Investment Strategy and Focus - The company has originated, underwritten, and managed Venture Loans with an aggregate original principal amount exceeding $3.0 billion to more than 330 companies since 2004[37]. - The company expects to invest at least 80% of its total assets in technology-related companies within its Target Industries under normal market conditions[35]. - The company focuses on structured investments in development-stage companies, providing secured loans that minimize downside risk compared to equity investments[34]. - The company emphasizes direct origination of transactions with technology, life science, healthcare, and sustainability companies, leveraging strong relationships with venture capital and private equity firms[34]. - The company requires prospective portfolio companies to have received at least their first round of venture capital or private equity financing before considering investment[42]. - The company assesses the enterprise value of prospective portfolio companies to ensure it substantially exceeds the principal balance of debt borrowed[48]. - The company may invest up to 100% of its assets in securities acquired directly from issuers in privately negotiated transactions[105]. - The company is classified as a non-diversified investment company, allowing it to invest a significant proportion of its assets in a single issuer without strict limitations[169]. Risk Management and Underwriting - The company utilizes a disciplined underwriting process that includes extensive financial analysis and validation from multiple sources to mitigate risks[41]. - The company maintains a robust investment process that includes thorough due diligence and a structured approval process involving its investment committee[60]. - The Advisor employs a proprietary internal credit rating system to assess debt investment quality, rating portfolio companies on a scale of 1 to 4, with 3 indicating standard risk and 4 indicating improved credit quality[63]. - Portfolio companies rated 1 or 2 are closely monitored for adverse developments, with regular contact maintained to discuss strategic initiatives[64]. - The Advisor's internal credit rating system helps identify unexpected developments in portfolio companies' financial performance, allowing for timely interventions[62]. - The company must diversify its holdings to meet regulatory requirements, ensuring no more than 25% of assets are invested in any one issuer[133]. Financial Performance and Fees - The base management fee is set at an annual rate of 2.00% of the Company's gross assets, decreasing to 1.60% for assets exceeding $250 million[72]. - The incentive fee is 20.00% of Pre-Incentive Fee Net Investment Income exceeding a hurdle rate of 1.75%, with a "catch-up" provision for amounts above 2.1875%[73]. - The incentive fee structure allows for potential payments even in quarters with net losses, as long as Pre-Incentive Fee Net Investment Income exceeds the hurdle rate[75]. - Cumulative incentive compensation accrued and/or paid since July 1, 2014, amounts to $9,000,000[86]. - Pre-Incentive Fee Net Investment Income is 2.10%, exceeding the hurdle rate of 1.75%[87]. - An incentive fee of 0.35% is payable based on Pre-Incentive Fee Net Investment Income[87]. - 20.0% of cumulative net increase in net assets resulting from operations since July 1, 2014, is $10,000,000[88]. Regulatory Compliance - The company is regulated as a BDC under the 1940 Act and must adhere to specific regulatory requirements[103]. - The company must maintain at least 70% of its total assets in qualifying assets as defined by the 1940 Act[109]. - The company must distribute at least 90% of its ordinary income and realized net short-term capital gains to maintain its RIC status[131]. - The company is subject to periodic SEC examinations for compliance with the 1940 Act[107]. - The company has adopted written policies to prevent violations of federal securities laws and designated a chief compliance officer for oversight[108]. - The company must review its compliance with the Sarbanes-Oxley Act and take necessary actions to ensure adherence[125]. - The company intends to comply with Nasdaq corporate governance regulations and monitor future listing standards[126]. - The company is subject to corporate-level federal income tax on all taxable income if it fails to qualify as a RIC, which would adversely affect financial performance[138]. Investment Risks - The company faces risks related to political, social, and economic uncertainty, which could materially affect its business and financial condition[141]. - The company relies on key personnel from its Advisor for investment management, and loss of these individuals could disrupt operations[142]. - The incentive fee structure may encourage the Advisor to pursue riskier investments, potentially leading to higher investment losses[152]. - Elevated interest rates may negatively impact portfolio companies, making it harder for them to raise capital and potentially leading to failures[173]. - Portfolio companies typically require substantial additional financing, which may not be readily available, increasing the risk of loss[175]. - The company may face challenges in making follow-on investments in portfolio companies, which could impair the value of its investments[176]. - Legislative changes regarding taxes could negatively impact the company's ability to qualify for tax treatment as a RIC, affecting stockholders[163]. - Economic downturns may lead to increased non-performing assets and decreased portfolio value, potentially resulting in financial losses and reduced revenues[179]. - The company may face challenges in recovering investments if the collateral securing debt investments decreases in value or becomes difficult to appraise[186]. - The lack of liquidity in investments may hinder the ability to sell at favorable prices, resulting in potential losses[189]. - The unpredictable borrowing needs of portfolio companies may exceed expected funding requirements, impacting the company's reputation and lending activity[197]. - The company may hold debt securities of leveraged companies that could experience bankruptcy or financial distress, leading to uncertainty regarding the recovery of investments[198]. - Bankruptcy proceedings can result in significant administrative costs that are paid out of the debtor's estate before any return to creditors, adversely affecting investment returns[199]. Portfolio Company Characteristics - The company focuses on investments in development-stage companies, which are typically rated below "investment grade" and may face significant risks including volatility and intense competition[183]. - The average selling prices of products from development-stage companies have historically decreased, adversely affecting their operating results and cash flow[184]. - The ability of portfolio companies to commercialize their technologies and products is crucial for investment returns, with failure to do so potentially leading to declines in value[217]. - Portfolio companies in the technology industry face intense competition and rapid changes, which could affect their ability to innovate and maintain market relevance[203]. - Life science companies require significant research and development, and the success of new products depends on various factors including regulatory approvals and market acceptance[209]. - Portfolio companies in the sustainability sector are subject to operational risks such as underestimated costs and potential litigation, which could adversely affect their financial condition[213]. - Changes in government regulations could impact the business and industries of portfolio companies, leading to potential penalties and claims that may adversely affect operations[215]. - Portfolio companies may rely on licenses for intellectual property, which can complicate ownership and claims in bankruptcy situations[218]. - Litigation regarding intellectual property rights can result in substantial costs and resource diversion, negatively affecting the portfolio company's ability to service debt investments[221]. - The company does not expect to control any of its portfolio companies, which may lead to risks if those companies make decisions that do not align with the company's interests as debt investors[223]. - Investments in foreign portfolio companies may involve greater risks, including less publicly available information and varying levels of governmental regulation[224]. Management and Operational Structure - The company does not have employees; all executive officers are employees of the Advisor, which manages day-to-day investment operations[69]. - The Advisor's services are not exclusive, allowing it to provide similar services to other entities while ensuring its obligations to the Company are met[70]. - The Advisor is reimbursed for expenses incurred while providing managerial assistance to portfolio companies, which may include operational monitoring and strategic guidance[68]. - The Advisor can resign with 60 days' notice, potentially disrupting operations and affecting financial conditions if a suitable replacement is not found[167]. - The Advisor's referral relationships are crucial for generating investment opportunities; failure to maintain these could adversely affect the company's growth[166]. - The valuation process for portfolio holdings may create conflicts of interest, as the Advisor's management fee is partially based on gross assets and unrealized appreciation[160].
Horizon Technology Finance(HRZN) - 2024 Q4 - Annual Report