What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-02 · 114 added, 240 removed, 393 unchanged (47% of the section changed)

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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-K.

Forward-looking statements

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We are focused on making Venture Loans to venture capital and private equity backed companies and publicly traded companies in our Target Industries, which we refer to as “Venture Lending.” Our debt investments are typically secured by first liens or first liens behind a secured revolving line of credit, or Senior Term Loans.

Some of our debt investments may also be subordinated to term debt provided by third parties.

As of December 31, 2021, 87.6%, or $383.3 million, of our debt investment portfolio at fair value consisted of Senior Term Loans.

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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 added to Section 61(a)(2) of the 1940 Act enables BDCs to reduce their asset coverage requirements from 200% to 150% as a result of the enactment of the SBCAA.

This provision permits a BDC to double the maximum amount of leverage that it is permitted to incur.

We are permitted to, and expect to, finance our investments through borrowings subject to a 150% asset coverage requirement.

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.

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Other investments

Equity interest in HSLFI

The following table shows total portfolio investment activity as of and for the years ended December 31, 2021 and 2020:

2 unchanged sentences

New debt investments

Less refinanced debt investments

Net new debt investments

Investment in controlled affiliate investment

Principal payments received on investments

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New debt investment fees

Warrants received in settlement of fee income

Warrants received in settlment of fee income

Proceeds from sale of investments

Dividend income from controlled affiliate investment

Distributions from controlled affiliate investment

Net realized loss on investments

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Biotechnology

Drug Delivery

Medical Device

2 unchanged sentences

Internet and Media

Power Management

Sustainability

Waste Recycling

Healthcare Information and Services

1 unchanged sentence

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 28% of total debt investments outstanding as of December 31, 2020 and 2019.

Our five largest debt investments represented 26% and 28% of total debt investments outstanding as of December 31, 2021 and 2020, respectively.

No single debt investment represented more than 10% of our total debt investments as of December 31, 2021 or 2020.

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See “Item 1 – Business” for a more detailed description of the internal credit rating system.

As of December 31, 2020 and 2019, our debt investments had a weighted average credit rating of 3.2 and 3.1, respectively.

As of December 31, 2021 and 2020, our debt investments had a weighted average credit rating of 3.2.

The following table shows the classification of our debt investment portfolio by credit rating as of December 31, 2021 and 2020:

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As of December 31, 2021, there was one debt investment with an internal credit rating of 1, with an aggregate cost of $11.5 million and an aggregate fair value of $6.9 million.

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.

As of December 31, 2020, there was one debt investment with an internal credit rating of 1, with an aggregate cost of $6.8 million and an aggregate fair value of $1.7 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.

As of April 21, 2020, HSLFI is wholly-owned by us and the assets and liabilities of HSLFI and HFI is 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.

On June 1, 2018, we and Arena Sunset SPV, LLC, or Arena, formed a joint venture, Horizon Secured Loan Fund I, or HSLFI, to make investments, either directly or indirectly through subsidiaries, primarily in secured loans to development-stage companies in the technology, life science, healthcare information and services and sustainability industries.

HSLFI was formed as a Delaware limited liability company and was not consolidated by either the Company or Arena for financial reporting purposes.

On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI, including, without limitation, undistributed amounts owed to Arena and interest accrued and unpaid on the debt investments of HSLFI through the date of purchase, for $17.1 million.

In addition, Arena received 50% of the warrants held by HSLFI or HFI, at closing.

As of April 21, 2020, HSLFI is wholly-owned by the Company and the assets and liabilities of HSLFI and HFI are consolidated with the assets and liabilities of the Company.

The transaction is accounted for as an asset acquisition under GAAP.

During the period January 1, 2020 through April 21, 2020, there were no distributions from HSLFI.

For the year ended December 31, 2019, HSLFI distributed $1.4 million.

In addition, on June 1, 2018, HSLFI entered into the Sale and Servicing Agreement.

HFI entered into the NYL Facility with several entities owned or affiliated with the NYL Noteholders for an aggregate purchase price of up to $100.0 million, with an accordion feature of up to $200.0 million at the mutual discretion and agreement of HSLFI and the NYL Noteholders.

HFI entered into a Note Funding Agreement, or the NYL Facility, with several entities owned or affiliated with New York Life Insurance Company, or the NYL Noteholders, for an aggregate purchase price of up to $100.0 million, with an accordion feature of up to $200.0 million at the mutual discretion and agreement of HSLFI and the NYL Noteholders.

The notes issued by HFI were collateralized by all investments held by HFI and permitted an advance rate of up to 67% of the aggregate principal amount of eligible debt investments.

The notes were issued pursuant to the Indenture.

The notes were issued pursuant to that certain indenture by and between HFI and U.S.

Bank National Association, dated as of June 1, 2018 (the “Indenture”).

Prior to June 5, 2020, the interest rate on the notes issued under the NYL Facility was based on the three year USD mid-market swap rate plus a margin of between 2.75% and 3.25% depending on the rating of such notes at the time of issuance.

There were $15.0 million in advances made by the NYL 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, for the year ended December 31, 2019 and for the period June 1, 2018 through December 31, 2018:

For the period

The following table shows a summary of HSLFI’s investment portfolio for the period January 1, 2020 through April 21, 2020:

January 1, 2020

April 21, 2020

December 31, 2019

December 31, 2018

(Dollars in thousands)

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The yield on dollar-weighted average debt investments represents the portfolio yield and does not reflect HSLFI’s expenses.

The following table shows HSLFI’s total portfolio investment activity as of and for the year ended December 31, 2019:

For the year ended

(In thousands)

Beginning portfolio

New debt investments

Early pay-offs

Accretion of debt investment fees

New debt investment fees

Net unrealized depreciation on investments

Ending portfolio

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

Portfolio Company (1)

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

Investments (5)

(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)

Term Loan (9.63% cash (Libor + 7.63%;

Floor 9.63%), 4.00% ETP, Due 7/1/22)

Encore Dermatology, Inc.

Biotechnology

Term Loan (10.00% cash (Libor + 7.50%;

Floor 10.00%), 3.00% ETP, Due 4/1/23)

Mustang Bio, Inc.

Biotechnology

Term Loan (9.00% cash (Libor + 6.50%;

Floor 9.00%), 5.00% ETP, Due 10/1/22)

Total Debt Investments — Life science

Debt Investments — Technology

Bridge2 Solutions, LLC (6)(7)

Term Loan (11.00% cash (Libor + 8.4%;

Floor 11.00%), 2.00% ETP, Due 9/1/23)

New Signature US, Inc.

Term Loan (10.50% cash (Libor + 8.50%;

Floor 10.50%), 3.50% ETP, Due 7/1/22)

Term Loan (10.50% cash (Libor + 8.50%;

Floor 10.50%), 3.50% ETP, Due 2/1/23)

OutboundEngine, Inc.

Term Loan (11.15% cash (Libor + 8.40%;

Floor 11.15%), 3.00% ETP, Due 7/1/23)

Revinate, Inc.

Term Loan (9.50% cash (Libor + 7.00%;

Floor 9.50%), 3.00% ETP, Due 6/1/23)

Total Debt Investments — Technology

Debt Investments — Healthcare information and services

HealthEdge Software, Inc.

Term Loan (9.94% cash (Libor + 8.25%;

Floor 9.25%), 3.00% ETP, Due 10/1/23)

Total Debt Investments — Healthcare information and services

Total Debt Investments

Warrant Investments — Life science

Celsion Corporation (6)(7)(8)

Biotechnology

95,057 Common Stock Warrants

Encore Dermatology, Inc.

Biotechnology

503,626 Preferred Stock Warrants

Mustang Bio, Inc.

Biotechnology

72,046 Common Stock Warrants

CSA Medical, Inc.

Medical Device

17,751 Preferred Stock Warrants

Total Warrant Investments — Life science

Warrant Investments — Technology

Intelepeer Holdings, Inc.

Communications

2,081,934 Preferred Stock Warrants

Bridge2 Solutions, LLC (6)(7)

2,500 Common Stock Warrants

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

562,500 Preferred Stock Warrants

OutboundEngine, Inc.

40,000 Preferred Stock Warrants

Revinate Inc.

216,362 Preferred Stock Warrants

Total Warrant Investments — Technology

Warrant Investments — Healthcare information and services

HealthEdge Software, Inc.

47,418 Preferred Stock Warrants

Total Warrant Investments — Healthcare information and services

Total Warrant Investments

Total Portfolio Investment Assets

Short Term Investments — Unrestricted Investments

US Bank Money Market Deposit Account (6)

Total Short Term Investments — Unrestricted Investments

Short Term Investments — Restricted Money Market Funds

US Bank Money Market Deposit Account (6)

Total Short Term Investments — Restricted Money Market Funds

(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 end-of-term payments, or 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, or 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 and for the period January 1, 2020 through April 21, 2010, for the year ended December 31, 2019 and for the period June 1, 2018 through December 31, 2018:

(In thousands)

Selected Statement of Assets and Liabilities Information

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

Cash and cash equivalents

Investments in money market funds

Restricted investments in money market funds

Interest receivable

Other liabilities

Total liabilities

Members’ equity

Total liabilities and members’ equity

For the period

January 1, 2020

April 21, 2020

December 31, 2019

December 31, 2018

(In thousands)

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Net investment income

Net realized (loss) gain on investments

Net unrealized appreciation (depreciation) on investments

Net realized loss

Net unrealized appreciation on investments

Net increase in net assets resulting from operations

Average debt investments, at fair value

Average gross assets less cash

Average borrowings outstanding

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Total investment income increased by $14.0 million, or 30.4%, to $60.0 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

For the year ended December 31, 2020, total investment income consisted primarily of $42.2 million in interest income from investments, which included $10.3 million in income from the accretion of origination fees and ETP, $3.7 million in fee income and $0.1 million in dividend income.

For the year ended December 31, 2021, total investment income consisted primarily of $54.4 million in interest income from investments, which included $13.9 million in income from the accretion of origination fees and ETP and $5.6 million in fee income.

Interest income on debt investments increased by $12.2 million, or 29.0%, to $54.4 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Interest income on investments for the year ended December 31, 2020 as compared to the year ended December 31, 2019 increased primarily due to an increase of $68.5 million, or 28.0%, in the average size of our debt investment portfolio partially offset by a decrease in one-month LIBOR which is the base rate for many of our variable rate debt investments.

Fee income, which includes success fee, other fee and prepayment fee income on debt investments, decreased by $0.1 million, or 2.1%, to $3.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to a decrease in fees earned on principal prepayments received.

Interest income on investments for the year ended December 31, 2021 as compared to the year ended December 31, 2020 increased primarily due to an increase of $68.0 million, or 21.7%, in the average size of our debt investment portfolio.

Fee income, which includes success fee, other fee and prepayment fee income on debt investments, increased by $1.9 million, or 50.4%, to $5.6 million for the year ended December 31, 2021 compared to the year ended

December 31, 2020 primarily due to a larger aggregate amount of principal prepayments for the year ended December 31, 2021.

Total investment income increased by $2.9 million, or 6.7%, to $46.0 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

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Interest income on debt investments increased by $5.1 million, or 13.8%, to $42.2 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

Interest income on investments for the year ended December 31, 2019 as compared to the year ended December 31, 2018 increased primarily due to an increase of $44.0 million, or 21.9%, in the average size of our debt investment portfolio and an increase in accelerated fees earned on higher principal prepayments received.

Fee income, which includes success fee, other fee and prepayment fee income on debt investments, increased by $1.8 million, or 85.6%, to $3.8 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to an increase in fees earned on higher principal prepayments received.

Interest income on investments for the year ended December 31, 2020 as compared to the year ended December 31, 2019 increased primarily due to an increase of $68.5 million, or 28.0%, in the average size of our debt investment portfolio partially offset by a decrease in one-month LIBOR which was the base rate for many of our variable rate debt investments.

The following table shows our dollar-weighted annualized yield for the years ended December 31, 2021, 2020 and 2019:

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Net expenses increased by $2.6 million, or 11.8%, to $25.1 million for the year ended December 31, 2020 as compared to the year ended December 31, 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 $1.3 million, or 16.1%, to $9.7 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

Interest expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $39.5 million, or 29.1%, offset by a reduction in our effective cost of debt.

Interest expense increased by $2.0 million, or 30.9%, to $8.3 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

Interest expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $36.0 million, or 36.2%, which was partially offset by a decrease in LIBOR.

Base management fee expense increased by $0.9 million, or 16.2%, to $6.5 million for the December 31, 2020 as compared to the year ended December 31, 2019 primarily due to an increase of $56.4 million, or 19.8%, in average gross assets less cash for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

Base management fee expense increased by $1.0 million, or 21.4%, to $5.6 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to an increase of $44.0 million, or 21.9%, in the average size of our investment portfolio for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

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, which includes the amortization of debt issuance costs, increased by $2.4 million, or 24.4%, to $12.0 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to an increase in average borrowings of $50.9 million, or 29.1%, offset by a reduction in our effective cost of debt.

Interest expense, which includes the amortization of debt issuance costs, increased by $1.3 million, or 16.1%, to $9.7 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 primarily due to an increase in average borrowings of $39.5 million, or 29.1%, offset by a reduction in our effective cost of debt.

Base management fee expense increased by $1.2 million, or 17.9%, to $7.6 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to an increase of $72.4 million, or 21.2%, in average gross assets less cash for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Base management fee expense increased by $0.9 million, or 16.2%, to $6.5 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 primarily due to an increase of $56.4 million, or 19.8%, in average gross assets less cash for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

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.

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This resulted in $1.8 million of reduced expense and additional net investment income for the year ended December 31, 2019.

On March 6, 2018, our Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled to receive under the Investment Management Agreement for the period commencing on January 1, 2018 and ending on December 31, 2018.

Such waived incentive fees will not be subject to recoupment.

During the year ended December 31, 2018, our Advisor waived performance based incentive fees of $1.2 million which our Advisor would have otherwise earned.

This resulted in $1.2 million of reduced expense and additional net investment income for the year ended December 31, 2018.

Performance based incentive fee expense increased by $1.9 million, or 36.0%, to $7.1 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

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Performance based incentive fee expense, net of the waiver above, increased by $0.1 million, or 1.3%, to $5.2 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

This increase was due to (i) an increase of $8.5 million, or 49.9%, in Pre-Incentive Fee Net Investment Income for the year ended December 31, 2019 compared to the year ended December 31, 2018 and (ii) an increase in the Incentive Fee Cap calculated based on the incentive fee cap and deferral mechanism in our Investment Management Agreement for the year ended December 31, 2019 compared to the year ended December 31, 2018.

The incentive fee on pre-incentive fee net investment income was subject to the Incentive Fee Cap for the year ended December 31, 2018 due to the cumulative incentive fees paid exceeding 20% of cumulative pre-incentive fee net return during the applicable quarter and the 11 preceding full calendar quarters.

This increase was due to an increase of $0.3 million, or 1.3%, in Pre-Incentive Fee Net Investment Income for the year ended December 31, 2020 compared to the year ended December 31, 2019.

In 2021 and 2020, we elected to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income.

For the years ended December 31, 2021 and 2020, we elected to carry forward taxable income in excess of current year distributions of $10.8 million and $6.2 million, respectively.

At December 31, 2020 and 2019, excise tax payable of $0.2 million was recorded.

At December 31, 2021 and 2020, excise tax payable of $0.4 million and $0.2 million, respectively, was recorded.

Administrative fee expense, professional fees and general and administrative expenses were $4.7 million, $3.7 million and $3.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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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 year ended December 31, 2020, we realized net losses totaling $14.7 million primarily due to the realized loss on the settlement of five of our debt investments partially offset by the realized gain from the consideration we received from the exercise and sale of warrants in six portfolio companies.

During the year ended December 31, 2019, we realized net losses totaling $4.2 million primarily due to the expiration of one of our royalty agreements and the sale of one of our license agreements, which were 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 three portfolio companies.

During the year ended December 31, 2018, we realized net gains totaling $0.6 million primarily due to gains realized on the sale of equity received upon the exercise of warrants.

During the year ended December 31, 2020, we recorded net unrealized appreciation on investments totaling $0.3 million due to the unrealized appreciation on our warrant investments offset by the unrealized depreciation on our debt

and equity investments.

During the year ended December 31, 2019, we recorded net unrealized appreciation on investments totaling $3.2 million due to the unrealized appreciation on one of our equity investments and the reversal of previously recorded unrealized depreciation from the expiration of one of our royalty agreements, which was included in other investments, partially offset by the unrealized depreciation on one of our debt investments.

During the year ended December 31, 2018, we recorded net unrealized depreciation on investments totaling $1.5 million due to the unrealized depreciation on our warrant and equity investments in public companies.

During the year ended December 31, 2021, we realized net losses totaling $3.6 million primarily due to the realized loss on the settlement of three of our debt investments partially offset by 1) the realized gain from the consideration we received from the termination of warrants upon the initial public offering of one portfolio company and 2) the realized gain from the consideration we received from exercise and sale of five of our warrant investments.

During the same period, we elected to exercise our option to redeem, in full, our 2022 Notes at par plus accrued and unpaid interest which resulted

in a realized loss on debt extinguishment of $0.4 million.

During the year ended December 31, 2020, we realized net losses totaling $14.7 million primarily due to the realied loss on the settlement of five of our debt investments partially offset by the realized gain from the consideration we received from the exercise and sale of warrants in six portfolio companies.

During the year ended December 31, 2021, net unrealized appreciation on investments totaling $3.2 million which was primarily due to (1) the reversal of previously recorded unrealized depreciation from the settlement of three of our debt investments and (2) the unrealized appreciation on our warrant investments partially offset by the unrealized depreciation on one of our equity investments and the unrealized depreciation on one of our debt investments.

Liquidity and capital resources

1 unchanged sentence

Cash and investments in money market funds are available to fund new investments, reduce borrowings, pay expenses, repurchase common stock and pay distributions.

In addition, as of December 31, 2020 and 2019, we had $1.1 million of restricted investments in money market funds.

In addition, as of December 31, 2021 and 2020, we had $1.4 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 or our NYL Facility.

1 unchanged sentence

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 (“ATM”), sales agreement (the “Prior Equity Distribution Agreement”), with Goldman Sachs & Co.

On August 2, 2019 we entered into an At-The-Market (“ATM”) sales agreement (the “2019 Equity Distribution Agreement”), with Goldman Sachs & Co.

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 (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 2019 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 2019 Equity Distribution Agreement and entered into a new ATM sales agreement (the “2020 Equity Distribution Agreement”) with the Sales Agents.

The 2020 Equity Distribution Agreement provided that we 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 us.

On August 2, 2021, we terminated the 2020 Equity Distribution Agreement and entered into a new ATM sales agreement (the “2021 Equity Distribution Agreement”) with the Sales Agents.

The remaining shares available under the 2019 Equity Distribution Agreement and the 2020 Equity Distribution Agreement are no longer available for issuance.

The 2021 Equity Distribution Agreement provides that we may offer and sell our shares from time to time through the Sales Agents up to $100.0 million worth of our common stock, in amounts and at times to be determined by us.

Sales of our common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at-the-market,” as defined in Rule 415 under the Securities Act, including sales made directly on the NASDAQ or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.

During the year ended December 31, 2020, we sold 3,702,500 shares of common stock under the Prior Equity Distribution Agreement and the Equity Distribution Agreement.

During the year ended December 31, 2021, we sold 1,907,234 shares of common stock under the 2020 Equity Distribution Agreement and the 2021 Equity Distribution Agreement.

For the same period, we received total accumulated net proceeds of approximately $30.1 million, including $0.8 million of offering expenses, from these sales.

During the year ended December 31, 2019, we sold 2,012,844 shares of common stock under the Prior Equity Distribution Agreement.

During the year ended December 31, 2020, we sold 3,702,500 shares of common stock under the 2019 Equity Distribution Agreement and the 2020 Equity Distribution Agreement.

For the same period, we received total accumulated net proceeds of approximately $44.6 million, including $1.0 million of offering expenses, from these sales.

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At December 31, 2021 and 2020, $19.8 million and $24.8 million, respectively, were available for borrowing, subject to existing terms and advance rates.

At December 31, 2020, the outstanding principal balance under the NYL Facility was $22.3 million.

As of December 31, 2020, we had borrowing capacity under the NYL Facility of $77.7 million.

At December 31, 2020, $0.9 million was available for borrowing, subject to existing terms and advance rates.

At December 31, 2021 and 2020, the outstanding principal balance under the NYL Facility was $78.8 million and $22.3 million, respectively.

As of December 31, 2021 and 2020, we had borrowing capacity under the NYL Facility of $21.2 million and $77.7 million, respectively.

At December 31, 2021 and 2020, $5.7 million and $0.9 million, respectively, were available for borrowing, subject to existing terms and advance rates.

Our operating activities used cash of $76.0 million for the year ended December 31, 2021, and our financing activities provided cash of $75.5 million for the same period.

Our operating activities used cash primarily to purchase investments in portfolio companies partially offset by principal payments received on our debt investments.

Our financing activities provided cash primarily from the issuance of the 2026 Notes, advances on our Credit Facilities and the sale of shares through our ATM for net proceeds of $30.1 million, after deducting underwriting commission and discounts and other offering expenses, partially offset by the use of cash to repay our Key Facility and 2022 Notes and to pay distributions to our stockholders.

Our operating activities used cash of $25.3 million for the year ended December 31, 2020, and our financing activities provided cash of $55.7 million for the same period.

Our operating activities used cash primarily to purchase investments in portfolio companies partially offset by principal payments received on our debt investments.

Our financing activities provided cash primarily from advances on our credit facilities and the sale of shares through our ATM for net proceeds of $44.6 million, after deducting underwriting commission and discounts and other offering expenses, partially offset by the use of cash to repay our Key Facility and to pay distributions to our stockholders.

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Our financing activities provided cash primarily from the sale of shares through a follow-on public offering and our ATM for net proceeds of $47.1 million, after deducting underwriting commission and discounts and other offering expenses and the completion of our Asset-Backed Notes, partially offset by the use of cash to pay distributions to our stockholders.

Our operating activities used cash of $12.1 million for the year ended December 31, 2018, and our financing activities provided cash of $18.1 million for the same period.

Our operating activities used cash primarily for investments made in portfolio companies and HSLFI, partially offset by principal payments received on our debt investments.

Our financing activities provided cash primarily from advances on our Key Facility partially offset by repayment of our Key Facility and payment of distributions to our stockholders.

Our primary use of available funds is to make debt investments in portfolio companies and for general corporate purposes.

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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 0.14% and 1.76% as of December 31, 2020 and 2019, respectively.

The interest rates in effect were 4.25% and 4.94% as of December 31, 2020 and 2019, respectively.

Through June 21, 2021, the interest rate on the Key Facility was based upon the one-month LIBOR plus a spread of 3.25%, with a LIBOR floor of 1.00%.

The LIBOR rate was 0.14% as of December 31, 2020.

From and after June 30, 2021, the interest rate on the Key Facility is based on the rate of interest published in The Wall Street Journal as the prime rate in the United States plus 0.25%, with a prime rate floor of 4.25%.

The prime rate was 3.25% as of December 31, 2021.

The interest rates in effect were 4.25% as of December 31, 2021 and 2020.

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 (the “Revolving Period”) to September 30, 2021.

The Key Facility is collateralized by debt investments held by Credit II and permits an advance rate of up to fifty percent (50%) of eligible debt investments held by Credit II.

On June 22, 2021, we amended the Key Facility, among other things, to amend the interest rate applied to the outstanding principal balance and to extend the period during which we may request advances under the Key Facility (the “Revolving Period”) to June 22, 2024.

The Key Facility is collateralized by debt investments held by Credit II and permits an advance rate of up to sixty percent (60%) of eligible debt investments held by Credit II.

The Key Facility contains covenants that, among other things, require us to maintain a minimum net worth, to restrict the debt investments securing the Key Facility to certain criteria for qualified debt investments and to comply with portfolio company concentration limits as defined in the related loan agreement.

After the Revolving Period, we may not request new advances, and we must repay the outstanding advances under the Key Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Key Facility, particularly the condition that the principal balance of the Key Facility not exceed 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.

After the Revolving Period, we may not request new advances, and we must repay the outstanding advances under the Key Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Key Facility, particularly the condition that the principal balance of the Key Facility not exceed sixty percent (60%) of the aggregate principal balance of our eligible debt investments to our portfolio companies.

The maturity of the Key Facility, the date on which all outstanding advances under the Key Facility are due and payable, is on June 22, 2026.

On September 29, 2017, we issued and sold an aggregate principal amount of $32.5 million 2022 Notes, and on October 11, 2017, pursuant to the underwriters’ 30-day option to purchase additional notes, we sold an additional $4.9 million of the 2022 Notes.

The 2022 Notes have a stated maturity of September 15, 2022 and may be redeemed in whole or in part at our option at any time or from time to time on or after September 15, 2019 at a redemption price of $25 per security plus accrued and unpaid interest.

The 2022 Notes had a stated maturity of September 15, 2022 and could be redeemed in whole or in part at our option at any time or from time to time on or after September 15, 2019 at a redemption price of $25 per security plus accrued and unpaid interest.

The 2022 Notes bore interest at a rate of 6.25% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year.

The 2022 Notes were our direct, unsecured obligations and (1) ranked equally in right of payment with our current and future unsecured indebtedness;

(2) were senior in right of payment to any of our future indebtedness that expressly provides it is subordinated to the 2022 Notes;

(3) were 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) were structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries.

On April 24, 2021, or the Redemption Date, we redeemed all of the issued and outstanding 2022 Notes in an aggregate principal amount of $37.4 million and paid accrued interest of $0.3 million.

The 2022 Notes were delisted effective on the Redemption Date.

On March 30, 2021, we issued and sold an aggregate principal amount of $57.5 million of 4.875% notes due in 2026 (the “2026 Notes”).

The amount of 2026 Notes issued and sold included the full exercise by the underwriters of their option to purchase $7.5 million aggregate principal of additional notes.

The 2026 Notes have a stated maturity of March 30, 2026 and may be redeemed in whole or in part at our option at any time or from time to time on or after March 30, 2023 at a redemption price of $25 per security plus accrued and unpaid interest.

The 2026 Notes bear interest at a rate of 4.875% per year, payable quarterly on March 30, June 30, September 30 and December 30 of each year.

The 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.

The 2026 Notes are our direct unsecured obligations and (i) rank equally in right of payment with our current and future unsecured indebtedness;

(ii) are senior in right of payment to any of our future indebtedness that expressly provides it is subordinated to the 2026 Notes;

(iii) are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grants security), to the extent of the value of the assets securing such indebtedness, and (iv) are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries.

As of December 31, 2021, we were in material compliance with the terms of the 2026 Notes.

The 2022 Notes are listed on the New York Stock Exchange under the symbol “HTFA”.

The 2026 Notes are listed on the New York Stock Exchange under the symbol “HTFB”.

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 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.

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.

1 unchanged sentence

There has been no change in the rating since August 13, 2019.

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

At December 31, 2021 and 2020, the Asset-Backed Notes had an outstanding principal balance of $70.5 million and $100.0 million, respectively.

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.

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Any obligation to make additional advances was conditioned on the occurrence of certain conditions, which were satisfied June 26, 2020.

There were $22.3 million in notes issued to the Noteholders as of December 31, 2020 at an interest rate of 4.60%.

There were $78.8 million and $22.3 million in notes issued to the Noteholders as of December 31, 2021 and 2020, respectively, at an interest rate of 4.62% and 4.60%, respectively.

As of December 31, 2021 and 2020, other assets were $2.5 million and $1.9 million, respectively, which is primarily comprised of debt issuance costs and prepaid expenses.

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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.

We regularly monitor our unfunded commitments and anticipated refinancings, maturities and capital raising, to ensure that we have sufficient liquidity to fund such unfunded commitments.

As of December 31, 2021, we reasonably believed that our assets would provide adequate financial resources to satisfy all of our unfunded commitments.

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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;

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.

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federal, state and local taxes, stockholders participating in our DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes.

If our common stock is trading above NAV, a stockholder receiving distributions in the form of additional shares of our common stock will be treated as receiving a distribution of an amount equal to the

fair market value of such shares of our common stock.

We may use newly issued shares to implement the DRIP, or we may purchase shares in the open market in connection with our obligations under the DRIP.

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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.

Under the 1940 Act, absent receipt of exemptive relief from the SEC, we

and our affiliates are precluded from co-investing in negotiated investments.

On November 27, 2017, we were granted exemptive relief from the SEC which permits us to co-invest with Advisor Funds, subject to certain conditions.

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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.

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.

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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.

Interest income is determined using a method that results in a level rate of return on principal amounts

Generally, when a debt investment becomes 90 days or more past due, or if we otherwise do not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued.

Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status.

For the year ended December 31, 2021, we recognized as interest income interest payments of $1.3 million received from two portfolio companies whose debt investment were on non-accrual status.

For the year ended December 31, 2020 we recognized as interest income interest payments of $0.03 million received from one portfolio company whose debt investment was on non-accrual status.

For the year ended December 31, 2019 and 2018, we did not recognize any interest income from debt investments on non-accrual status.

For the year ended December 31, 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.

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For the year ended December 31, 2019, HSLFI distributed $0.7 million classified as dividend income to us.

For the period June 1, 2018 (the commencement of HSLFI’s operations) through December 31, 2018, HSLFI distributed $0.3 million classified as dividend income to us.

Realized gains or losses on the sale of investments, or upon the determination that an investment balance, or portion thereof, is not recoverable, are calculated using the specific identification method.

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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.

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.

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Recent developments

Subsequent to December 31, 2020 pursuant to private foreclosure sales, we received net proceeds of approximately $1.7 million from the sale of substantially all of the assets of The NanoSteel Company, Inc.

(“NanoSteel”), which assets collateralized our debt investment in NanoSteel.

We do not expect to receive any additional material proceeds from the sale of additional assets of NanoSteel.

On January 14, 2021, we funded a $5.0 million debt investment to a new portfolio company, Clara Foods Co.

On January 15, 2021, we funded a $7.0 million debt investment to a new portfolio company, Supply Network Visibility Holdings LLC.

On February 23, 2021, we funded a $7.0 million debt investment to an existing portfolio company, Getaround, Inc.

On February 25, 2021, we funded a $6.0 million debt investment to a new portfolio company, Primary Kids, Inc.

On January 7, 2022, we funded a $1.3 million debt investment to an existing portfolio company, Unagi Inc.

On January 21, 2022, we funded a $7.5 million debt investment to a new portfolio company, Cognoa, Inc.

On January 26, 2022, we funded a $5.0 million debt investment to an existing portfolio company, Castle Creek Biosciences, Inc.

On January 28, 2022, we funded a $1.0 million debt investment to an existing portfolio company, Alula Holdings, Inc.

On February 1, 2022, we funded a $2.5 million debt investment to an existing portfolio company, Dropoff, Inc.

On February 7, 2022, we funded a $5.0 million debt investment to an existing portfolio company, Canary Medical Inc.

On February 10, 2022, we funded a $7.5 million debt investment to a new portfolio company, Lemongrass Holdings, Inc.

On February 11, 2022, Quip NYC Inc.

prepaid its outstanding principal balance of $10.0 million on its venture loan, plus interest, end-of-term payment and prepayment fee.

We continue to hold warrants in Quip NYC Inc.

On February 23, 2022, we funded a $2.5 million debt investment to an existing portfolio company, NextCar Holding Company, Inc.

On February 24, 2022, LiquiGlide, Inc.

prepaid its outstanding principal balance of $2.0 million on its venture loan, plus interest, end-of-term payment and prepayment fee.

We continue to hold warrants in Liquiglide, Inc.

On February 25, 2022, the Company amended its NYL Facility, increasing the commitment by $100 million to enable its wholly-owned subsidiary to issue up to $200 million of secured notes.

The amendment to the facility extends the investment period to June 2023 and the maturity date to June 2028.

In addition, the amendment, among other things, reduces the applicable margin used to calculate the credit facility’s interest rate on the Company’s borrowings above $100 million.

Such borrowings will be priced at the three-year USD mid-market swap rate plus 3.00%.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis