0001144204-15-062506.txt : 20151103 0001144204-15-062506.hdr.sgml : 20151103 20151103163249 ACCESSION NUMBER: 0001144204-15-062506 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20150930 FILED AS OF DATE: 20151103 DATE AS OF CHANGE: 20151103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Horizon Technology Finance Corp CENTRAL INDEX KEY: 0001487428 IRS NUMBER: 272114934 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 814-00802 FILM NUMBER: 151194131 BUSINESS ADDRESS: STREET 1: 312 FARMINGTON AVENUE CITY: FARMINGTON STATE: CT ZIP: 06032 BUSINESS PHONE: 860-676-8654 MAIL ADDRESS: STREET 1: 312 FARMINGTON AVENUE CITY: FARMINGTON STATE: CT ZIP: 06032 10-Q 1 v423516_10q.htm 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 814-00802

HORIZON TECHNOLOGY FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	27-2114934
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

312 Farmington Avenue
Farmington, CT	06032
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (860) 676-8654

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨		Accelerated filer þ		Non-accelerated filer ¨		Smaller Reporting Company ¨
				(Do not check if a smaller reporting company)

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

As of November 3, 2015, the Registrant had 11,644,940 shares of common stock, $0.001 par value, outstanding.

HORIZON TECHNOLOGY FINANCE CORPORATION

FORM 10-Q

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Consolidated Financial Statements	3

	Consolidated Statements of Assets and Liabilities as of September 30, 2015 and December 31, 2014 (unaudited)	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (unaudited)	4
	Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2015 and 2014 (unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)	6
	Consolidated Schedules of Investments as of September 30, 2015 and December 31, 2014 (unaudited)	7
	Notes to the Consolidated Financial Statements (unaudited)	18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative And Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	52

	PART II
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
	Signatures	54
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Assets and Liabilities (Unaudited)

(In thousands, except share and per share data)

	September 30, 2015			December 31, 2014

Assets
Non-affiliate investments at fair value (cost of $252,812 and $209,838, respectively) (Note 4)	$	249,033		$	205,101
Investments in money market funds		275			27
Cash		12,559			8,417
Restricted investments in money market funds		1,448			2,906
Interest receivable		5,984			4,758
Other assets		3,360			3,987
Total assets	$	272,659		$	225,196

Liabilities
Borrowings (Note 6)	$	104,302		$	81,753
Distributions payable		4,017			3,322
Base management fee payable (Note 3)		385			356
Incentive fee payable (Note 3)		1,015			799
Other accrued expenses		693			718
Total liabilities		110,412			86,948

Commitments and Contingencies (Notes 7 and 8)

Net assets
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of September 30, 2015 and December 31, 2014		—			—
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 11,642,522 and 9,628,124 shares outstanding as of September 30, 2015 and December 31, 2014, respectively		12			10
Paid-in capital in excess of par		180,954			155,240
Distributions in excess of net investment income		(2,132	)		(1,102	)
Net unrealized depreciation on investments		(3,779	)		(4,737	)
Net realized loss on investments		(12,808	)		(11,163	)
Total net assets		162,247			138,248
Total liabilities and net assets	$	272,659		$	225,196
Net asset value per common share	$	13.94		$	14.36

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Investment income
Interest income on non-affiliate investments	$	7,705		$	6,786		$	20,865		$	21,714
Prepayment fee income on non-affiliate investments		373			410			1,101			945
Fee income on non-affiliate investments		349			543			583			1,312
Total investment income		8,427			7,739			22,549			23,971
Expenses
Interest expense		1,441			1,495			4,291			7,326
Base management fee (Note 3)		1,279			1,038			3,456			3,618
Performance based incentive fee(Note 3)		1,015			800			2,473			1,314
Administrative fee (Note 3)		300			335			877			872
Professional fees		273			607			991			2,721
General and administrative		218			223			776			823
Total expenses		4,526			4,498			12,864			16,674
Management and performance based incentive fees waived (Note 3)		(140	)		—			(207	)		(345	)
Net expenses		4,386			4,498			12,657			16,329
Net investment income before excise tax		4,041			3,241			9,892			7,642
(Credit) provision for excise tax		(20	)		40			—			120
Net investment income		4,061			3,201			9,892			7,522
Net realized and unrealized (loss) gain on investments
Net realized (loss) gain on investments		(1,463	)		2,325			(1,723	)		(4,190	)
Net unrealized appreciation (depreciation) on investments		940			(766	)		958			8,993
Net realized and unrealized (loss) gain on investments		(523	)		1,559			(765	)		4,803
Net increase in net assets resulting from operations	$	3,538		$	4,760		$	9,127		$	12,325
Net investment income per common share	$	0.35		$	0.33		$	0.90		$	0.78
Net increase in net assets per common share	$	0.30		$	0.50		$	0.83		$	1.28
Distributions declared per share	$	0.345		$	0.345		$	1.035		$	1.035
Weighted average shares outstanding		11,638,925			9,623,468			11,032,992			9,619,133

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Changes in Net Assets (Unaudited)

(In thousands, except share data)

	Common Stock				Paid-In Capital in Excess of			Accumulated Undistributed (Distributions in Excess of) Net Investment			Net Unrealized Depreciation on			Net Realized Loss on			Total Net
	Shares		Amount		Par			Income			Investments			Investments			Assets
Balance at December 31, 2013		9,608,949	$	10	$	154,975		$	1,463		$	(13,026	)	$	(7,587	)	$	135,835
Net increase in net assets resulting from operations		—		—		—			7,522			8,993			(4,190	)		12,325
Issuance of common stock under dividend reinvestment plan		16,325		—		227			—			—			—			227
Distributions declared		—		—		—			(9,960	)		—			—			(9,960	)
Balance at September 30, 2014		9,625,274	$	10	$	155,202			(975	)	$	(4,033	)	$	(11,777	)	$	138,427

Balance at December 31, 2014		9,628,124	$	10	$	155,240		$	(1,102	)	$	(4,737	)	$	(11,163	)	$	138,248
Issuance of common stock, net of offering costs		2,000,000		2		26,504			—			—			—			26,506
Net increase in net assets resulting from operations		—		—		—			9,892			958			(1,723	)		9,127
Issuance of common stock under dividend reinvestment plan		14,398		—		181			—			—			—			181
Distributions declared		—		—		—			(11,815	)		—			—			(11,815	)
Reclassification of permanent tax differences (Note 2)		—		—		(971	)		893			—			78			—
Balance at September 30, 2015		11,642,522	$	12	$	180,954		$	(2,132	)	$	(3,779	)	$	(12,808	)	$	162,247

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	For the Nine Months Ended
	September 30,
	2015			2014
Cash flows from operating activities:
Net increase in net assets resulting from operations	$	9,127		$	12,325
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:
Amortization of debt issuance costs		733			2,370
Net realized loss on investments		1,723			4,190
Net unrealized appreciation on investments		(958	)		(8,993	)
Purchase of investments		(104,781	)		(66,836	)
Principal payments received on investments		58,593			83,906
Proceeds from sale of investments		1,078			5,119
Changes in assets and liabilities:
Net (increase) decrease in investments in money market funds		(248	)		388
Net decrease in restricted investments in money market funds		1,458			2,583
Increase in interest receivable		(399	)		(168	)
Increase in end-of-term payments		(827	)		(497	)
Decrease in unearned income		(56	)		(796	)
Decrease (increase) in other assets		773			(259	)
(Decrease) increase in other accrued expenses		(15	)		825
Increase (decrease) in base management fee payable		29			(84	)
Increase (decrease) in incentive fee payable		216			(52	)
Net cash (used in) provided by operating activities		(33,554	)		34,021
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs		26,506			—
Repayment of Asset-Backed Notes		(19,451	)		(34,441	)
Advances on credit facilities		42,000			—
Debt issuance costs		(420	)		—
Distributions paid		(10,939	)		(9,727	)
Net cash provided by (used in) financing activities		37,696			(44,168	)
Net increase (decrease) in cash		4,142			(10,147	)
Cash:
Beginning of period		8,417			25,341
End of period	$	12,559		$	15,194
Supplemental disclosure of cash flow information:
Cash paid for interest	$	3,474		$	4,968
Supplemental non-cash investing and financing activities:
Warrant investments received and recorded as unearned income	$	778		$	501
Distributions payable	$	4,017		$	3,321
End-of-term payments receivable	$	4,611		$	3,675
Receivable resulting from sale of investment	$	499		$	—

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(9)(10)	Amount		Investments (6)		Value
Debt Investments — 149.0 % (8)
Debt Investments — Life Science — 36.1% (8)
Argos Therapeutics, Inc. (2)(5)	Biotechnology	Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;	$	5,000	$	4,938	$	4,938
		Ceiling 10.75%), 5.00% ETP, Due 10/1/18)
		Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;		5,000		4,951		4,951
		Ceiling 10.75%), 5.00% ETP, Due 3/1/19)
New Haven Pharmaceuticals, Inc. (2)	Biotechnology	Term Loan (11.50% cash (Libor + 11.00%; Floor		1,301		1,292		1,292
		11.50%), 11.42% ETP, Due 3/1/19)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		434		430		430
		11.50%), 11.42% ETP, Due 3/1/19)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		2,000		1,986		1,986
		10.50%), 6.10% ETP, Due 3/1/19)
		Term Loan (10.00% cash (Libor + 9.50%; Floor		6,265		6,184		6,184
		10.00%), 4.00% ETP, Due 4/1/19)
Palatin Technologies, Inc. (2)(5)	Biotechnology	Term Loan (9.00% cash (Libor + 8.50%; Floor		5,000		4,934		4,934
		9.00%), 5.00% ETP, Due 1/1/19)
		Term Loan (9.00% cash (Libor + 8.50%; Floor		5,000		4,933		4,933
		9.00%), 5.00% ETP, Due 8/1/19)
Sample6, Inc. (2)	Biotechnology	Term Loan (9.50% cash (Libor + 9.00%; Floor		1,555		1,550		1,550
		9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)
		Term Loan (9.50% cash (Libor + 9.00%; Floor		945		939		939
		9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)
		Term Loan (9.50% cash (Libor + 9.00%; Floor		2,500		2,479		2,479
		9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)
Sunesis Pharmaceuticals, Inc. (2)(5)	Biotechnology	Term Loan (8.95% cash, 4.65% ETP, Due 10/1/16)		545		544		544
		Term Loan (9.00% cash, 4.65% ETP, Due 10/1/16)		818		814		814
IntegenX Inc. (2)	Medical Device	Term Loan (10.75% cash (Libor + 10.25%; Floor		3,750		3,699		3,699
		10.75%; Ceiling 12.75%), 3.50% ETP, Due 7/1/18)
Lantos Technologies, Inc. (2)	Medical Device	Term Loan (11.50% cash (Libor + 10.50%; Floor		3,500		3,448		3,388
		11.50%), 5.00% ETP, Due 2/1/18)
Mederi Therapeutics, Inc. (2)	Medical Device	Term Loan (12.02% cash (Libor + 11.82), 4.00% ETP,		2,925		2,897		2,801
		Due 7/1/17)
		Term Loan (12.02% cash (Libor + 11.82%), 4.00% ETP,		2,925		2,897		2,801
		Due 7/1/17)
NinePoint Medical, Inc. (2)	Medical Device	Term Loan (9.25% cash (Libor + 8.75%; Floor		5,000		4,928		4,928
		9.25%), 4.50% ETP, Due 3/1/19)
Tryton Medical, Inc. (2)	Medical Device	Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,		2,250		2,237		2,237
		Due 9/1/16)
ZetrOZ, Inc. (2)	Medical Device	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,500		1,480		1,406
		11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		1,500		1,476		1,406
		11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)
Total Debt Investments — Life Science						59,036		58,640
Debt Investments — Technology — 80.4% (8)
Ekahau, Inc. (2)	Communications	Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		854		849		849
		Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		285		283		283
mBlox, Inc. (2)	Communications	Term Loan (11.50% cash (Libor + 11.00%; Floor		5,000		4,974		4,974
		11.50%; Ceiling 13.00%), 3.40% ETP, Due 7/1/18)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		5,000		4,974		4,974
		11.50%; Ceiling 13.00%), 3.40% ETP, Due 7/1/18)
		Term Loan (12.00% cash, 100.0% ETP, Due 7/1/16)		1,000		1,000		1,000
		Term Loan (12.00% cash, 100.0% ETP, Due 7/1/16)		500		500		500
Overture Networks, Inc. (2)	Communications	Term Loan (10.75% cash, (Libor + 10.25%; Floor		4,104		4,087		4,087
		10.75%), 5.75% ETP, Due 12/1/17)
		Term Loan (10.75% cash (Libor + 10.25%; Floor		2,052		2,042		2,042
		10.75%), 5.75% ETP, Due 12/1/17)
		Term Loan (10.75% cash (Libor + 10.25%; Floor		1,000		991		991
		10.75%), 5.00% ETP, Due 11/1/18)
Additech, Inc. (2)	Consumer-related Technologies	Term Loan (11.75% cash (Libor + 11.25%; Floor		2,500		2,467		2,467
		11.75%; Ceiling 13.25%), 4.00% ETP, Due 7/1/18)
		Term Loan (11.75% cash (Libor + 11.25%; Floor		2,500		2,461		2,461
		11.75%; Ceiling 13.25%), 4.00% ETP, Due 1/1/19)
Gwynnie Bee, Inc. (2)	Consumer-related Technologies	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,667		1,642		1,642
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 11/1/17)

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(9)(10)	Amount		Investments (6)		Value
		Term Loan (11.00% cash (Libor + 10.50%; Floor		933		913		913
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 2/1/18)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		1,000		985		985
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 4/1/18)
Rhapsody International, Inc. (2)	Consumer-related Technologies	Term Loan (11.00% cash (Libor + 10.50%; Floor		7,500		7,261		7,261
		11.00%), 3.0% ETP, Due 10/1/19)
SavingStar, Inc. (2)	Consumer-related Technologies	Term Loan (10.90% cash (Libor + 10.40%; Floor		3,000		2,907		2,907
		10.90%), 3.0% ETP, Due 6/1/19)
IT Professional Solutions, Inc.	Internet and Media	Term Loan (11.45% cash (Libor + 11.25%), Due 1/1/16)		1,750		1,740		1,740
The NanoSteel Company, Inc. (2)	Materials	Term Loan (10.00% cash (Libor + 9.50%; Floor		5,000		4,861		4,861
		10.00%), 5.0% ETP, Due 7/1/19)
		Term Loan (10.00% cash (Libor + 9.50%; Floor		2,500		2,455		2,455
		10.00%), 5.0% ETP, Due 7/1/19)
Nanocomp Technologies, Inc. (2)	Networking	Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)		813		803		803
Powerhouse Dynamics, Inc. (2)	Power Management	Term Loan (11.20% cash (Libor + 10.70%; Floor		2,500		2,452		2,452
		11.20%), 3.0% ETP, Due 3/1/19)
Avalanche Technology, Inc. (2)	Semiconductors	Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;		1,878		1,872		1,872
		Ceiling 11.75%), 2.40% ETP, Due 4/1/17)
		Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;		2,185		2,178		2,178
		Ceiling 11.75%) ,2.40% ETP, Due 10/1/18)
		Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;		2,381		2,332		2,332
		Ceiling 11.75%), 2.00% ETP, Due 2/1/19)
InVisage Technologies, Inc. (2)	Semiconductors	Term Loan (12.00% cash (Libor + 11.50%; Floor		2,550		2,496		2,496
		12.00%; Ceiling 14.00%), 2.00% ETP, Due 4/1/18)
		Term Loan (12.00% cash (Libor + 11.50%; Floor		850		833		833
		12.00%; Ceiling 14.00%), 2.0% ETP, Due 10/1/18)
Luxtera, Inc. (2)	Semiconductors	Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;		1,930		1,905		1,905
		Ceiling 12.25%), 13.00% ETP, Due 7/1/17)
		Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;		1,077		1,073		1,073
		Ceiling 12.25%), 13.00% ETP, Due 7/1/17)
		Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%),		833		828		828
		4.50% ETP, Due 12/1/18)
		Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%),		833		827		827
		4.50% ETP, Due 12/1/18)
Xtera Communications, Inc. (2)	Semiconductors	Term Loan (12.50% cash, 15.65% ETP, Due 12/31/16)		4,796		4,733		4,733
		Term Loan (12.50% cash, 21.75% ETP, Due 12/31/16)		1,333		1,314		1,314
Bridge2 Solutions, Inc.	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		4,000		3,959		3,959
		11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19)
Crowdstar, Inc. (2)	Software	Term Loan (10.75% cash (Libor + 10.25%; Floor		2,000		1,973		1,973
		10.75%), 3.00% ETP, Due 9/1/18)
Decisyon, Inc. (2)	Software	Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)		1,740		1,734		1,699
		Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)		883		875		858
Education Elements, Inc. (2)	Software	Term Loan (10.50% cash (Libor + 10.00%; Floor		2,000		1,965		1,965
		10.50%), 4.00% ETP, Due 1/1/19)
Lotame Solutions, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		3,410		3,396		3,396
		11.50%), 5.25% ETP, Due 9/1/17)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		1,500		1,494		1,494
		11.50%), 5.25% ETP, Due 9/1/17)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		2,100		2,077		2,077
		11.50%), 3.00% ETP, Due 4/1/18)
Netuitive, Inc. (2)	Software	Term Loan (12.75% cash, Due 7/1/16)		1,233		1,230		1,230
ScoreBig, Inc. (2)	Software	Term Loan (10.50% cash (Libor + 10.00%; Floor		3,500		3,445		3,445
		10.50%), 4.00% ETP, Due 4/1/19)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		3,500		3,445		3,445
		10.50%), 4.00% ETP, Due 4/1/19)
SIGNiX, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		3,000		2,948		2,948
		11.50%), Due 7/1/18)
SilkRoad Technology, Inc. (2)	Software	Term Loan (10.85% cash (Libor + 10.35%; Floor		7,500		7,431		7,431
		10.85%; Ceiling 12.85%), 3.00% ETP, Due 6/1/19)
Social Intelligence Corp. (2)	Software	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,227		1,210		1,196
		11.00%; Ceiling 13.00%), 3.50% ETP, Due 12/1/17)
SpringCM, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		4,500		4,444		4,444
		11.50%; Ceiling 13.00%), 2.00% ETP, Due 1/1/18)
Sys-Tech Solutions, Inc. (2)	Software	Term Loan (11.65% cash (Libor + 11.15%; Floor		5,800		5,765		5,765

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(9)(10)	Amount		Investments (6)		Value
		11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)
		Term Loan (11.65% cash (Libor + 11.15%; Floor		5,000		4,963		4,963
		11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)
VBrick Systems, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		2,200		2,185		2,185
		11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)
Vidsys, Inc. (2)	Software	Term Loan (13.00% cash, 7.58% ETP, Due 12/1/17)		2,910		2,909		2,896
xTech Holdings, Inc. (2)	Software	Term Loan (11.00% cash (Libor + 10.50%; Floor		2,000		1,954		1,954
		11.00%), 3.00% ETP, Due 4/1/19)
Total Debt Investments — Technology						130,440		130,361
Debt Investments — Cleantech — 8.3% (8)
Renmatix, Inc. (2)	Alternative Energy	Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)		426		426		426
		Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)		426		426		426
		Term Loan (10.25% cash, Due 10/1/16)		2,141		2,134		2,134
Semprius, Inc. (2)	Alternative Energy	Term Loan (10.25% cash, 5.00% ETP, Due 6/1/16)		1,274		1,254		1,254
Rypos, Inc. (2)	Energy Efficiency	Term Loan (11.80% cash, 4.25% ETP, Due 6/1/17)		2,430		2,400		2,400
		Term Loan (11.80% cash, 4.25% ETP, Due 1/1/18)		947		931		931
Lehigh Technologies, Inc. (2)	Waste Recycling	Term Loan (9.91% cash (Libor + 9.72%), 6.75% ETP,		3,000		2,959		2,959
		Due 8/1/19)
		Term Loan (9.91% cash (Libor + 9.72%), 6.75% ETP,		3,000		2,973		2,973
		Due 8/1/19)
Total Debt Investments — Cleantech						13,503		13,503
Debt Investments — Healthcare information and services — 24.2% (8)
Interleukin Genetics, Inc. (2)(5)	Diagnostics	Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%)		5,000		4,870		4,870
		4.50% ETP, Due 10/1/18)
LifePrint Group, Inc. (2)	Diagnostics	Term Loan (11.00% cash (Libor + 10.50%; Floor		2,800		2,762		2,627
		11.00%; Ceiling 12.50%), 3.00% ETP, Due 1/1/18)
Watermark Medical, Inc. (2)	Other Healthcare	Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;		3,500		3,493		3,493
		Ceiling 11.00%); 4.00% ETP, Due 4/1/18)
		Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;		3,500		3,493		3,493
		Ceiling 11.00%); 4.00% ETP, Due 4/1/18)
		Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;		1,250		1,248		1,248
		Ceiling 11.00%); 4.00% ETP, Due 4/1/18)
Innovatient Solutions, Inc. (2)	Software	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,000		947		947
		11.00%, Ceiling 13.00%); 4.00% ETP, Due 7/1/18)
MedAvante, Inc. (2)	Software	Term Loan (9.75% cash (Libor + 9.25%; Floor		3,000		2,887		2,887
		9.75%), 4.00% ETP, Due 1/1/19)
		Term Loan (9.75% cash (Libor + 9.25%; Floor		3,000		2,954		2,954
		9.75%), 4.00% ETP, Due 1/1/19)
Medsphere Systems Corporation (2)	Software	Term Loan (10.50% cash (Libor + 10.00%; Floor		5,000		4,916		4,916
		10.50%), 7.00% ETP, Due 7/1/19)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		2,500		2,458		2,458
		10.50%), 7.00% ETP, Due 7/1/19)
Recondo Technology, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		1,384		1,379		1,379
		11.50%), 6.60% ETP, Due 12/1/17)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		2,500		2,493		2,493
		11.00%), 4.50% ETP, Due 12/1/17)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		2,500		2,494		2,494
		10.50%), 2.75% ETP, Due 12/1/17)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		3,000		2,962		2,962
		10.50%), 2.50% ETP, Due 1/1/19)
Total Debt Investments — Healthcare information and services						39,356		39,221
Total Debt Investments						242,335		241,725
Warrant Investments — 3.7% (8)
Warrants — Life Science — 0.8% (8)
ACT Biotech Corporation	Biotechnology	1,521,820 Preferred Stock Warrants		—		83		—
Argos Therapeutics, Inc. (2)(5)	Biotechnology	16,556 Common Stock Warrants		—		33		1
Celsion Corporation (5)	Biotechnology	5,708 Common Stock Warrants		—		15		—
Inotek Pharmaceuticals Corporation (5)	Biotechnology	33,762 Preferred Stock Warrants		—		17		145
New Haven Pharmaceuticals, Inc. (2)	Biotechnology	103,982 Preferred Stock Warrants		—		87		173
Nivalis Theraputics, Inc. (5)	Biotechnology	18,534 Common Stock Warrants		—		122		5
Palatin Technologies, Inc. (2)(5)	Biotechnology	608,058 Common Stock Warrants		—		51		67
Revance Therapeutics, Inc. (5)	Biotechnology	34,377 Common Stock Warrants		—		68		526
Sample6, Inc. (2)	Biotechnology	351,018 Preferred Stock Warrants		—		45		38

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(9)(10)	Amount		Investments (6)		Value
Sunesis Pharmaceuticals, Inc. (5)	Biotechnology	12,302 Common Stock Warrants		—		5		—
Tranzyme, Inc. (2)(5)	Biotechnology	6,460 Common Stock Warrants		—		6		—
AccuVein Inc. (2)	Medical Device	75,769 Preferred Stock Warrants		—		24		28
Direct Flow Medical, Inc.	Medical Device	176,922 Preferred Stock Warrants		—		144		39
EnteroMedics, Inc. (5)	Medical Device	141,026 Common Stock Warrants		—		347		—
IntegenX, Inc. (2)	Medical Device	158,006 Preferred Stock Warrants		—		33		24
Lantos Technologies, Inc. (2)	Medical Device	1,287,817 Preferred Stock Warrants		—		37		41
Mederi Therapeutics, Inc. (2)	Medical Device	248,736 Preferred Stock Warrants		—		26		39
Mitralign, Inc. (2)	Medical Device	641,909 Preferred Stock Warrants		—		52		36
NinePoint Medical, Inc. (2)	Medical Device	410,959 Preferred Stock Warrants		—		33		33
OraMetrix, Inc. (2)	Medical Device	812,348 Preferred Stock Warrants		—		78		—
Tryton Medical, Inc. (2)	Medical Device	122,362 Preferred Stock Warrants		—		15		10
ViOptix, Inc.	Medical Device	375,763 Preferred Stock Warrants		—		13		—
ZetrOZ, Inc. (2)	Medical Device	475,561 Preferred Stock Warrants		—		25		20
Total Warrants — Life Science						1,359		1,225
Warrants — Technology — 2.3% (8)
Ekahau, Inc. (2)	Communications	978,261 Preferred Stock Warrants		—		33		20
OpenPeak, Inc.	Communications	18,997 Common Stock Warrants		—		89		—
Overture Networks, Inc.	Communications	385,617 Preferred Stock Warrants		—		55		—
Additech, Inc. (2)	Consumer-related Technologies	150,000 Preferred Stock Warrants		—		33		27
Everyday Health, Inc. (5)	Consumer-related Technologies	43,783 Common Stock Warrants		—		69		22
Gwynnie Bee, Inc. (2)	Consumer-related Technologies	268,591 Preferred Stock Warrants		—		68		636
Rhapsody International Inc. (2)	Consumer-related Technologies	852,273 Common Stock Warrants		—		164		164
SavingStar, Inc. (2)	Consumer-related Technologies	79,088 Preferred Stock Warrants		—		48		47
SnagAJob.com, Inc.	Consumer-related Technologies	365,396 Preferred Stock Warrants		—		23		303
Tagged, Inc.	Consumer-related Technologies	190,868 Preferred Stock Warrants		—		27		65
XIOtech, Inc.	Data Storage	2,217,979 Preferred Stock Warrants		—		22		18
Cartera Commerce, Inc.	Internet and media	90,909 Preferred Stock Warrants		—		16		—
SimpleTuition, Inc.	Internet and media	189,573 Preferred Stock Warrants		—		63		66
The NanoSteel Company, Inc. (2)	Materials	147,424 Preferred Stock Warrants		—		93		91
IntelePeer, Inc.	Networking	141,549 Preferred Stock Warrants		—		39		33
Nanocomp Technologies, Inc. (2)	Networking	272,728 Preferred Stock Warrants		—		25		19
Aquion Energy, Inc.	Power Management	115,051 Preferred Stock Warrants		—		7		55
Powerhouse Dynamics, Inc. (2)	Power Management	290,698 Preferred Stock Warrants		—		28		27
Avalanche Technology, Inc. (2)	Semiconductors	607,435 Preferred Stock Warrants		—		101		41
eASIC Corporation (2)	Semiconductors	40,445 Preferred Stock Warrants		—		25		27
InVisage Technologies, Inc. (2)	Semiconductors	185,790 Preferred Stock Warrants		—		48		45
Kaminario, Inc.	Semiconductors	1,087,203 Preferred Stock Warrants		—		59		63
Luxtera, Inc.(2)	Semiconductors	2,304,667 Preferred Stock Warrants		—		48		108
NexPlanar Corporation	Semiconductors	216,001 Preferred Stock Warrants		—		36		126
Soraa, Inc. (2)	Semiconductors	180,000 Preferred Stock Warrants		—		80		98
Xtera Communications, Inc.	Semiconductors	983,607 Preferred Stock Warrants		—		206		—
Bolt Solutions Inc. (2)	Software	202,892 Preferred Stock Warrants		—		113		114
Bridge2 Solutions, Inc. (11)	Software	1,218 Preferred Stock Warrants		—		18		322
Clarabridge, Inc.	Software	53,486 Preferred Stock Warrants		—		14		82
Crowdstar, Inc. (2)	Software	75,428 Preferred Stock Warrants		—		14		14
Decisyon, Inc. (2)	Software	457,876 Preferred Stock Warrants		—		45		—
DriveCam, Inc.	Software	71,639 Preferred Stock Warrants		—		20		121
Education Elements, Inc. (2)	Software	136,070 Preferred Stock Warrants		—		16		16
Lotame Solutions, Inc. (2)	Software	288,115 Preferred Stock Warrants		—		22		267
Netuitive, Inc.	Software	41,569 Preferred Stock Warrants		—		48		—
Riv Data Corp. (2)	Software	237,361 Preferred Stock Warrants		—		13		12
ScoreBig, Inc. (2)	Software	481,198 Preferred Stock Warrants		—		55		55
SIGNiX, Inc. (2)	Software	63,365 Preferred Stock Warrants		—		48		47
SpringCM, Inc. (2)	Software	2,385,686 Preferred Stock Warrants		—		55		52
Sys-Tech Solutions, Inc.	Software	375,000 Preferred Stock Warrants		—		242		512
Vidsys, Inc.	Software	37,346 Preferred Stock Warrants		—		23		—
Visage Mobile, Inc.	Software	1,692,047 Preferred Stock Warrants		—		19		—
xTech Holdings, Inc. (2)	Software	111,111 Preferred Stock Warrants		—		30		30
Total Warrants — Technology						2,300		3,745
Warrants — Cleantech — 0.1% (8)
Renmatix, Inc.	Alternative Energy	53,022 Preferred Stock Warrants		—		67		64
Semprius, Inc.	Alternative Energy	519,981 Preferred Stock Warrants		—		25		—

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(9)(10)	Amount		Investments (6)		Value
Rypos, Inc. (2)	Energy Efficiency	5,627 Preferred Stock Warrants		—		44		31
Tigo Energy, Inc. (2)	Energy Efficiency	804,604 Preferred Stock Warrants		—		100		109
Lehigh Technologies, Inc. (2)	Waste Recycling	272,727 Preferred Stock Warrants		—		33		33
Total Warrants — Cleantech						269		237
Warrants — Healthcare information and services — 0.5% (8)
Accumetrics, Inc.	Diagnostics	100,928 Preferred Stock Warrants		—		107		63
BioScale, Inc. (2)	Diagnostics	315,618 Preferred Stock Warrants		—		54		—
Candescent Health, Inc. (2)	Diagnostics	519,992 Preferred Stock Warrants		—		378		—
Helomics Corporation	Diagnostics	13,461 Preferred Stock Warrants		—		73		—
Interleukin Genetics, Inc. (2)(5)	Diagnostics	2,492,523 Common Stock Warrants		—		112		50
LifePrint Group, Inc. (2)	Diagnostics	49,000 Preferred Stock Warrants		—		29		27
Singulex, Inc.	Other Healthcare	293,632 Preferred Stock Warrants		—		44		165
Talyst, Inc.	Other Healthcare	300,360 Preferred Stock Warrants		—		100		35
Watermark Medical, Inc. (2)	Other Healthcare	27,373 Preferred Stock Warrants		—		74		62
Innovatient Solutions, Inc. (2)	Software	157,895 Preferred Stock Warrants		—		35		35
MedAvante, Inc. (2)	Software	114,285 Preferred Stock Warrants		—		66		65
Medsphere Systems Corporation (2)	Software	7,097,791 Preferred Stock Warrants		—		60		59
Recondo Technology, Inc. (2)	Software	556,796 Preferred Stock Warrants		—		95		193
Total Warrants — Healthcare information and services						1,227		754
Total Warrants						5,155		5,961

Other Investments — 0.2% (8)
Vette Technology, LLC	Data Storage	Royalty Agreement Due 4/18/2019		—		4,445		300
Total Other Investments						4,445		300
Equity — 0.9% (8)
Insmed Incorporated (5)	Biotechnology	33,208 Common Stock		—		239		617
Revance Therapeutics, Inc.(5)	Biotechnology	4,861 Common Stock		—		73		145
Sunesis Pharmaceuticals, Inc. (5)	Biotechnology	78,493 Common Stock		—		83		63
Overture Networks Inc.	Communications	386,191 Common Stock		—		482		222
Total Equity						877		1,047
Total Portfolio Investment Assets — 153.5% (8)					$	252,812	$	249,033

Short Term Investments — Money Market Funds — 0.2% (8)
US Bank Money Market Deposit Account					$	275	$	275
Total Short Term Investments — Money Market Funds					$	275	$	275
Short Term Investments — Restricted Investments— 0.9% (8)
US Bank Money Market Deposit Account (2)					$	1,448	$	1,448
Total Short Term Investments — Restricted Investments					$	1,448	$	1,448

_____________________________

(1)

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

(2)

Has been pledged as collateral under the Key Facility or the 2013-1 Securitization.

(3)

All investments are less than 5% ownership of the class and ownership of the portfolio company.

(4)

All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include end-of-term payments (“ETPs”) and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the debt investment, unless otherwise indicated. Debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of September 30, 2015 is provided.

(5)

Portfolio company is a public company.

(6)

For debt investments, represents principal balance less unearned income.

(7)

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

(8)

Value as a percent of net assets.

(9)

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

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

(10)

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

(11)

The Company received a contractual right to receive warrants from Bridge2 Solutions, Inc. and its affiliates (collectively, “Bridge2”) upon the earliest of December 31, 2015, a qualifying equity sale of Bridge2’s equity securities or an acquisition of Bridge2.

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(10)(11)	Amount		Investments (6)		Value
Debt Investments — 144.1% (9)
Debt Investments — Life Science — 31.4% (9)
Argos Therapeutics, Inc. (2)(5)	Biotechnology	Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;	$	5,000	$	4,872	$	4,872
		Ceiling 10.75%), 5.00% ETP, Due 10/1/18)
Inotek Pharmaceuticals Corporation (2)	Biotechnology	Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)		2,795		2,777		2,777
New Haven Pharmaceuticals, Inc. (2)	Biotechnology	Term Loan (11.50% cash (Libor + 11.00%; Floor		1,301		1,292		1,292
		11.50%), 6.50% ETP, Due 11/1/17)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		434		431		431
		11.50%), 6.50% ETP, Due 11/1/17)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		2,000		1,967		1,967
		10.50%), 4.00% ETP, Due 7/1/18)
Palatin Technologies, Inc. (2)(5)	Biotechnology	Term Loan (9.00% cash (Libor + 8.50%; Floor		5,000		4,919		4,919
		9.00%), 5.00% ETP, Due 1/1/19)
Sample6, Inc. (2)	Biotechnology	Term Loan (9.50% cash (Libor + 9.00%; Floor		1,555		1,548		1,548
		9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)
		Term Loan (9.50% cash (Libor + 9.00%; Floor		945		912		912
		9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)
Sunesis Pharmaceuticals, Inc. (2)(5)	Biotechnology	Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)		677		675		675
		Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)		1,016		1,008		1,008
Xcovery Holding Company, LLC (2)	Biotechnology	Term Loan (12.50% cash, Due 8/1/15)		292		292		292
		Term Loan (12.50% cash, Due 8/1/15)		459		459		459
		Term Loan (12.50% cash, Due 10/1/15)		101		101		101
AccuVein Inc. (2)	Medical Device	Term Loan (10.40% cash (Libor + 9.90%; Floor		4,000		3,956		3,956
		10.40%; Ceiling 11.90%), 5.00% ETP, Due 2/1/18)
		Term Loan (10.00% cash (Libor + 9.50%; Floor		1,000		981		981
		10.00%; Ceiling 12.50%), 4.00% ETP, Due 7/1/18)
IntegenX Inc. (2)	Medical Device	Term Loan (10.75% cash (Libor + 10.25%; Floor		3,750		3,685		3,685
		10.75%; Ceiling 12.75%), 3.50% ETP, Due 7/1/18)
Lantos Technologies, Inc. (2)	Medical Device	Term Loan (10.50% cash (Libor + 10.00%; Floor		3,500		3,449		3,449
		10.50%; Ceiling 12.00%), 3.00% ETP, Due 2/1/18)
Mederi Therapeutics, Inc. (2)	Medical Device	Term Loan (10.75% cash (Libor + 10.25%; Floor		3,000		2,969		2,969
		10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)
		Term Loan (10.75% cash (Libor + 10.25%; Floor		3,000		2,969		2,969
		10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)
Tryton Medical, Inc. (2)	Medical Device	Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,		2,813		2,789		2,789
		Due 9/1/16)
ZetrOZ, Inc. (2)	Medical Device	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,500		1,427		1,427
		11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)
Total Debt Investments — Life Science						43,478		43,478
Debt Investments — Technology — 78.9% (9)
Ekahau, Inc. (2)	Communications	Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		1,279		1,267		1,267
		Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		426		422		422
mBlox, Inc. (2)	Communications	Term Loan (11.50% cash (Libor + 11.00%; Floor		5,000		4,967		4,967
		11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		5,000		4,967		4,967
		11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)
Overture Networks, Inc. (2)	Communications	Term Loan (10.75% cash, (Libor + 10.25%; Floor		4,104		4,071		4,071
		10.75%), 5.75% ETP, Due 12/1/17)
		Term Loan (10.75% cash (Libor + 10.25%; Floor		2,052		2,038		2,038
		10.75%), 5.75% ETP, Due 12/1/17)
Additech, Inc. (2)	Consumer-related Technologies	Term Loan (11.75% cash (Libor + 11.25%; Floor		2,500		2,417		2,417
		11.75%; Ceiling 13.25%), 4.00% ETP, Due 7/1/18)
Gwynnie Bee, Inc. (2)	Consumer-related Technologies	Term Loan (11.00% cash (Libor + 10.50%; Floor		2,000		1,966		1,966
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 11/1/17)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		1,000		974		974
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 2/1/18)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		1,000		980		980
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 4/1/18)
Nanocomp Technologies, Inc. (2)	Networking	Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)		1,000		981		981
Avalanche Technology, Inc. (2)	Semiconductors	Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;		1,983		1,972		1,972
		Ceiling 11.75%), 2.40% ETP, Due 4/1/17)
		Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;		2,246		2,179		2,179

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(10)(11)	Amount		Investments (6)		Value
		Ceiling 11.75%) ,2.40% ETP, Due 10/1/18)
eASIC Corporation (2)	Semiconductors	Term Loan (11.00% cash, 2.50% ETP, Due 4/1/17)		2,000		1,982		1,982
		Term Loan (10.75% cash, 2.50% ETP, Due 4/1/18)		2,000		1,983		1,983
InVisage Technologies, Inc. (2)	Semiconductors	Term Loan (12.00% cash (Libor + 11.50%; Floor		2,550		2,469		2,469
		12.00%; Ceiling 14.00%), 2.0% ETP, Due 4/1/18)
Kaminario, Inc. (2)	Semiconductors	Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)		2,275		2,255		2,255
		Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)		2,275		2,255		2,255
Luxtera, Inc. (2)	Semiconductors	Term Loan (10.25% cash, 13.00% ETP, Due 7/1/17)		2,632		2,590		2,590
		Term Loan (10.25% cash, 13.00% ETP, Due 7/1/17)		1,469		1,462		1,462
NexPlanar Corporation (2)	Semiconductors	Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)		2,368		2,352		2,352
		Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)		1,579		1,564		1,564
Xtera Communications, Inc. (2)	Semiconductors	Term Loan (11.50% cash, 15.65% ETP, Due 1/1/17)		5,846		5,708		5,708
		Term Loan (11.50% cash, 21.75% ETP, Due 1/1/17)		1,624		1,584		1,584
Courion Corporation (2)	Software	Term Loan (11.45% cash, Due 10/1/15)		1,279		1,277		1,277
		Term Loan (11.45% cash, Due 10/1/15)		1,279		1,277		1,277
Crowdstar, Inc. (2)	Software	Term Loan (10.75% cash (Libor + 10.25%; Floor		2,000		1,956		1,956
		10.75%), 3.00% ETP, Due 9/1/18)
Decisyon, Inc. (2)	Software	Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)		2,919		2,899		2,899
		Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)		1,000		986		986
Lotame Solutions, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		3,410		3,390		3,390
		11.50%), 5.25% ETP, Due 9/1/17)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		1,500		1,491		1,491
		11.50%), 5.25% ETP, Due 9/1/17)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		2,100		2,070		2,070
		11.50%), 3.00% ETP, Due 4/1/18)
Netuitive, Inc. (2)	Software	Term Loan (12.75% cash, Due 7/1/16)		1,717		1,707		1,707
Raydiance, Inc. (2)	Software	Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)		3,490		3,468		3,468
		Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)		698		688		688
		Term Loan (11.50% cash (Libor + 11.00%; Floor		3,000		2,955		2,955
		11.50%; Ceiling 13.50%), 2.75% ETP, Due 2/1/18)
Razorsight Corporation (2)	Software	Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)		1,142		1,132		1,132
		Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)		1,000		990		990
		Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)		1,000		988		988
SIGNiX, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		3,000		2,902		2,902
		11.50%), Due 7/1/18)
Social Intelligence Corp. (2)	Software	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,500		1,477		1,477
		11.00%; Ceiling 13.00%), 3.50% ETP, Due 12/1/17)
SpringCM, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		4,500		4,412		4,412
		11.50%; Ceiling 13.00%), 2.00% ETP, Due 1/1/18)
Sys-Tech Solutions, Inc. (2)	Software	Term Loan (11.65% cash (Libor + 11.15%; Floor		6,000		5,954		5,954
		11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)
		Term Loan (11.65% cash (Libor + 11.15%; Floor		5,000		4,952		4,952
		11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)
VBrick Systems, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		3,000		2,979		2,979
		11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)
Vidsys, Inc. (2)	Software	Term Loan (11.00% cash, 7.58% ETP, Due 4/1/15)		3,000		2,993		2,993
Visage Mobile, Inc. (2)	Software	Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)		645		640		640
Total Debt Investments — Technology						108,988		108,988
Debt Investments — Cleantech — 9.3% (9)
Renmatix, Inc. (2)	Alternative Energy	Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)		1,148		1,145		1,145
		Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)		1,148		1,145		1,145
		Term Loan (10.25% cash, Due 10/1/16)		3,488		3,469		3,469
Semprius, Inc. (2)(8)	Alternative Energy	Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)		2,432		2,432		2,250
Aurora Algae, Inc. (2)	Consumer-related Technologies	Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)		397		396		396
Rypos, Inc. (2)	Energy Efficiency	Term Loan (11.80% cash, Due 1/1/17)		2,670		2,643		2,643
		Term Loan (11.80% cash, Due 9/1/17)		1,000		986		986
Tigo Energy, Inc. (2)	Energy Efficiency	Term Loan (13.00% cash, 3.16% ETP, Due 6/1/15)		786		785		785
Total Debt Investments — Cleantech						13,001		12,819
Debt Investments — Healthcare information and services — 24.5% (9)
Interleukin Genetics, Inc. (2)(5)	Diagnostics	Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%)		5,000		4,837		4,837
		4.50% ETP, Due 10/1/18)
LifePrint Group, Inc. (2)	Diagnostics	Term Loan (11.00% cash (Libor + 10.50%; Floor		3,000		2,949		2,747

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(10)(11)	Amount		Investments (6)		Value
		11.00%; Ceiling 12.50%), 3.00% ETP, Due 1/1/18)
Radisphere National Radiology Group, Inc. (2)	Diagnostics	Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)		10,092		10,053		10,053
Watermark Medical, Inc. (2)	Other Healthcare	Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)		3,500		3,473		3,473
		Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)		3,500		3,473		3,473
Recondo Technology, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		1,384		1,379		1,379
		11.50%), 6.60% ETP, Due 12/1/17)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		2,500		2,490		2,490
		11.00%), 4.50% ETP, Due 12/1/17)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		2,500		2,490		2,490
		10.50%), 2.75% ETP, Due 12/1/17)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		3,000		2,953		2,953
		10.50%), 2.50% ETP, Due 1/1/19)
Total Debt Investments — Healthcare information and services						34,097		33,895
Total Debt Investments						199,564		199,180
Warrant Investments — 3.4% (9)
Warrants — Life Science — 0.6% (9)
ACT Biotech Corporation	Biotechnology	1,521,820 Preferred Stock Warrants		—		83		—
Argos Therapeutics, Inc. (2)(5)	Biotechnology	16,556 Common Stock Warrants		—		33		31
Celsion Corporation (5)	Biotechnology	5,708 Common Stock Warrants		—		15		—
Inotek Pharmaceuticals Corporation	Biotechnology	33,762 Preferred Stock Warrants		—		17		15
N30 Pharmaceuticals, Inc.	Biotechnology	53,550 Common Stock Warrants		—		122		—
New Haven Pharmaceuticals, Inc. (2)	Biotechnology	55,347 Preferred Stock Warrants		—		42		136
Palatin Technologies, Inc. (2)(5)	Biotechnology	333,333 Common Stock Warrants		—		31		31
Revance Therapeutics, Inc. (5)	Biotechnology	34,377 Common Stock Warrants		—		68		120
Sample6, Inc. (2)	Biotechnology	351,018 Preferred Stock Warrants		—		45		39
Supernus Pharmaceuticals, Inc. (2)(5)	Biotechnology	42,083 Common Stock Warrants		—		93		165
Tranzyme, Inc. (2)(5)	Biotechnology	6,460 Common Stock Warrants		—		6		—
AccuVein Inc. (2)	Medical Device	75,769 Preferred Stock Warrants		—		24		29
Direct Flow Medical, Inc.	Medical Device	176,922 Preferred Stock Warrants		—		144		40
EnteroMedics, Inc. (5)	Medical Device	141,026 Common Stock Warrants		—		347		—
IntegenX, Inc. (2)	Medical Device	158,006 Preferred Stock Warrants		—		33		31
Lantos Technologies, Inc. (2)	Medical Device	858,545 Preferred Stock Warrants		—		24		23
Mederi Therapeutics, Inc. (2)	Medical Device	248,736 Preferred Stock Warrants		—		26		40
Mitralign, Inc. (2)	Medical Device	641,909 Preferred Stock Warrants		—		52		37
OraMetrix, Inc. (2)	Medical Device	812,348 Preferred Stock Warrants		—		78		—
Tengion, Inc. (2)(5)	Medical Device	1,864,876 Common Stock Warrants		—		123		—
Tryton Medical, Inc. (2)	Medical Device	122,362 Preferred Stock Warrants		—		15		13
ViOptix, Inc.	Medical Device	375,763 Preferred Stock Warrants		—		13		—
ZetrOZ, Inc. (2)	Medical Device	475,561 Preferred Stock Warrants		—		25		24
Total Warrants — Life Science						1,459		774
Warrants — Technology — 2.2% (9)
Ekahau, Inc. (2)	Communications	978,261 Preferred Stock Warrants		—		33		19
OpenPeak, Inc.	Communications	18,997 Common Stock Warrants		—		89		—
Overture Networks, Inc.	Communications	385,617 Preferred Stock Warrants		—		56		—
Additech, Inc. (2)	Consumer-related Technologies	150,000 Preferred Stock Warrants		—		33		33
Everyday Health, Inc. (5)	Consumer-related Technologies	43,783 Common Stock Warrants		—		69		179
Gwynnie Bee, Inc. (2)	Consumer-related Technologies	268,591 Preferred Stock Warrants		—		68		312
SnagAJob.com, Inc.	Consumer-related Technologies	365,396 Preferred Stock Warrants		—		23		305
Tagged, Inc.	Consumer-related Technologies	190,868 Preferred Stock Warrants		—		26		62
XIOtech, Inc.	Data Storage	2,217,979 Preferred Stock Warrants		—		22		18
Cartera Commerce, Inc.	Internet and media	90,909 Preferred Stock Warrants		—		16		159
SimpleTuition, Inc.	Internet and media	189,573 Preferred Stock Warrants		—		63		29
IntelePeer, Inc.	Networking	141,549 Preferred Stock Warrants		—		39		33
Nanocomp Technologies, Inc. (2)	Networking	272,728 Preferred Stock Warrants		—		25		24
Aquion Energy, Inc.	Power Management	115,051 Preferred Stock Warrants		—		7		56
Avalanche Technology, Inc. (2)	Semiconductors	352,828 Preferred Stock Warrants		—		101		98
eASIC Corporation (2)	Semiconductors	40,445 Preferred Stock Warrants		—		25		28
InVisage Technologies, Inc. (2)	Semiconductors	165,147 Preferred Stock Warrants		—		43		41
Kaminario, Inc.	Semiconductors	1,087,203 Preferred Stock Warrants		—		59		64
Luxtera, Inc.	Semiconductors	2,087,766 Preferred Stock Warrants		—		43		105

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(10)(11)	Amount		Investments (6)		Value
NexPlanar Corporation	Semiconductors	216,001 Preferred Stock Warrants		—		36		56
Soraa, Inc. (2)	Semiconductors	180,000 Preferred Stock Warrants		—		80		77
Xtera Communications, Inc.	Semiconductors	983,607 Preferred Stock Warrants		—		206		—
Bolt Solutions, Inc. (2)	Software	202,892 Preferred Stock Warrants		—		113		118
Clarabridge, Inc.	Software	53,486 Preferred Stock Warrants		—		14		104
Courion Corporation	Software	772,543 Preferred Stock Warrants		—		107		—
Crowdstar, Inc. (2)	Software	75,428 Preferred Stock Warrants		—		14		14
Decisyon, Inc. (2)	Software	457,876 Preferred Stock Warrants		—		46		28
DriveCam, Inc.	Software	71,639 Preferred Stock Warrants		—		20		121
Lotame Solutions, Inc. (2)	Software	288,115 Preferred Stock Warrants		—		23		160
Netuitive, Inc.	Software	41,569 Preferred Stock Warrants		—		48		—
Raydiance, Inc. (2)	Software	1,051,120 Preferred Stock Warrants		—		71		67
Razorsight Corporation (2)	Software	259,404 Preferred Stock Warrants		—		43		44
SIGNiX, Inc. (2)	Software	63,365 Preferred Stock Warrants		—		48		48
Riv Data Corp. (2)	Software	237,361 Preferred Stock Warrants		—		13		12
SpringCM, Inc. (2)	Software	2,385,686 Preferred Stock Warrants		—		55		53
Sys-Tech Solutions, Inc.	Software	375,000 Preferred Stock Warrants		—		242		536
Vidsys, Inc.	Software	37,346 Preferred Stock Warrants		—		23		—
Visage Mobile, Inc.	Software	1,692,047 Preferred Stock Warrants		—		19		17
Total Warrants — Technology						2,061		3,020
Warrants — Cleantech — 0.1% (9)
Renmatix, Inc.	Alternative Energy	52,296 Preferred Stock Warrants		—		67		67
Semprius, Inc.	Alternative Energy	519,981 Preferred Stock Warrants		—		25		—
Rypos, Inc. (2)	Energy Efficiency	5,627 Preferred Stock Warrants		—		44		40
Tigo Energy, Inc. (2)	Energy Efficiency	804,604 Preferred Stock Warrants		—		99		33
Total Warrants — Cleantech						235		140
Warrants — Healthcare information and services — 0.5% (9)
Accumetrics, Inc.	Diagnostics	100,928 Preferred Stock Warrants		—		107		63
BioScale, Inc. (2)	Diagnostics	315,618 Preferred Stock Warrants		—		55		—
LifePrint Group, Inc. (2)	Diagnostics	49,000 Preferred Stock Warrants		—		29		29
Interleukin Genetics, Inc. (2)(5)	Diagnostics	2,492,523 Common Stock Warrants		—		112		112
Helomics Corporation	Diagnostics	13,461 Preferred Stock Warrants		—		73		—
Radisphere National Radiology Group, Inc. (2)	Diagnostics	519,992 Preferred Stock Warrants		—		378		—
Singulex, Inc.	Other Healthcare	293,632 Preferred Stock Warrants		—		44		141
Talyst, Inc.	Other Healthcare	300,360 Preferred Stock Warrants		—		100		52
Watermark Medical, Inc.	Other Healthcare	12,216 Preferred Stock Warrants		—		67		62
Recondo Technology, Inc. (2)	Software	556,796 Preferred Stock Warrants		—		95		210
Total Warrants — Healthcare information and services						1,060		669
Total Warrants						4,815		4,603

Other Investments — 0.2% (9)
Vette Technology, LLC	Data Storage	Royalty Agreement Due 4/18/2019		—		4,582		300
Total Other Investments						4,582		300
Equity — 0.7% (9)
Insmed Incorporated (5)	Biotechnology	33,208 Common Stock		—		239		514
Revance Therapeutics, Inc.(5)	Biotechnology	4,861 Common Stock		—		73		82
Sunesis Pharmaceuticals, Inc. (5)	Biotechnology	78,493 Common Stock		—		83		200
Overture Networks Inc.	Communications	386,191 Common Stock		—		482		222
Total Equity						877		1,018
Total Portfolio Investment Assets — 148.4% (9)					$	209,838	$	205,101

Short Term Investments — Money Market Funds — 0.0% (9)
US Bank Money Market Deposit Account					$	27	$	27
Total Short Term Investments — Money Market Funds					$	27	$	27
Short Term Investments — Restricted Investments— 2.1% (9)
US Bank Money Market Deposit Account (2)					$	2,906	$	2,906
Total Short Term Investments — Restricted Investments					$	2,906	$	2,906

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

____________________________

(1)

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

(2)

Has been pledged as collateral under the Key Facility or 2013-1 Securitization.

(3)

All investments are less than 5% ownership of the class and ownership of the portfolio company.

(4)

All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETP and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the debt investment, unless otherwise indicated. Debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2014 is provided.

(5)

Portfolio company is a public company.

(6)

For debt investments, represents principal balance less unearned income.

(7)

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

(8)

Debt investment is on non-accrual status at December 31, 2014, and interest payments received were recognized as income on a cash basis.

(9)

Value as a percent of net assets.

(10)

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

(11)

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Organization

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

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

Horizon Credit I LLC (“Credit I”) was formed as a Delaware limited liability company on January 23, 2008, with CHF as its sole equity member. Credit I is a separate legal entity from the Company and CHF. There has been no activity at Credit I during the nine months ended September 30, 2015.

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

Horizon Credit III LLC (“Credit III”) was formed as a Delaware limited liability company on May 30, 2012, with the Company as the sole equity member. Credit III is a separate legal entity from the Company. There has been no activity at Credit III during the nine months ended September 30, 2015.

Longview SBIC GP LLC and Longview SBIC LP (collectively, “Horizon SBIC”) were formed as a Delaware limited liability company and Delaware limited partnership, respectively, on February 11, 2011. Horizon SBIC are wholly owned subsidiaries of the Company and were formed in anticipation of obtaining a license to operate a small business investment company from the U. S. Small Business Administration. There has been no activity in Horizon SBIC since its inception.

The Company formed Horizon Funding 2013-1 LLC (“2013-1 LLC”) as a Delaware limited liability company on June 7, 2013 and Horizon Funding Trust 2013-1 (“2013-1 Trust” and, together with 2013-1 LLC, the “2013-1 Entities”) as a Delaware trust on June 18, 2013. The 2013-1 Entities are special purpose bankruptcy remote entities and are separate legal entities from the Company. The Company formed the 2013-1 Entities for purposes of securitizing $189.3 million of secured loans (the “2013-1 Securitization”) and issuing fixed-rate asset-backed notes in an aggregate principal amount of $90 million (the “Asset-Backed Notes”).

The Company has also established additional wholly owned subsidiaries, each of which is structured as a Delaware limited liability company, to hold the assets of portfolio companies acquired in connection with foreclosure or bankruptcy. Each is a separate legal entity from the Company.

The Company’s investment strategy is to maximize the investment portfolio’s return by generating current income from the debt investments the Company makes and capital appreciation from the warrants the Company receives when making such debt investments. The Company has entered into an investment management agreement, which was amended and restated effective July 1, 2014 (the “Investment Management Agreement”), with Horizon Technology Finance Management LLC (the “Advisor”), under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

On March 24, 2015, the Company completed a follow-on public offering of 2,000,000 shares of its common stock at a public offering price of $13.95 per share, for total net proceeds to the Company of $26.7 million, after deducting underwriting commission and discounts and other offering expenses.

Note 2. Basis of presentation and significant accounting policies

The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X (“Regulation S-X”) under the Securities Act of 1933, as amended (the “Securities Act”). In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2014.

Principles of consolidation

As required under GAAP and Regulation S-X, the Company will generally consolidate its investment in a company that is an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s subsidiaries in its consolidated financial statements.

Use of estimates

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

Fair value

The Company records all of its investments at fair value in accordance with relevant GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. The Company has categorized its investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as more fully described in Note 5. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

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

See Note 5 for additional information regarding fair value.

Segments

The Company has determined that it has a single reporting segment and operating unit structure. The Company lends to and invests in portfolio companies in various technology, life science, healthcare information and services and cleantech industries. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these debt investments and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Investments

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

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. As of September 30, 2015, there were no investments on non-accrual status. For the three and nine months ended September 30, 2015, the Company recognized interest income payments of $0.04 million and $0.2 million, respectively, received from one portfolio company whose debt investment was on non-accrual status. As of December 31, 2014, there was one investment on non-accrual status with a cost of $2.4 million and a fair value of $2.3 million.

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

Certain debt investment agreements also require the borrower to make an ETP, that is accrued into interest receivable and taken into income over the life of the debt investment to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay all principal and interest due. The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the three months ended September 30, 2015 and 2014 was 6.5% and 6.0%, respectively. The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the nine months ended September 30, 2015 and 2014 was 7.1% and 5.9%, respectively.

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

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Debt issuance costs

Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities. Debt issuance costs are recognized as assets and are amortized as interest expense over the term of the related debt financing. The unamortized balance of debt issuance costs as of September 30, 2015 and December 31, 2014, included in other assets, was $2.1 million and $2.4 million, respectively. The accumulated amortization balances as of September 30, 2015 and December 31, 2014 were $3.7 million and $3.0 million, respectively. The amortization expense for the three months ended September 30, 2015 and 2014 was $0.2 million and $0.3 million, respectively. The amortization expense for the nine months ended September 30, 2015 and 2014 was $0.7 million and $2.4 million, respectively.

Income taxes

As a BDC, the Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income distributed to stockholders, among other things, the Company is required to meet certain source of income and asset diversification requirements and to timely distribute dividends out of assets legally available for distribution to its stockholders of an amount generally at least equal to 90% of its investment company taxable income, as defined by the Code, for each tax year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from corporate-level U.S. federal income taxes. Accordingly, no provision for federal income tax has been recorded in the financial statements. Taxable income differs from net increase in net assets resulting from operations which can be temporary, meaning they will reverse in the future or be permanent. In accordance with Section 946-205-45-3 of the Financial Accounting Standards Board’s (“FASB’s”), Accounting Standards Codification, as amended (“ASC”), permanent tax differences, such as non-deductible excise taxes paid, are reclassified from distributions in excess of net investment income and net realized loss on investments to paid-in-capital at the end of each year. These permanent book-to-tax differences are reclassified on the consolidated statements of changes in net assets to reflect their tax character but have no impact on total net assets. For the nine months ended September 30, 2015, the Company reclassified $1.0 million to paid-in capital from distributions in excess of net investment income of $0.9 million and net realized loss on investments of $0.1 million, which related to excise taxes paid in prior years.

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the nine months ended September 30, 2015, there was no U.S. federal excise tax recorded. For the nine months ended September 30, 2014, $0.1 million was recorded for U.S. federal excise tax.

The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, as modified by ASC Topic 946. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no material uncertain tax positions at September 30, 2015 and December 31, 2014. The 2014, 2013 and 2012 tax years remain subject to examination by U.S. federal and state tax authorities.

Distributions

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The Company has adopted a dividend reinvestment plan that provides for reinvestment of cash distributions and other distributions on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board authorizes, and the Company declares, a cash distribution, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution. The Company may use newly issued shares to implement the plan (especially if the Company’s shares are trading at a premium to net asset value), or the Company may purchase shares in the open market to fulfill its obligations under the plan.

Stock Repurchase Program

On September 28, 2015, the Board authorized a stock repurchase program which allows the Company to repurchase up to $5.0 million of its common stock at prices below the Company’s net asset value per share as reported in its most recent consolidated financial statements. Under the repurchase program, the Company may, but is not obligated to, repurchase shares of its outstanding common stock in the open market or in privately negotiated transactions from time to time. Any repurchases by the Company will comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended, and any applicable requirements of the 1940 Act. Unless extended by the Board, the repurchase program will terminate on the earlier of September 30, 2016 or the repurchase of $5.0 million of the Company’s common stock. During the three and nine months ended September 30, 2015, the Company did not make any repurchases of its common stock.

Transfers of financial assets

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

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

New accounting pronouncement

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) containing new guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, instead of being recorded as a separate asset. This guidance will be effective for annual and interim periods beginning on or after December 15, 2015. The Company is evaluating the impact ASU 2015-03 will have on its consolidated financial position and disclosures.

Note 3. Related party transactions

Investment Management Agreement

The Investment Management Agreement was reapproved by the Board in July 2015. Under the terms of the Investment Management Agreement, the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The base management fee under the Investment Management Agreement through and including June 30, 2014 was calculated at an annual rate of 2.00% of the Company’s gross assets, payable monthly in arrears. As a result of an amendment and restatement of the Investment Management Agreement, the base management fee on and after July 1, 2014 is calculated at an annual rate of 2.00% of (i) the Company’s gross assets, less (ii) assets consisting of cash and cash equivalents, and is payable monthly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. In addition, the Advisor has agreed to waive its base management fee relating to the proceeds raised in the public offering of the Company’s common stock that closed on March 24, 2015, to the extent such fee is not otherwise waived and regardless of the application of the proceeds raised, until the earlier to occur of (i) March 31, 2016 or (ii) the last day of the second consecutive calendar quarter in which the Company’s net investment income exceeds distributions declared on its shares of common stock for the applicable quarter.

During the three and nine months ended September 30, 2015, the Advisor waived base management fees of $0.1 million and $0.2 million, respectively, which the Advisor would have otherwise earned on the proceeds raised in the public offering of the Company’s common stock that closed on March 24, 2015. During the first six months of the period ended September 30, 2014, the Advisor waived base management fees of $0.2 million, which the Advisor would have otherwise earned on cash held by the Company at the time of calculation. The base management fee payable at September 30, 2015 and December 31, 2014 was $0.4 million. After giving effect of the waivers, the base management fee expense was $1.1 million and $1.0 million for the three months ended September 30, 2015 and 2014, respectively. After giving effect of the waivers, the base management fee expense was $3.2 million and $3.4 million for the nine months ended September 30, 2015 and 2014, respectively.

The incentive fee has two parts, as follows:

The first part, which is subject to the Incentive Fee Cap and Deferral Mechanism, as defined below, is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar quarter, minus expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income the Company has not yet received in cash. The incentive fee with respect to the Pre-Incentive Fee Net Investment Income is 20.00% of the amount, if any, by which the Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter exceeds a 1.75% (which is 7.00% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, the Advisor receives no incentive fee until the Pre-Incentive Fee Net Investment Income equals the hurdle rate of 1.75%, but then receives, as a “catch-up,” 100.00% of the Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.1875%. The effect of this “catch-up” provision is that, if Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter, the Advisor will receive 20.00% of the Pre-Incentive Fee Net Investment Income as if the hurdle rate did not apply.

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Commencing with the calendar quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee cap and deferral mechanism which is determined based upon a look-back period of up to three years and will be expensed when incurred. For this purpose, the look-back period for the incentive fee based on Pre-Incentive Fee Net Investment Income (the “Incentive Fee Look-back Period”) commenced on July 1, 2014 and will increase by one quarter in length at the end of each of the 12 succeeding calendar quarters, after which time, the Incentive Fee Look-back Period will include the relevant calendar quarter and the 11 preceding full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income is subject to a cap (the “Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such deferred incentive fees (collectively, the “Incentive Fee Cap and Deferral Mechanism”). The Incentive Fee Cap is equal to (a) 20.00% of Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to the Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or a negative value in any calendar quarter, the Company will not pay an incentive fee on Pre-Incentive Fee Net Investment Income to the Advisor in that quarter. To the extent that the payment of incentive fees on Pre-Incentive Fee Net Investment Income is limited by the Incentive Fee Cap, the payment of such fees will be deferred and paid in subsequent calendar quarters up to three years after their date of deferment, subject to certain limitations, which are set forth in the Investment Management Agreement. The Company only pays incentive fees on Pre-Incentive Fee Net Investment Income to the extent allowed by the Incentive Fee Cap and Deferral Mechanism. “Cumulative Pre-Incentive Fee Net Return” during any Incentive Fee Look-back Period means the sum of (a) Pre-Incentive Fee Net Investment Income and the base management fee for each calendar quarter during the Incentive Fee Look-back Period and (b) the sum of cumulative realized capital gains and losses, cumulative unrealized capital appreciation and cumulative unrealized capital depreciation during the applicable Incentive Fee Look-back Period. As of September 30, 2015 and December 31, 2014, the quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income was not limited by the Incentive Fee Cap and Deferral Mechanism.

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

The performance based incentive fee expense was $1.0 million and $0.8 million for the three months ended September 30, 2015 and 2014, respectively. During the nine months ended September 30, 2014, the Advisor waived performance based incentive fees of $0.1 million which the Advisor would have otherwise earned. After giving effect of the waiver, the performance based incentive fee expense was $2.5 million and $1.2 million for the nine months ended September 30, 2015 and 2014, respectively. The performance based incentive fee payable as of September 30, 2015 and December 31, 2014 was $1.0 million and $0.8 million, respectively. The entire incentive fee payable as of September 30, 2015 and December 31, 2014 represented part one of the incentive fee.

Administration Agreement

The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief compliance officer and chief financial officer and their respective staffs. The administrative fee expense was $0.3 million for the three months ended September 30, 2015 and 2014. The administrative fee expense was $0.9 million for the nine months ended September 30, 2015 and 2014.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Investments

The following table shows the Company’s investments:

	September 30, 2015				December 31, 2014
	Cost		Fair Value		Cost		Fair Value
			(In thousands)
Money market funds	$	275	$	275	$	27	$	27
Restricted investments in money market funds	$	1,448	$	1,448	$	2,906	$	2,906
Non-affiliate investments
Debt	$	242,335	$	241,725	$	199,564	$	199,180
Warrants		5,155		5,961		4,815		4,603
Other		4,445		300		4,582		300
Equity		877		1,047		877		1,018
Total non-affiliate investments	$	252,812	$	249,033	$	209,838	$	205,101

The following table shows the Company’s investments by industry sector:

	September 30, 2015				December 31, 2014
	Cost		Fair Value		Cost		Fair Value
			(In thousands)
Life Science
Biotechnology	$	36,901	$	37,754	$	22,203	$	22,586
Medical Device		23,889		22,936		23,129		22,462
Technology
Communications		20,359		19,942		18,392		17,973
Consumer-Related		19,068		19,900		6,556		7,228
Data Storage		4,467		318		4,604		318
Internet and Media		1,819		1,806		79		188
Materials		7,409		7,407		—		—
Networking		867		855		1,045		1,038
Power Management		2,487		2,534		7		56
Semiconductors		20,994		20,899		30,948		30,824
Software		60,197		60,967		54,482		54,905
Cleantech
Alternative Energy		4,332		4,304		8,283		8,076
Consumer-Related		—		—		396		396
Energy Efficiency		3,475		3,471		4,557		4,487
Waste Recycling		5,965		5,965		—		—
Healthcare Information and Services
Diagnostics		8,385		7,637		18,593		17,841
Other		8,452		8,496		7,157		7,201
Software		23,746		23,842		9,407		9,522
Total non-affiliate investments	$	252,812	$	249,033	$	209,838	$	205,101

Note 5. Fair value

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

The Company’s fair value measurements are classified into a fair value hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three categories within the hierarchy are as follows:

Level 1

Quoted prices in active markets for identical assets and liabilities.

Level 2

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, and model-based valuation techniques for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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

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

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

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

Debt investments: For variable rate debt investments which re-price frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values. The fair value of fixed rate debt investments is estimated by discounting the expected future cash flows using the period end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the same remaining maturities. At September 30, 2015 and December 31, 2014, the hypothetical market yield used ranged from 11% to 25% and 11% to 18%, respectively. Significant increases (decreases) in this unobservable input would result in a significantly lower (higher) fair value measurement. These assets are recorded at fair value on a recurring basis and are categorized as Level 3 within the fair value hierarchy described above.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

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

•

Underlying asset value of the issuer is estimated based on information available, including any information regarding the most recent rounds of borrower funding. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement.

•

Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on indices of publicly traded companies similar in nature to the underlying company issuing the warrant. A total of seven such indices are used. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement.

•

The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant.

•

Other adjustments, including a marketability discount on private company warrants, are estimated based on management’s judgment about the general industry environment.

•

Historical portfolio experience on cancellations and exercises of the Company’s warrants are utilized as the basis for determining the estimated time to exit of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or IPOs, and cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life assumption to be shorter than the contractual term of the warrants. Significant increases (decreases) in this unobservable input would result in significantly higher (lower) fair value measurement.

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

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

Equity investments: The fair value of an equity investment in a privately held company is initially the face value of the amount invested. The Company adjusts the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing. The Company may make adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in a portfolio company’s financial or operational performance. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement. The Company has categorized these equity investments as Level 3 within the fair value hierarchy described above. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. Therefore, the Company has categorized these equity investments as Level 1 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of September 30, 2015 and December 31, 2014. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining its fair value measurements.

The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements as of September 30, 2015:

September 30, 2015

Fair

Valuation Techniques/

Unobservable

Weighted

Investment Type

Value

Methodologies

Input

Range

Average

(Dollars in thousands, except share data)

Debt investments

241,725

Discounted Expected Future Cash Flows

Hypothetical Market Yield

11% – 25%

13%

Warrant investments

5,146

Black-Scholes Valuation Model

Price per share
Average Industry Volatility

$0.00 – $576.05
18%

$39.12
18%

Marketability Discount

20%

Estimated Time to Exit

1 to 5 years

3 years

Other investments

300

Multiple Probability Weighted Cash Flow Model

Discount Rate
Probability Weighting

25%
100%

Equity investments

222

Market Comparable Companies

Price Per Share

$0.58

Total Level 3 investments

247,393

December 31, 2014

Fair

Valuation Techniques/

Unobservable

Weighted

Investment Type

Value

Methodologies

Input

Range

Average

(Dollars in thousands, except share data)

Debt investments

193,937

Discounted Expected Future Cash Flows

Hypothetical Market Yield

11% – 18%

13%

5,243

Multiple Probability Weighted Cash

Probability Weighting

10% – 65%

33%

Flow Model

Warrant investments

3,966

Black-Scholes Valuation Model

Price per share
Average Industry Volatility

$0.04 – $63.98
18%

$3.81
18%

Marketability Discount

20%

Estimated Time to Exit

1 to 5 years

3 years

Other investments

300

Multiple Probability Weighted Cash Flow Model

Discount Rate
Probability Weighting

25%
100%

Equity investments

222

Market Comparable Companies

Price Per Share

$0.57

Total Level 3 investments

203,668

Borrowings: The carrying amount of borrowings under the Company’s revolving credit facility (the “Key Facility”) with KeyBank National Association fka Key Equipment Finance Inc. (“Key”) approximates fair value due to the variable interest rate of the Key Facility and is categorized as Level 2 within the fair value hierarchy described above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed rate 2019 Notes (as defined in Note 6) is based on the closing public share price on the date of measurement. On September 30, 2015, the closing price of the 2019 Notes on the New York Stock Exchange was $25.20 per note, or $33.3 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. Based on market quotations on or around September 30, 2015, the Asset-Backed Notes (as defined in Note 6) were trading at par value, or $19.3 million, and are categorized as Level 3 within the fair value hierarchy described above. These liabilities are not recorded at fair value on a recurring basis.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings. Therefore, the Company has categorized these instruments as Level 3 within the fair value hierarchy described above.

The following tables detail the assets and liabilities that are carried at fair value and measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

	September 30, 2015
	Total		Level 1		Level 2		Level 3
	(In thousands)
Money market funds	$	275	$	—	$	275	$	—
Restricted investments in money market funds	$	1,448	$	—	$	1,448	$	—
Debt investments	$	241,725	$	—	$	—	$	241,725
Warrant investments	$	5,961	$	—	$	815	$	5,146
Other investments	$	300	$	—	$	—	$	300
Equity investments	$	1,047	$	825	$	—	$	222

	December 31, 2014
	Total		Level 1		Level 2		Level 3
	(In thousands)
Money market funds	$	27	$	—	$	27	$	—
Restricted investments in money market funds	$	2,906	$	—	$	2,906	$	—
Debt investments	$	199,180	$	—	$	—	$	199,180
Warrant investments	$	4,603	$	—	$	637	$	3,966
Other investments	$	300	$	—	$	—	$	300
Equity investments	$	1,018	$	796	$	—	$	222

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended September 30, 2015:

	Three Months Ended September 30, 2015
	Debt Investments			Warrant Investments			Equity Investments		Other Investments			Total
	(In thousands)
Level 3 assets, beginning of period	$	232,428		$	4,556		$	222	$	300		$	237,506
Purchase of investments		32,848			—			—		—			32,848
Warrants and equity received and classified as Level 3		—			272			—		—			272
Principal payments received on investments		(21,991	)		—			—		(25	)		(22,016	)
Proceeds from sale of investments		(1,000	)		(78	)		—		—			(1,078	)
Net realized loss on investments		(1,832	)		(36	)		—		—			(1,868	)
Unrealized appreciation included in earnings		1,411			432			—		25			1,868
Other		(139	)		—			—		—			(139	)
Level 3 assets, end of period	$	241,725		$	5,146		$	222	$	300		$	247,393

The Company’s transfers between levels are recognized at the end of each reporting period. During the three months ended September 30, 2015, there were no transfers between levels.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended September 30, 2014:

	Three Months Ended September 30, 2014
	Debt Investments			Warrant Investments			Equity Investments		Other Investments			Total
	(In thousands)
Level 3 assets, beginning of period	$	209,197		$	3,612		$	2,522	$	400		$	215,731
Purchase of investments		22,845			—			—		—			22,845
Warrants and equity received and classified as Level 3		—			208			—		—			208
Principal payments received on investments		(36,393	)		—			—		(24	)		(36,417	)
Net realized loss on investments		—			(341	)		—		—			(341	)
Unrealized appreciation (depreciation) included in earnings		4			1,077			—		(76	)		1,005
Other		(2	)		—			—		—			(2	)
Level 3 assets, end of period	$	195,651		$	4,556		$	2,522	$	300		$	203,029

The Company’s transfers between levels are recognized at the end of the applicable reporting period. During the three months ended September 30, 2014, there were no transfers between levels.

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2015:

	Nine Months Ended September 30, 2015
	Debt Investments			Warrant Investments			Equity Investments		Other Investments			Total
	(In thousands)
Level 3 assets, beginning of period	$	199,180		$	3,966		$	222	$	300		$	203,668
Purchase of investments		104,781			—			—		—			104,781
Warrants and equity received and classified as Level 3		—			752			—		—			752
Principal payments received on investments		(58,456	)		—			—		(137	)		(58,593	)
Proceeds from sale of investments		(1,000	)		(78	)		—		—			(1,078	)
Net realized loss on investments		(1,832	)		(266	)		—		—			(2,098	)
Unrealized (depreciation) appreciation included in earnings		(226	)		787			—		137			698
Transfer out of Level 3		—			(15	)		—		—			(15	)
Other		(722	)		—			—		—			(722	)
Level 3 assets, end of period	$	241,725		$	5,146		$	222	$	300		$	247,393

The Company’s transfers between levels are recognized at the end of each reporting period. During the nine months ended September 30, 2015, there were no transfers between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in two portfolio companies, with an aggregate fair value of $0.02 million, that were transferred into Level 2 upon the portfolio companies becoming public companies during the period.

The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at September 30, 2015 includes $0.1 million in unrealized depreciation for debt and other investments and $0.6 million in unrealized appreciation on warrants.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2014:

	Nine Months Ended September 30, 2014
	Debt Investments			Warrant Investments			Equity Investments			Other Investments			Total
	(In thousands)
Level 3 assets, beginning of period	$	213,754		$	4,579		$	529		$	400		$	219,262
Purchase of investments		66,823			—			—			—			66,823
Warrants and equity received and classified as Level 3		—			468			—			—			468
Principal payments received on investments		(83,821	)		—			—			(85	)		(83,906	)
Proceeds from sale of investments		—			(929	)		—			—			(929	)
Net realized (loss) gain on investments		(8,096	)		160			—			—			(7,936	)
Unrealized appreciation (depreciation) included in earnings		8,994			598			(198	)		(15	)		9,379
Transfer out of Level 3		—			(320	)		(109	)		—			(429	)
Transfer from debt to equity investments		(2,300	)		—			2,300			—			—
Other		297			—			—			—			297
Level 3 assets, end of period	$	195,651		$	4,556		$	2,522		$	300		$	203,029

The Company’s transfers between levels are recognized at the end of the applicable reporting period. During the nine months ended September 30, 2014, there were no transfers between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in two portfolio companies and equity held in one portfolio company, with an aggregate fair value of $0.4 million, that were transferred into Level 2 upon the portfolio companies becoming public companies during the period. During the nine months ended September 30, 2014, there was one transfer between debt investments and equity investments. The transfer out of debt investments relates to the settlement of one of the Company’s debt investments for a cash payment of $2.7 million and $2.3 million in newly issued preferred stock of the applicable portfolio company.

The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at September 30, 2014 includes $0.1 million in unrealized appreciation on debt and other investments, $0.7 million in unrealized appreciation on warrants and $0.2 million in unrealized depreciation on equity.

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

The fair value amounts for 2015 and 2014 have been measured as of the reporting date and have not been reevaluated or updated for purposes of these financial statements subsequent to that date. As such, the fair values of these financial instruments subsequent to the reporting date may be different than amounts reported.

As of September 30, 2015 and December 31, 2014, the recorded balances equaled fair values of all the Company’s financial instruments, except for the Company’s 2019 Notes, as previously described.

Off-balance-sheet instruments

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 6. Borrowings

The following table shows the Company’s borrowings as of September 30, 2015 and December 31, 2014:

	September 30, 2015						December 31, 2014
	Total Commitment		Balance Outstanding		Unused Commitment		Total Commitment		Balance Outstanding		Unused Commitment
					(In thousands)
Asset-Backed Notes	$	19,302	$	19,302	$	—	$	38,753	$	38,753	$	—
Key Facility		70,000		52,000		18,000		50,000		10,000		40,000
2019 Notes		33,000		33,000		—		33,000		33,000		—
Total	$	122,302	$	104,302	$	18,000	$	121,753	$	81,753	$	40,000

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that the Company’s asset coverage, as defined in the 1940 Act, is at least 200% after such borrowings. As of September 30, 2015, the asset coverage for borrowed amounts was 256%.

On November 4, 2013, the Company renewed and amended the Key Facility, which it originally entered into with Wells Fargo Capital Finance LLC (“Wells”), and facilitated the assignment of all rights and obligations of Wells thereunder to Key. On August 12, 2015, the Company further amended the Key Facility to (1) add a $20 million commitment to the existing $50 million commitment and (2) extend the term of the Key Facility. The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million from the current $70 million commitment. The Key Facility is collateralized by all debt investments and warrants held by Credit II and permits an advance rate of up to 50% of eligible debt investments held by Credit II. The Key Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the debt investments securing the Key Facility to certain criteria for qualified debt investments and includes portfolio company concentration limits as defined in the related loan agreement. The Key Facility has a three-year revolving period followed by a two-year amortization period and matures on August 12, 2020. The interest rate is based upon the one-month London Interbank Offered Rate (“LIBOR”), plus a spread of 3.25%, with a LIBOR floor of 0.75%. The interest rate at September 30, 2015 and December 31, 2014 was 4.00%. The average rate for the three and nine months ended September 30, 2015 and 2014 was 4.00%. As of September 30, 2015, the Company had available borrowing capacity of $18.0 million, subject to existing terms and advance rates.

On March 23, 2012, the Company issued and sold an aggregate principal amount of $30 million of 7.375% senior unsecured notes due in 2019 and on April 18, 2012, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $3 million of such notes (collectively, the “2019 Notes”). The 2019 Notes will mature on March 15, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after March 15, 2015 at a redemption price of $25 per security plus accrued and unpaid interest. The 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 the Company’s direct unsecured obligations and (i) rank equally in right of payment with the Company’s future unsecured indebtedness; (ii) are senior in right of payment to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2019 Notes; (iii) are effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness, and (iv) are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. As of September 30, 2015, the Company was 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”.

The Company entered into a term loan facility (the “Fortress Facility”) with Fortress Credit Co LLC (“Fortress”) effective August 23, 2012. The Fortress Facility was collateralized by all debt investments and warrants held by Credit III. The Fortress Facility contained covenants that, among other things, required the Company to maintain a minimum net worth and restricted the debt investments securing the Fortress Facility to certain criteria for qualified debt investments and included portfolio company concentration limits as defined in the related loan agreement. The Fortress Facility, among other things, had a three-year term subject to two one-year extensions with a draw period of up to four years. The Fortress Facility required the payment of an unused line fee in an amount equal to 1.00% of unborrowed amounts available under the facility annually and had an effective advance rate of 66% against eligible debt investments. The Fortress Facility bore interest based upon the one-month LIBOR plus a spread of 6.00%, with a LIBOR floor of 1.00%.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Effective June 17, 2014, the Company terminated the Fortress Facility. In connection therewith, a loan and security agreement and other related documents governing the Fortress Facility were also terminated. As such, the Company had no borrowing capacity under the Fortress Facility as of September 30, 2015 and December 31, 2014.

On June 28, 2013, the Company completed the 2013-1 Securitization. In connection with the 2013-1 Securitization, 2013-1 Trust, a wholly owned subsidiary of the Company, issued $90 million in the Asset-Backed Notes, which are rated A2(sf) by Moody’s Investors Service, Inc. The Company is the sponsor, originator and servicer for the transaction. The Asset-Backed Notes bear interest at a fixed rate of 3.00% per annum and have a stated maturity of May 15, 2018. As of September 30, 2015, 22.4%, or $54.1 million, of the fair value balance of the Company’s total debt investment portfolio was held through the 2013-1 Securitization.

The Asset-Backed Notes were issued by 2013-1 Trust pursuant to a note purchase agreement (the “Note Purchase Agreement”), dated as of June 28, 2013, by and among the Company, 2013-1 LLC, as trust depositor, 2013-1 Trust and Guggenheim Securities, LLC (“Guggenheim Securities”), as initial purchaser, and are backed by a pool of loans made to certain portfolio companies of the Company (the “Trust Loans”) and secured by certain assets of such portfolio companies. The Trust Loans are serviced by the Company. In connection with the issuance and sale of the Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the Note Purchase Agreement. The Asset-Backed Notes are secured obligations of 2013-1 Trust and are non-recourse to the Company.

As part of the transaction, the Company entered into a sale and contribution agreement, dated as of June 28, 2013 (the “Sale and Contribution Agreement”), with 2013-1 LLC, pursuant to which the Company sold or contributed to 2013-1 LLC the Trust Loans. The Company made customary representations, warranties and covenants in the Sale and Contribution Agreement with respect to the Trust Loans as of the date of the transfer of the Trust Loans to 2013-1 LLC. The Company also entered into a sale and servicing agreement, dated as of June 28, 2013 (the “Sale and Servicing Agreement”), with 2013-1 LLC and 2013-1 Trust pursuant to which 2013-1 LLC sold or contributed the Trust Loans to 2013-1 Trust. The Company has made customary representations, warranties and covenants in the Sale and Servicing Agreement. The Company serves as administrator to 2013-1 Trust pursuant to an administration agreement, dated as of June 28, 2013, with 2013-1 Trust, Wilmington Trust, National Association, and U.S. Bank National Association. 2013-1 Trust also entered into an indenture, dated as of June 28, 2013, which governs the Asset-Backed Notes and includes customary covenants and events of default. In addition, 2013-1 LLC entered into an amended and restated trust agreement, dated as of June 28, 2013, which includes customary representations, warranties and covenants. The Asset-Backed Notes were sold through an unregistered private placement to “qualified institutional buyers” in compliance with the exemption from registration provided by Rule 144A under the Securities Act, and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who, in each case, were “qualified purchasers” for purposes of Section 3(c)(7) under the 1940 Act.

Under the terms of the Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through principal collections from the underlying securitized debt portfolio, which may be used to make monthly interest and principal payments on the Asset-Backed Notes. The Company has segregated these funds and classified them as restricted investments in money market funds on the consolidated statements of assets and liabilities. The balances of restricted investments in money market funds were $1.4 million and $2.9 million as of September 30, 2015 and December 31, 2014, respectively.

Note 7. Financial instruments with off-balance-sheet risk

In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its borrowers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statement of assets and liabilities. The Company attempts to limit its credit risk by conducting extensive due diligence and obtaining collateral where appropriate.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The balance of unfunded commitments to extend credit was $17.5 million and $25.7 million as of September 30, 2015 and December 31, 2014, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving credit arrangements or similar transactions. These commitments are often subject to financial or non-financial milestones and other conditions to borrow that must be achieved before the commitment can be drawn. In addition, the commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The following table provides the Company’s unfunded commitments by portfolio company as of September 30, 2015:

	September 30, 2015
	Principal Balance		Fair Value of Unfunded Commitment Liability
	(In thousands)
Bridge2 Solutions, Inc.	$	1,000	$	5
Innovatient Solutions, Inc.		1,000		28
Lehigh Technologies, Inc.		1,500		14
MedAvante, Inc.		4,000		66
NinePoint Medical, Inc.		2,500		11
SavingStar, Inc.		2,000		32
The NanoSteel Company, Inc.		2,500		48
xTech Holdings, Inc.		3,000		13
Total	$	17,500	$	217

The table above also provides the fair value of the Company’s unfunded commitment liability as of September 30, 2015 totaling $0.2 million. The fair value at inception of the delay draw credit agreements is equal to the fees and/or warrants received to enter into these agreements, taking into account the remaining terms of the agreements and the counterparties’ credit profile. The unfunded commitment liability reflects the fair value of these future funding commitments and is included in the Company’s consolidated statement of assets and liabilities.

Note 8. Concentrations of credit risk

The Company’s debt investments consist primarily of loans to development-stage companies at various stages of development in the technology, life science, healthcare information and services and cleantech industries. Many of these companies may have relatively limited operating histories and also may experience variation in operating results. Many of these companies conduct business in regulated industries and could be affected by changes in government regulations. Most of the Company’s borrowers will need additional capital to satisfy their continuing working capital needs and other requirements, and in many instances, to service the interest and principal payments on the loans.

The largest debt investments may vary from period to period as new debt investments are recorded and existing debt investments are repaid. The Company’s five largest debt investments represented 21% and 24% of total debt investments outstanding as of September 30, 2015 and December 31, 2014, respectively. No single debt investment represented more than 10% of the total debt investments as of September 30, 2015 and December 31, 2014. Investment income, consisting of interest and fees, can fluctuate significantly upon repayment of large debt investments. Interest income from the five largest debt investments accounted for 18% and 24% of total interest and fee income on investments for the three months ended September 30, 2015 and 2014, respectively. Interest income from the five largest debt investments accounted for 18% and 19% of total interest and fee income on investments for the nine months ended September 30, 2015 and 2014, respectively.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 9. Distributions

The Company’s distributions are recorded on the declaration date. The following table summarizes the Company’s distribution activity for the nine months ended September 30, 2015 and for the years ended December 31, 2014 and 2013:

Date Declared	Record Date	Payment Date	Amount Per Share		Cash Distribution		DRIP Shares Issued		DRIP Share Value
			(In thousands, except share and per share data)
Nine Months Ended September 30, 2015
7/29/15	11/19/15	12/15/15	$	0.115	$	—		—	$	—
7/29/15	10/20/15	11/16/15		0.115		—		—		—
7/29/15	9/18/15	10/15/15		0.115		1,315		2,418		24
5/1/15	8/19/15	9/15/15		0.115		1,312		2,577		26
5/1/15	7/20/15	8/14/15		0.115		1,312		2,420		27
5/1/15	6/18/15	7/15/15		0.115		1,312		2,045		26
3/6/15	5/20/15	6/15/15		0.115		1,311		2,036		28
3/6/15	4/20/15	5/15/15		0.115		1,311		1,950		28
3/6/15	3/20/15	4/15/15		0.115		1,095		877		12
			$	1.035	$	8,968		14,323	$	171
Year Ended December 31, 2014
10/31/14	2/19/15	3/16/15	$	0.115	$	1,096		751	$	11
10/31/14	1/20/15	2/13/15		0.115		1,094		956		12
10/31/14	12/17/14	1/15/15		0.115		1,096		786		11
8/1/14	11/19/14	12/15/14		0.115		1,093		1,099		15
8/1/14	10/20/14	11/17/14		0.115		1,095		850		12
8/1/14	9/18/14	10/15/14		0.115		1,095		901		12
5/1/14	8/19/14	9/15/14		0.115		1,095		812		12
5/1/14	7/21/14	8/15/14		0.115		1,080		2,042		29
5/1/14	6/18/14	7/17/14		0.115		1,093		784		11
3/6/14	5/20/14	6/16/14		0.115		1,091		1,128		15
3/6/14	4/17/14	5/15/14		0.115		1,090		1,174		16
3/6/14	3/19/14	4/15/14		0.115		1,097		644		8
			$	1.380	$	13,115		11,927	$	164
Year Ended December 31, 2013
11/1/13	2/17/14	3/17/14	$	0.115	$	1,062		3,444	$	44
11/1/13	1/20/14	2/14/14		0.115		1,058		3,249		47
11/1/13	12/16/13	1/15/14		0.115		1,061		3,048		44
8/2/13	11/19/13	12/16/13		0.115		1,045		4,225		59
8/2/13	10/17/13	11/15/13		0.115		937		11,851		167
8/2/13	9/18/13	10/15/13		0.115		1,051		3,882		52
5/3/13	8/19/13	9/16/13		0.115		1,057		3,376		46
5/3/13	7/17/13	8/15/13		0.115		1,060		2,980		42
5/3/13	6/20/13	7/15/13		0.115		1,070		2,191		31
3/8/13	5/20/13	6/17/13		0.115		1,086		1,099		15
3/8/13	4/18/13	5/15/13		0.115		1,087		1,035		15
3/8/13	3/20/13	4/15/13		0.115		1,046		3,867		55
			$	1.380	$	12,620		44,247	$	617

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

On October 30, 2015, the Board declared monthly distributions per share, payable as set forth in the following table.

Record Dates	Payment Dates	Distributions Declared
February 22, 2016	March 15, 2016	$	0.115
January 21, 2016	February 17, 2016	$	0.115
December 18, 2015	January 15, 2016	$	0.115

After paying third quarter distributions of $0.345 per share and earning $0.35 per share for the third quarter, the Company’s undistributed spillover income as of September 30, 2015 was $0.22 per share. Spillover income includes any ordinary income and net capital gains from the preceding years that were not distributed during such years.

Note 10. Financial highlights

The following table shows financial highlights for the Company:

	Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014
	(In thousands, except share and per share data)
Per share data:
Net asset value at beginning of period	$	14.36		$	14.14
Net investment income		0.90			0.78
Realized loss on investments		(0.16	)		(0.43	)
Unrealized appreciation on investments		0.09			0.93
Net increase in net assets resulting from operations		0.83			1.28
Net dilution from issuance of common stock		(0.18	)		—
Distributions declared⁽¹⁾		(1.04	)		(1.04	)
From net investment income		(1.04	)		(1.04	)
From net realized gain on investments		—			—
Return of capital		—			—
Other⁽²⁾		(0.03	)		—
Net asset value at end of period	$	13.94		$	14.38
Per share market value, beginning of period	$	13.99		$	14.21
Per share market value, end of period	$	9.05		$	13.46
Total return based on a market value⁽³⁾		(27.9	)%		2.0	%
Shares outstanding at end of period		11,642,522			9,625,274
Ratios to average net assets:
Expenses without incentive fees⁽⁵⁾		8.6	%⁽⁴⁾		14.7	%⁽⁴⁾
Incentive fees		2.1	%⁽⁴⁾		1.2	%⁽⁴⁾
Net expenses⁽⁵⁾		10.7	%⁽⁴⁾		15.9	%⁽⁴⁾
Net investment income with incentive fees⁽⁵⁾		8.4	%⁽⁴⁾		7.3	%⁽⁴⁾
Net assets at the end of the period	$	162,247		$	138,427
Average net asset value	$	157,077		$	137,244
Average debt per share	$	7.54		$	11.34
Portfolio turnover ratio		49.1	%		32.0	%

____________

(1)

Distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP due to (i) changes in unrealized appreciation and depreciation, (ii) temporary and permanent differences in income and expense recognition, and (iii) the amount of spillover income carried over from a given year for distribution in the following year. The final determination of taxable income for each tax year, as well as the tax attributes for distributions in such tax year, will be made after the close of the tax year.

(2)

Includes the impact of the different share amounts as a result of calculating per share data based on the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(3)

The total return equals the change in the ending market value over the beginning of period price per share plus distributions paid per share during the period, divided by the beginning price.

(4)

Annualized.

(5)

During the nine months ended September 30, 2015, the Advisor waived $0.2 million of base management fee. Had this expense not been waived, the ratio of expenses without incentive fee to average net assets, the ratio of total expenses to average net assets and the ratio of net investment income with incentive fee to average net assets would have been 8.8%, 10.9% and 8.2%, respectively. During the nine months ended September 30, 2014, the Advisor waived $0.2 million of base management fee and $0.1 million of incentive fee. Had these expenses not been waived, the ratio of expenses without incentive fee to average net assets, the ratio of total expenses to average net assets and the ratio of net investment income with incentive fee to average net assets would have been 14.9%, 16.2% and 7.0%, respectively.

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:

•

our future operating results, including the performance of our existing debt investments and warrants;

•

the introduction, withdrawal, success and timing of business initiatives and strategies;

•

changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

•

the relative and absolute investment performance and operations of our investment advisor, Horizon Technology Finance Management LLC, or the Advisor;

•

the impact of increased competition;

•

the impact of investments we intend to make and future acquisitions and divestitures;

•

the unfavorable resolution of legal proceedings;

•

our business prospects and the prospects of our portfolio companies;

•

the impact, extent and timing of technological changes and the adequacy of intellectual property protection;

•

our regulatory structure and tax status;

•

our ability to qualify and maintain qualification as a regulated investment company, or RIC, and as a business development company, or BDC;

•

the adequacy of our cash resources and working capital;

•

the timing of cash flows, if any, from the operations of our portfolio companies;

•

the impact of interest rate volatility on our results, particularly if we use leverage as part of our investment strategy;

•

the ability of our portfolio companies to achieve their objective;

•

our ability to cause a subsidiary to become a licensed small business investment company;

•

the impact of legislative and regulatory actions and reforms and regulatory supervisory or enforcement actions of government agencies relating to us or our Advisor;

•

our contractual arrangements and relationships with third parties;

•

our ability to access capital and any future financings by us;

•

the ability of our Advisor to attract and retain highly talented professionals; and

•

the impact of changes to tax legislation and, generally, our tax position.

We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks” and similar expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in “Risk Factors” and elsewhere in our annual report on Form 10-K for the year ended December 31, 2014, 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 generate 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 as “Venture Loans,” to venture capital backed companies in our Target Industries, which we refer to as “Venture Lending.” We also selectively lend to publicly traded companies in our Target Industries. 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 do not have to pay corporate-level federal income taxes on our investment company taxable income and net capital gain that we distribute 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 September 30, 2015 and December 31, 2014:

	September 30, 2015							December 31, 2014
	Number of Investments		Fair Value		Percentage of Total Portfolio			Number of Investments		Fair Value		Percentage of Total Portfolio

					(Dollars in thousands)
Term loans		52	$	241,725		97.1	%		49	$	189,127		92.2	%
Revolving loans		—		—		—			1		10,053		4.9
Total loans		52		241,725		97.1			50		199,180		97.1
Warrants		84		5,961		2.4			75		4,603		2.2
Other investments		1		300		0.1			1		300		0.2
Equity		4		1,047		0.4			4		1,018		0.5
Total			$	249,033		100.0	%			$	205,101		100.0	%

The following table shows total portfolio investment activity as of and for the three and nine months ended September 30, 2015 and 2014:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
				(In thousands)
Beginning portfolio	$	240,148		$	219,295		$	205,101		$	221,284
New debt investments		32,848			22,845			104,781			66,824
Principal payments received on investments		(5,820	)		(9,773	)		(18,975	)		(31,407	)
Early pay-offs		(16,196	)		(26,643	)		(39,618	)		(52,499	)
Accretion of debt investment fees		411			623			1,015			1,686
New debt investment fees		(258	)		(385	)		(959	)		(890	)
New equity		—			—			—			12
Sale of investments		(1,578	)		(1,306	)		(1,578	)		(2,636	)
Net realized (loss) gain on investments		(1,462	)		872			(1,692	)		(6,673	)
Net unrealized appreciation (depreciation) on investments		940			(834	)		958			8,993
Ending portfolio	$	249,033		$	204,694		$	249,033		$	204,694

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

The following table shows our debt investments by industry sector as of September 30, 2015 and December 31, 2014:

	September 30, 2015					December 31, 2014
	Debt Investments at Fair Value		Percentage of Total Portfolio			Debt Investments at Fair Value		Percentage of Total Portfolio
			(Dollars in thousands)
Life Science
Biotechnology	$	35,974		14.9	%	$	21,253		10.7	%
Medical Device		22,666		9.4			22,225		11.2
Technology
Communications		19,700		8.2			17,732		8.9
Consumer-Related		18,636		7.7			6,337		3.2
Internet and Media		1,740		0.7			—		—
Materials		7,316		3.0			—		—
Networking		803		0.3			981		0.5
Power Management		2,452		1.0			—		—
Semiconductors		20,391		8.4			30,355		15.2
Software		59,323		24.5			53,583		26.9
Cleantech
Alternative Energy		4,240		1.8			8,009		4.0
Consumer-Related		—		—			396		0.2
Energy Efficiency		3,331		1.4			4,414		2.2
Waste Recycling		5,932		2.5			—		—
Healthcare Information and Services
Diagnostics		7,497		3.1			17,637		8.8
Other		8,234		3.4			6,946		3.5
Software		23,490		9.7			9,312		4.7
Total	$	241,725		100.0	%	$	199,180		100.0	%

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 21% and 24% of total debt investments outstanding as of September 30, 2015 and December 31, 2014, respectively. No single debt investment represented more than 10% of our total debt investments as of September 30, 2015 and December 31, 2014.

Debt investment asset quality

We use an internal credit rating system which rates each debt investment on a scale of 4 to 1, with 4 being the highest credit quality rating and 3 being the rating for a standard level of risk. A rating of 2 represents an increased level of risk and, while no loss is currently anticipated for a 2-rated debt investment, there is potential for future loss of principal. A rating of 1 represents a deteriorating credit quality and a high degree of risk of loss of principal. Our internal credit rating system is not a national credit rating system. As of September 30, 2015 and December 31, 2014, our debt investments had a weighted average credit rating of 3.0 and 3.1, respectively. The following table shows the classification of our debt investment portfolio by credit rating as of September 30, 2015 and December 31, 2014:

	September 30, 2015							December 31, 2014
	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		5	$	25,688		10.7	%		9	$	44,082		22.1	%
3		38		187,659		77.6			36		138,109		69.4
2		9		28,378		11.7			3		11,746		5.9
1		—		—		—			2		5,243		2.6
Total		52	$	241,725		100.0	%		50	$	199,180		100.0	%

Consolidated results of operations

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

Comparison of the three months ended September 30, 2015 and 2014

The following table shows consolidated results of operations for the three months ended September 30, 2015 and 2014:

	For the Three Months Ended
	September 30,
	2015			2014
	(In thousands)
Total investment income	$	8,427		$	7,739
Total net expenses		4,386			4,498
Net investment income before excise tax		4,041			3,241
(Credit) provision for excise tax		(20	)		40
Net investment income		4,061			3,201
Net realized (loss) gain on investments		(1,463	)		2,325
Net unrealized appreciation (depreciation) on investments		940			(766	)
Net increase in net assets resulting from operations	$	3,538		$	4,760
Average debt investments, at fair value	$	237,400		$	196,223
Average borrowings outstanding	$	98,090		$	94,556

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

Investment income

Total investment income increased by $0.7 million, or 8.9%, to $8.4 million for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. For the three months ended September 30, 2015, total investment income consisted primarily of $7.7 million in interest income from investments, which included $1.1 million in income from the accretion of origination fees and end-of-term payments, or ETPs, and $0.7 million in income from fees. Interest income on investments increased by $0.9 million, or 13.5%, for the three months ended September 30, 2015 compared the three months ended September 30, 2014. Interest income on investments increased primarily due to an increase of $41.2 million, or 21.0%, in the average size of our investment portfolio partially offset by a decrease in accelerated accretion of origination fees and ETPs from a lower aggregate amount of principal prepayments during the three months ended September 30, 2015. Other income, which includes prepayment fee income and fee income on debt investments, decreased by $0.2 million, or 24.2%, primarily due to a lower aggregate amount of principal prepayments during the three months ended September 30, 2015 compared to the three months ended September 30, 2014. For the three months ended September 30, 2014, total investment income consisted primarily of $6.8 million in interest income from investments, which included $1.4 million in income from the accretion of origination fees and ETPs and $1.0 million in fee income.

For the three months ended September 30, 2015 and 2014, our dollar-weighted annualized yield on average debt investments was 14.2% and 15.8%, 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 18% and 24% of investment income for the three months ended September 30, 2015 and 2014, respectively.

Expenses

Total net expenses decreased by $0.1 million, or 2.5%, to $4.4 million for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. Total expenses for each period consisted principally of interest expense, base management fee, incentive and administrative fees, professional fees and general and administrative expenses.

Interest expense decreased by $0.1 million, or 3.6%, to $1.4 million for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. Interest expense, which includes the amortization of debt issuance costs, decreased primarily due to the decrease of our effective cost of debt for the three months ended September 30, 2015.

Base management fee expense increased by $0.1 million, or 9.7%, to $1.1 million for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014, primarily due to an increase in average gross assets of $33.8 million, or 14.4%, offset by the exclusion of cash from the base management fee calculation, as a result of the amendment to the Investment Management Agreement, and the waiver of base management fee on the proceeds raised from our March 24, 2015 public offering.

Our Advisor has agreed to waive its base management fee relating to the proceeds raised in the public offering of our common stock that closed on March 24, 2015, to the extent such fee is not otherwise waived and regardless of the application of the proceeds raised, until the earlier to occur of (i) March 31, 2016 or (ii) the last day of the second consecutive calendar quarter in which our net investment income exceeds distributions declared on shares of our common stock for the applicable quarter. During the three months ended September 30, 2015, our Advisor waived $0.1 million of base management fees.

Performance based incentive fee expense increased by $0.2 million, or 26.9%, to $1.0 million for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. Performance based incentive fee expense increased due to higher pre-incentive fee net investment income.

Professional fees and general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses for the three months ended September 30, 2015 decreased compared to the three months ended September 30, 2014, due to decreased legal fees and other costs associated with certain non-accrual investments and other assets.

Net realized gains and losses and net unrealized appreciation and depreciation

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

During the three months ended September 30, 2015, we realized net losses totaling $1.5 million primarily due to the resolution of one debt investment partially offset by realized gains on the sale of warrants. The debt investment was settled for a net cash payment of $4.9 million, which resulted in a realized loss of $1.8 million and unrealized appreciation of $1.8 million as the fair value of the debt investment was adjusted on June 30, 2015 to reflect the outcome of this resolution. During the three months ended September 30, 2014, we realized net gains totaling $2.3 million primarily due to the sale of warrants and the sale of other assets acquired through bankruptcy.

During the three months ended September 30, 2015, net unrealized appreciation on investments totaled $0.9 million which was primarily due to the reversal of previously recorded unrealized depreciation on one debt investment that was settled during the period, described above, partially offset by changes in fair values of our investment portfolio. During the three months ended September 30, 2014, net unrealized depreciation on investments totaled $0.8 million which was primarily due to the reversal of previously recorded unrealized appreciation on warrants sold in one portfolio company during the period, as described above.

Comparison of the nine months ended September 30, 2015 and 2014

The following table shows consolidated results of operations for the nine months ended September 30, 2015 and 2014:

	For the Nine Months Ended
	September 30,
	2015			2014
	(In thousands)
Total investment income	$	22,549		$	23,971
Total net expenses		12,657			16,329
Net investment income before excise tax		9,892			7,642
Provision for excise tax		—			120
Net investment income		9,892			7,522
Net realized loss on investments		(1,723	)		(4,190	)
Net unrealized appreciation on investments		958			8,993
Net increase in net assets resulting from operations	$	9,127		$	12,325
Average debt investments, at fair value	$	213,249		$	208,675
Average borrowings outstanding	$	83,211		$	109,087

Investment income

Total investment income decreased by $1.4 million, or 5.9%, to $22.5 million for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. For the nine months ended September 30, 2015, total investment income consisted primarily of $20.9 million in interest income from investments, which included $3.3 million in income from the accretion of origination fees and ETPs and $1.7 million in fee income. Interest income on investments decreased by $0.8 million, or 3.9%, for the nine months ended September 30, 2015 compared the nine months ended September 30, 2014. Interest income on investments decreased primarily due to a decrease in accelerated accretion of origination fees and ETPs from a lower aggregate amount of principal prepayments during the nine months ended September 30, 2015. Other income, which includes prepayment fee income and fee income on debt investments, decreased by $0.6 million, or 25.4%, primarily due to a lower aggregate amount of principal prepayments for the nine months ended September 30, 2015. For the nine months ended September 30, 2014, total investment income consisted primarily of $21.7 million in interest income from investments, which included $4.6 million in income from the accretion of origination fees and ETPs and $2.3 million in fee income.

For the nine months ended September 30, 2015 and 2014, our dollar-weighted annualized yield on average debt investments was 14.1% and 15.3%, 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 18% and 19% of investment income for the nine months ended September 30, 2015 and 2014, respectively.

Expenses

Total net expenses decreased by $3.7 million, or 22.5%, to $12.7 million for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. Total expenses for each period consisted principally of interest expense, base management fee, incentive and administrative fees, professional fees and general and administrative expenses.

Interest expense decreased by $3.0 million, or 41.4%, to $4.3 million for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. Interest expense, which includes the amortization of debt issuance costs, decreased primarily due to a decrease in average borrowings of $25.9 million, or 23.7%, for the nine months ended September 30, 2015 and the acceleration of $1.1 million of unamortized debt issuance costs and a $0.8 million prepayment fee related to the termination of the Fortress Facility during the nine months ended September 30, 2014.

Base management fee expense decreased by $0.1 million, or 3.9%, to $3.2 million for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014, after giving effect of waivers of $0.2 million for the nine months ended September 30, 2015 and 2014. Base management fee expense decreased primarily due to the exclusion of cash from the base management fee calculation, as the result of the amendment to the Investment Management Agreement, and the waiver of base management fee related to the proceeds raised from our March 24, 2015 public offering during the nine months ended September 30, 2015.

Our Advisor has agreed to waive its base management fee relating to the proceeds raised in the public offering of our common stock that closed on March 24, 2015, to the extent such fee is not otherwise waived and regardless of the application of the proceeds raised, until the earlier to occur of (i) March 31, 2016 or (ii) the last day of the second consecutive calendar quarter in which our net investment income exceeds distributions declared on shares of our common stock for the applicable quarter. During the nine months ended September 30, 2015, our Advisor waived $0.2 million of base management fees.

Performance based incentive fee expense increased by $1.3 million, or 104.9%, to $2.5 million for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. Performance based incentive fee expense increased due to higher pre-incentive fee net investment income, as the pre-incentive fee net investment income for the nine months ended September 30, 2014 was impacted by the one-time costs associated with the termination of the Fortress Facility, described above.

Professional fees and general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses for the nine months ended September 30, 2015 decreased compared to the nine months ended September 30, 2014, due to decreased legal fees and other costs associated with certain non-accrual investments and other assets.

Net realized gains and losses and net unrealized appreciation and depreciation

During the nine months ended September 30, 2015, we realized net losses totaling $1.7 million primarily due to the resolution of one debt investment partially offset by realized gains on the sale of warrants. The debt investment was settled for a net cash payment of $4.9 million, which resulted in a realized loss of $1.8 million and unrealized appreciation of $1.8 million as the fair value of the debt investment was adjusted on June 30, 2015 to reflect the outcome of this resolution. During the nine months ended September 30, 2014, we realized net losses totaling $4.2 million primarily due to the resolution of three debt investments that were previously on non-accrual status which was partially offset by realized gains on the sale of warrants. As a result of the resolution of the debt investments that were previously on non-accrual, we recognized $7.1 million of realized losses and $7.6 million of unrealized appreciation.

During the nine months ended September 30, 2015, net unrealized appreciation on investments totaled $1.0 million which was primarily due to the reversal of previously recorded unrealized depreciation on one debt investment that was settled during the period, described above, partially offset by changes in fair values of our investment portfolio. During the nine months ended September 30, 2014, net unrealized appreciation on investments totaled $9.0 million which was primarily due to the reversal of previously recorded unrealized depreciation on three debt investments that were settled in the period and one debt investment that returned to accrual status.

Liquidity and capital resources

As of September 30, 2015 and December 31, 2014, we had cash and investments in money market funds of $12.8 million and $8.4 million, respectively. Cash and investments in money market funds are available to fund new investments, reduce borrowings, pay expenses and pay distributions. In addition, as of September 30, 2015 and December 31, 2014, we had $1.4 million and $2.9 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 the Asset-Backed Notes. Our primary sources of capital have been from our private and public equity offerings, use of our revolving credit facilities and issuance of our 7.375% notes due 2019, or the 2019 Notes, and the Asset-Backed Notes.

At September 30, 2015 and December 31, 2014, the outstanding principal balance under our revolving credit facility, or the Key Facility, with KeyBank National Association fka Key Equipment Finance Inc., or Key, was $52.0 million and $10.0 million, respectively. At September 30, 2015 and December 31, 2014, we had borrowing capacity under the Key Facility of $18.0 million and $40.0 million, respectively. At September 30, 2015 and December 31, 2014, $18.0 million and $35.6 million, respectively, was available, subject to existing terms and advance rates.

Our operating activities used cash of $33.6 million for the nine months ended September 30, 2015, and our financing activities provided cash of $37.7 million for the same period. Our operating activities used cash primarily for investments made in portfolio companies, partially offset by principal payments received on our debt investments. Our financing activities provided cash primarily from the completion of a follow-on public offering of 2.0 million shares of common stock for net proceeds of $26.7 million, after deducting underwriting commission and discounts and other offering expenses, and advances on our Key Facility of $42.0 million, which was partially offset by cash used to pay down our Asset-Backed Notes and pay distributions to our stockholders.

Our operating activities provided cash of $34.0 million for the nine months ended September 30, 2014, and our financing activities used cash of $44.2 million for the same period. Our operating activities provided cash primarily from regular principal payments and early pay-offs received, partially offset by investments made in portfolio companies. Our financing activities used cash primarily to pay down our borrowings and pay our monthly distributions.

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 satisfy the Code requirements applicable to 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 and investments in money market funds, 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 September 30, 2015 and December 31, 2014:

	September 30, 2015						December 31, 2014
	Total Commitment		Balance Outstanding		Unused Commitment		Total Commitment		Balance Outstanding		Unused Commitment
					(In thousands)
Asset-Backed Notes	$	19,302	$	19,302	$	—	$	38,753	$	38,753	$	—
Key Facility		70,000		52,000		18,000		50,000		10,000		40,000
2019 Notes		33,000		33,000		—		33,000		33,000		—
Total	$	122,302	$	104,302	$	18,000	$	121,753	$	81,753	$	40,000

On November 4, 2013, through our wholly owned subsidiary, Horizon Credit II LLC, or Credit II, we renewed and amended our revolving credit facility which, among other things, assigned all rights and obligations to Key. On August 12, 2015, we further amended the Key Facility to (1) add a $20 million commitment to the existing $50 million commitment and (2) extend the term of the Key Facility. 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 interest rate was 4.00% as of September 30, 2015 and December 31, 2014.

The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million from the current $70 million commitment. 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. 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 on or after March 15, 2015 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. As of September 30, 2015, 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”.

We, through our wholly owned subsidiary Horizon Credit III LLC, or Credit III, entered into our term loan facility, or the Fortress Facility, on August 23, 2012. The interest rate on the Fortress Facility was based upon the one-month LIBOR plus a spread of 6.00%, with a LIBOR floor of 1.00% and provided for a four-year drawing period. The Fortress Facility contained customary covenants for a facility of its type. Effective June 17, 2014, we terminated the Fortress Facility and a related loan and security agreement and other documents. As such, we had no borrowing capacity under the Fortress Facility as of September 30, 2015 and December 31, 2014.

On June 28, 2013, we completed a $189.3 million securitization of secured loans which we originated. Horizon Funding Trust 2013-1, or 2013-1 Trust, a wholly owned subsidiary of ours, issued the Asset-Backed Notes, which are rated A2(sf) by Moody’s Investors Service, Inc. We are the sponsor, originator and servicer for the transaction. The Asset-Backed Notes bear interest at a fixed rate of 3.00% per annum and have a stated maturity of May 15, 2018.

The Asset-Backed Notes were issued by 2013-1 Trust pursuant to a note purchase agreement, or the Note Purchase Agreement, dated as of June 28, 2013, by and among us, Horizon Funding 2013-1, LLC, or the Trust Depositor, as the Trust Depositor, 2013-1 Trust and Guggenheim Securities, LLC, or Guggenheim Securities, as initial purchaser, and are backed by a pool of loans, or the Trust Loans, made to certain portfolio companies of ours and secured by certain assets of such portfolio companies. The Trust Loans are serviced by us. In connection with the issuance and sale of the Asset-Backed Notes, we have made customary representations, warranties and covenants in the Note Purchase Agreement. The Asset-Backed Notes are secured obligations of 2013-1 Trust and are non-recourse to us.

As part of the transaction, we entered into a sale and contribution agreement, or the Sale and Contribution Agreement, dated as of June 28, 2013, with the Trust Depositor, pursuant to which we sold or contributed the Trust Loans to the Trust Depositor. We made customary representations, warranties and covenants in the Sale and Contribution Agreement with respect to the Trust Loans as of the date of the transfer of the Trust Loans to the Trust Depositor. We also entered into a sale and servicing agreement, or the Sale and Servicing Agreement, dated as of June 28, 2013, with the Trust Depositor and 2013-1 Trust pursuant to which the Trust Depositor sold or contributed the Trust Loans to 2013-1 Trust. We made customary representations, warranties and covenants in the Sale and Servicing Agreement. We serve as administrator to 2013-1 Trust pursuant to an administration agreement, dated as of June 28, 2013, with 2013-1 Trust, Wilmington Trust, National Association, and U.S. Bank National Association. 2013-1 Trust also entered into an indenture, dated as of June 28, 2013, which governs the Asset-Backed Notes and includes customary covenants and events of default. In addition, the Trust Depositor entered into an amended and restated trust agreement, dated as of June 28, 2013, which includes customary representations, warranties and covenants. The Asset-Backed Notes were sold through an unregistered private placement to “qualified institutional buyers” in compliance with the exemption from registration provided by Rule 144A under the Securities Act of 1933, as amended, or the Securities Act, and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who, in each case, are “qualified purchasers” for purposes of Section 3(c)(7) under the 1940 Act.

Under the terms of the Asset-Backed Notes, we are required to maintain a reserve cash balance, funded through principal collections from the underlying securitized debt portfolio, which may be used to make monthly interest and principal payments on the Asset-Backed Notes.

As of September 30, 2015 and December 31, 2014, other assets were $3.4 million and $4.0 million, respectively, which is primarily comprised of debt issuance costs and prepaid expenses.

Contractual obligations and off-balance sheet arrangements

The following table shows our significant contractual payment obligations and off-balance sheet arrangements as of September 30, 2015:

	Payments due by period
	Total		Less than 1 year		1 – 3 Years		3 – 5 Years		After 5 years
	(In thousands)
Borrowings	$	104,302	$	6,082	$	54,075	$	44,145	$	—
Unfunded commitments		17,500		17,500		—		—		—
Total	$	121,802	$	23,582	$	54,075	$	44,145	$	—

In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our unfunded commitments may be significant from time to time. As of September 30, 2015, we had unfunded commitments of $17.5 million. These commitments are subject to the same underwriting and ongoing portfolio maintenance 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.

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. Very 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 eligible for the special tax treatment accorded to RICs and to avoid corporate level tax on the income and gains we distribute to our stockholders, we are required under the Code to annually distribute as dividends to our stockholders out of assets legally available for distribution an amount generally at least equal to 90% 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 paid no 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, pay 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 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 read 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 Advisers Act. The investment activities are managed by the Advisor and supervised by the Board, the majority of whom are independent directors. Under the Investment Management Agreement, we have agreed to pay the Advisor a base management fee as well as an incentive fee. During the three months ended September 30, 2015 and 2014, we paid the Advisor $2.2 million and $1.8 million, respectively, pursuant to the Investment Management Agreement. During the nine months ended September 30, 2015 and 2014, we paid the Advisor $5.7 million and $4.6 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 Administrator. Under the Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our General Counsel, Secretary and Chief Compliance Officer, our Chief Financial Officer and their respective staffs. In addition, pursuant to the terms of the Administration Agreement the Administrator provides us with the office facilities and administrative services necessary to conduct our day-to-day operations.

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. Accordingly, we may apply for exemptive relief which would permit us to co-invest subject to certain conditions, including, without limitation, approval of such investments by both a majority of our directors who have no financial interest in such transaction and a majority of directors who are not interested persons of us as defined in the 1940 Act.

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, or GAAP. 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 GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. We have categorized our investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

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

Level 1

Quoted prices in active markets for identical assets and liabilities.

Level 2

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active and model-based valuation techniques for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

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

Income recognition

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if we otherwise do not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. For the three and nine months ended September 30, 2015, we recognized as interest income interest payments of $0.04 million and $0.2 million, respectively, received from one portfolio company whose debt investment was 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 warrant 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 from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains 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, 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 pay 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 Topic 740, as modified by Topic 946, of the Financial Accounting Standards Board’s, or FASB’s, Accounting Standards Codification, as amended. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, are recorded as a tax expense in the current year. It is our policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. We had no material uncertain tax positions at September 30, 2015 and December 31, 2014.

Recently issued accounting standards

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, or ASU 2015-03, containing new guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, instead of being recorded as a separate asset. This guidance is effective for annual and interim periods beginning on or after December 15, 2015. We are evaluating the impact ASU 2015-03 will have on our consolidated financial position and disclosures.

Item 3. Quantitative And Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. During the periods covered by our financial statements, the interest rates on the debt investments within our portfolio were at floating and fixed rates.
We expect that our debt investments in the future will primarily have floating interest rates. As of September 30, 2015 and December 31, 2014, 91% and 64%, respectively, of the outstanding principal amount of our debt investments bore interest at floating rates. The initial commitments to lend to our portfolio companies are usually based on a floating LIBOR index.

Assuming that the consolidated statement of assets and liabilities as of September 30, 2015 was to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% change in interest rates may affect net income by more than 1% over a one-year horizon. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the consolidated statement of assets and liabilities and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement above.

While our 2019 Notes and Asset-Backed Notes bear interest at a fixed rate, our Key Facility has a floating interest rate provision, subject to an annual floor of 0.75%, based on a LIBOR index which resets daily, and any other credit facilities into which we enter in the future may have floating interest rate provisions. We have used hedging instruments in the past to protect us against interest rate fluctuations and we may use them in the future. Such instruments may include swaps, futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.

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

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

As of September 30, 2015, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

(b) Changes in internal controls over financial reporting.

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

PART II

Item 1: Legal Proceedings.

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

Item 1A: Risk Factors.

In addition to other information set forth in this report, you should carefully consider the “Risk Factors” discussed in our annual report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results. There have been no material changes during the nine months ended September 30, 2015 to the risk factors set forth in “Item 1A. Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2014.

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

None.

Item 3: Defaults Upon Senior Securities.

None.

Item 4: Mine Safety Disclosures.

Not applicable

Item 5: Other Information.

None.

Item 6: Exhibits.

EXHIBIT INDEX

Exhibit No.		Description
10.1		Amendment No. 1 to Amended and Restated Loan Agreement, dated as of August 12, 2015, by and among Horizon Credit II LLC, as borrower, the Lenders that are signatory thereto, as lenders, and KeyBank National Association, as arranger and agent (Incorporated by reference to Exhibit (k)(13) to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form N-2 (File No. 333-201866), filed on August 19, 2015).
31.1*		Certifications by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certifications by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

____________

Filed herewith

SIGNATURES

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

	Horizon Technology Finance Corporation

Date: November 3, 2015	By:	/s/ Robert D. Pomeroy, Jr.
		Name: Robert D. Pomeroy, Jr.
		Title: Chief Executive Officer and Chairman of
		the Board

Date: November 3, 2015	By:	/s/ Christopher M. Mathieu
		Name: Christopher M. Mathieu
		Title: Chief Financial Officer

EX-31.1 2 v423516_ex31-1.htm EXHIBIT 31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO EXCHANGE ACT
RULES 13a-14 AND 15d-14, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Robert D. Pomeroy, Jr., as Chief Executive Officer and Chairman of the Board of Horizon Technology Finance Corporation and Subsidiaries, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Horizon Technology Finance Corporation and Subsidiaries;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2015

By:	/s/ Robert D. Pomeroy, Jr.
	Chief Executive Officer and
	Chairman of the Board

EX-31.2 3 v423516_ex31-2.htm EXHIBIT 31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO EXCHANGE ACT
RULES 13a-14 AND 15d-14, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Christopher M. Mathieu, Chief Financial Officer of Horizon Technology Finance Corporation and Subsidiaries, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Horizon Technology Finance Corporation and Subsidiaries;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2015

By:	/s/ Christopher M. Mathieu
	Christopher M. Mathieu
	Chief Financial Officer

EX-32.1 4 v423516_ex32-1.htm EXHIBIT 32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

In connection with the Quarterly Report on Form 10-Q of Horizon Technology Finance Corporation and Subsidiaries (the “Company”) for the quarterly period ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert D. Pomeroy, Jr., as Chief Executive Officer and Chairman of the Board, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

/s/ Robert D. Pomeroy, Jr.
Name:	Robert D. Pomeroy, Jr.
Title:	Chief Executive Officer and Chairman of the Board

Date: November 3, 2015

EX-32.2 5 v423516_ex32-2.htm EXHIBIT 32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

In connection with the Quarterly Report on Form 10-Q of Horizon Technology Finance Corporation and Subsidiaries (the “Company”) for the quarterly period ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher M. Mathieu, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company as of the dates and for the periods expressed in the Report.

/s/ Christopher M. Mathieu
Name:	Christopher M. Mathieu
Title:	Chief Financial Officer

Date: November 3, 2015