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.
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:
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our future operating results, including the performance of our existing debt investments and warrants;
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the introduction, withdrawal, success and timing of business initiatives and strategies;
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changes in political, economic or industry conditions, the interest rate environment or financial
and capital markets, which could result in changes in the value of our assets;
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the relative and absolute investment performance and operations of our investment advisor, Horizon
Technology Finance Management LLC, or the Advisor;
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the impact of increased competition;
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the impact of investments we intend to make and future acquisitions and divestitures;
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the unfavorable resolution of legal proceedings;
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our business prospects and the prospects of our portfolio companies;
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the impact, extent and timing of technological changes and the adequacy of intellectual property
protection;
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our regulatory structure and tax status;
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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;
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the timing of cash flows, if any, from the operations of our portfolio companies;
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the impact of interest rate volatility on our results, particularly if we use leverage as part
of our investment strategy;
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the ability of our portfolio companies to achieve their objective;
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the impact of legislative and regulatory actions and reforms and regulatory supervisory or enforcement
actions of government agencies relating to us or our Advisor;
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our contractual arrangements and relationships with third parties;
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our ability to access capital and any future financings by us;
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the ability of our Advisor to attract and retain highly talented professionals; and
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the impact of changes to tax legislation and, generally, our tax position.
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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, 2016, 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 cleantech 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 backed companies in our Target Industries, which
we refer to as “Venture Lending.” We also selectively provide Venture Loans to publicly traded companies in our Target
Industries. Our debt investments are typically secured by first liens or first liens behind a secured revolving line of credit,
or Senior Term Loans. As of June 30, 2017, 99.0%, or $163.2 million, of our debt investment portfolio at fair value consisted of
Senior Term Loans. Venture Lending is typically characterized by (1) the making of a secured debt investment after a venture capital
or equity investment in the portfolio company has been made, which investment provides a source of cash to fund the portfolio company’s
debt service obligations under the Venture Loan, (2) the senior priority of the Venture Loan which requires repayment of the Venture
Loan prior to the equity investors realizing a return on their capital, (3) the relatively rapid amortization of the Venture Loan
and (4) the lender’s receipt of warrants or other success fees with the making of the Venture Loan.
We are an externally
managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 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. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined
in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on our assessment of
market conditions and other factors at the time of any proposed borrowing. As a RIC, we generally are not subject to corporate-level
income taxes on our investment company taxable income, determined without regard to any deductions for dividends paid, and our
net capital gain that we distribute as distributions 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 amended and restated investment management agreement, or the Investment Management
Agreement, we have agreed to pay our Advisor a base management fee and an incentive fee for its advisory services to us. We have
also entered into an administration agreement, or the Administration Agreement, with our Advisor under which we have agreed to
reimburse our Advisor for our allocable portion of overhead and other expenses incurred by our Advisor in performing its obligations
under the Administration Agreement.
Portfolio composition and investment activity
The following table
shows our portfolio by type of investment as of June 30, 2017 and December 31, 2016:
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June 30, 2017
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December 31, 2016
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Number of
Investments
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Fair
Value
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Percentage
of Total
Portfolio
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Number of
Investments
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Fair
Value
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Percentage
of Total
Portfolio
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(Dollars in thousands)
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Term loans
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37
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$
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164,895
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92.1
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%
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44
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$
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186,186
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96.0
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%
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Warrants
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72
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7,341
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4.1
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78
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6,362
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3.3
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Other investments
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3
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5,900
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3.3
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2
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600
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0.3
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Equity
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5
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948
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0.5
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5
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855
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0.4
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Total
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$
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179,084
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100.0
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%
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$
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194,033
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100.0
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%
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The following table
shows total portfolio investment activity as of and for the three and six months ended June 30, 2017 and 2016:
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For the Three Months Ended
June 30,
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For the Six Months Ended
June 30,
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2017
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2016
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2017
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2016
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(In thousands)
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Beginning portfolio
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$
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180,114
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$
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245,035
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$
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194,003
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$
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250,267
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New debt investments
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22,074
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15,187
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47,990
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31,687
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Principal payments received on investments
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(8,441
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)
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(13,800
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)
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(20,332
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)
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(23,786
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)
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Early pay-offs
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(12,308
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)
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(8,632
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)
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(39,517
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)
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(16,729
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Accretion of debt investment fees
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433
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379
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938
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741
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New debt investment fees
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(420
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)
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(230
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)
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(690
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)
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(519
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)
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New equity
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—
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11
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—
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56
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Proceeds from sale of investments
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(346
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)
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(99
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)
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(1,572
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)
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(935
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)
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Net realized gain (loss) on investments
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175
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(871
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)
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(10,670
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)
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(2,788
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)
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Net unrealized (depreciation) appreciation on investments
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(2,197
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)
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(3,714
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)
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8,934
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(4,728
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)
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Ending portfolio
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$
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179,084
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$
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233,266
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$
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179,084
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$
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233,266
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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 June 30, 2017 and December 31, 2016:
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June 30, 2017
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December 31, 2016
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Debt
Investments at
Fair Value
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Percentage
of Total
Portfolio
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Debt
Investments at
Fair Value
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Percentage
of Total
Portfolio
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(Dollars in thousands)
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Life Science
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Biotechnology
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$
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26,752
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16.2
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%
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$
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40,612
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21.8
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%
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Medical Device
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8,703
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5.3
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13,003
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7.0
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Technology
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Communications
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7,788
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4.7
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|
|
76
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0.1
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Consumer-Related
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18,620
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11.3
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20,631
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11.1
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Internet and Media
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30,941
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18.8
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|
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7,933
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|
|
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4.2
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Materials
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|
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9,898
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6.0
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|
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9,874
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5.3
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|
Networking
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|
|
—
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|
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—
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3,306
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|
|
1.8
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|
Power Management
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|
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1,727
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1.1
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|
|
|
2,220
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|
|
|
1.2
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|
Semiconductors
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|
|
1,880
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|
|
|
1.1
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|
|
|
7,528
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|
|
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4.0
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Software
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|
|
41,222
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|
|
|
25.0
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|
|
|
53,349
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|
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28.7
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|
Cleantech
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Efficiency
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|
|
—
|
|
|
|
—
|
|
|
|
1,942
|
|
|
|
1.0
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|
Waste Recycling
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|
|
5,984
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|
|
|
3.6
|
|
|
|
5,964
|
|
|
|
3.2
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|
Healthcare Information and Services
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Diagnostics
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|
|
3,000
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|
|
|
1.8
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|
|
|
4,081
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|
|
|
2.2
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|
Other
|
|
|
3,606
|
|
|
|
2.2
|
|
|
|
5,770
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|
|
|
3.1
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|
Software
|
|
|
4,774
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|
|
|
2.9
|
|
|
|
9,897
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|
|
|
5.3
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|
Total
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|
$
|
164,895
|
|
|
|
100.0
|
%
|
|
$
|
186,186
|
|
|
|
100.0
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%
|
The largest debt investments
in our portfolio may vary from year to year as new debt investments are originated and existing debt investments are repaid. Our
five largest debt investments represented 29% and 24% of total debt investments outstanding as of June 30, 2017 and December 31,
2016, respectively. No single debt investment represented more than 10% of our total debt investments as of June 30, 2017 and December
31, 2016.
Debt investment asset quality
We use an internal
credit rating system which rates each debt investment on a scale of 4 to 1, with 4 being the highest credit quality rating and
3 being the rating for a standard level of risk. A rating of 2 represents an increased level of risk and, while no loss is currently
anticipated for a 2-rated debt investment, there is potential for future loss of principal. A rating of 1 represents a deteriorating
credit quality and a high degree of risk of loss of principal. Our internal credit rating system is not a national credit rating
system. As of June 30, 2017 and December 31, 2016, our debt investments had a weighted average credit rating of 3.0. The following
table shows the classification of our debt investment portfolio by credit rating as of June 30, 2017 and December 31, 2016:
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June 30, 2017
|
|
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December 31, 2016
|
|
|
|
Number of
Investments
|
|
|
Debt
Investments
at Fair Value
|
|
|
Percentage
of Debt
Investments
|
|
|
Number of
Investments
|
|
|
Debt
Investments
at Fair Value
|
|
|
Percentage
of Debt
Investments
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
8
|
|
|
$
|
26,132
|
|
|
|
15.8
|
%
|
|
|
6
|
|
|
$
|
29,721
|
|
|
|
16.0
|
%
|
3
|
|
|
23
|
|
|
|
124,123
|
|
|
|
75.3
|
|
|
|
28
|
|
|
|
131,605
|
|
|
|
70.6
|
|
2
|
|
|
3
|
|
|
|
7,040
|
|
|
|
4.3
|
|
|
|
6
|
|
|
|
13,360
|
|
|
|
7.2
|
|
1
|
|
|
3
|
|
|
|
7,600
|
|
|
|
4.6
|
|
|
|
4
|
|
|
|
11,500
|
|
|
|
6.2
|
|
Total
|
|
|
37
|
|
|
$
|
164,895
|
|
|
|
100.0
|
%
|
|
|
44
|
|
|
$
|
186,186
|
|
|
|
100.0
|
%
|
As of June 30, 2017, there were three debt
investments with an internal credit rating of 1, with an aggregate cost of $16.0 million and an aggregate fair value of $7.6 million.
As of December 31, 2016, there were four debt investments with an internal credit rating of 1, with an aggregate cost of $26.2
million and an aggregate fair value of $11.5 million.
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
June 30, 2017 and 2016
The following table
shows consolidated results of operations for the three months ended June 30, 2017 and 2016:
|
|
For the Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Total investment income
|
|
$
|
5,878
|
|
|
$
|
9,092
|
|
Total expenses
|
|
|
3,124
|
|
|
|
4,665
|
|
Net investment income before excise tax
|
|
|
2,754
|
|
|
|
4,427
|
|
Credit for excise tax
|
|
|
—
|
|
|
|
(85
|
)
|
Net investment income
|
|
|
2,754
|
|
|
|
4,512
|
|
Net realized gain (loss) on investments
|
|
|
176
|
|
|
|
(876
|
)
|
Net unrealized depreciation on investments
|
|
|
(2,197
|
)
|
|
|
(3,714
|
)
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
733
|
|
|
$
|
(78
|
)
|
Average debt investments, at fair value
|
|
$
|
159,879
|
|
|
$
|
234,186
|
|
Average borrowings outstanding
|
|
$
|
56,989
|
|
|
$
|
107,067
|
|
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
decreased by $3.2 million, or 35.3%, to $5.9 million for the three months ended June 30, 2017 as compared to the three months ended
June 30, 2016. For the three months ended June 30, 2017, total investment income consisted primarily of $5.4 million in interest
income from investments, which included $1.2 million in income from the accretion of origination fees and end-of-term payments,
or ETPs, and $0.5 million in fee income. Interest income on investments decreased by $3.4 million, or 38.3%, for the three months
ended June 30, 2017 compared to the three months ended June 30, 2016. Interest income on investments decreased primarily due to
a decrease of $74.3 million, or 31.7%, in the average size of our investment portfolio for the three months ended June 30, 2017
as compared to the three months ended June 30, 2016. Fee income, which includes success fee and prepayment fee income on debt investments,
increased by $0.2 million, or 51.3%, to $0.5 million primarily due to prepayment fees earned on higher principal prepayments and
fees charged for waivers or amendments received during the three months ended June 30, 2017 compared to the three months ended
June 30, 2016.
For the three months
ended June 30, 2017 and 2016, our dollar-weighted annualized yield on average debt investments was 14.7% and 15.5%, respectively,
and our investment portfolio (including non-income producing investments) had an overall total return of 13.5% and 15.1%, respectively.
We calculate 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 dollar-weighted
annualized yield represents the portfolio yield and will be higher than what investors will realize because it does not reflect
our expenses or any sales load paid by investors.
Investment income,
consisting of interest income and fees on debt investments, can fluctuate significantly upon repayment of large debt investments.
Interest income from the five largest debt investments in the aggregate accounted for 28% and 17%, respectively, of investment
income for the three months ended June 30, 2017 and 2016.
Expenses
Total expenses decreased
by $1.5 million, or 33.0%, to $3.1 million for the three months ended June 30, 2017 as compared to the three months ended
June 30, 2016. Total expenses for each period consisted of interest expense, base management fee, incentive and administrative
fees, professional fees and general and administrative expenses.
Interest expense decreased
by $0.4 million, or 28.3%, to $1.1 million for the three months ended June 30, 2017 as compared to the three months ended
June 30, 2016. Interest expense, which includes the amortization of debt issuance costs, decreased primarily due to a decrease
in average borrowings of $50.1 million, or 46.8%, which was partially offset by an increase in our effective cost of debt for the
three months ended June 30, 2017 as compared to the three months ended June 30, 2016.
Base management fee
expense decreased by $0.4 million, or 28.8%, to $0.9 million for the three months ended June 30, 2017 as compared to the three
months ended June 30, 2016. Base management fee decreased primarily due to a decrease of $74.3 million, or 31.7%, in the average
size of our investment portfolio for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016.
Performance based
incentive fee expense decreased by $0.6 million, or 60.6%, to $0.4 million for the three months ended June 30, 2017 as compared
to the three months ended June 30, 2016. Performance based incentive fee expense decreased due to lower pre-incentive fee net investment
income for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016, as well as the fact that the
incentive fee expense for the three months ended June 30, 2017 was limited by the cap and deferral mechanism, or the Incentive
Fee Cap and Deferral Mechanism, under our Investment Management Agreement. This resulted in $0.2 million of reduced expense and
additional net investment income for the three months ended June 30, 2017. The incentive fee on pre-incentive fee net investment
income was subject to the Incentive Fee Cap and Deferral Mechanism due to the cumulative incentive fees paid since July 1, 2014
exceeding the cumulative pre-incentive fee net return since July 1, 2015.
Administrative fee
expense decreased by $0.1 million, or 32.0%, to $0.2 million for the three months ended June 30, 2017 as compared to
the three months ended June 30, 2016. Administrative fee expense decreased primarily due to a decrease in our allocated costs of
compensation incurred by the Advisor on our behalf for the three months ended June 30, 2017 as compared to the three months ended
June 30, 2016.
Professional fees
and general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses remained
flat at $0.6 million for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016.
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 June 30, 2017, we realized net gains totaling $0.2 million primarily due to the realized gains on the sale of equity received
upon the exercise of warrants. During the three months ended June 30, 2016, we realized net losses totaling $0.9 million primarily
due to the resolution of one debt investment.
During the three months
ended June 30, 2017, net unrealized depreciation on investments totaled $2.2 million which was primarily due to the unrealized
depreciation on two debt investments. During the three months ended June 30, 2016, net unrealized depreciation on investments totaled
$3.7 million which was primarily due to the unrealized depreciation on one debt investment offset by the reversal of previously
recorded unrealized depreciation on one debt investment that was settled during the period.
Comparison of the six months ended June
30, 2017 and 2016
The following table
shows consolidated results of operations for the six months ended June 30, 2017 and 2016:
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Total investment income
|
|
$
|
12,841
|
|
|
$
|
18,389
|
|
Total expenses
|
|
|
6,720
|
|
|
|
9,565
|
|
Net investment income before excise tax
|
|
|
6,121
|
|
|
|
8,824
|
|
Credit for excise tax
|
|
|
—
|
|
|
|
(85
|
)
|
Net investment income
|
|
|
6,121
|
|
|
|
8,909
|
|
Net realized loss on investments
|
|
|
(10,670
|
)
|
|
|
(2,862
|
)
|
Net unrealized appreciation (depreciation) on investments
|
|
|
8,934
|
|
|
|
(4,728
|
)
|
Net increase in net assets resulting from operations
|
|
$
|
4,385
|
|
|
$
|
1,319
|
|
Average debt investments, at fair value
|
|
$
|
170,225
|
|
|
$
|
237,174
|
|
Average borrowings outstanding
|
|
$
|
71,442
|
|
|
$
|
109,551
|
|
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
decreased by $5.5 million, or 30.2%, to $12.8 million for the six months ended June 30, 2017 as compared to the six months ended
June 30, 2016. For the six months ended June 30, 2017, total investment income consisted primarily of $11.7 million in interest
income from investments, which included $2.9 million in income from the accretion of origination fees and ETPs, and $1.1 million
in fee income. Interest income on investments decreased by $6.1 million, or 34.2%, for the six months ended June 30, 2017 compared
to the six months ended June 30, 2016. Interest income on investments decreased primarily due to a decrease of $66.9 million, or
28.2%, in the average size of our investment portfolio for the six months ended June 30, 2017 as compared to the six months ended
June 30, 2016. Fee income, which includes success fee and prepayment fee income on debt investments, increased by $0.5 million,
or 91.0%, to $1.1 million primarily due to fees earned on higher principal prepayments received during the six months ended June
30, 2017 compared to the six months ended June 30, 2016.
For the six months
ended June 30, 2017 and 2016, our dollar-weighted annualized yield on average debt investments was 15.1% and 15.5%, respectively,
and our investment portfolio (including non-income producing investments) had an overall total return of 14.1% and 15.1%, respectively.
We calculate 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 dollar-weighted
annualized yield represents the portfolio yield and will be higher than what investors will realize because it does not reflect
our expenses or any sales load paid by investors.
Investment income,
consisting of interest income and fees on debt investments, can fluctuate significantly upon repayment of large debt investments.
Interest income from the five largest debt investments in the aggregate accounted for 21% and 18%, respectively, of investment
income for the six months ended June 30, 2017 and 2016.
Expenses
Total expenses decreased
by $2.8 million, or 29.7%, to $6.7 million for the six months ended June 30, 2017 as compared to the six months ended
June 30, 2016. Total expenses for each period consisted of interest expense, base management fee, incentive and administrative
fees, professional fees and general and administrative expenses.
Interest expense decreased
by $0.6 million, or 21.2%, to $2.4 million for the six months ended June 30, 2017 as compared to the six months ended
June 30, 2016. Interest expense, which includes the amortization of debt issuance costs, decreased primarily due to a decrease
in average borrowings of $38.1 million, or 34.8%, which was partially offset by an increase in our effective cost of debt for the
six months ended June 30, 2017 as compared to the six months ended June 30, 2016.
Base management fee
expense decreased by $0.7 million, or 26.4%, to $1.9 million for the six months ended June 30, 2017 as compared to the six months
ended June 30, 2016. Base management fee expense decreased primarily due to a decrease of $66.9 million, or 28.2%, in the average
size of our investment portfolio for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016.
Performance based
incentive fee expense decreased by $1.3 million, or 60.7%, to $0.8 million for the six months ended June 30, 2017 as compared to
the six months ended June 30, 2016. Performance based incentive fee expense decreased due to lower pre-incentive fee net investment
income for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016, as well as the fact that the incentive
fee expense for the six months ended June 30, 2017 was limited by the Incentive Fee Cap and Deferral Mechanism under our Investment
Management Agreement. This resulted in $0.6 million of reduced expense and additional net investment income for the six months
ended June 30, 2017. The incentive fee on pre-incentive fee net investment income was subject to the Incentive Fee Cap and Deferral
Mechanism due to the cumulative incentive fees paid since July 1, 2014 exceeding the cumulative pre-incentive fee net return since
July 1, 2015.
Administrative fee
expense decreased by $0.2 million, or 31.5%, to $0.4 million for the six months ended June 30, 2017 as compared to the
six months ended June 30, 2016. Administrative fee expense decreased primarily due to a decrease in our allocated costs of compensation
incurred by the Advisor on our behalf for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016.
Professional fees
and general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses were $1.2
million and $1.3 million for the six months ended June 30, 2017 and 2016, respectively.
Net realized gains and losses and net unrealized
appreciation and depreciation
Realized gains or
losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of
our investments without regard to unrealized appreciation or depreciation previously recognized. Realized gains or losses on investments
include investments charged off during the period, net of recoveries. The net change in unrealized appreciation or depreciation
on investments primarily reflects the change in portfolio investment fair values during the reporting period, including the reversal
of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
During the six months
ended June 30, 2017, we realized net losses totaling $10.7 million primarily due to the resolution of two debt investments partially
offset by realized gains on the sale of equity received upon the exercise of warrants. During the six months ended June 30, 2016,
we realized net losses totaling $2.9 million primarily due to the resolution of two debt investments partially offset by realized
gains on the sale of equity received upon the exercise of warrants.
During the six months
ended June 30, 2017, net unrealized appreciation on investments totaled $8.9 million which was primarily due to reversal of previously
recorded unrealized depreciation on two debt investments that were settled during the period, partially offset by the unrealized
depreciation on two debt investments. During the six months ended June 30, 2016, net unrealized depreciation on investments totaled
$4.7 million which was primarily due to the unrealized depreciation on one debt investment.
Liquidity and capital
resources
As of June 30, 2017
and December 31, 2016, we had cash of $12.3 million and $37.1 million, respectively. Cash is available to fund new investments,
reduce borrowings, pay expenses, repurchase common stock and pay distributions. Our primary sources of capital have been from our
public and private equity offerings, use of our revolving credit facilities and issuance of our 7.375% notes due 2019, or the 2019
Notes, and our fixed-rate asset-backed notes, or the Asset-Backed Notes.
On April 27, 2017,
our Board extended a previously authorized stock repurchase program which allows us to repurchase up to $5.0 million of our common
stock at prices below our net asset value per share as reported in our most recent consolidated financial statements. Under the
repurchase program, we may, but are not obligated to, repurchase shares of our outstanding common stock in the open market or in
privately negotiated transactions from time to time. Any repurchases by us will comply with the requirements of Rule 10b-18 under
the Exchange Act and any applicable requirements of the 1940 Act. Unless extended by our Board, the repurchase program will terminate
on the earlier of June 30, 2018 or the repurchase of $5.0 million of our common stock. During the three and six months ended June
30, 2017 and 2016, we did not complete any repurchases of our common stock. From the inception of the stock repurchase program
through June 30, 2017, we repurchased 161,542 shares of our common stock at an average price of $11.27 on the open market at a
total cost of $1.8 million.
At June 30, 2017 and
December 31, 2016, the outstanding principal balance under our revolving credit facility, or the Key Facility, with KeyBank National
Association, or Key, was $23.0 million and $63.0 million, respectively. As of June 30, 2017 and December 31, 2016, we had borrowing
capacity under the Key Facility of $72.0 million and $32.0 million, respectively. At June 30, 2017 and December 31, 2016, $37.4
million and $4.6 million, respectively, was available, subject to existing terms and advance rates.
Our operating activities
provided cash of $22.0 million for the six months ended June 30, 2017, and our financing activities used cash of $46.8 million
for the same period. Our operating activities provided cash primarily from principal payments received on our debt investments,
partially offset by investments made in portfolio companies. Our financing activities used cash primarily to repay the Key Facility
and pay distributions to our stockholders.
Our operating activities
provided cash of $18.1 million for the six months ended June 30, 2016, and our financing activities used cash of $22.6 million
for the same period. Our operating activities provided cash primarily from principal payments received on our debt investments
partially offset by investments made in portfolio companies. Our financing activities used cash primarily to fully pay off our
Asset-Backed Notes and pay distributions to our stockholders.
Our primary use of
available funds is to make debt investments in portfolio companies and for general corporate purposes. We expect to raise additional
equity and debt capital opportunistically as needed and, subject to market conditions, to support our future growth to the extent
permitted by the 1940 Act.
In order to be subject
to taxation as a RIC, we intend to distribute to our stockholders all or substantially all of our investment company taxable income.
In addition, as a BDC, we are required to maintain asset coverage of at least 200%. This requirement limits the amount that we
may borrow.
We believe that our
current cash, cash generated from operations, and funds available from our Key Facility will be sufficient to meet our working
capital and capital expenditure commitments for at least the next 12 months.
Current borrowings
The following table
shows our borrowings as of June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Total
Commitment
|
|
|
Balance
Outstanding
|
|
|
Unused
Commitment
|
|
|
Total
Commitment
|
|
|
Balance
Outstanding
|
|
|
Unused
Commitment
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Key Facility
|
|
$
|
95,000
|
|
|
$
|
23,000
|
|
|
$
|
72,000
|
|
|
$
|
95,000
|
|
|
$
|
63,000
|
|
|
$
|
32,000
|
|
2019 Notes
|
|
|
33,000
|
|
|
|
33,000
|
|
|
|
—
|
|
|
|
33,000
|
|
|
|
33,000
|
|
|
|
—
|
|
Total before debt issuance costs
|
|
|
128,000
|
|
|
|
56,000
|
|
|
|
72,000
|
|
|
|
128,000
|
|
|
|
96,000
|
|
|
|
32,000
|
|
Unamortized debt issuance costs attributable to term borrowings
|
|
|
—
|
|
|
|
(309
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(403
|
)
|
|
|
—
|
|
Total borrowings outstanding, net
|
|
$
|
128,000
|
|
|
$
|
55,691
|
|
|
$
|
72,000
|
|
|
$
|
128,000
|
|
|
$
|
95,597
|
|
|
$
|
32,000
|
|
We entered into the
Key Facility with Key effective November 4, 2013. The interest rate on the Key Facility is based upon the one-month London Interbank
Offered Rate, or LIBOR, plus a spread of 3.25%, with a LIBOR floor of 0.75%. The LIBOR rate was 1.22% and 0.77% on June 30, 2017
and December 31, 2016, respectively. The interest rate in effect was 4.30% and 4.00%, respectively, as of June 30, 2017 and December
31, 2016. The Key Facility requires the payment of an unused line fee in an amount equal to 0.50% of any unborrowed amount available
under the facility annually.
The Key Facility has
an accordion feature which allows for an increase in the total loan commitment to $150 million. The Key Facility is collateralized
by debt investments held by 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. We may request advances under
the Key Facility through August 12, 2018, or the Revolving Period. After the Revolving Period, we may not request new advances,
and we must repay the outstanding advances under the Key Facility as of such date, at such times and in such amounts as are necessary
to maintain compliance with the terms and conditions of the Key Facility, particularly the condition that the principal balance
of the Key Facility not exceed fifty percent (50%) of the aggregate principal balance of our eligible debt investments to our portfolio
companies. All outstanding advances under the Key Facility are due and payable on August 12, 2020.
On March 23, 2012,
we issued and sold an aggregate principal amount of $30 million 2019 Notes, and on April 18, 2012, pursuant to the underwriters’
30-day option to purchase additional notes, we sold an additional $3 million of the 2019 Notes. The 2019 Notes will mature on March
15, 2019 and may be redeemed in whole or in part at our option at any time or from time to time at a redemption price of $25 per
security plus accrued and unpaid interest. The 2019 Notes bear interest at a rate of 7.375% per year payable quarterly on March
15, June 15, September 15 and December 15 of each year. The 2019 Notes are our direct, unsecured obligations and (1) rank equally
in right of payment with our future unsecured indebtedness; (2) are senior in right of payment to any of our future indebtedness
that expressly provides it is subordinated to the 2019 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. A
s of June 30, 2017,
we were in material compliance with the terms of the 2019 Notes.
The 2019 Notes are listed on the New York Stock Exchange
under the symbol “HTF”.
On June 28, 2013,
we completed the 2013-1 Securitization. In connection with the 2013-1 Securitization, 2013-1 Trust, a wholly owned subsidiary of
ours, issued $90 million in the Asset-Backed Notes, which were rated A1(sf) by Moody’s Investors Service, Inc. The Asset-Backed
Notes were issued by 2013-1 Trust and were backed by a pool of loans made to certain portfolio companies of ours and secured by
certain assets of such portfolio companies. The Asset-Backed Notes were secured obligations of 2013-1 Trust and non-recourse to
us. In connection with the issuance and sale of the Asset-Backed Notes, we made customary representations, warranties and covenants.
The Asset-Backed Notes bore interest at a fixed rate of 3.00% per annum and had a stated maturity of May 15, 2018. As of June 13,
2016, the Asset-Backed Notes were repaid in full.
Under the terms of
the Asset-Backed Notes, we were required to maintain a reserve cash balance, funded through principal collections from the underlying
securitized debt portfolio, which could have been used to make monthly interest and principal payments on the Asset-Backed Notes.
Other Assets
As of June 30, 2017
and December 31, 2016, other assets were $1.7 million and $2.1 million, respectively, which were 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 June 30, 2017:
|
|
Payments due by period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 – 3
Years
|
|
|
3 – 5
Years
|
|
|
After 5
years
|
|
|
|
(In thousands)
|
|
Borrowings
|
|
$
|
56,000
|
|
|
$
|
—
|
|
|
$
|
47,079
|
|
|
$
|
8,921
|
|
|
$
|
—
|
|
Unfunded commitments
|
|
|
30,000
|
|
|
|
22,500
|
|
|
|
7,500
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
86,000
|
|
|
$
|
22,500
|
|
|
$
|
54,579
|
|
|
$
|
8,921
|
|
|
$
|
—
|
|
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 June 30, 2017, we
had unfunded commitments of $30.0 million. These commitments are subject to the same underwriting and ongoing portfolio maintenance
requirements as are the financial instruments that we hold on our balance sheet. In addition, these commitments are often subject
to financial or non-financial milestones and other conditions to borrowing that must be achieved before the commitment can be drawn.
Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future
cash requirements. We regularly monitor our unfunded commitments and anticipated refinancings, maturities and capital raising,
to ensure that we have sufficient liquidity to fund such unfunded commitments. As of June 30, 2017, we reasonably believed that
our assets would provide adequate financial resources to satisfy all of our unfunded commitments.
In addition to the
Key Facility, we have certain commitments pursuant to our Investment Management Agreement entered into with our Advisor. We have
agreed to pay a fee for investment advisory and management services consisting of two components (1) a base management fee
equal to a percentage of the value of our gross assets less cash or cash equivalents, and (2) a two-part incentive fee. We
have also entered into a contract with our Advisor to serve as our administrator. Payments under the Administration Agreement are
equal to an amount based upon our allocable portion of our Advisor’s overhead in performing its obligations under the agreement,
including rent, fees and other expenses inclusive of our allocable portion of the compensation of our Chief Financial Officer and
Chief Compliance Officer and their respective staffs. See Note 3 to our consolidated financial statements for additional information
regarding our Investment Management Agreement and our Administration Agreement.
Distributions
In order to qualify
and be subject to tax as a RIC, we must meet certain source-of-income, asset diversification and annual distribution requirements.
Generally, in order to qualify as a RIC, we must derive at least 90% of our gross income for each tax year from dividends, interest,
payments with respect to certain securities, loans, gains from the sale or other disposition of stock, securities or foreign currencies,
or other income derived with respect to its business of investing in stock or other securities. We must also meet certain asset
diversification requirements at the end of each quarter of each tax year. Failure to meet these diversification requirements on
the last day of a quarter may result in us having to dispose of certain investments quickly in order to prevent the loss of RIC
status. Any such dispositions could be made at disadvantageous prices or times, and may cause us to incur substantial losses.
In addition, in order
to be subject to tax as a RIC and to avoid the imposition of corporate-level tax on the income and gains we distribute to our stockholders
in respect of any tax year, we are required under the Code to distribute as dividends to our stockholders out of assets legally
available for distribution each tax year an amount generally at least equal to 90% of the sum of our net ordinary income and net
short-term capital gains in excess of net long-term capital losses, if any. Additionally, in order to avoid the imposition of a
U.S. federal excise tax, we are required to distribute, in respect of each calendar year, dividends to our stockholders of an amount
at least equal to the sum of 98% of our calendar year net ordinary income (taking into account certain deferrals and elections);
98.2% of our capital gain net income (adjusted for certain ordinary losses) for the one year period ending on October 31 of such
calendar year; and any net ordinary income and capital gain net income for preceding calendar years that were not distributed during
such calendar years and on which we previously did not incur any U.S. federal income tax. If we fail to qualify as a RIC for any
reason and become subject to corporate tax, the resulting corporate taxes could substantially reduce our net assets, the amount
of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on
us and our stockholders. In addition, we could be required to recognize unrealized gains, incur substantial taxes and interest
and make substantial distributions in order to re-qualify as a RIC. We cannot assure stockholders that they will receive any distributions.
To the extent our
taxable earnings for a fiscal year fall below the total amount of our distributions for that fiscal 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 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 June 30, 2017 and 2016, we paid the Advisor $1.3 million and $2.3 million,
respectively, pursuant to the Investment Management Agreement. During the six months ended June 30, 2017 and 2016, we paid the
Advisor $2.7 million and $4.7 million, respectively, pursuant to the Investment Management Agreement.
Our Advisor is 60%
owned by HTF Holdings LLC, which is 100% owned by Horizon Technology Finance, LLC. By virtue of their ownership interest in Horizon
Technology Finance, LLC, our Chief Executive Officer, Robert D. Pomeroy, Jr. and our President, Gerald A. Michaud, may be deemed
to control our Advisor.
We have also entered
into the Administration Agreement with the Advisor. Under the Administration Agreement, we have agreed to reimburse the Advisor
for our allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration
Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Financial Officer
and Chief Compliance Officer and their respective staffs. In addition, pursuant to the terms of the Administration Agreement the
Advisor provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. During
the three months ended June 30, 2017 and 2016, we paid the Advisor $0.2 million and $0.3 million, respectively, pursuant to the
Administration Agreement. During the six months ended June 30, 2017 and 2016, we paid the Advisor $0.4 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 such
investments. On January 23, 2017, we filed an application for exemptive relief with the SEC which, if granted, would permit us
more flexibility to co-invest with the 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.
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 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
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Quoted prices in active markets for identical assets and liabilities.
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Level 2
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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.
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Level 3
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Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
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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 at least 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 six months ended June 30, 2017 and 2016, 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 origination fees, net of certain direct origination costs, are deferred,
and along with unearned income, are amortized as a level yield adjustment over the respective term of the debt investment. All
other income is recorded into income when earned. Fees for counterparty debt investment commitments with multiple debt investments
are allocated to each debt investment based upon each debt investment’s relative fair value. When a debt investment is placed
on non-accrual status, the amortization of the related fees and unearned income is discontinued until the debt investment is returned
to accrual status.
Certain debt investment
agreements also require the borrower to make an ETP that is accrued into income over the life of the debt investment to the extent
such amounts are expected to be collected. We will generally cease accruing the income if there is insufficient value to support
the accrual or if we do not expect the borrower to be able to pay all principal and interest due.
In connection with
substantially all lending arrangements, we receive warrants to purchase shares of stock from the borrower. We record the warrants
as assets at estimated fair value on the grant date using the Black-Scholes valuation model. We consider the warrants as loan fees
and record them as unearned income on the grant date. The unearned income is recognized as interest income over the contractual
life of the related debt investment in accordance with our income recognition policy. Subsequent to origination, the warrants are
also measured at fair value using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings
as net unrealized gain or loss on investments. Gains and losses from the disposition of the warrants or stock acquired from the
exercise of warrants are recognized as realized gains and losses on investments.
Realized gains or
losses on the sale of investments, or upon the determination that an investment balance, or portion thereof, is not recoverable,
are calculated using the specific identification method. We measure realized gains or losses by calculating the difference between
the net proceeds from the repayment or sale and the amortized cost basis of the investment. Net change in unrealized appreciation
or depreciation reflects the change in the fair values of our portfolio investments during the reporting period, including any
reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
Income taxes
We have elected to
be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to
RICs. In order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income distributed to 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 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, for each tax year. We, among other things, have made and intend to continue to make the requisite distributions to our stockholders,
which will generally relieve us from U.S. federal income taxes.
Depending on the level
of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into
the next tax year and incur a 4% excise tax on such income, as required. To the extent that we determine that our estimated current
year annual taxable income will be in excess of estimated current year distributions, we will accrue excise tax, if any, on estimated
excess taxable income as taxable income is earned.
We evaluate tax positions
taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not”
to be sustained by the applicable tax authority in accordance with ASC Topic 740,
Income Taxes
, as modified by ASC Topic
946,
Financial Services
—
Investment Companies
. Tax benefits of positions not deemed to meet the more-likely-than-not
threshold, or uncertain tax positions, are recorded as a tax expense in the current year. It is our policy to recognize accrued
interest and penalties related to uncertain tax benefits in income tax expense. We had no material uncertain tax positions at June
30, 2017 and December 31, 2016.