon, Inc. (12)

 

Software

45,365,936 Common Stock

 

185

 

75

StereoVision Imaging, Inc. (12)

 

Software

1,943,572 Common Stock

 

791

 

2,653

Total Non-controlled Affiliate Equity

 

 

 

976

 

2,728

Total Non-controlled Affiliate Portfolio Investment Assets

 

$

6,891

 

$

8,597

Controlled Affiliate Investments — 9.0% (8)

 

 

  

 

 

  

Controlled Affiliate Equity — Financial — 9.0% (8)

 

 

  

 

 

  

Horizon Secured Loan Fund I LLC (12)(14)

Investment funds

 

$

16,684

 

$

16,650

Total Controlled Affiliate Equity

 

 

16,684

 

 

16,650

Total Controlled Affiliate Portfolio Investment Assets

 

$

16,684

 

$

16,650

Total Portfolio Investment Assets — 173.7% (8)

 

$

318,831

 

$

319,551

See Notes to Consolidated Financial Statements

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2019

(Dollars in thousands)

    

    

    

    

Cost of

    

Fair

Portfolio Company (1)(3)

Sector

Type of Investment (4)(7)(9)(10)

Investments (6)

Value

Short Term Investments — Unrestricted Investments — 5.3% (8)

US Bank Money Market Deposit Account

$

9,787

$

9,787

Total Short Term Investments —Unrestricted Investments

$

9,787

 

$

9,787

Short Term Investments — Restricted Investments—0.6% (8)

US Bank Money Market Deposit Account

$

1,133

$

1,133

Total Short Term Investments —Restricted Investments

$

1,133

 

$

1,133


(1)

All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States.

(2)

Has been pledged as collateral under the Key Facility and/or the the Asset-Backed Notes.

(3)

All non-affiliate investments are investments in which the Company owns less than 5% of the voting securities of the portfolio company. All non-controlled affiliate investments are investments in which the Company owns 5% or more of the voting securities of the portfolio company but not more than 25% of the voting securities of the portfolio company. All controlled affiliate investments are investments in which the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement).

(4)

All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETPs, and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt investments are at variable rates for the term of the debt investment, unless otherwise indicated. All debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2019 is provided.

(5)

Portfolio company is a public company.

(6)

For debt investments, represents principal balance less unearned income.

(7)

Warrants, Equity and Other Investments are non-income producing.

(8)

Value as a percent of net assets.

(9)

As of December 31, 2019, 4.9% and 4.8% of the Company’s total assets on a cost and fair value basis, respectively, are in non-qualifying assets. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.

(10)ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive fee the Company may pay its Advisor will be based on income that the Company has not yet received in cash.

(11)Debt investment has a PIK feature.

(12)The fair value of the investment was valued using significant unobservable inputs.

(13)New Signature US, Inc. is a subsidiary of BSI Platform Holdings, LLC.

(14)On June 1, 2018, the Company entered into an agreement with Arena Sunset SPV, LLC (“Arena”) to co-invest through Horizon Secured Loan Fund I LLC (“HSLFI”), a joint venture, which is expected to make investments, either directly or indirectly through subsidiaries, primarily in the form of secured loans to development-stage companies in the technology, life science, healthcare information and services and sustainability industries. All HSLFI investment decisions require unanimous approval of a quorum of HSLFI’s board of managers, which consists of two representatives of the Company and Arena. Although the Company owns more than 25% of the voting securities of HSLFI, the Company does not have sole control over significant actions of HSLFI for purposes of the 1940 Act or otherwise.

(15)Debt investment is on non-accrual status as of December 31, 2019.

See Notes to Consolidated Financial Statements

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Organization

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

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

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

The Company formed Horizon Funding 2019-1 LLC (“2019-1 LLC”) as a Delaware limited liability company on May 2, 2019 and Horizon Funding Trust 2019-1 on May 15, 2019 (“2019-1 Trust” and, together with the 2019-1 LLC, the “2019-1 Entities”). The 2019-1 Entities are special purpose bankruptcy remote entities and are separate legal entities from the Company. The Company formed the 2019-1 Entities for purposes of securitizing the Asset-Backed Notes.

The Company formed Horizon Funding I, LLC (“HFI”) as a Delaware limited liability company on May 9, 2018, with HSLFI as its sole member. HFI is a special purpose bankruptcy-remote entity and is a separate legal entity from HSLFI. Any assets conveyed to HFI are not available to creditors of HSLFI or any other entity other than HFI’s lenders.

On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI, including, without limitation, undistributed amounts owed to Arena and interest accrued and unpaid on the debt investments of HSLFI through the date of purchase. As of April 21, 2020, HSLFI and its subsidiary, HFI, are consolidated by the Company.The Company has also established an additional wholly owned subsidiary, which is structured as a Delaware limited liability company, to hold the assets of a portfolio company acquired in connection with foreclosure or bankruptcy, which is a separate legal entity from the Company.

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

Note 2. Basis of presentation and significant accounting policies

The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X (“Regulation S-X”) under the Securities Act of 1933, as amended (the “Securities Act”). In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications, consisting soley of normal recurring accruals, that are necessary for the fair presentation of financial results as of and for the periods presented. All

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

intercompany balances and transactions have been eliminated. 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, 2019.

Principles of consolidation

As required under GAAP and Regulation S-X, the Company will generally consolidate its investment in a company that is an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly-owned subsidiaries in its consolidated financial statements. Although the Company owned more than 25% of the voting securities of HSLFI through April 21, 2020, the Company did not have sole control over significant actions of HSLFI for purposes of the 1940 Act or otherwise, and thus did not consolidate its interest prior to April 21, 2020.

Assets related to transactions that do not meet ASC Topic 860 requirements for accounting sale treatment are reflected in the Company’s Consolidated Statements of Assets and Liabilites as investments. Those assets are owned by special purpose entities, including 2019-1 Entities, that are consolidated in the Company’s consolidated financial statements. The creditors of the special purpose entities have received security interests in such assets and such assets are not intended to be available to the creditors of the Company (or any affiliate of the Company).

Use of estimates

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

Fair value

The Company records all of its investments at fair value in accordance with relevant GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. The Company has categorized its investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as more fully described in Note 6. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

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

See Note 6 for additional information regarding fair value.

Segments

The Company has determined that it has a single reporting segment and operating unit structure. The Company lends to and invests in portfolio companies in various technology, life science, healthcare information and services and

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

sustainability industries. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these debt investments and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment.

Investments

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

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. As of September 30, 2020, there were four debt investments on non-accrual status with a cost of $35.4 million and a fair value of $20.1 million. As of December 31, 2019, there were two investments on non-accrual status with a cost of $5.7 million and a fair value of $2.0 million. For the three and nine months ended September 30, 2020, the Company recognized, as interest income, payments of $0.03 million received from one portfolio company whose debt investment was on non-accrual status. For the three and nine months ended September 30, 2019, the Company did not recognize any interest income from debt investments on non-accrual status.

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

Certain debt investment agreements also require the borrower to make an ETP, that is accrued into interest receivable and taken into income over the life of the debt investment to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay the ETP when due. The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the three months ended September 30, 2020 and 2019 was 4.9% and 4.5%, respectively.  The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the nine months ended September 30, 2020 and 2019 was 5.9%.

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

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Prior to consolidating the investment in HSLFI on and after April 21, 2020, distributions from HSLFI were evaluated at the time of distribution to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Company did not record distributions from HSLFI as dividend income unless there was sufficient accumulated tax-basis earnings and profit in HSLFI prior to distribution. Distributions that were classified as a return of capital were recorded as a reduction in the cost basis of the investment. For the period January 1, 2020 through April 21, 2020, HSLFI made no distributions classified as dividend income or a return of capital to the Company. For the three and nine months ended September 30, 2019, HSLFI distributed $0.2 million and $0.7 million, respectively, classified as dividend income to the Company.

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

Debt issuance costs

Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities. The unamortized balance of debt issuance costs as of September 30, 2020 and December 31, 2019 was $3.4 million and $3.3 million, respectively. These amounts are amortized and included in interest expense in the consolidated statements of operations over the life of the borrowings. The accumulated amortization balances as of September 30, 2020 and December 31, 2019 were $3.9 million and $3.1 million, respectively. The amortization expense for the three months ended September 30, 2020 and 2019 was $0.2 million. The amortization expense for the nine months ended September 30, 2020 and 2019 was $0.8 million and $0.5 million, respectively.  

Income taxes

As a BDC, the Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC and to avoid the imposition of corporate-level income tax on the portion of its taxable income distributed to stockholders, among other things, the Company is required to meet certain source of income and asset diversification requirements and to timely distribute dividends out of assets legally available for distribution to its stockholders of an amount generally at least equal to 90% of its investment company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid, for each tax year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which generally relieves the Company from corporate-level U.S. federal income taxes. Accordingly, no provision for federal income tax has been recorded in the financial statements. Differences between taxable income and net increase in net assets resulting from operations either can be temporary, meaning they will reverse in the future, or permanent. In accordance with Topic 946, Financial ServicesInvestment Companies, as amended, of the Financial Accounting Standards Board’s (“FASB’s”), Accounting Standards Codification, as amended (“ASC”), permanent tax differences, such as non-deductible excise taxes paid, are reclassified from distributions in excess of net investment income and net realized loss on investments to paid-in-capital at the end of each fiscal year. These permanent book-to-tax differences are reclassified on the consolidated statements of changes in net assets to reflect their tax character but have no impact on total net assets. For the year ended December 31, 2019, the Company reclassified $0.2 million to paid-in capital from distributions in excess of net investment income, which related to excise taxes payable.

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and incur a 4% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues excise tax, if any, on estimated excess taxable income

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Notes to Consolidated Financial Statements

as taxable income is earned. For the three and nine months ended September 30, 2020 and 2019, there was no U.S. federal excise tax recorded.

The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes, as modified by ASC Topic 946. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no material uncertain tax positions at September 30, 2020 and December 31, 2019. The Company’s income tax returns for the 2018, 2017 and 2016 tax years remain subject to examination by U.S. federal and state tax authorities.

Distributions

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

The Company has adopted a dividend reinvestment plan that provides for reinvestment of cash distributions on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board declares a cash distribution, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution. The Company may issue new shares or purchase shares in the open market to fulfill its obligations under the plan.

Stockholders’ Equity

On March 26, 2019, the Company completed a follow-on public offering of 2,000,000 shares of its common stock at a public offering price of $12.14 per share, for total net proceeds to the Company of $23.1 million, after deducting underwriting commission and discounts and other offering expenses

On August 2, 2019, the Company entered into an At-The-Market (“ATM”) sales agreement (the “Prior Equity Distribution Agreement”), with Goldman Sachs & Co. LLC and B. Riley FBR, Inc. (each a “Sales Agent” and, collectively, the “Sales Agents”). The Prior Equity Distribution Agreement provided that the Company may offer and sell its shares from time to time through the Sales Agents up to $50.0 million worth of its common stock, in amounts and at times to be determined by the Company.

On July 30, 2020, the Company terminated the Prior Equity Distribution Agreement and entered into a new ATM sales agreement (the “Equity Distribution Agreement”), with the Sales Agents. The remaining shares available under the Prior Equity Distribution Agreement are no longer available for issuance. The Equity Distribution Agreement provides that the Company may offer and sell its shares from time to time through the Sales Agents up to $100.0 million worth of its common stock, in amounts and at times to be determined by the Company. Sales of the Company’s common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at-the-market,” as defined in Rule 415 under the Securities Act, including sales made directly on the NASDAQ or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.

During the three months ended September 30, 2020, the Company sold 1,069,259 shares of common stock under the Equity Distribution Agreement. For the same period, the Company received total accumulated net proceeds of approximately $12.7 million, including $0.3 million of offering expenses, from these sales.

During the nine months ended September 30, 2020, the Company sold 2,787,160 shares of common stock under the Prior Equity Distribution Agreement and the Equity Distribution Agreement. For the same period, the Company received

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Notes to Consolidated Financial Statements

total accumulated net proceeds of approximately $33.8 million, including $0.8 million of offering expenses, from these sales.

The Company generally uses net proceeds from these offerings to make investments, to pay down liabilities and for general corporate purposes. As of September 30, 2020, shares representing approximately $87.0 million of its common stock remain available for issuance and sale under the Equity Distribution Agreement.

Stock Repurchase Program

On April 24, 2020, the Board extended a previously authorized stock repurchase program which allows the Company to repurchase up to $5.0 million of its common stock at prices below the Company’s net asset value per share as reported in its most recent consolidated financial statements. Under the repurchase program, the Company may, but is not obligated to, repurchase shares of its outstanding common stock in the open market or in privately negotiated transactions from time to time. Any repurchases by the Company will comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and any applicable requirements of the 1940 Act. Unless extended by the Board, the repurchase program will terminate on the earlier of June 30, 2021 or the repurchase of $5.0 million of the Company’s common stock. During the three and nine months ended September 30, 2020 and 2019, the Company did not make any repurchases of its common stock. From the inception of the stock repurchase program through September 30, 2020, the Company repurchased 167,465 shares of its common stock at an average price of $11.22 on the open market at a total cost of $1.9 million.

Transfers of financial assets

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

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

Recently issued accounting pronouncement

In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently assessing the impact of ASU 2020-04 and the LIBOR transition on its consolidated financial statements.

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Notes to Consolidated Financial Statements

Note 3. Related party transactions

Investment Management Agreement

At a special meeting of the stockholders on October 30, 2018, the stockholders approved a new Investment Management Agreement which became effective on March 7, 2019. The new Investment Management Agreement replaced the previously effective Amended and Restated Investment Management Agreement dated as of October 28, 2010 and amended effective July 1, 2014. On October 26, 2020, the Board unanimously approved the renewal of the Investment Management Agreement. Under the terms of the Investment Management Agreement, the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.

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

Through October 30, 2018, the base management fee was calculated at an annual rate of 2.00% of the Company’s gross assets (less cash and cash equivalents) including any assets acquired with the proceeds of leverage. From and after October 31, 2018, the first date on which the reduced asset coverage requirements in Section 61(a)(2) of the 1940 Act applied to the Company, the base management fee was and will be calculated at an annual rate of 2.00% of the Company’s gross assets (less cash and cash equivalents) including any assets acquired with the proceeds of leverage; provided, that, to the extent the Company’s gross assets (less cash and cash equivalents) exceed $250 million, the base management fee on the amount of such excess over $250 million will be calculated at an annual rate of 1.60% of the Company’s gross assets (less cash and cash equivalents) including any assets acquired with the proceeds of leverage. The base management fee is payable monthly in arrears and is prorated for any partial month.

The base management fee payable at September 30, 2020 and December 31, 2019 was $0.5 million. The base management fee expense was $1.6 million and $1.4 million for the three months ended September 30, 2020 and 2019, respectively. The base management fee expense was $4.9 million and $4.1 million for the nine months ended September 30, 2020 and 2019, respectively.

The incentive fee has two parts, as follows:

The first part, which is subject to the Incentive Fee Cap and Deferral Mechanism, as defined below, is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar quarter, minus expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income the Company has not yet received in cash. The incentive fee with respect to the Pre-Incentive Fee Net Investment Income is 20.00% of the amount, if any, by which the Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter exceeds a hurdle rate of 1.75% (which is 7.00% annualized) of the Company’s net assets at the end of the immediately preceding calendar quarter, adjusted for any share issuances or repurchases during the relevant quarter, subject to a “catch-up” provision measured as of the end of each

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Notes to Consolidated Financial Statements

calendar quarter. Under this provision, in any calendar quarter, the Advisor receives no incentive fee until the Pre-Incentive Fee Net Investment Income equals the hurdle rate of 1.75%, but then receives, as a “catch-up,” 100.00% of the Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.1875% quarterly (which is 8.75% annualized). The effect of this “catch-up” provision is that, if Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter, the Advisor will receive 20.00% of the Pre-Incentive Fee Net Investment Income as if the hurdle rate did not apply.

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

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

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

On March 5, 2019, the Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled to receive under the Investment Management Agreement for the period commencing on January 1, 2019 and ending on December 31, 2019. Such waived incentive fees will not be subject to recoupment. During

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Notes to Consolidated Financial Statements

the nine months ended September 30, 2019, the Advisor waived performance based incentive fees of $1.8 million, respectively, which the Advisor would have otherwise been paid by the Company.

The net performance based incentive fee expense was $1.5 million and $1.4 million, respectively, for the three months ended September 30, 2020 and 2019, respectively. The net performance based incentive fee expense was $4.2 million and $3.5 million for the nine months ended September 30, 2020 and 2019, respectively. The performance based incentive fee payable as of September 30, 2020 and December 31, 2019 was $1.5 million and $1.6 million, respectively. The entire incentive fee payable as of September 30, 2020 and December 31, 2019 represented part one of the incentive fee.

Administration Agreement

The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s Chief Financial Officer and Chief Compliance Officer and their respective staffs. The administrative fee expense was $0.2 million for the three months ended September 30, 2020 and 2019, respectively. The administrative fee expense was $0.7 million and $0.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Note 4. Investments

The following table shows the Company’s investments as of September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

    

Cost

    

Fair Value

    

Cost

    

Fair Value

(In thousands)

Investments

 

  

 

  

 

  

 

  

Debt

$

318,823

$

298,886

$

292,054

$

288,355

Warrants

 

7,623

 

10,590

 

8,322

 

10,829

Other

 

14

 

200

 

61

 

500

Equity

 

1,396

 

2,074

 

1,710

 

3,217

Equity interest in HSLFI

 

 

 

16,684

 

16,650

Total investments

$

327,856

$

311,750

$

318,831

$

319,551

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Notes to Consolidated Financial Statements

The following table shows the Company’s investments by industry sector as of September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

    

Cost

    

Fair Value

    

Cost

    

Fair Value

(In thousands)

Life Science

 

  

 

  

 

  

 

  

Biotechnology

$

72,332

$

57,876

$

42,886

$

42,265

Drug Delivery

 

1,649

 

1,400

 

1,628

 

1,533

Medical Device

 

92,417

 

90,647

 

60,660

 

60,807

Technology

 

 

 

 

  

Communications

 

270

 

289

 

4,561

 

1,734

Consumer-Related

 

43,450

 

44,070

 

43,412

 

44,196

Data Storage

 

24,390

 

24,831

 

24,928

 

25,012

Internet and Media

 

7,642

 

9,798

 

24,089

 

22,992

Materials

 

8,728

 

5,000

 

8,717

 

8,491

Power Management

 

1,585

 

1,315

 

11,813

 

11,813

Semiconductors

 

181

 

 

181

 

170

Software

 

59,995

 

60,073

 

54,998

 

59,530

Sustainability

 

 

 

 

  

Energy Efficiency

 

100

 

 

100

 

Healthcare Information and Services

 

 

 

 

  

Diagnostics

 

42

 

 

42

 

Other

 

14,971

 

15,807

 

9,931

 

9,920

Software

 

104

 

644

 

14,201

 

14,438

Investment funds

 

 

 

 

  

HSLFI

 

 

 

16,684

 

16,650

Total investments

$

327,856

$

311,750

$

318,831

$

319,551

Horizon Secured Loan Fund I LLC

On June 1, 2018, the Company and Arena formed a joint venture, HSLFI, to make investments, either directly or indirectly through subsidiaries, primarily in secured loans to development-stage companies in the technology, life science, healthcare information and services and sustainability industries. HSLFI was formed as a Delaware limited liability company and was not consolidated by either the Company or Arena for financial reporting purposes. On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI, including, without limitation, undistributed amounts owed to Arena and interest accrued and unpaid on the debt investments of HSLFI through the date of purchase, for $17.1 million. In addition, Arena received 50% of the warrants held by HSLFI or HFI at closing. HSLFI is now wholly-owned by the Company and in future reporting periods, the assets and liabilities of HSLFI and HFI will be consolidated with the assets and liabilities of the Company. The transaction is accounted for as an asset acquisition under GAAP.

Investments held by HSLFI were measured at fair value using the same valuation methodology as described in Note 6. As of December 31, 2019, HSLFI had total assets of $48.3 million. HSLFI’s portfolio consisted of debt investments in eight portfolio companies as of December 31, 2019. As of December 31, 2019, the largest investment in a single portfolio company in the HSLFI’s portfolio in aggregate principal amount was $11.3 million and the five largest investments in portfolio companies in the HSLFI totaled $30.3 million. As of December 31, 2019, HSLFI had no investments on non-accrual status. HSLFI invested in portfolio companies in the same industries in which the Company may directly invest.

The Company invested cash or securities in portfolio companies in HSLFI in exchange for limited liability company equity interests in HSLFI. As of December 31, 2019, the Company and Arena each owned 50.0% of the equity interests

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Notes to Consolidated Financial Statements

of HSLFI. The Company had an original commitment to fund $25.0 million of equity interests in HSLFI. As of December 31, 2019, $9.8 million was unfunded. The Company’s investment in HSLFI consisted of an equity contribution of $15.2 million as of December 31, 2019. During the period January 1, 2020 through April 21, 2020, there were no distributions from HSLFI. During the three and nine months ended September 30, 2019, HSLFI distributed $0.4 million and $1.4 million, respectively.

The Company and Arena each appointed two members to HSLFI’s four-person board of managers. All material decisions with respect to HSLFI, including those involving its investment portfolio, required unanimous approval of a quorum of the board of managers. Quorum was defined as (i) the presence of two members of the board of managers; provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of three members of the board of managers, provided that the individual that was elected, designated or appointed by the member with only one individual present will be entitled to cast two votes on each matter; or (iii) the presence of all four members of the board of managers.

HFI entered into the NYL Facility with the Noteholders for an aggregate purchase price of up to $100.0 million, with an accordion feature of up to $200.0 million at the mutual discretion and agreement of HSLFI and the Noteholders. The Note Funding Agreement’s investment period has ended. On June 1, 2018, HSLFI sold or contributed to HFI certain secured loans made to certain portfolio companies pursuant to a sale and servicing agreement with HFI, as Issuer, and the Company, as Servicer (the “Sale and Servicing Agreement”), as amended by that certain Amendment No. 1 to the Sale and Servicing Agreement, dated June 19, 2019 (the “Amendment No. 1”). Any notes issued by HFI were collateralized by all investments held by HFI and permitted an advance rate of up to 67% of the aggregate principal amount of eligible debt investments. The notes were issued pursuant to that certain indenture by and between HFI and U.S. Bank National Association, dated as of June 1, 2018 (the “Indenture”). The interest rate on the notes issued under the NYL Facility was based on the three year USD mid-market swap rate plus a margin of between 2.75% and 3.25% depending on the rating of such notes at the time of issuance. There were $15.0 million in advances made by the Noteholders as of December 31, 2019 at an interest rate of 4.98%.

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Notes to Consolidated Financial Statements

The following table shows HSLFI’s investments as of December 31, 2019:

    

    

    

Principal

    

Cost of

    

Fair

Portfolio Company (1)

Sector

Type of Investment (2)(3)(4)

Amount

Investments(5)

Value

(Dollars in thousands)

Debt Investments — Life science

Celsion Corporation (6)(7)(8)

 

Biotechnology

 

Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)

$

2,500

$

2,464

$

2,464

 

 

Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)

2,500

2,464

2,464

Encore Dermatology, Inc. (6)(7)

 

Biotechnology

 

Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 3.00% ETP, Due 4/1/23)

 

5,000

 

4,929

 

4,929

Mustang Bio, Inc. (6)(7)(8)

 

Biotechnology

 

Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)

 

5,000

 

4,924

 

4,924

Total Debt Investments — Life science

 

 

 

  

 

14,781

 

14,781

Debt Investments — Technology

 

  

 

  

 

  

 

  

 

  

Bridge2 Solutions, LLC (6)(7)

 

Software

 

Term Loan (11.00% cash (Libor + 8.4%; Floor 11.00%), 2.00% ETP, Due 9/1/23)

 

500

 

481

481

New Signature US, Inc. (6)(7)(9)

 

Software

 

Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 7/1/22)

 

8,250

 

8,163

8,163

 

 

Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 2/1/23)

 

3,000

 

2,961

 

2,961

OutboundEngine, Inc. (6)(7)

 

Software

 

Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)

 

500

 

491

491

Revinate, Inc. (6)(7)

 

Software

 

Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 3.00% ETP, Due 6/1/23)

 

4,000

 

3,952

 

3,952

Total Debt Investments — Technology

 

 

 

  

 

16,048

 

16,048

Debt Investments — Healthcare information and services

 

  

 

  

 

  

 

  

HealthEdge Software, Inc. (6)(7)

 

Software

 

Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 10/1/23)

 

3,750

 

3,709

 

3,709

Total Debt Investments — Healthcare information and services

 

 

  

 

3,709

 

3,709

Total Debt Investments

 

 

 

  

 

34,538

 

34,538

Warrant Investments — Life science

 

  

 

  

 

  

 

  

 

  

Celsion Corporation (6)(7)(8)

 

Biotechnology

 

95,057 Common Stock Warrants

 

58

 

6

Encore Dermatology, Inc. (6)(7)

 

Biotechnology

 

503,626 Preferred Stock Warrants

 

38

 

Mustang Bio, Inc. (6)(7)(8)

 

Biotechnology

 

72,046 Common Stock Warrants

 

45

 

74

CSA Medical, Inc. (6)(7)

 

Medical Device

 

17,751 Preferred Stock Warrants

 

2

 

2

Total Warrant Investments — Life science

 

 

 

143

 

82

Warrant Investments — Technology

 

  

 

  

 

  

 

  

Intelepeer Holdings, Inc. (6)(7)

 

Communications

 

2,081,934 Preferred Stock Warrants

 

82

 

72

Bridge2 Solutions, LLC (6)(7)

Software

2,500 Common Stock Warrants

18

34

BSI Platform Holdings, LLC (6)(7)(9)

 

Software

 

562,500 Preferred Stock Warrants

 

77

 

62

OutboundEngine, Inc. (6)(7)

Software

40,000 Preferred Stock Warrants

5

6

Revinate Inc. (6)(7)

 

Software

 

216,362 Preferred Stock Warrants

 

16

 

18

Total Warrant Investments — Technology

 

 

 

198

 

192

Warrant Investments — Healthcare information and services

 

  

 

  

 

  

HealthEdge Software, Inc. (6)(7)

 

Software

 

47,418 Preferred Stock Warrants

 

16

 

17

Total Warrant Investments — Healthcare information and services

 

 

  

 

16

 

17

Total Warrant Investments

 

 

 

  

 

357

 

291

Total Portfolio Investment Assets

 

 

 

  

$

34,895

$

34,829

Short Term Investments — Unrestricted Investments

 

 

  

 

  

 

  

US Bank Money Market Deposit Account (6)

 

 

  

$

11,201

$

11,201

Total Short Term Investments — Unrestricted Investments

 

 

  

$

11,201

$

11,201

Short Term Investments — Restricted Money Market Funds

 

 

  

 

  

 

  

US Bank Money Market Deposit Account (6)

 

 

  

$

138

$

138

Total Short Term Investments — Restricted Money Market Funds

 

 

  

$

138

$

138


(1)All investments of HSLFI are in entities which are organized under the laws of the United States and have a principal place of business in the United States.
(2)All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to HSLFI’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETPs and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt investments are at variable rates for the term of the debt investment, unless otherwise indicated. All debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2019 is provided.

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(3)ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid.
(4)Warrants are non-income producing.
(5)For debt investments, represents principal balance less unearned income.
(6)Has been pledged as collateral under the NYL Facility.
(7)The fair value of the investment was valued using significant unobservable inputs.
(8)Portfolio company is a public company.
(9)New Signature US, Inc. is a subsidiary of BSI Platform Holdings, LLC.

The following tables show certain summarized financial information for HSLFI as of December 31, 2019, for the period January 1, 2020 through April 21, 2020 and for the three and nine months ended September 30, 2019:

December 31, 

    

2019

Selected Statement of Assets and Liabilities Information

 

  

Total investments at fair value (cost of $34,895)

$

34,829

Cash and cash equivalents

 

503

Investments in money market funds

 

11,201

Restricted investments in money market funds

138

Interest receivable

 

477

Other assets

 

1,109

Total assets

$

48,257

Borrowings

$

14,955

Other liabilities

 

126

Total liabilities

 

15,081

Members’ equity

 

33,176

Total liabilities and members’ equity

$

48,257

For the period

For the three

For the nine

January 1, 2020

months ended

months ended

through

September 30, 

September 30, 

    

April 21, 2020

    

2019

    

2019

(In thousands)

Selected Statements of Operations Information

  

  

  

Interest income on investments

$

1,353

$

1,317

$

3,314

Total investment income

$

1,465

$

1,317

$

3,314

Total expenses

$

1,229

$

395

$

869

Net investment income

$

236

$

922

$

2,445

Net realized gain on investments

$

120

$

Net unrealized depreciation on investments

$

(392)

$

(27)

$

(33)

Net (decrease) increase in net assets resulting from operations

$

(36)

$

895

$

2,412

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 5. Transactions with affiliated companies

A non-controlled affiliated company is generally a portfolio company in which the Company owns 5% or more of such portfolio company’s voting securities but not more than 25% of such portfolio company’s voting securities.

Transactions related to investments in non-controlled affiliated companies for the nine months ended September 30, 2020 were as follows:

  

Nine months ended September 30, 2020

  

  

  

Fair value at

Transfers

Net

Fair value at

Portfolio

December 31, 

Principal

in/(out) at

Discount

unrealized

September 30, 

Net realized

Interest

Company

    

2019

    

Purchases

    

Payments

    

fair value

    

accretion

    

gain/(loss)

    

2020

    

gain/(loss)

    

income

(In thousands)

Decisyon, Inc.

$

1,206

$

$

(25)

$

$

$

(42)

$

1,139

$

$

129

 

639

 

 

(14)

 

 

11

 

(22)

 

614

 

 

68

 

234

 

 

(7)

 

 

 

(8)

 

219

 

 

22

 

234

 

 

(7)

 

 

 

(8)

 

219

 

 

22

 

704

 

 

(19)

 

 

 

(24)

 

661

 

 

65

 

283

 

 

(7)

 

 

 

(10)

 

266

 

 

27

 

187

 

 

(4)

 

 

 

(6)

 

177

 

 

18

 

75

 

 

 

 

 

 

75

 

 

StereoVision, Inc.

 

2,382

 

 

 

 

 

 

2,382

 

 

181

 

2,653

 

 

 

 

 

(1,014)

 

1,639

 

 

Total non-controlled affiliates

$

8,597

$

$

(83)

$

$

11

$

(1,134)

$

7,391

$

$

532

Transactions related to investments in non-controlled affiliated companies for the year ended December 31, 2019 were as follows:

  

Year ended December 31, 2019

  

  

  

Fair value at

Transfers

Net

Fair value at

Portfolio

December 31, 

Principal

in/(out) at

Discount

unrealized

December 31, 

Net realized

Interest

Company

    

2018

    

Purchases

    

Payments

    

fair value

    

accretion

    

gain/(loss)

    

2019

    

gain/(loss)

    

income

(In thousands)

Decisyon, Inc.

$

1,464

$

$

(316)

$

$

$

58

$

1,206

$

$

212

 

764

 

 

(173)

 

 

17

 

31

 

639

 

 

112

 

240

 

 

(16)

 

 

 

10

 

234

 

 

31

 

240

 

 

(16)

 

 

 

10

 

234

 

 

31

 

721

 

 

(46)

 

 

 

29

 

704

 

 

93

 

289

 

 

(17)

 

 

 

11

 

283

 

 

39

 

192

 

 

(13)

 

 

 

8

 

187

 

 

26

 

75

 

 

 

 

 

 

75

 

 

StereoVision, Inc.

 

2,798

 

 

(416)

 

 

 

 

2,382

 

 

295

 

791

 

 

 

 

 

1,862

 

2,653

 

 

Total non-controlled affiliates

$

7,574

$

$

(1,013)

$

$

17

$

2,019

$

8,597

$

$

839

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

A controlled affiliated company is generally a portfolio company in which the Company owns more than 25% of such portfolio company’s voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Transactions related to investments in controlled affiliated companies for the nine months ended September 30, 2020 were as follows:

  

Nine months ended September 30, 2020

  

  

Fair value at

Transfers

Net

Fair value at

Portfolio

 

December 31, 

 

in/(out) at

Dividends

 

unrealized

Net realized

 

September 30,

Dividend

Company

    

2019

    

Purchases

    

Distributions

    

fair value

    

declared

    

gain/(loss)

    

gain/(loss)

    

2020

    

income

(In thousands)

HSLFI(1)

$

16,650

$

$

$

(16,498)

$

118

$

(12)

$

(258)

$

$

118

Total controlled affiliates

$

16,650

$

$

$

(16,498)

$

118

$

(12)

$

(258)

$

$

118


(1)The Company and Arena were the members of HSLFI, a joint venture formed as a Delaware limited liability company that was not consolidated by either member for financial reporting purposes. The members provided cash or securities in portfolio companies to HSLFI in exchange for limited liability company equity interests. All HSLFI investment decisions required unanimous approval of a quorum of HSLFI’s board of managers, which consisted of two representatives of the Company and Arena. Because management of HSLFI was shared equally between the Company and Arena, the Company did not have sole control over significant actions of HSLFI for purposes of the 1940 Act or otherwise. On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI.  As of September 30, 2020, HLSFI is consolidated by the Company.

Transactions related to investments in controlled affiliated companies for the year ended December 31, 2019 were as follows:

  

Year ended December 31, 2019

  

  

  

Fair value at

Transfers

Net

Fair value at

Portfolio

 

December 31, 

 

in/(out) at

Dividends

 

unrealized

Net realized

 

December 31,

Dividend

Company

    

2018

    

Purchases

    

Distributions

    

fair value

    

declared

    

gain/(loss)

    

gain/(loss)

    

2019

    

income

(In thousands)

HSLFI(1)

$

13,243

$

1,900

$

(715)

$

$

2,236

$

(14)

$

$

16,650

$

2,236

Total controlled affiliates

$

13,243

$

1,900

$

(715)

$

$

2,236

$

(14)

$

$

16,650

$

2,236


(1)The Company and Arena were the members of HSLFI, a joint venture formed as a Delaware limited liability company that was not consolidated by either member for financial reporting purposes. The members provided cash or securities in portfolio companies to HSLFI in exchange for limited liability company equity interests. All HSLFI investment decisions required unanimous approval of a quorum of HSLFI’s board of managers, which consisted of two representatives of the Company and Arena. Because management of HSLFI was shared equally between the Company and Arena, the Company did not have sole control over significant actions of HSLFI for purposes of the 1940 Act or otherwise.

Note 6. Fair value

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

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

The Company’s fair value measurements are classified into a fair value hierarchy in accordance with ASC Topic 820, Fair Value Measurement, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three categories within the hierarchy are as follows:

Level 1

Quoted prices in active markets for identical assets and liabilities.

Level 2

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

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

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

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

Debt investments: The fair value of debt investments is estimated by discounting the expected future cash flows using the period end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

same remaining maturities. At September 30, 2020 and December 31, 2019, the hypothetical market yields used ranged from 10% to 25% and 10% to 16%, respectively. Significant increases (decreases) in this unobservable input would result in a significantly lower (higher) fair value measurement. These assets are recorded at fair value on a recurring basis and are categorized as Level 3 within the fair value hierarchy described above.

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

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

Underlying asset value of the issuer is estimated based on information available, including any information regarding the most recent rounds of borrower funding. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement.
Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on indices of publicly traded companies similar in nature to the underlying company issuing the warrant. A total of seven such indices are used. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement.
The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant.
Other adjustments, including a marketability discount on private company warrants, are estimated based on management’s judgment about the general industry environment.
Historical portfolio experience on cancellations and exercises of the Company’s warrants are utilized as the basis for determining the estimated time to exit of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or initial public offerings, and cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life assumption to be shorter than the contractual term of the warrants. Significant increases (decreases) in this unobservable input would result in significantly higher (lower) fair value measurement.

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

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

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

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

financing event, based upon positive or negative changes in a portfolio company’s financial or operational performance. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement. The Company has categorized these equity investments as Level 3 within the fair value hierarchy described above. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. Therefore, the Company has categorized these equity investments as Level 1 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.

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

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of September 30, 2020 and December 31, 2019. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining its fair value measurements.

The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements as of September 30, 2020:

September 30, 2020

 

Fair

Valuation Techniques/

Unobservable

Weighted

 

Investment Type

    

Value

    

Methodologies

    

Input

    

Range

    

Average(1)

 

  

(Dollars in thousands, except per share data)

 

Debt investments

$

272,411

 

Discounted Expected Future Cash Flows

 

Hypothetical Market Yield

 

 

10% – 25%

12

%

9,075

Liquidation Scenario

Probability Weighting

100%

100

%

17,400

Multiple Probability Weighted Cash Flow Model

Probability Weighting

17% – 67%

38

%

Warrant investments

9,981

 

Black-Scholes Valuation Model

 

Price Per Share

$0.00 – $980.00

$

21.75

Average Industry Volatility

22%

22

%

Marketability Discount

20%

20

%

  

Estimated Time to Exit

  

  

1 to 4 years

3

years

 

Other investments

200

 

Multiple Probability Weighted Cash Flow Model

 

Discount Rate

25%

25

%

Probability Weighting

100%

100

%

Equity investments

2,072

 

Last Equity Financing

 

Price Per Share

$0.00 – $13.04

$

2.54

Total Level 3 investments

$

311,139

  

  


(1)Weighted average is calculated by multiplying (a) the unobservable input for each investment in the investment type by (b) (1) the fair value of the related investment in the investment type divided by (2) the total fair value of the investment type.

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements as of December 31, 2019:

December 31, 2019

 

Fair

Valuation Techniques/

Unobservable

Weighted

 

Investment Type

    

Value

    

Methodologies

    

Input

    

Range

    

Average(1)

    

(Dollars in thousands, except per share data)

 

Debt investments

$

262,635

 

Discounted Expected Future Cash Flows

 

Hypothetical Market Yield

 

 

10% – 16%

12

%

13,864

Liquidation Scenario

Probability Weighting

13% – 100%

50

%

11,856

Multiple Probability Weighted Cash Flow Model

Probability Weighting

10% – 60%

38

%

Warrant investments

5,598

 

Black-Scholes Valuation Model

 

Price Per Share

$0.00 – $980.00

$

12.42

Average Industry Volatility

22%

22

%

Marketability Discount

20%

20

%

  

Estimated Time to Exit

  

  

1 to 4 years

3

years

 

Price Per Share

$6.22 – $12.90

$

9.48

4,561

 

Estimated Proceeds

 

Discount Rate

0% – 20%

10

%

Other investments

500

 

Multiple Probability Weighted Cash Flow Model

 

Discount Rate

25%

25

%

Probability Weighting

100%

100

%

Equity investments

3,125

 

Last Equity Financing

 

Price Per Share

$0.00 – $13.04

$

2.71

Total Level 3 investments

$

302,139

  

  


(1)Weighted average is calculated by multiplying (a) the unobservable input for each investment in the investment type by (b) (1) the fair value of the related investment in the investment type divided by (2) the total fair value of the investment type.

Borrowings: The Key Facility approximates fair value due to the variable interest rate of the Key Facility and is categorized as Level 2 within the fair value hierarchy described above. The fair value of the NYL Facility also approximates its carrying value and is categorized as Level 2. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed-rate 2022 Notes (as defined in Note 7) is based on the closing public share price on the date of measurement. On September 30, 2020, the closing price of the 2022 Notes on the New York Stock Exchange was $25.06 per note, or $37.5 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. Based on market quotations on September 30, 2020, the Asset-Backed Notes (as defined in Note 7) were trading at par value, or $100.0 million, and are categorized as Level 3 within the fair value hierarchy described above. These borrowings are not recorded at fair value on a recurring basis.

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.

36


Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following tables detail the assets that are carried at fair value and measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

    

September 30, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

(In thousands)

Investments in money market funds

$

$

22,735

$

$

22,735

Restricted investments in money market funds

$

$

801

$

$

801

Debt investments

$

$

$

298,886

$

298,886

Warrant investments

 

 

609

 

9,981

 

10,590

Other investments

 

 

 

200

 

200

Equity investments

 

2

 

 

2,072

 

2,074

Total investments

$

2

$

609

$

311,139

$

311,750

December 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

(In thousands)

Investments in money market funds

$

$

9,787

$

$

9,787

Restricted investments in money market funds

$

$

1,133

$

$

1,133

Debt investments

$

$

$

288,355

$

288,355

Warrant investments

 

 

670

 

10,159

 

10,829

Other investments

 

 

 

500

 

500

Equity investments

 

92

 

 

3,125

 

3,217

Equity interest in HSLFI(1)

 

 

 

 

16,650

Total investments

$

92

$

670

$

302,139

$

319,551


(1)The fair value of Company’s equity interest in HSLFI is determined using the net asset value of the Company’s ownership interest in member’s capital.

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended September 30, 2020:

Three months ended September 30, 2020

    

Debt 

    

Warrant 

    

Equity 

    

Other 

    

Investments

Investments

Investments

Investments

Total

(In thousands)

Level 3 assets, beginning of period

$

342,722

$

9,325

$

2,146

$

500

$

354,693

Purchase of investments

 

16,094

 

 

 

 

16,094

Warrants and equity received and classified as Level 3

 

 

143

 

 

 

143

Principal payments received on investments

 

(49,947)

 

 

 

(14)

 

(49,961)

Proceeds from sale of investments

 

 

(863)

 

 

 

(863)

Net realized (loss) gain on investments

 

(313)

 

583

 

 

 

270

Unrealized (depreciation) appreciation included in earnings

 

(10,319)

793

(74)

(286)

 

(9,886)

Transfer of investment

 

 

 

 

 

Other

 

649

 

 

 

 

649

Level 3 assets, end of period

$

298,886

$

9,981

$

2,072

$

200

$

311,139

During the three months ended September 30, 2020, there were no transfers in or out of Level 3.

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended September 30, 2019:

Three months ended September 30, 2019

    

Debt 

    

Warrant 

    

Equity 

    

Other 

    

Investments

Investments

Investments

Investments

Total

(In thousands)

Level 3 assets, beginning of period

$

242,287

$

8,500

$

3,110

$

6,200

$

260,097

Purchase of investments

 

42,147

 

 

 

 

42,147

Warrants and equity received and classified as Level 3

 

 

300

 

240

 

 

540

Principal payments received on investments

 

(35,913)

 

 

 

 

(35,913)

Proceeds from sale of investments

 

 

(506)

 

 

 

(506)

Net realized gain (loss) on investments

 

 

358

 

 

(800)

 

(442)

Unrealized (depreciation) appreciation included in earnings

 

(56)

 

498

 

(133)

 

(12)

 

297

Transfer of investment

4,500

(4,500)

Other

 

220

 

(16)

 

 

 

204

Level 3 assets, end of period

$

253,185

$

9,134

$

3,217

$

888

$

266,424

During the three months ended September 30, 2019, there were no transfers in or out of Level 3.

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2020:

Nine months ended September 30, 2020

    

Debt 

    

Warrant 

    

Equity 

    

Other 

    

Investments

Investments

Investments

Investments

Total

(In thousands)

Level 3 assets, beginning of period

$

288,355

$

10,159

$

3,125

$

500

$

302,139

Purchase of investments

 

138,146

 

 

 

 

138,146

Warrants and equity received and classified as Level 3

 

 

1,872

 

 

 

1,872

Principal payments received on investments

 

(111,087)

 

 

 

(42)

 

(111,129)

Proceeds from sale of investments

 

(36)

 

(6,661)

 

 

 

(6,697)

Net realized (loss) gain on investments

 

(1,244)

 

4,266

 

(225)

 

 

2,797

Unrealized (depreciation) appreciation included in earnings

 

(15,943)

 

287

(842)

 

(258)

 

(16,756)

Transfer of investment

 

 

(14)

 

14

 

 

Other

 

695

 

72

 

 

 

767

Level 3 assets, end of period

$

298,886

$

9,981

$

2,072

$

200

$

311,139

During the nine months ended September 30, 2020, there were no transfers in or out of Level 3.

The change in unrealized depreciation included in the consolidated statement of operations attributable to Level 3 investments still held at September 30, 2020 includes $19.7 million in unrealized depreciation on debt and other investments, $3.0 million in unrealized appreciation on warrant investments and $1.0 million in unrealized depreciation on equity.

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2019:

Nine months ended September 30, 2019

    

Debt 

    

Warrant 

    

Equity 

    

Other 

    

Investments

Investments

Investments

Investments

Total

(In thousands)

Level 3 assets, beginning of period

$

216,401

$

8,632

$

1,289

$

7,640

$

233,962

Purchase of investments

 

135,284

 

 

 

 

135,284

Warrants and equity received and classified as Level 3

 

 

1,288

 

240

 

 

1,528

Principal payments received on investments

 

(101,035)

 

 

 

(82)

 

(101,117)

Proceeds from sale of investments

 

 

(1,381)

 

(45)

 

 

(1,426)

Net realized gain (loss) on investments

 

 

634

 

4

 

(4,944)

 

(4,306)

Unrealized (depreciation) appreciation included in earnings

 

(1,602)

 

167

 

1,729

 

2,774

 

3,068

Transfer out of Level 3

(190)

(190)

Transfer of investment

4,500

(4,500)

Other

 

(363)

 

(16)

 

 

 

(379)

Level 3 assets, end of period

$

253,185

$

9,134

$

3,217

$

888

$

266,424

During the nine months ended September 30, 2019, there was one transfer out of Level 3. The transfer out of Level 3 related to warrants held in one portfolio company with an aggregate fair value of $0.2 million that was transferred to Level 2 upon the portfolio company becoming a public company. During the nine months ended September 30, 2019, there were no transfers to Level 3.

The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at September 30, 2019 includes $3.8 million in unrealized depreciation on debt and other investments, $0.7 million in unrealized appreciation on warrant investments and $1.9 million in unrealized appreciation on equity investments.

The Company discloses fair value information about financial instruments, whether or not recognized in the consolidated statement of assets and liabilities, for which it is practicable to estimate that value. Certain financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The fair value amounts have been measured as of the reporting date and have not been reevaluated or updated for purposes of these financial statements subsequent to that date. As such, the fair values of these financial instruments subsequent to the reporting date may be different than amounts reported.

As of September 30, 2020 and December 31, 2019, all of the balances of all the Company’s financial instruments were recorded at fair value, except for the Company’s borrowings, as previously described.

Market risk

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new debt investments and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 7. Borrowings

The following table shows the Company’s borrowings as of September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

    

Total

    

Balance

    

Unused

    

Total

    

Balance

    

Unused

Commitment

Outstanding

Commitment

Commitment

Outstanding

Commitment

(In thousands)

Key Facility

$

125,000

$

15,000

$

110,000

$

125,000

$

17,000

$

108,000

NYL Facility

100,000

13,250

86,750

Asset-Backed Notes

 

100,000

 

100,000

 

 

100,000

 

100,000

 

2022 Notes

 

37,375

 

37,375

 

 

37,375

 

37,375

 

Total before debt issuance costs

 

362,375

 

165,625

 

196,750

 

262,375

 

154,375

 

108,000

Unamortized debt issuance costs attributable to term borrowings

 

 

(1,936)

 

 

 

(2,325)

 

Total borrowings outstanding, net

$

362,375

$

163,689

$

196,750

$

262,375

$

152,050

$

108,000

On March 23, 2018, President Trump signed into law the Small Business Credit Availability Act as part of an omnibus spending bill, which, among other things, amends the 1940 Act to reduce the minimum required asset coverage applicable to BDCs under the 1940 Act from 200% to 150% if certain approval and disclosure requirements are met. Before such reduced asset coverage requirement can apply to the Company, such reduced asset coverage requirement must be approved by either (a) a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Board, in which case such reduced asset coverage requirement would take effect on the first anniversary of the date of such Board approval, or (b) a majority of votes cast by the stockholders of the Company at a special or annual meeting at which a quorum is present, in which case such reduced asset coverage requirement shall take effect on the day after such approval. On June 7, 2018, a “required majority” of the Board approved the reduced asset coverage requirements and separately recommended that the Company’s stockholders approve the reduced asset coverage requirements at a special meeting of the Company’s stockholders. The Company held a special meeting on October 30, 2018 during which the reduced asset coverage requirements were approved by stockholders. The reduced asset coverage requirements took effect October 31, 2018.

As of September 30, 2020, with certain limited exceptions, as a BDC, the Company is only allowed to borrow amounts such that the Company’s asset coverage, as defined in the 1940 Act, is at least 150% after such borrowings. As of September 30, 2020, the asset coverage for borrowed amounts was 224%.

The Company entered into the Key Facility with Key effective November 4, 2013. On June 29, 2020, the Company amended the Key Facility, among other things, to amend the LIBOR floor from 0.75% to 1.00% and to extend the revolving period to September 30, 2021. The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million from the $125 million commitment. The Key Facility is collateralized by all debt investments and warrants held by Credit II and permits an advance rate of up to 50% of eligible debt investments held by Credit II. The Key Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the debt investments securing the Key Facility to certain criteria for qualified debt investments and includes portfolio company concentration limits as defined in the related loan agreement. The Key Facility is scheduled to mature on April 6, 2023. The interest rate is based upon the one-month LIBOR, plus a spread of 3.25%, with a LIBOR floor of 1.00%. The LIBOR rate was 0.15% and 1.76% on September 30, 2020 and December 31, 2019, respectively. The average interest rate for the three months ended September 30, 2020 and 2019 was 4.25% and 5.49%, respectively. The average interest rate for the nine months ended September 30, 2020 and 2019 was 4.42% and 5.65%, respectively. The Key Facility requires the payment of an unused line fee in an amount up to 0.50% on an annualized basis of any unborrowed amount available under the facility. As of September 30, 2020 and December 31, 2019, the Company had borrowing capacity under the Key Facility of $110.0 million and $108.0 million, respectively. At September 30, 2020 and December 31, 2019, $45.1 million and $24.2 million, respectively, was available, subject to existing terms and advance rates.

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

On September 29, 2017, the Company issued and sold an aggregate principal amount of $32.5 million of 6.25% notes due in 2022 and on October 11, 2017, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $4.9 million of such notes (collectively, the “2022 Notes”). The 2022 Notes have a stated maturity of September 15, 2022 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after September 15, 2019 at a redemption price of $25 per security plus accrued and unpaid interest. The 2022 Notes bear interest at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2022 Notes are the Company’s direct unsecured obligations and (i) rank equally in right of payment with the Company’s current and future unsecured indebtedness; (ii) are senior in right of payment to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2022 Notes; (iii) are effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness, and (iv) are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. As of September 30, 2020, the Company was in material compliance with the terms of the 2022 Notes. The 2022 Notes are listed on the New York Stock Exchange under the symbol “HTFA”.

On August 13, 2019, the Company completed a term debt securitization in connection with which an affiliate of the Company made an offering of the Asset-Backed Notes. The Asset-Backed Notes were rated A+(sf) by Morningstar Credit Ratings, LLC on August 13, 2019.  There has been no change in the rating since August 13, 2019.

The Asset-Backed Notes were issued by the 2019-1 Trust pursuant to a note purchase agreement, dated as of August 13, 2019, by and among the Company and Keybanc Capital Markets Inc. as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of the Company and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.21% per annum. The Asset-Backed Notes have a two-year reinvestment period and a stated maturity of September 15, 2027.

At September 30, 2020 and December 31, 2019, the Asset-Backed Notes had an outstanding principal balance of $100.0 million.

Under the terms of the Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the Asset-Backed Notes. The Company has segregated these funds and classified them as restricted investments in money market funds. At September 30, 2020 and December 31, 2019, there was approximately $0.8 million and $1.1 million of restricted investments, respectively.

On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI, which is a party to the NYL Facility. HFI entered into the NYL Facility with the Noteholders for an aggregate purchase price of up to $100.0 million, with an accordion feature of up to $200.0 million at the mutual discretion and agreement of HSLFI and the Noteholders. On June 1, 2018, HSLFI sold or contributed to HFI certain secured loans made to certain portfolio companies pursuant to into the Sale and Servicing Agreement. Any notes issued by HFI are collateralized by all investments held by HFI and permit an advance rate of up to 67% of the aggregate principal amount of eligible debt investments. The notes were issued pursuant to the Indenture.

On June 5, 2020, the Company amended the NYL Facility to extend the investment period to June 5, 2022. The investment period will be followed by a five year amortization period. The stated final payment date was extended to June 15, 2027, subject to any extension of the investment period. The interest rate on the notes issued under the NYL Facility is based on the three year USD mid-market swap rate plus a margin of between 3.55% and 5.15% with an interest rate floor, depending on the rating of such notes at the time of issuance. Any obligation to make additional advances was conditioned on the occurrence of certain conditions, which were satisfied June 26, 2020. There were $13.3 million in advances made by the Noteholders as of September 30, 2020 at an interest rate of 4.60%. As of September 30, 2020, the

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Company had borrowing capacity under the NYL Facility of $86.8 million. At September 30, 2020, $2.2 million was available, subject to existing terms and advance rates.

Note 8. 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 $80.9 million and $49.5 million as of September 30, 2020 and December 31, 2019, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving credit arrangements or similar transactions. These commitments are often subject to financial or non-financial milestones and other conditions to borrow that must be achieved before the commitment can be drawn. In addition, the commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. This includes the undrawn revolver commitments discussed in Note 4.

The following table provides the Company’s unfunded commitments by portfolio company as of September 30, 2020:

September 30, 2020

    

    

Fair Value of

 Unfunded 

Principal

 

Commitment

 Balance

 

 Liability

 

(In thousands)

Betabrand Corporation

$

1,125

$

32

Ceribell, Inc.

10,000

64

Castle Creek Biosciences, Inc.

5,000

54

Emalex Biosciences, Inc.

10,000

104

Keypath Education Holdings, LLC

5,000

103

LogicBio, Inc.

5,000

Maculogix, Inc.

 

3,750

 

37

Magnolia Medical Technologies, Inc.

10,000

71

Provivi, Inc.

10,000

149

Revinate, Inc.

 

5,000

 

60

Skillshare, Inc.

 

11,000

 

199

Topia Mobility Inc.

5,000

78

Total

$

80,875

$

951

The table above also provides the fair value of the Company’s unfunded commitment liability as of September 30, 2020, which totaled $1.0 million. The fair value at inception of the delay draw credit agreements is equal to the fees and/or warrants received to enter into these agreements, taking into account the remaining terms of the agreements and the counterparties’ credit profile. The unfunded commitment liability reflects the fair value of these future funding commitments and is included in the Company’s consolidated statement of assets and liabilities.

Note 9. Concentrations of credit risk

The Company’s debt investments consist primarily of loans to development-stage companies at various stages of development in the technology, life science, healthcare information and services and sustainability industries. Many of these companies may have relatively limited operating histories and also may experience variation in operating results.

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Many of these companies conduct business in regulated industries and could be affected by changes in government regulations. Most of the Company’s borrowers will need additional capital to satisfy their continuing working capital needs and other requirements, and in many instances, to service the interest and principal payments on the loans.

The Company’s largest debt investments may vary from period to period as new debt investments are recorded and existing debt investments are repaid. The Company’s five largest debt investments, at cost, represented 28% of total debt investments outstanding as of September 30, 2020 and December 31, 2019. No single debt investment represented more than 10% of the total debt investments as of September 30, 2020 and December 31, 2019. Investment income, consisting of interest and fees, can fluctuate significantly upon repayment of large debt investments. Interest income from the five largest debt investments accounted for 29% and 24% of total interest and fee income on investments for the three months ended September 30, 2020 and 2019, respectively. Interest income from the five largest debt investments accounted for 25% and 24% of total interest and fee income on investments for the nine months ended September 30, 2020 and 2019, respectively.

Note 10. Distributions

The Company’s distributions are recorded on the declaration date. The following table summarizes the Company’s distribution activity for the nine months ended September 30, 2020 and for the year ended December 31, 2019:

    

    

    

    

    

DRIP 

    

DRIP 

Date

Amount  

Cash 

 Shares 

Share

Declared

Record Date

Payment Date

Per Share

Distribution

 

Issued

 

 Value

 

(In thousands, except share and per share data)

Nine Months Ended September 30, 2020

7/24/20

 

11/18/20

 

12/15/20

$

0.10

$

$

7/24/20

 

10/20/20

 

11/16/20

 

0.10

 

 

 

7/24/20

 

9/17/20

 

10/16/20

 

0.10

 

1,835

 

1,674

 

22

4/24/20

8/18/20

 

9/15/20

0.10

1,745

 

1,588

19

4/24/20

7/17/20

 

8/14/20

 

0.10

 

1,710

 

1,586

 

20

4/24/20

6/18/20

 

7/15/20

 

0.10

 

1,703

 

1,710

 

20

2/28/20

 

5/19/20

 

6/16/20

0.10

1,667

 

1,646

18

2/28/20

 

4/17/20

 

5/15/20

 

0.10

 

1,667

 

1,879

 

19

2/28/20

 

3/18/20

 

4/15/20

 

0.15

 

2,496

 

3,144

 

30

$

0.95

$

12,823

13,227

$

148

Year Ended December 31, 2019

10/25/19

 

2/19/20

 

3/16/20

$

0.10

$

1,659

 

1,561

$

18

10/25/19

 

1/17/20

 

2/14/20

 

0.10

 

1,660

 

1,234

 

17

10/25/19

 

12/18/19

 

1/15/20

 

0.10

 

1,519

 

1,115

 

15

7/26/19

 

11/19/19

 

12/16/19

0.10

1,467

1,215

15

7/26/19

 

10/18/19

 

11/15/19

 

0.10

 

1,442

 

1,226

 

16

7/26/19

 

9/19/19

 

10/16/19

 

0.10

 

1,412

 

1,258

 

15

4/26/19

 

8/19/19

 

9/17/19

 

0.10

 

1,366

 

1,274

 

15

4/26/19

 

7/18/19

 

8/15/19

 

0.10

 

1,339

 

1,261

 

15

4/26/19

 

6/19/19

 

7/16/19

 

0.10

 

1,338

 

1,339

 

16

3/1/19

 

5/17/19

 

6/17/19

 

0.10

 

1,339

 

1,308

 

15

3/1/19

 

4/18/19

 

5/15/19

 

0.10

 

1,332

 

1,885

 

22

3/1/19

 

3/19/19

 

4/16/19

 

0.10

 

1,139

 

1,199

 

15

$

1.20

$

17,012

15,875

$

194

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

On October 26, 2020, the Board declared monthly distributions per share, payable as set forth in the following table:

Ex-Dividend Date

    

Record Date

    

Payment Date

    

Distributions Declared

December 16, 2020

December 17, 2020

January 15, 2021

$

0.10

January 19, 2021

January 20, 2021

February 17, 2021

$

0.10

February 18, 2021

February 19, 2021

March 16, 2021

$

0.10

After paying distributions of $0.30 per share and earning net investment income of $0.34 per share for the quarter, the Company’s undistributed spillover income as of September 30, 2020 was $0.45 per share. Spillover income includes any ordinary income and net capital gains from the preceding tax years that were not distributed during such tax years.

Note 11. Financial highlights

The following table shows financial highlights for the Company:

Nine months ended September 30, 

    

2020

    

2019

 

(In thousands, except share and per share data)

Per share data:

Net asset value at beginning of period

 

$

11.83

$

11.64

Net investment income

 

0.98

 

1.08

Realized gain (loss) on investments

 

0.23

 

(0.30)

Unrealized (depreciation) appreciation on investments

 

(0.98)

 

0.20

Net increase in net assets resulting from operations

 

0.23

 

0.98

Distributions declared(1)

 

(0.95)

 

(0.90)

From net investment income

 

(0.95)

 

(0.90)

From net realized gain on investments

 

Return of capital

 

Other (2)

 

0.06

 

(0.05)

Net asset value at end of period

$

11.17

$

11.67

Per share market value, beginning of period

$

12.93

$

11.25

Per share market value, end of period

$

12.28

$

11.83

Total return based on a market value (3)

2.3

%

 

13.2

%

Shares outstanding at end of period

18,365,913

 

14,412,475

Ratios, net of waivers, to average net assets:

 

  

 

  

Expenses without incentive fees

10.1

%(4)

 

10.9

%(4)

Incentive fees

 

2.9

%(4)

 

3.0

%(4)

Net expenses

 

13.0

%(4)

 

13.9

%(4)

Net investment income with incentive fees

 

11.5

%(4)

 

12.1

%(4)

Ratios, without waivers, to average net assets:

  

 

  

Expenses without incentive fees(4)

10.1

%(4)

 

10.9

%(4)

Incentive fees(4)

 

2.9

%(4)

 

4.6

%(4)

Net expenses(4)

 

13.0

%(4)

 

15.5

%(4)

Net investment income with incentive fees(4)

11.5

%(4)

10.5

%(4)

Net assets at the end of the period

$

205,171

$

168,144

Average net asset value

$

195,978

$

153,997

Average debt per share

$

10.39

$

10.39

Portfolio turnover ratio

 

29.9

%(6)

 

50.0

%(7)


(1)Distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP due to (i) changes in unrealized appreciation and depreciation, (ii) temporary and permanent differences in income and expense recognition, and (iii) the amount of spillover income carried over from a given tax year for distribution in the following tax year. The final determination of taxable income for each tax year, as well as the tax attributes for distributions in such tax year, will be made after the close of the tax year.
(2)Includes the impact of the different share amounts as a result of calculating per share data based on the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(3)The total return equals the change in the ending market value over the beginning of period price per share plus distributions paid per share during the period, divided by the beginning price.
(4)Annualized.
(5)During the nine months ended September 30, 2019, the Advisor waived $1.8 million of performance based incentive fee.
(6)Calculated by dividing the lesser of purchases or the sum of (1) principal prepayments and (2) maturities by the monthly average debt investment balance.
(7)Calculated by dividing net debt investment purchases by the monthly average debt investment balance.

Note 12. Subsequent Event

On July 8, 2020, Espero BioPharma, Inc. and its affiliates, Jacksonville Pharmaceuticals, Inc. and  Espero Pharmaceuticals, Inc. (collectively, “Espero”) assigned substantially all of their assets to their respective assignment estates and respectively appointed PSE (ABC), LLC, PS PJAX (ABC), LLC, and PPSE (ABC), LLC (collectively, “Espero ABC”) to administer their respective estates and to facilitate the orderly sale and liquidation of their property and assets. On October 6, 2020, the Court of Chancery of the State of Delaware approved the transfer of the assets of Espero to the Company and Credit II or their designees in consideration for the Company and Credit II’s credit bid at auction of $7.0 million. On October 22, 2020, Espero ABC transferred the assets of Espero to HESP LLC, a Delaware limited liability company, wholly owned by the Company.

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Table of Contents

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.

COVID-19

Governments around the world remain highly focused on mitigating the risk of further spread of COVID-19 and continue to manage their response to the crisis, which has included measures such as quarantines, travel restrictions and business curtailments.  COVID-19 has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity and our portfolio companies’ results of operations and by extension our operating results. The extent to which the COVID-19 pandemic will continue to affect our business, financial condition, liquidity, our portfolio companies’ results of operations and by extension our operating results will depend on future developments, which are highly uncertain and cannot be predicteds as of the filing of this Form 10-Q.

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 debt investments, warrants and other investments;
the introduction, withdrawal, success and timing of business initiatives and strategies;
general economic and political trends and other external factors, including the current COVID-19 pandemic;
the relative and absolute investment performance and operations of our investment advisor, Horizon Technology Finance 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, including our and their ability to achieve our respective objectives as a result of the current COVID-19 pandemic;
the impact, extent and timing of technological changes and the adequacy of intellectual property protection;
our regulatory structure and tax status;
our ability to qualify and maintain qualification as a regulated investment company, or RIC, and as a business development company, or BDC;

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the adequacy of our cash resources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies;
the impact of interest rate volatility on our results, particularly if we use leverage as part of our investment strategy;
the ability of our portfolio companies to achieve their objective;
the impact of legislative and regulatory actions and reforms and regulatory supervisory or enforcement actions of government agencies relating to us or our Advisor;
the impact of the Small Business Credit Availability Act, or SBCAA, on our operations and the BDC industry;
our contractual arrangements and relationships with third parties;
our ability to access capital and any future financings by us;
the ability of our Advisor to attract and retain highly talented professionals;
the impact of changes to tax legislation and, generally, our tax position; and
our ability to fund unfunded commitments.

We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks” and similar expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in “Risk Factors” and elsewhere in our annual report on Form 10-K for the year ended December 31, 2019, and elsewhere in this quarterly report on Form 10-Q.

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 periodic reports on Form 10-Q and Form 10-K and current reports on Form 8-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 sustainability industries, which we refer to as our “Target Industries.” Our investment objective is to maximize our investment portfolio’s total return by generating current income from the debt investments we make and capital appreciation from the warrants we receive when making such debt investments. We are focused on making secured debt investments, which we refer to collectively as “Venture Loans,” to venture capital and private equity backed companies and publicly traded companies in our Target Industries, which we refer to as “Venture Lending.” Our debt investments are typically secured by first liens or first liens behind a secured revolving line of credit, or Senior Term Loans. As of September 30, 2020, 100%, or $298.9 million, of our debt investment portfolio at fair value consisted of Senior Term Loans. Venture Lending is typically characterized by (1) the making of a secured debt investment after a venture capital or equity investment in the portfolio company has been made, which investment provides a source of cash to fund the portfolio company’s debt service obligations under the Venture Loan, (2) the senior priority of the Venture Loan which requires repayment of the Venture Loan prior to the equity investors realizing a return on their capital, (3) the relatively rapid amortization of the Venture Loan and (4) the lender’s receipt of warrants or other success fees with the making of the Venture Loan.

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We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a 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 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. Section 61(a) of the 1940 Act to add Section 61(a)(2) enables BDCs to reduce their asset coverage requirements from 200% to 150%. This provision permits a BDC to double the maximum amount of leverage that it is permitted to incur. As defined in the 1940 Act, asset coverage of 150% means that for every $100 of net assets a BDC holds, it may raise up to $200 from borrowing and issuing senior securities. We received approval from our stockholders to reduce our asset coverage requirement from 200% to 150% on October 30, 2018. The amount of leverage that we may employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing. As a RIC, we generally are not subject to corporate-level income taxes on our investment company taxable income, determined without regard to any deductions for dividends paid, and our net capital gain that we distribute as dividends for U.S. federal income tax purposes to our stockholders as long as we meet certain source-of-income, distribution, asset diversification and other requirements.

Compass Horizon 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, and our day-to-day operations, are managed by our Advisor and supervised by our board of directors, or the Board, of which a majority of the members are independent of us. Under an investment management agreement, or the Investment Management Agreement, we have agreed to pay our Advisor a base management fee and an incentive fee for its advisory services to us. We have also entered into an administration agreement, or the Administration Agreement, with our Advisor under which we have agreed to reimburse our Advisor for our allocable portion of overhead and other expenses incurred by our Advisor in performing its obligations under the Administration Agreement.

Portfolio composition and investment activity

The following table shows our portfolio by type of investment as of September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

 

Percentage of

Percentage of

 

Number of

Fair

Total

Number of

Fair

Total

 

    

Investments

    

Value

    

Portfolio

    

Investments

    

Value

    

Portfolio

 

(Dollars in thousands)

 

Debt investments

34

$

298,886

95.9

%  

35

$

288,355

90.2

%

Warrants

 

61

 

10,590

 

3.3

 

66

 

10,829

 

3.4

Other investments

 

1

 

200

 

0.1

 

1

 

500

 

0.2

Equity

 

7

 

2,074

 

0.7

 

9

 

3,217

 

1.0

Equity interest in HSLFI

 

 

 

 

1

 

16,650

 

5.2

Total

$

311,750

 

100.0

%  

$

319,551

 

100.0

%  

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The following table shows total portfolio investment activity as of and for the three and nine months ended September 30, 2020 and 2019:

For the three months ended

For the nine months ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

(In thousands)

Beginning portfolio

$

355,880

$

274,759

$

319,551

$

248,441

New debt investments

 

16,094

 

42,147

 

121,648

 

135,284

Less refinanced debt investments

 

 

(7,500)

 

 

(17,500)

Net new debt investments

 

16,094

 

34,647

 

121,648

 

117,784

Investment in controlled affiliate investment

589

589

Principal payments received on investments

 

(6,419)

 

(3,413)

 

(20,344)

 

(13,069)

Early pay-offs

 

(43,542)

 

(25,000)

 

(90,785)

 

(70,548)

Accretion of debt investment fees

 

795

 

1,131

 

3,080

 

2,879

New debt investment fees

 

(202)

 

(658)

 

(1,415)

 

(1,764)

New equity

240

240

Warrants received in settlement of fee income

978

Proceeds from sale of investments

 

(1,945)

 

(506)

 

(8,200)

 

(2,411)

Dividend income from controlled affiliate investment

 

 

461

 

118

 

1,223

Distributions from controlled affiliate investment

 

 

(185)

 

 

(715)

Net realized gain (loss) on investments

 

1,178

 

(444)

 

3,945

 

(3,891)

Net unrealized (depreciation) appreciation on investments

 

(10,288)

 

(143)

 

(16,827)

 

2,622

Other

 

199

 

41

 

1

 

139

Ending portfolio

$

311,750

$

281,519

$

311,750

$

281,519

We receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period.

The following table shows our debt investments by industry sector as of September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

 

Debt

Percentage of

Debt

Percentage of

 

Investments at

Total

Investments at

Total

 

    

Fair Value

    

Portfolio  

    

Fair Value

    

Portfolio  

 

(Dollars in thousands)

 

Life Science

Biotechnology

$

57,129

 

19.1

%  

$

41,789

 

14.5

%

Drug Delivery

 

1,400

 

0.5

 

1,533

 

0.6

Medical Device

 

89,250

 

29.8

 

59,477

 

20.6

Technology

 

 

 

 

Communications

 

 

 

1,500

 

0.5

Consumer-Related

 

43,041

 

14.4

 

42,779

 

14.8

Data Storage

 

23,913

 

8.0

 

24,452

 

8.5

Internet and Media

 

7,075

 

2.4

 

22,504

 

7.8

Materials

 

5,000

 

1.7

 

8,410

 

2.9

Power Management

 

 

 

11,207

 

3.9

Software

 

57,282

 

19.1

 

51,069

 

17.7

Healthcare Information and Services

 

 

 

  

 

  

Other Healthcare

 

14,796

 

5.0

 

9,771

 

3.4

Software

 

 

 

13,864

 

4.8

Total

$

298,886

 

100.0

%  

$

288,355

 

100.0

%

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The largest debt investments in our portfolio may vary from period to period as new debt investments are originated and existing debt investments are repaid. Our five largest debt investments represented 28% of total debt investments outstanding as of September 30, 2020 and December 31, 2019. No single debt investment represented more than 10% of our total debt investments as of September 30, 2020 and December 31, 2019.

Debt investment asset quality

We use an internal credit rating system which rates each debt investment on a scale of 4 to 1, with 4 being the highest credit quality rating and 3 being the rating for a standard level of risk. A rating of 2 represents an increased level of risk and, while no loss is currently anticipated for a 2-rated debt investment, there is potential for future loss of principal. A rating of 1 represents a deteriorating credit quality and a high degree of risk of loss of principal. Our internal credit rating system is not a national credit rating system. As of September 30, 2020 and December 31, 2019, our debt investments had a weighted average credit rating of 3.1. The following table shows the classification of our debt investment portfolio by credit rating as of September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

 

Debt

Percentage

Debt

Percentage

 

Number of

Investments at

of Debt

Number of

Investments at

of Debt

 

    

Investments

    

Fair Value

    

Investments

    

Investments

    

Fair Value

    

Investments

 

 

(Dollars in thousands)

Credit Rating

4

 

5

$

67,893

 

22.7

%  

4

$

45,339

 

15.7

%

3

 

21

 

198,841

 

66.5

 

26

 

216,128

 

75.0

2

 

3

 

12,752

 

4.3

 

3

 

24,888

 

8.6

1

 

5

 

19,400

 

6.5

 

2

 

2,000

 

0.7

Total

 

34

$

298,886

 

100.0

%  

35

$

288,355

 

100.0

%

As of September 30, 2020, there were five debt investments with an internal credit rating of 1, with a cost of $38.3 million and a fair value of $19.4 million. As of December 31, 2019, there were two debt investments with an internal credit rating of 1, with an aggregate cost of $5.7 million and an aggregate fair value of $2.0 million.

Horizon Secured Loan Fund I LLC

On June 1, 2018, we and Arena Sunset SPV, LLC, or Arena, formed a joint venture, Horizon Secured Loan Fund I, or HSLFI, to make investments, either directly or indirectly through subsidiaries, primarily in the form of secured loans to development-stage companies in the technology, life science, healthcare information and services and sustainability industries. HSLFI was formed as a Delaware limited liability company and was not consolidated by either us or Arena for financial reporting purposes. On April 21, 2020, we purchased all of the limited liability company interests of Arena in HSLFI, including, without limitation, undistributed amounts owed to Arena and interest accrued and unpaid on the debt investments of HSLFI through the date of purchase, for $17.1 million. In addition, Arena received 50% of the warrants held by HSLFI or Horizon Funding I, LLC, or HFI, at closing. HSLFI is now wholly-owned by us and in future reporting periods, the assets and liabilities of HSLFI and HFI will be consolidated with the assets and liabilities by us.

Investments held by HSLFI were measured at fair value. As of December 31, 2019, HSLFI had total assets of $48.3 million. HSLFI’s portfolio consisted of debt investments in eight portfolio companies as of December 31, 2019. As of December 31, 2019, the largest investment in a single portfolio company in the HSLFI’s portfolio in aggregate principal amount was $11.3 million and the five largest investments in portfolio companies in the HSLFI totaled $30.3 million. As of December 31, 2019, HSLFI had no investments on non-accrual status. HSLFI invested in portfolio companies in the same industries in which we may directly invest.

We invested cash or securities in portfolio companies in HSLFI in exchange for limited liability company equity interests in HSLFI. As of December 31, 2019, we and Arena each owned 50.0% of the equity interests of HSLFI. We had an original commitment to fund $25.0 million of equity interests in HSLFI. As of December 31, 2019, $9.8 million was unfunded. Our investment in HSLFI consisted of an equity contribution of $15.2 million as of December 31, 2019. During

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the period January 1, 2020 through April 21, 2020, there were no distributions from HSLFI. For the three and nine months ended September 30, 2019, HSLFI distributed $0.4 million and $1.4 million, respectively.

We and Arena each appointed two members to HSLFI’s four-person board of managers. All material decisions with respect to HSLFI, including those involving its investment portfolio, required unanimous approval of a quorum of the board of managers. Quorum wass defined as (i) the presence of two members of the board of managers; provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of three members of the board of managers, provided that the individual that was elected, designated or appointed by the member with only one individual present will be entitled to cast two votes on each matter; or (iii) the presence of all four members of the board of managers.

HFI was formed as a Delaware limited liability company on May 9, 2018, with HSLFI as its sole equity member. HFI was a special purpose bankruptcy-remote entity and was a separate legal entity from HSLFI. Any assets conveyed to HFI were not available to creditors of HSLFI or any other entity other than HFI’s lenders.

In addition, on June 1, 2018, HSLFI entered into the Sale and Servicing Agreement. HFI entered into a Note Funding Agreement, or the NYL Facility, with several entities owned or affiliated with New York Life Insurance Company, or the Noteholders, for an aggregate purchase price of up to $100.0 million, with an accordion feature of up to $200.0 million at the mutual discretion and agreement of HSLFI and the Noteholders. The Note Funding Agreement’s investment period has ended. Any notes issued by HFI was collateralized by all investments held by HFI and permitted an advance rate of up to 67% of the aggregate principal amount of eligible debt investments. The notes were issued pursuant to the Indenture. The interest rate on the notes issued under the NYL Facility was based on the three year USD mid-market swap rate plus a margin of between 2.75% and 3.25% depending on the rating of such notes at the time of issuance. There were $15.0 million in advances made by the Noteholders as of December 31, 2019 at an interest rate of 4.98%.

The following table shows a summary of HSLFI’s investment portfolio for the period January 1, 2020 through April 21, 2020 and the three and nine months ended September 30, 2019:

For the period

 

For the three

For the nine

January 1, 2020

months ended

months ended

through

 

September 30, 

September 30, 

    

April 21, 2020

 

2019

    

2019

    

 

(Dollars in thousands)

Total investments at fair value

$

$

42,882

$

42,882

Dollar-weighted annualized yield on average debt investments(1)

 

14.3

%

 

12.7

%

 

12.7

%  

Number of portfolio companies in HSLFI

 

 

7

 

7

Largest portfolio company investment at fair value

$

$

11,158

$

11,158


(1)HSLFI calculates the yield on dollar-weighted average debt investments for any period measured as (1) total investment income during the period divided by (2) the average of the fair value of debt investments outstanding on (a) the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar month during the period. The yield on dollar-weighted average debt investments represents the portfolio yield and does not reflect HSLFI’s expenses.

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The following table shows HSLFI’s total portfolio investment activity as of and for the three and nine months ended September 30, 2019:

For the three months ended

For the nine months ended

September 30, 

September 30, 

    

2019

    

2019

    

Beginning portfolio

$

38,896

$

24,734

New debt investments

 

4,000

 

18,227

Accretion of debt investment fees

 

52

 

129

New debt investment fees

 

(39)

 

(175)

Net unrealized depreciation on investments

 

(27)

 

(33)

Ending portfolio

$

42,882

$

42,882

The following table shows HSLFI’s investments as of December 31, 2019:

    

    

    

Principal

    

Cost of

    

Fair

Portfolio Company (1)

Sector

Type of Investment (2)(3)(4)

Amount

Investments(5)

Value

(Dollars in thousands)

Debt Investments — Life science

Celsion Corporation (6)(7)(8)

 

Biotechnology

 

Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)

$

2,500

$

2,464

$

2,464

 

 

Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)

2,500

2,464

2,464

Encore Dermatology, Inc. (6)(7)

 

Biotechnology

 

Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 3.00% ETP, Due 4/1/23)

 

5,000

 

4,929

 

4,929

Mustang Bio, Inc. (6)(7)(8)

 

Biotechnology

 

Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)

 

5,000

 

4,924

 

4,924

Total Debt Investments — Life science

 

 

 

  

 

14,781

 

14,781

Debt Investments — Technology

 

  

 

  

 

  

 

  

 

  

Bridge2 Solutions, LLC (6)(7)

 

Software

 

Term Loan (11.00% cash (Libor + 8.4%; Floor 11.00%), 2.00% ETP, Due 9/1/23)

 

500

 

481

481

New Signature US, Inc. (6)(7)(9)

 

Software

 

Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 7/1/22)

 

8,250

 

8,163

8,163

 

 

Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 2/1/23)

 

3,000

 

2,961

 

2,961

OutboundEngine, Inc. (6)(7)

 

Software

 

Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)

 

500

 

491

491

Revinate, Inc. (6)(7)

 

Software

 

Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 3.00% ETP, Due 6/1/23)

 

4,000

 

3,952

 

3,952

Total Debt Investments — Technology

 

 

 

  

 

16,048

 

16,048

Debt Investments — Healthcare information and services

 

  

 

  

 

  

 

  

HealthEdge Software, Inc. (6)(7)

 

Software

 

Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 10/1/23)

 

3,750

 

3,709

 

3,709

Total Debt Investments — Healthcare information and services

 

 

  

 

3,709

 

3,709

Total Debt Investments

 

 

 

  

 

34,538

 

34,538

Warrant Investments — Life science

 

  

 

  

 

  

 

  

 

  

Celsion Corporation (6)(7)(8)

 

Biotechnology

 

95,057 Common Stock Warrants

 

58

 

6

Encore Dermatology, Inc. (6)(7)

 

Biotechnology

 

503,626 Preferred Stock Warrants

 

38

 

Mustang Bio, Inc. (6)(7)(8)

 

Biotechnology

 

72,046 Common Stock Warrants

 

45

 

74

CSA Medical, Inc. (6)(7)

 

Medical Device

 

17,751 Preferred Stock Warrants

 

2

 

2

Total Warrant Investments — Life science

 

 

 

143

 

82

Warrant Investments — Technology

 

  

 

  

 

  

 

  

Intelepeer Holdings, Inc. (6)(7)

 

Communications

 

2,081,934 Preferred Stock Warrants

 

82

 

72

Bridge2 Solutions, LLC (6)(7)

Software

2,500 Common Stock Warrants

18

34

BSI Platform Holdings, LLC (6)(7)(9)

 

Software

 

562,500 Preferred Stock Warrants

 

77

 

62

OutboundEngine, Inc. (6)(7)

Software

40,000 Preferred Stock Warrants

5

6

Revinate Inc. (6)(7)

 

Software

 

216,362 Preferred Stock Warrants

 

16

 

18

Total Warrant Investments — Technology

 

 

 

198

 

192

Warrant Investments — Healthcare information and services

 

  

 

  

 

  

HealthEdge Software, Inc. (6)(7)

 

Software

 

47,418 Preferred Stock Warrants

 

16

 

17

Total Warrant Investments — Healthcare information and services

 

 

  

 

16

 

17

Total Warrant Investments

 

 

 

  

 

357

 

291

Total Portfolio Investment Assets

 

 

 

  

$

34,895

$

34,829

Short Term Investments — Unrestricted Investments

 

 

  

 

  

 

  

US Bank Money Market Deposit Account (6)

 

 

  

$

11,201

$

11,201

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Total Short Term Investments — Unrestricted Investments

 

 

  

$

11,201

$

11,201

Short Term Investments — Restricted Money Market Funds

 

 

  

 

  

 

  

US Bank Money Market Deposit Account (6)

 

 

  

$

138

$

138

Total Short Term Investments — Restricted Money Market Funds

 

 

  

$

138

$

138


(1)All investments of HSLFI are in entities which are organized under the laws of the United States and have a principal place of business in the United States.
(2)All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to HSLFI’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETPs and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt investments are at variable rates for the term of the debt investment, unless otherwise indicated. All debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2019 is provided.
(3)ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid.
(4)Warrants are non-income producing.
(5)For debt investments, represents principal balance less unearned income.
(6)Has been pledged as collateral under the NYL Facility.
(7)The fair value of the investment was valued using significant unobservable inputs.
(8)Portfolio company is a public company.
(9)New Signature US, Inc. is a subsidiary of BSI Platform Holdings, LLC.

The following tables show certain summarized financial information for HSLFI as of December 31, 2019, for the period January 1, 2020 through April 21, 2020 and the three and nine months ended September 30, 2019:

December 31, 

    

2019

Selected Statement of Assets and Liabilities Information

 

  

Total investments at fair value (cost of $34,895)

$

34,829

Cash and cash equivalents

 

503

Investments in money market funds

 

11,201

Restricted investments in money market funds

138

Interest receivable

 

477

Other assets

 

1,109

Total assets

$

48,257

Borrowings

$

14,955

Other liabilities

 

126

Total liabilities

 

15,081

Members’ equity

 

33,176

Total liabilities and members’ equity

$

48,257

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For the period

For the three

For the nine

January 1, 2020

months ended

months ended

through

September 30, 

September 30, 

    

April 21, 2020

    

2019

    

2019

(In thousands)

Selected Statements of Operations Information

  

  

  

Interest income on investments

$

1,353

$

1,317

$

3,314

Total investment income

$

1,465

$

1,317

$

3,314

Total expenses

$

1,229

$

395

$

869

Net investment income

$

236

$

922

$

2,445

Net realized gain on investments

$

120

$

Net unrealized depreciation on investments

$

(392)

$

(27)

$

(33)

Net (decrease) increase in net assets resulting from operations

$

(36)

$

895

$

2,412

Consolidated results of operations

As a BDC and a RIC, we are subject to certain constraints on our operations, including limitations imposed by the 1940 Act and the Code. The consolidated results of operations described below may not be indicative of the results we report in future periods.

Comparison of the three months ended September 30, 2020 and 2019

The following table shows consolidated results of operations for the three months ended September 30, 2020 and 2019:

For the three months ended

September 30, 

    

2020

    

2019

(In thousands)

Total investment income

$

12,331

$

11,375

Total expenses

 

6,471

 

5,602

Net investment income

 

5,860

 

5,773

Net realized gain (loss) on investments

 

1,178

 

(424)

Net unrealized depreciation on investments

 

(10,288)

 

(143)

Net (decrease) increase in net assets resulting from operations

$

(3,250)

$

5,206

Average debt investments, at fair value

$

325,809

$

246,648

Average borrowings outstanding

$

194,973

$

135,232

Net (decrease) increase in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation on investments. As a result, quarterly comparisons of net increase in net assets resulting from operations may not be meaningful.

Investment income

Total investment income increased by $1.0 million, or 8.4%, to $12.3 million for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. For the three months ended September 30, 2020, total investment income consisted primarily of $11.1 million in interest income from investments, which included $2.9 million in income from the accretion of origination fees and ETPs and $1.2 million in fee income. Interest income on debt investments increased by $2.0 million, or 21.4%, to $11.1 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Interest income on debt investments for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 increased primarily due to an increase of $79.2 million, or 32.1%, in the average size of our debt investment portfolio, partially offset by a decrease in one-month LIBOR which is the base rate for most of our variable rate debt investments. Fee income, which includes success fee, other fee and prepayment fee income on debt investments, decreased by $0.5 million, or 31.7%, to

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$1.2 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to lower fee income earned on prepayments.

The following table shows our dollar-weighted annualized yield for the three months ended September 30, 2020 and 2019:

For the three months ended

September 30, 

Investment type:

    

2020

    

2019

    

Debt investments(1)(2)

 

15.1

%  

17.7

%

Equity interest in HSLFI and debt investments(1)(3)

 

%  

17.5

%

Equity interest in HSLFI(1)(4)

 

%  

13.5

All investments(1)(5)

 

14.6

%  

16.4

%


(1)We calculate the dollar-weighted annualized yield on average investment type for any period as (1) total related investment income during the period divided by (2) the average of the fair value of the investment type outstanding on (a) the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar month during the period. The dollar-weighted annualized yield on average investment type is higher than what investors will realize because it does not reflect our expenses or any sales load paid by investors
(2)Excludes any yield from warrants, equity, other investments and equity interest in HSLFI. Related investment income includes interest income and fee income from debt investments.
(3)Excludes any yield from warrants, equity and other investments. Related investment income includes interest income and fee income from debt investments and dividend income from equity interest in HSLFI. There was no equity interest in HSLFI for the three months ended September 30, 2020.
(4)Excludes any yield from debt investments, warrants, equity and other investments. Related investment income includes dividend income from equity interest in HSLFI. There was no equity interest in HSLFI for the three months ended September 30, 2020.
(5)Includes any yield from debt investments, warrants, equity, other investments and equity interest in HSFLI. Related investment income includes interest income, fee income and dividend income.

Investment income, consisting of interest income and fees on debt investments, can fluctuate significantly upon repayment of large debt investments. Interest income from the five largest debt investments in the aggregate accounted for 29% and 24% of investment income for the three months ended September 30, 2020 and 2019, respectively.

Expenses

Net expenses increased by $0.9 million, or 15.5%, to $6.5 million for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. Total expenses for each period consisted of interest expense, base management fee, incentive and administrative fees, professional fees and general and administrative expenses.

Interest expense increased by $0.6 million, or 27.4%, to $2.6 million for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. Interest expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $59.7 million, or 44.2%, offset by a reduction in our effective cost of debt, for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Base management fee expense increased by $0.2 million, or 15.9%, to $1.6 million for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. Base management fee increased primarily due to an increase of $79.2 million, or 32.1%, in the average size of our investment portfolio for the three months

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ended September 30, 2020 as compared to the three months ended September 30, 2019, offset by the reduced management fee rate on which the base management fee is calculated for assets in excess of $250 million.

On March 5, 2019, our Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled to receive under the Investment Management Agreement for the period commencing on January 1, 2019 and ending on December 31, 2019. Such waived incentive fees will not be subject to recoupment. During the three months ended September 30, 2019, our Advisor did not waive performance based incentive fees as the total amount previously deferred had been completely earned and waived by our Advisor.

Performance based incentive fee expense, net of the waiver above, increased by $0.02 million, or 1.5%, to $1.5 million for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. This increase was due to an increase of $0.1 million, or 1.5%, in Pre-Incentive Fee Net Investment Income for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Administrative fee expense, professional fees and general and administrative were $0.8 million and $0.7 million for the three months ended September 30, 2020 and 2019, respectively.

Net realized gains and losses and net unrealized appreciation and depreciation

Realized gains or losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of our investments without regard to unrealized appreciation or depreciation previously recognized. Realized gains or losses on investments include investments charged off during the period, net of recoveries. The net change in unrealized appreciation or depreciation on investments primarily reflects the change in portfolio investment fair values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

During the three months ended September 30, 2020, we realized net gains totaling $1.2 million primarily due to the realized gain from the exercise and sale of one of our warrant investments and the termination of another warrant investment. During the three months ended September 30, 2019, we realized net losses totaling $0.4 million primarily due to the sale of one of our royalty agreements which was included in other investments and partially offset by a realized gain from the sale of one of our warrant investments.

During the three months ended September 30, 2020, net unrealized depreciation on investments totaled $10.3 million which was primarily due to the unrealized depreciation on two of our debt investments. During the three months ended September 30, 2019, net unrealized depreciation on investments totaled $0.1 million which was primarily due to (1) a reversal of previously recorded unrealized depreciation on one of our royalty agreements which was included in other investments and (2) unrealized depreciation on one of our other investments.

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Comparison of the nine months ended September 30, 2020 and 2019

The following table shows consolidated results of operations for the nine months ended September 30, 2020 and 2019:

For the nine months ended

September 30, 

    

2020

    

2019

(In thousands)

Total investment income

35,969

$

30,150

Total expenses

 

19,120

 

17,980

Performance based incentive fee waived

 

 

(1,848)

Net expenses

 

19,120

 

16,132

Net investment income

 

16,849

 

14,018

Net realized gain (loss) on investments

 

3,945

 

(3,871)

Net unrealized (depreciation) appreciation on investments

 

(16,827)

 

2,622

Net increase in net assets resulting from operations

$

3,967

$

12,769

Average debt investments, at fair value

$

313,633

$

235,391

Average borrowings outstanding

$

177,708

$

129,661

Net increase in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation on investments. As a result, quarterly comparisons of net increase in net assets resulting from operations may not be meaningful.

Investment income

Total investment income increased by $5.8 million, or 19.3%, to $36.0 million for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. For the nine months ended September 30, 2020, total investment income consisted primarily of $32.8 million in interest income from investments, which included $8.3 million in income from the accretion of origination fees and ETPs, $3.0 million in fee income and $0.1 million in dividend income. Interest income on debt investments increased by $6.7 million, or 25.9%, to $32.8 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Interest income on debt investments for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 increased primarily due to an increase of $78.2 million, or 33.2%, in the average size of our debt investment portfolio, partially offset by a decrease in one-month LIBOR which is the base rate for most of our variable rate debt investments. Fee income, which includes success fee, other fee and prepayment fee income on debt investments, increased by $0.2 million, or 6.3%, to $3.0 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to an increase in fees earned on higher principal prepayments received.

The following table shows our dollar-weighted annualized yield for the nine months ended September 30, 2020 and 2019:

For the nine months ended

September 30, 

Investment type:

    

2020

    

2019

    

Debt investments(1)(2)

 

15.2

%  

16.4

%  

Equity interest in HSLFI and debt investments(1)(3)

 

15.0

%  

16.2

%  

Equity interest in HSLFI(1)(4)

 

%  

12.2

%  

All investments(1)(5)

 

14.4

%  

15.1

%  


(1)We calculate the dollar-weighted annualized yield on average investment type for any period as (1) total related investment income during the period divided by (2) the average of the fair value of the investment type outstanding on (a) the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar month during the period. The dollar-weighted annualized yield on average investment type is higher than what investors will realize because it does not reflect our expenses or any sales load paid by investors

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(2)Excludes any yield from warrants, equity, other investments and equity interest in HSLFI. Related investment income includes interest income and fee income from debt investments.
(3)Excludes any yield from warrants, equity and other investments. Related investment income includes interest income and fee income from debt investments and dividend income from equity interest in HSLFI.
(4)Excludes any yield from debt investments, warrants, equity and other investments. Related investment income includes dividend income from equity interest in HSLFI.
(5)Includes any yield from debt investments, warrants, equity, other investments and equity interest in HSFLI. Related investment income includes interest income, fee income and dividend income.

Investment income, consisting of interest income and fees on debt investments, can fluctuate significantly upon repayment of large debt investments. Interest income from the five largest debt investments in the aggregate accounted for 25% and 24% of investment income for the nine months ended September 30, 2020 and 2019, respectively.

Expenses

Net expenses increased by $3.0 million, or 18.5%, to $19.1 million for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. Total expenses for each period consisted of interest expense, base management fee, incentive and administrative fees, professional fees and general and administrative expenses.

Interest expense increased by $1.1 million, or 18.1%, to $7.3 million for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. Interest expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $48.0 million, or 37.1%, offset by a reduction in our effective cost of debt, for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Base management fee expense increased by $0.8 million, or 20.0%, to $4.9 million for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. Base management fee increased primarily due to an increase of $78.2 million, or 33.2%, in the average size of our investment portfolio for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, offset by the reduced management fee rate on which the base management fee is calculated for assets in excess of $250 million.

On March 5, 2019, our Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled to receive under the Investment Management Agreement for the period commencing on January 1, 2019 and ending on December 31, 2019. Such waived incentive fees will not be subject to recoupment. During the nine months ended September 30, 2019, our Advisor waived performance based incentive fees of $1.8 million which our Advisor would have otherwise been paid. This resulted in $1.8 million of reduced expense and additional net investment income for the nine months ended September 30, 2019.

Performance based incentive fee expense, net of the waiver above, increased by $0.7 million, or 20.2%, to $4.2 million for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 . This increase was due to an increase of $3.5 million, or 20.2%, in Pre-Incentive Fee Net Investment Income for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Administrative fee expense, professional fees and general and administrative were $2.7 million and $2.4 million for the nine months ended September 30, 2020 and 2019, respectively.

Net realized gains and losses and net unrealized appreciation and depreciation

Realized gains or losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of our investments without regard to unrealized appreciation or depreciation previously recognized. Realized gains or losses on investments include investments charged off during the period, net of recoveries.

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The net change in unrealized appreciation or depreciation on investments primarily reflects the change in portfolio investment fair values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

During the nine months ended September 30, 2020, we realized net gains totaling $3.9 million primarily due to the realized gain from the consideration we received from the exercise and sale of warrants in five portfolio companies offset by the realized loss on the settlement of one of our debt investmetns. During the nine months ended September 30, 2019, we realized net losses totaling $3.9 million primarily due to the expiration of one of our royalty agreements which was included in other investments which was partially offset by a gain on the sale of our equity investment in one portfolio company and from the consideration we received from the termination of warrants upon the sale of two portfolio companies.

During the nine months ended September 30, 2020, net unrealized depreciation on investments totaled $16.8 million which was primarily due to the unrealized depreciation on four of our debt investments. During the nine months ended September 30, 2019, net unrealized appreciation on investments totaled $2.7 million which was primarily due to the net unrealized appreciation on two of our royalty agreements which were included in other investments and the unrealized appreciation on one of our equity investments, partially offset by the unrealized depreciation on one of our debt investments.

Liquidity and capital resources

As of September 30, 2020 and December 31, 2019, we had cash and investments in money market funds of $56.9 million and $16.3 million, respectively. Cash is available to fund new investments, reduce borrowings, pay expenses, repurchase common stock and pay distributions. In addition, as of September 30, 2020 and December 31, 2019, we had $0.8 million and $1.1 million, respectively, of restricted investments in money market funds. Restricted investments in money market funds may be used to make monthly interest and principal payments on our Asset-Backed Notes. Our primary sources of capital have been from our public and private equity offerings, use of our revolving credit facilities and issuance of our public debt offerings.

On March 26, 2019, we completed a follow-on public offering of 2,000,000 shares of our common stock at a public offering price of $12.14 per share, for total net proceeds to us of $23.1 million, after deducting underwriting commission and discounts and other offering expenses.

On August 2, 2019 we entered into an At-The-Market, or ATM, sales agreement, or the Prior Equity Distribution Agreement, with Goldman Sachs & Co. LLC and B. Riley FBR, Inc., each a Sales Agent and, collectively, the Sales Agents. The Prior Equity Distribution Agreement provided that we may offer and sell shares of common stock from time to time through the Sales Agents representing up to $50.0 million worth of our common stock, in amounts and at times to be determined by us.

On July 30, 2020, we terminated the Prior Equity Distribution Agreement and entered into a new ATM sales agreement, or the Equity Distribution Agreement, with the Sales Agents. The remaining shares available under the Prior Equity Distribution Agreement are no longer available for issuance. The Equity Distribution Agreement provides that we may offer and sell our shares from time to time through the Sales Agents up to $100.0 million worth of its common stock, in amounts and at times to be determined by us. Sales of our common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at-the-market,” as defined in Rule 415 under the Securities Act, including sales made directly on the NASDAQ or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices

During the three months ended September 30, 2020, we sold 1,069,259 shares of common stock under the Equity Distribution Agreement. For the same period, we received total accumulated net proceeds of approximately $12.7 million, including $0.3 million of offering expenses, from these sales.

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During the nine months ended September 30, 2020, we sold 2,787,160 shares of common stock under the Prior Equity Distribution Agreement and the Equity Distribution Agreement. For the same period, we received total accumulated net proceeds of approximately $33.8 million, including $0.8 million of offering expenses, from these sales.

On April 24, 2020, our Board extended a previously authorized stock repurchase program which allows us to repurchase up to $5.0 million of our common stock at prices below our net asset value per share as reported in our most recent consolidated financial statements. Under the repurchase program, we may, but are not obligated to, repurchase shares of our outstanding common stock in the open market or in privately negotiated transactions from time to time. Any repurchases by us will comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and any applicable requirements of the 1940 Act. Unless extended by our Board, the repurchase program will terminate on the earlier of June 30, 2021 or the repurchase of $5.0 million of our common stock. During the three and nine months ended September 30, 2020 and 2019, we did not make any repurchases of our common stock. From the inception of the stock repurchase program through September 30, 2020, we repurchased 167,465 shares of our common stock at an average price of $11.22 on the open market at a total cost of $1.9 million.

At September 30, 2020 and December 31, 2019, the outstanding principal balance under our revolving credit facility, or the Key Facility, with KeyBank National Association was $15.0 million and $17.0 million, respectively. As of September 30, 2020 and December 31, 2019, we had borrowing capacity under the Key Facility of $110.0 million and $108.0 million, respectively. At September 30, 2020 and December 31, 2019, $45.1 million and $24.2 million, respectively, were available, subject to existing terms and advance rates.

At September 30, 2020, the outstanding principal balance under the NYL Facility was $13.3 million. As of September 30, 2020, we had borrowing capacity under the NYL Facility of $86.8 million. At September 30, 2020, $2.2 million was available, subject to existing terms and advance rates.

Our operating activities provided cash of $11.9 million for the nine months ended September 30, 2020, and our financing activities provided cash of $28.4 million for the same period. Our operating activities provided cash primarily from principal payments received on our debt investments and proceeds from the sales of investments offset by purchases of investments in portfolio companies. Our financing activities provided cash primarily from advances on our credit facilities and the sale of shares through our ATM for net proceeds of $33.8 million, after deducting underwriting commission and discounts and other offering expenses, partially offset by cash used to repay our Key Facility and pay distributions to our stockholders.

Our operating activities used cash of $20.9 million for the nine months ended September 30, 2019, and our financing activities provided cash of $44.7 million for the same period. Our operating activities used cash primarily to purchase investments in portfolio companies partially offset by principal payments received on our debt investments. Our financing activities provided cash primarily from the sale of shares through a follow-on public offering and our ATM for net proceeds of $33.3 million, after deducting underwriting commission and discounts and other offering expenses and the completion of our securitization, partially offset by cash used to repay our Key Facility and pay distributions to our stockholders.

Our primary use of available funds is to make debt investments in portfolio companies and for general corporate purposes. We expect to raise additional equity and debt capital opportunistically as needed and, subject to market conditions, to support our future growth to the extent permitted by the 1940 Act.

In order to remain subject to taxation as a RIC, we intend to distribute to our stockholders all or substantially all of our investment company taxable income. In addition, as a BDC, we are required to maintain asset coverage of at least 150%. This requirement limits the amount that we may borrow.

We believe that our current cash, cash generated from operations, and funds available from our Key Facility and our NYL Facility will be sufficient to meet our working capital and capital expenditure commitments for at least the next 12 months.

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Current borrowings

The following table shows our borrowings as of September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

    

Total

    

Balance

    

Unused

    

Total

    

Balance

    

Unused

Commitment

Outstanding

Commitment

Commitment

Outstanding

Commitment

(In thousands)

Key Facility

$

125,000

$

15,000

$

110,000

$

125,000

$

17,000

$

108,000

NYL Facility

100,000

13,250

86,750

Asset-Backed Notes

 

100,000

 

100,000

 

 

100,000

 

100,000

 

2022 Notes

 

37,375

 

37,375

 

 

37,375

 

37,375

 

Total before debt issuance costs

 

362,375

 

165,625

 

196,750

 

262,375

 

154,375

 

108,000

Unamortized debt issuance costs attributable to term borrowings

 

 

(1,936)

 

 

 

(2,325)

 

Total borrowings outstanding, net

$

362,375

$

163,689

$

196,750

$

262,375

$

152,050

$

108,000

We entered into the Key Facility effective November 4, 2013. The interest rate on the Key Facility is based upon the one-month LIBOR plus a spread of 3.25%, with a LIBOR floor of 1.00%. The LIBOR rate was 0.15% and 1.76% as of September 30, 2020 and December 31, 2019, respectively. The interest rates in effect were 4.25% and 4.94% as of September 30, 2020 and December 31, 2019, respectively. The Key Facility requires the payment of an unused line fee in an amount equal to 0.50% of any unborrowed amount available under the facility annually.

The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million. On June 29, 2020, we amended the Key Facility, among other things, to amend the LIBOR floor from 0.75% to 1.00% and to extend the period during which we may request advances under the Key Facility, or the Revolving Period, to September 30, 2021. The Key Facility is collateralized by debt investments held by Horizon Credit II LLC, or Credit II, and permits an advance rate of up to fifty percent (50%) of eligible debt investments held by Credit II. The Key Facility contains covenants that, among other things, require us to maintain a minimum net worth, to restrict the debt investments securing the Key Facility to certain criteria for qualified debt investments and to comply with portfolio company concentration limits as defined in the related loan agreement. After the Revolving Period, we may not request new advances, and we must repay the outstanding advances under the Key Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Key Facility, particularly the condition that the principal balance of the Key Facility not exceed fifty percent (50%) of the aggregate principal balance of our eligible debt investments to our portfolio companies. The maturity of the Key Facility, the date on which all outstanding advances under the Key Facility are due and payable, is on April 6, 2023.

On September 29, 2017, we issued and sold an aggregate principal amount of $32.5 million of our 6.25% notes due 2022, or the 2022 Notes, and on October 11, 2017, pursuant to the underwriters’ 30-day option to purchase additional notes, we sold an additional $4.9 million of the 2022 Notes. The 2022 Notes have a stated maturity of September 15, 2022 and may be redeemed in whole or in part at our option at any time or from time to time on or after September 15, 2019 at a redemption price of $25 per security plus accrued and unpaid interest. The 2022 Notes bear interest at a rate of 6.25% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2022 Notes are our direct, unsecured obligations and (1) rank equally in right of payment with our current and future unsecured indebtedness; (2) are senior in right of payment to any of our future indebtedness that expressly provides it is subordinated to the 2022 Notes; (3) are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness and (4) are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. As of September 30, 2020, we were in material compliance with the terms of the 2022 Notes. The 2022 Notes are listed on the New York Stock Exchange under the symbol “HTFA”.

On August 13, 2019, the Asset-Backed Notes were issued by the 2019-1 Trust pursuant to a note purchase agreement, dated as of August 13, 2019, by and among us and Keybanc Capital Markets Inc. as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of ours and secured by certain assets of those portfolio companies and

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are to be serviced by us. Interest on the Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.21% per annum. The Asset-Backed Notes have a two-year reinvestment period and a stated maturity of September 15, 2027. The Asset-Backed Notes were rated A+(sf) by Morningstar Credit Ratings, LLC on August 13, 2019.  There has been no change in the rating since August 13, 2019.

At September 30, 2020, and December 31, 2019, the Asset-Backed Notes had an outstanding principal balance of $100.0 million.

Under the terms of the Asset-Backed Notes, we are required to maintain a reserve cash balance, funded through proceeds from the sale of the Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the Asset-Backed Notes. The Company has segregated these funds and classified them as restricted investments in money market funds. At September 30, 2020, and December 31, 2019, there was approximately $0.8 million and $1.1 million, respectively, of restricted investments.

On April 21, 2020, we purchased all of the limited liability company interests of Arena in HSLFI, including, which is a party to the NYL Facility. HFI entered into the NYL Facility with the Noteholders for an aggregate purchase price of up to $100.0 million, with an accordion feature of up to $200.0 million at the mutual discretion and agreement of HSLFI and the Noteholders. On June 1, 2018, HSLFI sold or contributed to HFI certain secured loans made to certain portfolio companies pursuant to into the Sale and Servicing Agreement. Any notes issued by HFI are collateralized by all investments held by HFI and permit an advance rate of up to 67% of the aggregate principal amount of eligible debt investments.

On June 5, 2020, we amended the NYL Facility to extend the investment period to June 5, 2022. The investment period will be followed by a five year amortization period. The stated final payment date was extended to June 15, 2027, subject to any extension of the investment period. The interest rate on the notes issued under the NYL Facility is based on the three year USD mid-market swap rate plus a margin of between 3.55% and 5.15% with an interest rate floor, depending on the rating of such notes at the time of issuance. Any obligation to make additional advances was conditioned on the occurrence of certain conditions, which were satisfied June 26, 2020. There were $13.3 million in advances made by the Noteholders as of September 30, 2020 at an interest rate of 4.60%.

Other assets

As of September 30, 2020 and December 31, 2019, other assets were $1.9 million and $1.5 million, respectively, which is primarily comprised of debt issuance costs and prepaid expenses.

Contractual obligations and off-balance sheet arrangements

The following table shows our significant contractual payment obligations and off-balance sheet arrangements as of September 30, 2020:

Payments due by period

    

    

Less than

    

1 – 3

    

3 – 5

    

After 5

Total

1 year

Years

Years

years

(In thousands)

Borrowings

$

165,625

$

23,188

$

118,600

$

23,837

$

Unfunded commitments

 

80,875

 

55,875

 

25,000

 

 

Total

$

246,500

$

79,063

$

143,600

$

23,837

$

In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our unfunded commitments may be significant from time to time. As of September 30, 2020, we had such unfunded commitments of $80.9 million. This includes no undrawn revolver commitments. These commitments are subject to the same underwriting and ongoing portfolio maintenance requirements as are the financial instruments that we hold on our balance sheet. In addition, these

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commitments are often subject to financial or non-financial milestones and other conditions to borrowing that must be achieved before the commitment can be drawn. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We regularly monitor our unfunded commitments and anticipated refinancings, maturities and capital raising, to ensure that we have sufficient liquidity to fund such unfunded commitments. As of September 30, 2020, we reasonably believed that our assets would provide adequate financial resources to satisfy all of our unfunded commitments.

In addition to the Key Facility and the NYL Facility, we have certain commitments pursuant to our Investment Management Agreement entered into with our Advisor. We have agreed to pay a fee for investment advisory and management services consisting of two components (1) a base management fee equal to a percentage of the value of our gross assets less cash or cash equivalents, and (2) a two-part incentive fee. We have also entered into a contract with our Advisor to serve as our administrator. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of our Advisor’s overhead in performing its obligations under the agreement, including rent, fees and other expenses inclusive of our allocable portion of the compensation of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. See Note 3 to our consolidated financial statements for additional information regarding our Investment Management Agreement and our Administration Agreement.

Distributions

In order to qualify and be subject to tax as a RIC, we must meet certain source-of-income, asset diversification and annual distribution requirements. Generally, in order to qualify as a RIC, we must derive at least 90% of our gross income for each tax year from dividends, interest, payments with respect to certain securities, loans, gains from the sale or other disposition of stock, securities or foreign currencies, income derived from certain publicly traded partnerships, or other income derived with respect to its business of investing in stock or other securities. We must also meet certain asset diversification requirements at the end of each quarter of each tax year. Failure to meet these diversification requirements on the last day of a quarter may result in us having to dispose of certain investments quickly in order to prevent the loss of RIC status. Any such dispositions could be made at disadvantageous prices or times, and may cause us to incur substantial losses.

In addition, in order to be subject to tax as a RIC and to avoid the imposition of corporate-level tax on the income and gains we distribute to our stockholders in respect of any tax year, we are required under the Code to distribute as dividends to our stockholders out of assets legally available for distribution each tax year an amount generally at least equal to 90% of the sum of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any. Additionally, in order to avoid the imposition of a U.S. federal excise tax, we are required to distribute, in respect of each calendar year, dividends to our stockholders of an amount at least equal to the sum of 98% of our calendar year net ordinary income (taking into account certain deferrals and elections); 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the one year period ending on October 31 of such calendar year; and any net ordinary income and capital gain net income for preceding calendar years that were not distributed during such calendar years and on which we previously did not incur any U.S. federal income tax. If we fail to qualify as a RIC for any reason and become subject to corporate tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders. In addition, we could be required to recognize unrealized gains, incur substantial taxes and interest and make substantial distributions in order to re-qualify as a RIC. We cannot assure stockholders that they will receive any distributions.

To the extent our taxable earnings in a tax year fall below the total amount of our distributions made to stockholders in respect of such tax year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should review any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary income or gains.

We have adopted an “opt out” dividend reinvestment plan, or DRIP, for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our DRIP. If a stockholder opts out, that stockholder will

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receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes, stockholders participating in our DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes. If our common stock is trading above net asset value, a stockholder receiving distributions in the form of additional shares of our common stock will be treated as receiving a distribution of an amount equal to the fair market value of such shares of our common stock. We may use newly issued shares to implement the DRIP, or we may purchase shares in the open market in connection with our obligations under the DRIP.

Related party transactions

We have entered into the Investment Management Agreement with the Advisor. The Advisor is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Our investment activities are managed by the Advisor and supervised by the Board, the majority of whom are independent directors. Under the Investment Management Agreement, we have agreed to pay the Advisor a base management fee as well as an incentive fee. During the three months ended September 30, 2020 and 2019, the Advisor earned $3.1 million and $2.8 million, respectively, pursuant to the Investment Management Agreement. During the nine months ended September 30, 2020 and 2019, the Advisor earned $9.1 million and $7.6 million, respectively, pursuant to the Investment Management Agreement.

Through March 6, 2019, our Advisor was 60% owned by HTF Holdings LLC, which was wholly-owned by Horizon Technology Finance Principals LLC f/k/a Horizon Technology Finance, LLC (“HTF Principals”). HTF Principals was wholly-owned by Robert D. Pomeroy, Jr. and Gerald A. Michaud. By virtue of their ownership interest in HTF Principals, our Chief Executive Officer, Robert D. Pomeroy, Jr. and our President, Gerald A. Michaud controlled our Advisor. Effective as of March 7, 2019, HTF Principals owns seventy-five percent (75%) of the Advisor. By virtue of their ownership interest in Horizon Principals, our Chief Executive Officer, Robert D. Pomeroy, Jr. and our President, Gerald A. Michaud control our Advisor.

We have also entered into the Administration Agreement with the Advisor. Under the Administration Agreement, we have agreed to reimburse the Advisor for our allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. In addition, pursuant to the terms of the Administration Agreement the Advisor provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. During the three months ended September 30, 2020 and 2019, the Advisor earned $0.2 million, pursuant to the Administration Agreement. During the nine months ended September 30, 2020 and 2019, the Advisor earned $0.7 million and $0.6 million, respectively, pursuant to the Administration Agreement.

The predecessor of the Advisor has granted the Company a non-exclusive, royalty-free license to use the name “Horizon Technology Finance.”

We believe that we derive substantial benefits from our relationship with our Advisor. Our Advisor may manage other investment vehicles, or Advisor Funds, with the same investment strategy as us. The Advisor may provide us an opportunity to co-invest with the Advisor Funds. Under the 1940 Act, absent receipt of exemptive relief from the SEC, we and our affiliates are precluded from co-investing in negotiated investments. On November 27, 2017, we were granted exemptive relief from the SEC which permits us to co-invest with Advisor Funds, subject to certain conditions.

Critical accounting policies

The discussion of our financial condition and results of operation is based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we describe our significant accounting policies in the notes to our consolidated financial statements.

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We have identified the following items as critical accounting policies.

Valuation of investments

Investments are recorded at fair value. Our Board determines the fair value of our portfolio investments. We apply fair value to substantially all of our investments in accordance with Topic 820, Fair Value Measurement, of the Financial Accounting Standards Board’s, or FASB’s, Accounting Standards Codification as amended, or ASC, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. We have categorized our investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. The three categories within the hierarchy are as follows:

Level 1

Quoted prices in active markets for identical assets and liabilities.

Level 2

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.

Our Board determines the fair value of investments in good faith, based on the input of management, the audit committee and independent valuation firms that have been engaged at the direction of our Board to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing twelve-month period under our valuation policy and a consistently applied valuation process. The Board conducts this valuation process at the end of each fiscal quarter, with 25% (based on fair value) of our valuation of portfolio companies that do not have a readily available market quotations subject to review by an independent valuation firm.

Income recognition

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if we otherwise do not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. For the three and nine months ended September 30, 2020, we recognized as interest income interest payments of $0.03 million received from one portfolio company whose debt investment was on non-accrual status. For the three and nine months ended September 30, 2019, we did not recognize any interest income from debt investments on non-accrual status.

We receive a variety of fees from borrowers in the ordinary course of conducting our business, including advisory fees, commitment fees, amendment fees, non-utilization fees, success fees and prepayment fees. In a limited number of cases, we may also receive a non-refundable deposit earned upon the termination of a transaction. Debt investment

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origination fees, net of certain direct origination costs, are deferred, and along with unearned income, are amortized as a level yield adjustment over the respective term of the debt investment. All other income is recorded into income when earned. Fees for counterparty debt investment commitments with multiple debt investments are allocated to each debt investment based upon each debt investment’s relative fair value. When a debt investment is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the debt investment is returned to accrual status.

Certain debt investment agreements also require the borrower to make an ETP that is accrued into income over the life of the debt investment to the extent such amounts are expected to be collected. We will generally cease accruing the income if there is insufficient value to support the accrual or if we do not expect the borrower to be able to pay all principal and interest due.

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

Prior to consolidating the investment of HSLFI on and after April 21, 2020, distributions from HSLFI were evaluated at the time of distribution to determine if the distribution should be recorded as dividend income or a return of capital. Generally, we did not record distributions from HSLFI as dividend income unless there were sufficient accumulated tax-basis earnings and profit in HSLFI prior to distribution. Distributions that were classified as a return of capital were recorded as a reduction in the cost basis of the investment. For the period January 1, 2020 through April 21, 2020, there were no distributions from HSLFI. For the three and nine months ended September 30, 2019, HSLFI distributed $0.2 million and $0.7 million, respectively, classified as dividend income to us.

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

Income taxes

We have elected to be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC and to avoid the imposition of corporate-level U.S. federal income tax on the amounts we distribute to our stockholders, among other things, we are required to meet certain source of income and asset diversification requirements, and we must timely distribute dividends to our stockholders out of assets legally available for distribution each tax year of an amount generally at least equal to 90% of our investment company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid. We, among other things, have made and intend to continue to make the requisite distributions to our stockholders, which will generally relieve us from incurring any material liability for U.S. federal income taxes.

Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and incur a 4% excise tax on such income, as required. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year distributions, we will accrue excise tax, if any, on estimated excess taxable income as taxable income is earned.

We evaluate tax positions taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes,

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as modified by ASC Topic 946, Financial Services Investment Companies. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, are recorded as a tax expense in the current year. It is our policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. We had no material uncertain tax positions at September 30, 2020 and December 31, 2019.

Recent development

On July 8, 2020, Espero BioPharma, Inc. and its affiliates, Jacksonville Pharmaceuticals, Inc. and  Espero Pharmaceuticals, Inc. (collectively, “Espero”) assigned substantially all of their assets to their respective assignment estates and respectively appointed PSE (ABC), LLC, PS PJAX (ABC), LLC, and PPSE (ABC), LLC (collectively, “Espero ABC”) to administer their respective estates and to facilitate the orderly sale and liquidation of their property and assets. On October 6, 2020, the Court of Chancery of the State of Delaware approved the transfer of the assets of Espero to us and Credit II or our designees in consideration for our and Credit II’s credit bid at auction of $7.0 million. On October 22, 2020, Espero ABC transferred the assets of Espero to HESP LLC, a Delaware limited liability company, wholly owned by us.

Recently issued accounting pronouncement

In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, or ASU 2020-04. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently assessing the impact of ASU 2020-04 and the LIBOR transition on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. During the periods covered by our financial statements, the interest rates on the debt investments within our portfolio were primarily at floating rates. We expect that our debt investments in the future will primarily have floating interest rates. As of September 30, 2020 and December 31, 2019, 100% and 99%, respectively, of the outstanding principal amount of our debt investments bore interest at floating rates. The initial commitments to lend to our portfolio companies are usually based on either a floating LIBOR index or the Prime Rate as published in the Wall Street Journal.

Based on our September 30, 2020 consolidated statement of assets and liabilities (without adjustment for potential changes in the credit market, credit quality, size and composition of assets on the consolidated statement of assets and liabilities or other business developments that could affect net income) and the base index rates at September 30, 2020, the following table shows the annual impact on the change in net assets resulting from operations of changes in interest rates, which assumes no changes in our investments and borrowings:

    

Investment

    

Interest

    

Change in Net

Change in basis points

Income

Expense

Assets(1)

(In thousands)

Up 300 basis points

$

3,882

$

328

$

3,554

Up 200 basis points

$

1,422

$

176

$

1,246

Up 100 basis points

$

392

$

24

$

368

Down 300 basis points

$

$

$

Down 200 basis points

$

$

$

Down 100 basis points

$

$

$


(1)

Excludes the impact of incentive fees based on pre-incentive fee net investment income.

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While our 2022 Notes and our Asset-Backed Notes bear interest at a fixed rate, our Key Facility and our NYL Facility have a floating interest rate provision. The Key Facility is subject to a floor of 1.00% per annum, based on a LIBOR index which resets monthly and the NYL Facility is based on the three year USD mid-market swap rate plus a margin of between 3.55% and 5.15% with an interest rate floor, depending on the rating of such notes at the time of issuance. Any other credit facilities into which we enter in the future may have floating interest rate provisions. We have used hedging instruments in the past to protect us against interest rate fluctuations, and we may use them in the future. Such instruments may include caps, swaps, futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates. Engaging in commodity interest transactions such as swap transactions or futures contracts for the Company may cause the Investment Adviser to fall within the definition of “commodity pool operator” under the Commodity Exchange Act (the “CEA”) and related Commodity Futures Trading Commission (the “CFTC”) regulations. On January 31, 2020, the Investment Adviser claimed an exclusion from the definition of the term “commodity pool operator” under the CEA and the CFTC regulations in connection with its management of the Company and, therefore, is not subject to CFTC registration or regulation under the CEA as a commodity pool operator with respect to its management of the Company.

Because we currently fund, and expect to continue to fund, our investments with borrowings, our net income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

As of September 30, 2020, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

(b) Changes in internal controls over financial reporting.

There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1: Legal Proceedings.

Neither we nor our Advisor is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or against our Advisor.

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Item 1A: Risk Factors.

In addition to other information set forth in this report, you should carefully consider the factors set forth below and in “Item 1A Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results. There have been no material changes during the nine months ended September 30, 2020 to the risk factors set forth in “Item 1A. Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2019, except as set forth below.

The COVID-19 pandemic could materially and adversely affect our portfolio companies and the results of our operations.

Social, political, economic and other conditions and events will occur that create uncertainty and have significant impacts on issuers, industries, governments and other systems, including the financial markets, to which the Company and its investments are exposed. In addition, global economies and financial markets are increasingly interconnected, and political, economic and other conditions and events in one country, region, or financial market may adversely impact issuers in a different country, region or financial market. Furthermore, the occurrence of, among other events, natural or man-made disasters, severe weather or geological events, fires, floods, earthquakes, outbreaks of disease (such as COVID-19, avian influenza or H1N1/09), epidemics, pandemics, malicious acts, cyber-attacks, terrorist acts or the occurrence of climate change, also adversely impact our performance from time to time. Such events may result in, and have resulted in, closing borders, securities exchange closures, health screenings, healthcare service delays, quarantines, cancellations, supply chain disruptions, lower consumer demand, market volatility and general uncertainty. Such events have adversely impacted, and may continue to adversely impact our portfolio companies and markets and economies over the short- and long-term, including in ways that cannot necessarily be foreseen. We have been, and may continue to be negatively impacted if the value of our portfolio company holdings were harmed by such political or economic conditions or events. Moreover, such negative political and economic conditions and events have disrupted, and could continue to disrupt the processes necessary for our operations. This has created, and may continue to create widespread business continuity issues for us and our portfolio companies and heightened cybersecurity, information security and operational risks as a result of, among other things, remote work arrangements.

For example, in December 2019, COVID-19 emerged in China and has since spread rapidly to other countries, including the United States. This outbreak has led, and for an unknown period of time will continue to lead, to disruptions in local, regional, national and global markets and economies affected thereby. The global impact of the outbreak is rapidly evolving, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. While several countries, as well as certain states in the United States, have liberalized public health restrictions as to further reopen their economies, recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession in the U.S. and other major markets. With respect to the U.S. credit markets (in particular for middle market loans), this outbreak has resulted in, and until fully resolved is likely to continue to result in, the following, among other things: (i) government imposition and/or re-imposition of various forms of shelter-in-place orders and the closing of "non-essential" businesses, resulting in significant disruption to the businesses of many middle-market loan borrowers including supply chains, demand and practical aspects of their operations, as well as furloughs or lay-offs of employees (while such measures are hoped to be temporary, their impact may persist or become permanent); (ii) increased draws by borrowers on revolving lines of credit; (iii) increased requests by borrowers for amendments, forbearance agreements and waivers of provisions of their credit agreements in order to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; (iv) volatility and disruption of these markets including greater volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility, and liquidity issues; and (v) rapidly evolving proposals and/or actions by state and federal governments to address problems in functioning of the markets and by businesses and the economy in general which will not necessarily adequately address the problems facing the loan market and middle market businesses. The COVID-19 outbreak is having, and any future outbreaks could have, an adverse impact on the markets and the

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economy in general, which could have a material adverse impact on, among other things, the ability of lenders to originate loans, the volume and type of loans originated, and the volume and type of amendments and waivers granted to borrowers and remedial actions taken in the event of a borrower default, each of which could negatively impact the amount and quality of loans available for investment by us and returns to us, among other things. As of the date of this quarterly report on Form 10-Q, it is impossible to determine the scope of this outbreak, or any future outbreaks, how long any such outbreak, market disruption or uncertainties may last, the effect any governmental actions will have or the full potential impact on us and our portfolio companies.  Further, even after the pandemic subsides, the U.S. economy, as well as most other major global economies may continue to experience a recession, and we anticipate our business could be materially and adversely affected by a prolonged recession in the U.S. and other major markets.

Although it is impossible to predict the precise nature and consequences of these events, or of any political or policy decisions and regulatory changes occasioned by emerging events or uncertainty on applicable laws or regulations that impact us, our portfolio companies and our investments, it is clear that these types of events are impacting and will, for at least some time, continue to impact us and our portfolio companies.  In many instances, the impact will be adverse and profound. For example, middle market companies in which we may invest are being significantly impacted by these emerging events and the uncertainty caused by these events. The effects of a public health emergency may materially and adversely impact (i) the value and performance of us and our portfolio companies, (ii) the ability of our borrowers to continue to meet loan covenants or repay loans provided by us on a timely basis or at all, which may require us to restructure our investments or write down the value of our investments, (iii) our ability to comply with the covenants and other terms of our debt obligations and to repay such obligations, on a timely basis or at all, (iv) our ability to comply with certain regulatory requirements, such as asset coverage requirements under the 1940 Act, (v) our ability maintain our distributions at their current level or to pay them at all or (vi) our ability to source, manage and divest investments and achieve our investment objectives, all of which could result in significant losses to us. We will also be negatively affected if the operations and effectiveness of any of our portfolio companies (or any of the key personnel or service providers of the foregoing) is compromised or if necessary or beneficial systems and processes are disrupted.

Disruptions in the capital markets caused by the COVID-19 pandemic have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity can be expected to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also would be expected to increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our and our portfolio companies’ operating results and the fair values of our debt and equity investments.

We are currently operating in a period of capital markets disruption and economic uncertainty.

The U.S. capital markets have experienced extreme volatility and disruption following the spread of COVID-19 in the United States. Some economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a world-wide economic downturn. Disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity would be expected to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also would be expected to increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity investments.

Terrorist attacks, acts of war, natural disasters, disease outbreaks or pandemics may impact our portfolio companies and harm our business, operating results and financial condition.

Terrorist acts, acts of war, natural disasters, disease outbreaks, pandemics, or other similar events may disrupt our operations, as well as the operations of our portfolio companies. Such acts have created, and continue to create, economic and political uncertainties and have contributed to recent global economic instability. Future terrorist activities, military or security operations, natural disasters, disease outbreaks, pandemics, or other similar events could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact our portfolio companies and,

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in turn, could have a material adverse impact on our business, operating results, and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3: Defaults Upon Senior Securities.

None.

Item 4: Mine Safety Disclosures.

Not applicable

Item 5: Other Information.

None.

Item 6: Exhibits.

EXHIBIT INDEX


*

Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

HORIZON TECHNOLOGY FINANCE CORPORATION

Date: November 3, 2020

By:

/s/ Robert D. Pomeroy, Jr.

Name:

Robert D. Pomeroy, Jr.

Title:

Chief Executive Officer and Chairman of the Board

Date: November 3, 2020

By:

/s/ Daniel R. Trolio

Name:

Daniel R. Trolio

Title:

Chief Financial Officer

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