UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549



Form 10-K



(Mark One)

| | þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ------------------------------------------------------------------------------------

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014



OR



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

FOR THE TRANSITION PERIOD FROM       TO



COMMISSION FILE NUMBER: 814-00802



HORIZON TECHNOLOGY FINANCE CORPORATION

(Exact name of registrant as specified
in its charter)



|DELAWARE                                 |  | 27-2114934         
|---------------------------------------- |  | -------------------
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|incorporation or organization)           |  | 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



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



|Title of Each Class                      |  | Name of Each Exchange on
    Which Registered
|---------------------------------------- |  | ---------------------------------------------
|Common Stock, par value $0.001 per share |  | The NASDAQ Stock Market LLC                  
|                                         |  |                                              
|7.375% 2019 Notes due 2019               |  | The New York Stock Exchange                  



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

None



Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ.



Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ.



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 o.



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
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.  þ



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 o | Accelerated filer þ                           | Non-accelerated filer o | Smaller Reporting Company o
|------------------------- | --------------------------------------------- | ----------------------- | ---------------------------
|                          | (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.



The aggregate market
value of common stock held by non-affiliates of the Registrant on June 30, 2014 based on the closing price on that date of $14.62
on the Nasdaq Global Select Market was $139.2 million. For the purposes of calculating this amount only, all directors and executive
officers of the Registrant have been treated as affiliates. There were 9,629,866 shares of the Registrant’s common stock
outstanding as of March 6, 2015.



Documents Incorporated
by Reference: Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2015 Annual Meeting of Stockholders
to be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated
by reference into Part III of this Annual Report on Form 10-K.


















HORIZON TECHNOLOGY FINANCE CORPORATION



FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2014



TABLE OF CONTENTS



|         |                                                                                                              | Page
|-------- | ------------------------------------------------------------------------------------------------------------ | ----
|PART I   |                                                                                                             
|Item 1.  | Business                                                                                                     | 3   
|Item 1A. | Risk Factors                                                                                                 | 25  
|Item 1B. | Unresolved Staff Comments                                                                                    | 50  
|Item 2.  | Properties                                                                                                   | 50  
|Item 3.  | Legal Proceedings                                                                                            | 50  
|Item 4.  | Mine Safety Disclosures                                                                                      | 50  
|         |                                                                                                              |     
|PART II  |                                                                                                             
|Item 5.  | Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 51  
|Item 6.  | Selected Financial Data                                                                                      | 54  
|Item 7.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                        | 55  
|Item 7A. | Quantitative And Qualitative Disclosures About Market Risk                                                   | 67  
|Item 8.  | Consolidated Financial Statements and Supplementary Data                                                     | 68  
|Item 9.  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         | 105 
|Item 9A. | Controls and Procedures                                                                                      | 105 
|Item 9B. | Other Information                                                                                            | 105 
|         |                                                                                                              |     
|PART III |                                                                                                             
|Item 10. | Directors, Executive Officers and Corporate Governance                                                       | 105 
|Item 11. | Executive Compensation                                                                                       | 105 
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 105 
|Item 13. | Certain Relationships and Related Transactions, and Director Independence                                    | 106 
|Item 14. | Principal Accountant Fees and Services                                                                       | 106 
|         |                                                                                                              |     
|PART IV  |                                                                                                             
|Item 15. | Exhibits and Financial Statement Schedules                                                                   | 106 
|         | Signatures                                                                                                   | 109 



2







PART I

In this annual report on Form 10-K,
except where the context suggests otherwise, the terms:



| | · | “we,” “us,” “our” “the Company” and “Horizon
Technology Finance” refer to Horizon Technology Finance Corporation, a Delaware corporation, and its consolidated subsidiaries;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The “Advisor” and the “Administrator” refer to Horizon Technology Finance
Management LLC, a Delaware limited liability company;
| | - | -------------------------------------------------------------------------------------------------------------------------------



| | · | “Credit II” refers to Horizon Credit II LLC, a Delaware limited liability company,
“Credit III” refers to Horizon Credit III LLC, a Delaware limited liability company, which are special purpose bankruptcy
remote entities and our direct subsidiaries;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Wells” refers to Wells Fargo Capital Finance LLC and “Wells Facility”
refers to a revolving credit facility we entered into with Wells on July 14, 2011 and with respect to which all rights and obligations
of Wells were assigned to Key, effective November 4, 2013;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Key” refers to Key Equipment Finance, Inc. and “Key Facility” refers to
the Wells Facility after all rights and obligations of Wells under the Wells Facility were assigned to Key, effective November
4, 2013;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “2019 Notes” refers to our $33 million aggregate principal amount of 7.375% senior
unsecured notes due 2019;
| | - | ------------------------------------------------------------------------------------------------------------



| | · | “Fortress” refers to Fortress Credit Co LLC and “Fortress Facility” and
“Term Loan Facility” refer to a term loan credit facility we entered into with Fortress on August 23, 2012 that was
terminated on June 17, 2014;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “2013-1 Securitization” refers to the $189.3 million securitization of secured loans
we completed on June 28, 2013; and
| | - | -----------------------------------------------------------------------------------------------------------------------



| | · | “Asset-Backed Notes” refers to our $90 million aggregate principal amount of fixed-rate
asset-backed notes issued in conjunction with the 2013-1 Securitization; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The “2013-1 Trust” refers to Horizon Funding Trust 2013-1, a Delaware trust.
| | - | ----------------------------------------------------------------------------



Some of the statements in this annual
report on Form 10-K constitute forward-looking statements which apply to both us and our consolidated subsidiaries and relate to
future events, future performance or financial condition. The forward-looking statements involve risks and uncertainties for both
us and our consolidated subsidiaries and actual results could differ materially from those projected in the forward-looking statements
for any reason, including those factors described in “Item 1A.—Risk Factors” and elsewhere in this annual report
on Form 10-K.



Item 1.Business



General



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 collectively 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 investments 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.



3







We are an externally
managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company,
or 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 regulated investment company, or 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.



From our inception
through December 31, 2014, we funded 120 portfolio companies and invested $656.7 million in debt investments (including 70
debt investments, in the amount of $303.4 million, that have been repaid). As of December 31, 2014, our total debt investment portfolio
consisted of 50 debt investments with an aggregate fair value balance of $199.2 million. As of December 31, 2014, 43.6%, or
$86.9 million, of the fair value balance of our total debt investment portfolio was held through our 2013-1 Securitization. As
of December 31, 2014, our net assets were $138.2 million. As of that date, all of our existing debt investments were secured
by all or a portion of the tangible and intangible assets of the applicable portfolio company. The debt investments in our portfolio
are generally not rated by any rating agency. If the individual debt investments in our portfolio were rated, they would be rated
below “investment grade” because they are subject to many risks, including volatility, intense competition, short product
life cycles and periodic downturns.



For the year ended
December 31, 2014, our debt investments had a dollar-weighted annualized yield of 15.3% (excluding any yield from warrants). The
warrants we receive from time to time when making loans to portfolio companies are excluded from the calculation of our dollar-weighted
annualized yield because such warrants do not generate any yield since we do not receive dividends or other payments in respect
of our outstanding warrants. The dollar-weighted annualized yield represents the portfolio yield and may be higher than what investors
will realize because it does not reflect our expenses or any sales load paid by investors. As of December 31, 2014, our debt investments
had a dollar-weighted average term of 42 months from inception and a dollar-weighted average remaining term of 31 months.
In addition, we held warrants to purchase either common stock or preferred stock in 75 portfolio companies. As of December 31,
2014, substantially all of our debt investments had an original committed principal amount of between $2 million and $15 million,
repayment terms of between 28 and 48 months and bore current pay interest at annual interest rates of between 9% and 13%.



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, 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.



Our common stock began
trading October 29, 2010 and is currently traded on the NASDAQ Global Select Market under the symbol “HRZN”.



Information available



Our principal executive
office is located at 312 Farmington Avenue, Farmington, Connecticut 06032, our telephone number is (860) 676-8654, and our
internet address is www.horizontechnologyfinancecorp.com. We make available, free of charge, on our website our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon
as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange
Commission, or the SEC. Information contained on our website is not incorporated by reference into this annual report on Form 10-K
and you should not consider information contained on our website to be part of this annual report on Form 10-K or any other
report we file with the SEC.



4







Our advisor



Our investment activities
are managed by our Advisor and we expect to continue to benefit from our Advisor’s ability to identify attractive investment
opportunities, conduct diligence on and value prospective investments, negotiate investments and manage our diversified portfolio
of investments. In addition to the experience gained from the years that they have worked together both at our Advisor and prior
to the formation by our Advisor, the members of our investment team have broad lending backgrounds, with substantial experience
at a variety of commercial finance companies, technology banks and private debt funds, and have developed a broad network of contacts
within the venture capital and private equity community. This network of contacts provides a principal source of investment opportunities.



Our Advisor is led
by five senior managers, including its two co-founders, Robert D. Pomeroy, Jr., our Chief Executive Officer, and Gerald A.
Michaud, our President. The other senior managers include Christopher M. Mathieu, our Senior Vice President and Chief Financial
Officer, John C. Bombara, our Senior Vice President, General Counsel and Chief Compliance Officer, and Daniel S. Devorsetz, our
Senior Vice President and Chief Credit Officer.



Our strategy



Our investment objective
is to maximize our investment portfolio’s total return by generating current income from the debt investments we make and
capital appreciation from the warrants we receive when making such debt investments. To further implement our business strategy,
we expect our Advisor to continue to employ the following core strategies:



| | • | Structured investments in the venture capital and private equity markets.  We
make loans to development-stage companies within our Target Industries typically in the form of secured loans. The secured debt
structure provides a lower risk strategy, as compared to equity investments, to participate in the emerging technology markets
because the debt structures we typically utilize provide collateral against the downside risk of loss, provide return of capital
in a much shorter timeframe through current-pay interest and amortization of principal and have a senior position to equity in
the borrower’s capital structure in the case of insolvency, wind down or bankruptcy. Unlike venture capital and private equity
investments, our investment returns and return of our capital do not require equity investment exits such as mergers and acquisitions
or initial public offerings. Instead, we receive returns on our debt investments primarily through regularly scheduled payments
of principal and interest and, if necessary, liquidation of the collateral supporting the debt investment upon a default. Only
the potential gains from warrants depend upon equity investments exits.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | “Enterprise value” lending.  We and our Advisor take an enterprise
value approach to the loan structuring and underwriting process. Enterprise value includes the implied valuation based upon recent
equity capital invested as well as the intrinsic value of the applicable portfolio company’s particular technology, service
or customer base. We secure our senior or subordinated lien position against the enterprise value of a portfolio company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Creative products with attractive risk-adjusted pricing.  Each of our existing
and prospective portfolio companies has its own unique funding needs for the capital provided from the proceeds of our Venture
Loans. These funding needs include funds for additional development “runways”, funds to hire or retain sales staff
or funds to invest in research and development in order to reach important technical milestones in advance of raising additional
equity. Our loans include current-pay interest, commitment fees, end-of-term payments, or ETPs, pre-payment fees, success fees
and non-utilization fees. We believe we have developed pricing tools, structuring techniques and valuation metrics that satisfy
our portfolio companies’ financing requirements while mitigating risk and maximizing returns on our investments.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Opportunity for enhanced returns.  To enhance our debt investment returns, in
addition to interest and fees, we obtain warrants to purchase the equity of our portfolio companies as additional consideration
for making debt investments. The warrants we obtain generally include a “cashless exercise” provision to allow us to
exercise these rights without requiring us to make any additional cash investment. Obtaining warrants in our portfolio companies
has allowed us to participate in the equity appreciation of our portfolio companies, which we expect will enable us to generate
higher returns for our investors.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



5







| | • | Direct origination.  We originate transactions directly with technology, life
science, healthcare information and services and cleantech companies. These transactions are referred to our Advisor from a number
of sources, including referrals from, or direct solicitation of, venture capital and private equity firms, portfolio company management
teams, legal firms, accounting firms, investment banks and other lenders that represent companies within our Target Industries.
Our Advisor has been the sole or lead originator in substantially all transactions in which the funds it manages have invested.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Disciplined and balanced underwriting and portfolio management.  We use
a disciplined underwriting process that includes obtaining information validation from multiple sources, extensive knowledge of
our Target Industries, comparable industry valuation metrics and sophisticated financial analysis related to development-stage
companies. Our Advisor’s due diligence on investment prospects includes obtaining and evaluating information on the prospective
portfolio company’s technology, market opportunity, management team, fund raising history, investor support, valuation considerations,
financial condition and projections. We seek to balance our investment portfolio to reduce the risk of down market cycles associated
with any particular industry or sector, development-stage or geographic area. Our Advisor employs a “hands on” approach
to portfolio management requiring private portfolio companies to provide monthly financial information and to participate in regular
updates on performance and future plans.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Use of leverage.  We use leverage to increase returns on equity through our Key
Facility, our 2013-1 Securitization and our 2019 Notes. See “Item 7 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Liquidity and Capital Resources” for additional information about
our use of leverage. In addition, we may issue additional debt securities or preferred stock in one or more series in the future.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Market opportunity



We focus our investments
primarily in four key industries of the emerging technology market: technology, life science, healthcare information and services
and cleantech. The technology sectors we focus on include communications, networking, wireless communications, data storage, software,
cloud computing, semiconductor, internet and media and consumer-related technologies. The life science sectors we focus on include
biotechnology, drug delivery, bioinformatics and medical devices. The healthcare information and services sectors we focus on include
diagnostics, medical record services and software and other healthcare related services and technologies that improve efficiency
and quality of administered healthcare. The cleantech sectors we focus on include alternative energy, water purification, energy
efficiency, green building materials and waste recycling. We refer to all of these companies as “technology-related”
companies and intend, under normal market conditions, to invest at least 80% of the value of our total assets in such businesses.



We believe that Venture
Lending has the potential to achieve enhanced returns that are attractive notwithstanding the high degree of risk associated with
lending to development-stage companies. Potential benefits include:



| | • | interest rates that typically exceed rates that would be available to portfolio companies if they
could borrow in traditional commercial financing transactions;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | the debt investment support provided by cash proceeds from equity capital invested by venture capital
and private equity firms;
| | - | -------------------------------------------------------------------------------------------------------------------------------



| | • | relatively rapid amortization of principal;
| | - | -------------------------------------------



| | • | senior ranking to equity and collateralization of debt investments to minimize potential loss of
capital; and
| | - | -------------------------------------------------------------------------------------------------------------



| | • | potential equity appreciation through warrants.
| | - | -----------------------------------------------



We believe that Venture
Lending also provides an attractive financing source for portfolio companies, their management teams and their equity capital investors,
as it:



| | • | is typically less dilutive to the equity holders than additional equity financing;
| | - | ----------------------------------------------------------------------------------



| | • | extends the time period during which a portfolio company can operate before seeking additional
equity capital or pursuing a sale transaction or other liquidity event; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | allows portfolio companies to better match cash sources with uses.
| | - | ------------------------------------------------------------------



6







Competitive strengths



We believe that we,
together with our Advisor, possess significant competitive strengths, including:



Consistently
execute commitments and close transactions.  Our Advisor and its senior management and investment professionals have
an extensive track record of originating, underwriting and managing Venture Loans. Our Advisor and its predecessor have directly
originated, underwritten and managed more than 185 Venture Loans with an aggregate original principal amount over $1.1 billion
since operations commenced in 2004.



Robust
direct origination capabilities.  Our Advisor’s managing directors each have significant experience originating
Venture Loans in our Target Industries. This experience has given each managing director a deep knowledge of our Target Industries
and an extensive base of transaction sources and references.



Highly
experienced and cohesive management team.  Our Advisor has had the same senior management team of experienced professionals
since its inception. This consistency allows companies, their management teams and their investors to rely on consistent and predictable
service, loan products and terms and underwriting standards.



Relationships
with venture capital and private equity investors.  Our Advisor has developed strong relationships with venture capital
and private equity firms and their partners.



Well-known
brand name.  Our Advisor has originated Venture Loans to more than 185 companies in our Target Industries under
the “Horizon Technology Finance” brand.



Competition



We compete to provide
financing to development-stage companies in our Target Industries with a number of investment funds and other BDCs, as well as
traditional financial services companies such as commercial banks and other financing sources. Some of our competitors are larger
and have greater financial and other resources than we do. We believe we compete effectively with these entities primarily on the
basis of the experience, industry knowledge and contacts of our Advisor’s investment professionals, its responsiveness and
efficient investment analysis and decision-making processes, its creative financing products and its customized investment terms.
We do not intend to compete primarily on the interest rates we offer and believe that some competitors make loans with rates that
are comparable or lower than our rates. For additional information concerning our competitive position and competitive risks, see
“Item 1A — Risk Factors — Risks related to our business and structure — We operate in a highly
competitive market for investment opportunities, and if we are not able to compete effectively, our business, results of operations
and financial condition may be adversely affected and the value of your investment in us could decline.”



Investment criteria



We seek to invest
in companies that are diversified by their stage of development, their Target Industries and sectors of Target Industries and their
geographical location, as well as by the venture capital and private equity sponsors that support our portfolio companies. While
we invest in companies at various stages of development, we require that prospective portfolio companies be beyond the seed stage
of development and have received at least their first round of venture capital or private equity financing before we will consider
making an investment. We expect a prospective portfolio company to demonstrate its ability to advance technology and increase its
value over time.



We have identified
several criteria that we believe have proven, and will prove, important in achieving our investment objective. These criteria provide
general guidelines for our investment decisions. However, we caution you that not all of these criteria are met by each portfolio
company in which we choose to invest.



Management.Our portfolio companies are generally led by experienced management that has in-market expertise in the Target
Industry in which the company operates, as well as extensive experience with development-stage companies. The adequacy and completeness
of the management team is assessed relative to the stage of development and the challenges facing the potential portfolio company.



7







Continuing
support from one or more venture capital and private equity investors.We typically invest in companies in which
one or more established venture capital and private equity investors have previously invested and continue to make a contribution
to the management of the business. We believe that established venture capital and private equity investors can serve as a committed
partner and will assist their portfolio companies and their management teams in creating value. We take into consideration the
total amount raised by the company, the valuation history, investor reserves for future investment and the expected timing and
milestones to the next equity round financing.



Operating
plan and cash resources.We generally require that a prospective portfolio company, in addition to having sufficient
access to capital to support leverage, demonstrate an operating plan capable of generating cash flows or the ability to raise the
additional capital necessary to cover its operating expenses and service its debt. Our review of the operating plan will take into
consideration existing cash, cash burn, cash runway and the milestones necessary for the company to achieve cash flow positive
operations or to access additional equity from the investors.



Enterprise
and technology value.We expect that the enterprise value of a prospective portfolio company should substantially
exceed the principal balance of debt borrowed by the company. Enterprise value includes the implied valuation based upon recent
equity capital invested as well as the intrinsic value of the company’s particular technology, service or customer base.



Market
opportunity and exit strategy.We seek portfolio companies that are addressing large market opportunities that
capitalize on their competitive advantages. Competitive advantages may include a unique technology, protected intellectual property,
superior clinical results or significant market traction. As part of our investment analysis, we typically also consider potential
realization of our warrants through merger, acquisition or initial public offering based upon comparable exits in the company’s
Target Industry.



Investment process



Our Board has delegated
authority for all investment decisions to our Advisor. Our Advisor, in turn, has created an integrated approach to the loan origination,
underwriting, approval and documentation process that we believe effectively combines the skills of our Advisor’s professionals.
This process allows our Advisor to achieve an efficient and timely closing of an investment from the initial contact with a prospective
portfolio company through the investment decision, close of documentation and funding of the investment, while ensuring that our
Advisor’s rigorous underwriting standards are consistently maintained. We believe that the high level of involvement by our
Advisor’s staff in the various phases of the investment process allows us to minimize the credit risk while delivering superior
service to our portfolio companies.



Origination.Our Advisor’s loan origination process begins with its industry-focused regional managing directors who are
responsible for identifying, contacting and screening prospects. These managing directors meet with key decision makers and deal
referral sources such as venture capital and private equity firms and management teams, legal firms, accounting firms, investment
banks and other lenders to source prospective portfolio companies. We believe our brand name and management team are well known
within the Venture Lending community, as well as by many repeat entrepreneurs and board members of prospective portfolio companies.
These broad relationships, which reach across the Venture Lending industry, give rise to a significant portion of our Advisor’s
deal origination.



The responsible
managing director of our Advisor obtains review materials from the prospective portfolio company and from those materials, as well
as other available information, determines whether it is appropriate for our Advisor to issue a non-binding term sheet. The managing
director bases this decision to proceed on his or her experience, the competitive environment and the prospective portfolio company’s
needs and also seeks the counsel of our Advisor’s senior management and investment team.



Term
sheet.If the managing director determines, after review and consultation with senior management, that the potential
transaction meets our Advisor’s initial credit standards, our Advisor will issue a non-binding term sheet to the prospective
portfolio company.



The terms
of the transaction are tailored to a prospective portfolio company’s specific funding needs while taking into consideration
market dynamics, the quality of the management team, the venture capital and private equity investors involved and applicable credit
criteria, which may include the prospective portfolio company’s existing cash resources, the development of its technology
and the anticipated timing for the next round of equity financing.



8







Underwriting.Once the term sheet has been negotiated and executed and the prospective portfolio company has remitted a good
faith deposit, we request additional due diligence materials from the prospective portfolio company and arrange for a due diligence
visit.



Due
diligence.The due diligence process includes a formal visit to the prospective portfolio company’s location
and interviews with the prospective portfolio company’s senior management team. The process includes obtaining and analyzing
information from independent third parties that have knowledge of the prospective portfolio company’s business, including,
to the extent available, analysts that follow the technology market, thought leaders in our Target Industries and important customers
or partners, if any. Outside sources of information are reviewed, including industry publications, scientific and market articles,
Internet publications, publicly available information on competitors or competing technologies and information known to our Advisor’s
investment team from their experience in the technology markets.



A key element
of the due diligence process is interviewing key existing investors in the prospective portfolio company, who are often also members
of the prospective portfolio company’s board of directors. While these board members and/or investors are not independent
sources of information, their support for management and willingness to support the prospective portfolio company’s further
development are critical elements of our decision making process.



Investment
memorandum.Upon completion of the due diligence process and review and analysis of all of the information provided
by the prospective portfolio company and obtained externally, our Advisor’s assigned credit officer prepares an investment
memorandum for review and approval. The investment memorandum is reviewed by our Advisor’s Chief Credit Officer and submitted
to our Advisor’s investment committee for approval.



Investment
committee.Our Advisor’s investment committee is responsible for overall credit policy, portfolio management,
approval of all investments, portfolio monitoring and reporting and managing of problem accounts. The committee interacts with
the entire staff of our Advisor to review potential transactions and deal flow. This interaction of cross-functional members of
our Advisor’s staff assures efficient transaction sourcing, negotiating and underwriting throughout the transaction process.
Portfolio performance and current market conditions are reviewed and discussed by the investment committee on a regular basis to
assure that transaction structures and terms are consistent and current.



Loan
closing and funding. Approved investments are documented and closed by our Advisor’s in-house legal and loan
administration staff. Loan documentation is based upon standard templates created by our Advisor and is customized for each transaction
to reflect the specific deal terms. The transaction documents typically include a loan and security agreement, warrant agreement
and applicable perfection documents, including applicable Uniform Commercial Code, or UCC, financing statements and, as applicable,
may also include a landlord agreement, patent and trademark security grants, a subordination agreement and other standard agreements
for commercial loans in the Venture Lending industry. Funding requires final approval by our Advisor’s General Counsel, Chief
Executive Officer or President, Chief Financial Officer and Chief Credit Officer.



Portfolio
management and reporting.Our Advisor maintains a “hands on” approach to maintain communication with
our portfolio companies. At least quarterly, our Advisor contacts our portfolio companies for operational and financial updates
by phone and performs reviews. Our Advisor may contact portfolio companies deemed to have greater credit risk on a monthly basis.
Our Advisor requires all private companies to provide financial statements. For public companies, our Advisor typically relies
on publicly reported quarterly financials. This allows our Advisor to identify any unexpected developments in the financial performance
or condition of our portfolio company.



Our Advisor
has developed a proprietary internal credit rating system to analyze the quality of our debt investments. Using this system, our
Advisor analyzes and then rates the credit risk within the portfolio on a monthly basis. Each portfolio company is rated on a 1
through 4 scale, with 3 representing the rating for a standard level of risk. A rating of 4 represents an improved and better credit
quality. A rating of 2 or 1 represents a deteriorating credit quality and increasing risk. Newly funded investments are typically
assigned a rating of 3, unless extraordinary circumstances require otherwise. These investment ratings are generated internally
by our Advisor, and we cannot guarantee that others would assign the same ratings to our portfolio investments or similar portfolio
investments.



9







Our Advisor
closely monitors portfolio companies rated a 1 or 2 for adverse developments. In addition, our Advisor maintains regular contact
with the management, board of directors and major equity holders of these portfolio companies in order to discuss strategic initiatives
to correct the deterioration of the portfolio company.



The following table describes each rating
level:



|Rating |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4      | The portfolio company has performed in excess of our expectations at the time of initial underwriting as demonstrated by exceeding revenue milestones, clinical milestones or other operating metrics or as a result of raising capital well in excess of our underwriting assumptions. Generally the portfolio company displays one or more of the following: its enterprise value greatly exceeds our loan balance; it has achieved cash flow positive operations or has sufficient cash resources to cover the remaining balance of the loan; there is strong potential for warrant gains from our warrants; and there is a high likelihood that the borrower will receive favorable future financing to support operations. Loans rated 4 are the lowest risk profile in our portfolio and there is no expected risk of principal loss.                                                                                                                       
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|3      | The portfolio company has performed to our expectations at the time of initial underwriting as demonstrated by meeting revenue milestones, clinical milestones or other operating metrics. It has raised, or is expected to raise, capital consistent with our underwriting assumptions. Generally the portfolio company displays one or more of the following: its enterprise value comfortably exceeds our loan balance; it has sufficient cash resources to operate according to its plan; it is expected to raise additional capital as needed; and there continues to be potential for warrant gains from our warrants. New loans are typically rated 3 when approved and thereafter 3-rated loans represent a standard risk profile, with no loss currently expected.                                                                                                                                                                                       
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|2      | The portfolio company has performed below our expectations at underwriting as demonstrated by missing revenue milestones, delayed clinical progress or otherwise failing to meet projected operating metrics. It may have raised capital in support of the poorer performance but generally on less favorable terms than originally contemplated at the time of underwriting. Generally the portfolio company displays one or more of the following: its enterprise value exceeds our loan balance but at a lower multiple than originally expected; it has sufficient cash to operate according to its plan but liquidity may be tight; and it is planning to raise additional capital but there is uncertainty and the potential for warrant gains from our warrants are possible, but unlikely. Loans rated 2 represent an increased level of risk. While no loss is currently anticipated for a 2-rated loan, there is potential for future loss of principal.
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|1      | The portfolio company has performed well below plan as demonstrated by materially missing revenue milestones, delayed or failed clinical progress or otherwise failing to meet operating metrics. The portfolio company has not raised sufficient capital to operate effectively or retire its debt obligation to us. Generally the portfolio company displays one or more of the following: its enterprise value may not exceed our loan balance; it has insufficient cash to operate according to its plan and liquidity may be tight; and there are uncertain plans to raise additional capital or the portfolio company is being sold under distressed conditions. There is no potential for warrant gains from our warrants. Loans rated 1 are generally put on non-accrual status and represent a high degree of risk of loss.                                                                                                                              



For a discussion of
the ratings of our existing portfolio, see “Item 7 — Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Debt investment asset quality.”



Managerial assistance



As a BDC, we offer,
through our Advisor, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance
may involve monitoring the operations of the portfolio companies, participating in board of directors and management meetings,
consulting with and advising officers of portfolio companies and providing other organizational and financial guidance.



10







Although we may receive
fees for these services, pursuant to the Administration Agreement, we will reimburse our Advisor for its expenses related to providing
such services on our behalf.



Employees



We do not have any
employees. Each of our executive officers is an employee of our Advisor. Our day-to-day investment operations are managed by our
Advisor. We reimburse our Advisor for our allocable portion of expenses incurred by it in performing its obligations under the
Administration Agreement, as our Administrator, including our allocable portion of the cost of our Chief Financial Officer and
Chief Compliance Officer and their respective staffs.



Investment Management Agreement



Under the terms of
the Investment Management Agreement, our Advisor:



| | • | determines the composition of our portfolio, the nature and timing of the changes to our portfolio
and the manner of implementing such changes;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| | • | identifies, evaluates and negotiates the structure of the investments we make (including performing
due diligence on our prospective portfolio companies); and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | closes, monitors and administers the investments we make, including the exercise of any voting
or consent rights.
| | - | -----------------------------------------------------------------------------------------------------------------



Our Advisor’s
services under the Investment Management Agreement are not exclusive, and it is free to furnish similar services to other entities
so long as its services to us are not impaired.



Investment advisory fees



Pursuant to our Investment
Management Agreement, we pay our Advisor a fee for investment advisory and management services consisting of a base management
fee and an incentive fee.



Base management
fee.  The base management fee, payable monthly in arrears, is calculated at an annual rate of 2.00% of (i) the Company’s
gross assets, less (ii) cash and cash equivalents. For purposes of calculating the base management fee, the term “gross assets”
includes any assets acquired with the proceeds of leverage.



Incentive
fee.  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 our 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 our operating expenses for the quarter (including
the base management fee, expenses payable under the Administration Agreement 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 that we have not yet received in cash. The incentive fee with respect to our
Pre-Incentive Fee Net Investment Income is 20.00% of the amount, if any, by which our 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 our Pre-Incentive Fee Net Investment Income equals the hurdle rate of 1.75%, but then receives, as a “catch-up,”
100.00% of our 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 provision is that, if Pre-Incentive Fee Net Investment
Income exceeds 2.1875% in any calendar quarter, our Advisor will receive 20.00% of our Pre-Incentive Fee Net Investment Income
as if the hurdle rate did not apply.



11







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 we may pay an incentive fee in a quarter in which
we incur a loss. For example, if we receive Pre-Incentive Fee Net Investment Income in excess of the quarterly minimum hurdle rate,
we will pay the applicable incentive fee up to the Incentive Fee Cap, defined below, even if we have incurred a loss in that quarter
due to realized and unrealized capital losses. Our net investment income used to calculate this part of the incentive fee is also
included in the amount of our 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 applicable quarter.



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 “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.



The following is a
graphical representation of the calculation of the income-related portion of the incentive fee:



Quarterly incentive fee based on Net
Investment Income



Pre-Incentive Fee Net Investment Income(expressed as a percentage of the value of net assets)







Percentage of Pre-Incentive
Fee Net Investment Income allocated to first part of incentive fee



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 will equal 20.00% of our realized capital gains, if any, on a cumulative
basis from the date of our 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, less all previous amounts paid in respect of the capital gain incentive
fee.



Examples of incentive fee calculation



Example 1: Income related portion of incentive
fee before total return requirement calculation for each fiscal quarter



Alternative 1



Assumptions:



Investment income (including interest,
distributions, fees, etc.) = 1.25%



Hurdle rate(1) = 1.75%



12







Management fee(2) = 0.50%



Other expenses (legal, accounting, custodian,
transfer agent, etc.)(3) = 0.20%



Pre-Incentive Fee Net Investment Income
(investment income - (management fee + other expenses)) = 0.55%



Pre-Incentive Fee Net Investment Income does not
exceed hurdle rate; therefore, there is no income-related incentive fee.



Alternative 2



Assumptions:



Investment income (including interest,
distributions, fees, etc.) = 2.80%



Hurdle rate(1)= 1.75%



Management fee(2) = 0.50%



Other expenses (legal, accounting, custodian,
transfer agent, etc.)(3) = 0.20%



Pre-Incentive Fee Net Investment Income
(investment income - (management fee + other expenses)) = 2.10%



Incentive fee = 100.00% × Pre-Incentive
Fee Net Investment Income (subject to “catch-up”)(4)



= 100.00% × (2.10% - 1.75%)



= 0.35%



Pre-Incentive Fee Net Investment
Income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision; therefore, the income related
portion of the incentive fee is 0.35%.



Alternative 3



Assumptions:



Investment income (including interest,
distributions, fees, etc.) = 3.00%



Hurdle rate(1) = 1.75%



Management fee(2) = 0.50%



Other expenses (legal, accounting, custodian,
transfer agent, etc.)(3) = 0.20%



Pre-Incentive Fee Net Investment Income
(investment income - (management fee + other expenses)) = 2.30%



Incentive fee = 100.00% × Pre-Incentive
Fee Net Investment Income (subject to “catch-up”)(4)



Incentive fee = 100.00% × “catch-up”
+ (20.00% × (Pre-Incentive Fee Net Investment Income -



2.1875%))



Catch up = 2.1875% - 1.75%



= 0.4375%



Incentive fee = (100.00% × 0.4375%)
+ (20.00% × (2.30% - 2.1875%))



= 0.4375% + (20.00% × 0.1125%)



= 0.4375% + 0.0225%



= 0.46%



Pre-Incentive Fee Net Investment
Income exceeds the hurdle rate and fully satisfies the “catch-up” provision; therefore, the income related portion
of the incentive fee is 0.46%.



13







___________



| | (1) | Represents 7.00% annualized hurdle rate.
| | --- | ----------------------------------------



| | (2) | Represents 2.00% annualized base management fee.
| | --- | ------------------------------------------------



| | (3) | Excludes organizational and offering expenses.
| | --- | ----------------------------------------------



| | (4) | The “catch-up” provision is intended to provide our Advisor with an incentive fee of
20.00% on all Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when our net investment income exceeds
2.1875% in any fiscal quarter.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Example 2: Income related portion of incentive
fee after total return requirement calculation for each fiscal quarter



Alternative 1



Assumptions:



Investment income (including interest, distributions,
fees, etc.) = 1.25%



Hurdle rate(1) = 1.75%



Management fee(2) = 0.50%



Other expenses (legal, accounting, custodian, transfer
agent, etc.)(3) = 0.20%



Pre-Incentive Fee Net Investment Income (investment
income - (management fee + other expenses)) = 0.55%



Pre-Incentive
Fee Net Investment Income does not exceed hurdle rate; therefore, there is no income-related incentive fee.



Cumulative incentive compensation accrued and/or
paid since July 1, 2014 = $9,000,000



20.0% of cumulative net increase in net assets resulting
from operations since July 1, 2014 = $8,000,000



Although
our Pre-Incentive Fee Net Investment Income exceeds the hurdle rate of 1.75% (as shown in Alternative 3 of Example 1 above), no
incentive fee is payable because 20.0% of the cumulative net increase in net assets resulting from operations since July 1, 2014
did not exceed the cumulative income and capital gains incentive fees accrued and/or paid since July 1, 2014.



Alternative 2



Assumptions:



Investment income (including interest, distributions,
fees, etc.) = 2.80%



Hurdle rate(1) = 1.75%



Management fee(2) = 0.50%



Other expenses (legal, accounting, custodian, transfer
agent, etc.)(3) = 0.20%



Pre-Incentive Fee Net Investment Income (investment
income - (management fee + other expenses)) = 2.10%



Incentive fee = 100.00% × Pre-Incentive Fee
Net Investment Income (subject to ‘‘catch-up’’)(4)



=100.00% × (2.10% - 1.75%)



= 0.35%



Pre-Incentive
Fee Net Investment Income exceeds the hurdle rate, but does not fully satisfy the ‘‘catch-up’’ provision;
therefore, the income related portion of the incentive fee is 0.35%.



Cumulative incentive compensation accrued
and/or paid since July 1, 2014 = $9,000,000



20.0% of cumulative net increase in net assets resulting
from operations since July 1, 2014 = $10,000,000



14







Because
our Pre-Incentive Fee Net Investment Income exceeds the hurdle rate of 1.75% and because 20.0% of the cumulative net increase in
net assets resulting from operations since July 1, 2014 exceeds the cumulative income and capital gains incentive fees accrued
and/or paid since July 1, 2014, an incentive fee would be payable, as shown in Alternative 3 of Example 1 above.



___________



| | (1) | Represents 7.00% annualized hurdle rate.
| | --- | ----------------------------------------



| | (2) | Represents 2.00% annualized base management fee.
| | --- | ------------------------------------------------



| | (3) | Excludes organizational and offering expenses.
| | --- | ----------------------------------------------



| | (4) | The “catch-up” provision is intended to provide our Advisor with an incentive fee of
20.00% on all Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when our net investment income exceeds
2.1875% in any fiscal quarter.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Example 3: Capital gains portion of incentive
fee



Alternative 1



Assumptions:



Year 1: $20 million investment
made in Company A (“Investment A”), and $30 million investment made in Company B (“Investment B”)



Year 2: Investment A sold for
$50 million and fair market value (“FMV”) of Investment B determined to be $32 million



Year 3: FMV of Investment
B determined to be $25 million



Year 4: Investment
B sold for $31 million



The capital gains
portion of the incentive fee, if any, would be:



Year 1: None (No sales
transaction)



Year 2: Capital gains incentive
fee of $6 million ($30 million realized capital gains on sale of Investment A multiplied by 20%)



Year 3: None; $5 million
((20% multiplied by ($30 million cumulative capital gains less $5 million cumulative capital depreciation)) less $6 million
(previous capital gains fee paid in Year 2))



Year 4: Capital gains incentive
fee of $200,000; $6.2 million (($31 million cumulative realized capital gains multiplied by 20%) less $6 million
(capital gains incentive fee taken in Year 2))



Alternative 2



Assumptions:



Year 1: $20 million investment
made in Company A (“Investment A”), $30 million investment made in Company B (“Investment B”) and
$25 million investment made in Company C (“Investment C”)



Year 2: Investment A sold for
$50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25 million



Year 3: FMV of Investment
B determined to be $27 million and Investment C sold for $30 million



Year 4: FMV of Investment
B determined to be $35 million



Year 5: Investment
B sold for $20 million



The capital gains
incentive fee, if any, would be:



Year 1: None (no sales
transaction)



15







Year 2: $5 million capital
gains incentive fee (20% multiplied by $25 million ($30 million realized capital gains on Investment A less unrealized
capital depreciation on Investment B))



Year 3: $1.4 million capital
gains incentive fee(1) ($6.4 million (20% multiplied by $32 million ($35 million cumulative realized
capital gains less $3 million unrealized capital depreciation)) less $5 million capital gains incentive fee received
in Year 2



Year 4: None (no sales
transaction)



Year 5: None ($5 million
(20% multiplied by $25 million (cumulative realized capital gains of $35 million less realized capital losses of $10 million))
less $6.4 million cumulative capital gains incentive fee paid in Year 2 and Year 3(2)



The hypothetical amounts of
returns shown are based on a percentage of our total net assets and assume no leverage. There is no guarantee that positive returns
will be realized and actual returns may vary from those shown in this example.



____________



| | (1) | As illustrated in Year 3 of Alternative 1 above, if we were to be wound up on a date other than
our fiscal year end of any year, we may have paid aggregate capital gains incentive fees that are more than the amount of such
fees that would be payable if we had been wound up on its fiscal year end of such year.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | As noted above, it is possible that the cumulative aggregate capital gains fee received by the
Investment Manager ($6.4 million) is effectively greater than $5 million (20.00% of cumulative aggregate realized capital
gains less net realized capital losses or net unrealized depreciation ($25 million)).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Payment of our expenses



All investment professionals
and staff of our Advisor, when and to the extent engaged in providing investment advisory and management services, and the compensation
and routine overhead expenses of its personnel allocable to such services, are provided and paid for by our Advisor. We bear all
other costs and expenses of our operations and transactions, including those relating to:



| | • | our organization;
| | - | -----------------



| | • | calculating our net asset value (including the cost and expenses of any independent valuation firms);
| | - | -----------------------------------------------------------------------------------------------------



| | • | expenses, including travel expense, incurred by our Advisor or payable to third parties performing
due diligence on prospective portfolio companies, monitoring our investments and, if necessary, enforcing our rights;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | interest payable on debt, if any, incurred to finance our investments;
| | - | ----------------------------------------------------------------------



| | • | the costs of all future offerings of our common stock and other securities, if any;
| | - | -----------------------------------------------------------------------------------



| | • | the base management fee and any incentive fee;
| | - | ----------------------------------------------



| | • | distributions on our shares;
| | - | ----------------------------



| | • | administration fees payable under the Administration Agreement;
| | - | ---------------------------------------------------------------



| | • | the allocated costs incurred by our Advisor as our Administrator in providing managerial assistance
to those portfolio companies that request it;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| | • | amounts payable to third parties relating to, or associated with, making investments;
| | - | -------------------------------------------------------------------------------------



| | • | transfer agent and custodial fees;
| | - | ----------------------------------



| | • | registration fees;
| | - | ------------------



| | • | listing fees;
| | - | -------------



| | • | fees and expenses associated with marketing efforts;
| | - | ----------------------------------------------------



| | • | taxes;
| | - | ------



16







| | • | independent director fees and expenses;
| | - | ---------------------------------------



| | • | brokerage commissions;
| | - | ----------------------



| | • | costs of preparing and filing reports or other documents with the SEC;
| | - | ----------------------------------------------------------------------



| | • | the costs of any reports, proxy statements or other notices to our stockholders, including printing
costs;
| | - | ----------------------------------------------------------------------------------------------------------



| | • | the fidelity bond;
| | - | ------------------



| | • | directors and officers/errors and omissions liability insurance, and any other insurance premiums;
| | - | --------------------------------------------------------------------------------------------------



| | • | indemnification payments;
| | - | -------------------------



| | • | direct costs and expenses of administration, including audit and legal costs; and
| | - | ---------------------------------------------------------------------------------



| | • | all other expenses incurred by us or the Administrator in connection with administering our business,
such as the allocable portion of overhead under the Administration Agreement, including rent, the fees and expenses associated
with performing compliance functions and our allocable portion of the costs of compensation and related expenses of our Chief Compliance
Officer and our Chief Financial Officer and their respective staffs.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Generally, our expenses
are expensed as incurred in accordance with U.S. generally accepted accounting principles, or GAAP. To the extent we incur costs
that should be capitalized and amortized into expense we also do so in accordance with GAAP, which may include amortizing such
amount on a straight line basis over the life of the asset or the life of the services or product being performed or provided.



Limitation of liability and indemnification



The Investment Management
Agreement provides that our Advisor and its officers, managers, partners, agents, employees, controlling persons and any other
person or entity affiliated with our Advisor are not liable to us for any act or omission by it in the supervision or management
of our investment activities or for any loss sustained by us except for acts or omissions constituting willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations under the Investment Management Agreement. The Investment Management
Agreement also provides for indemnification by us of our Advisor and its officers, managers, partners, agents, employees, controlling
persons and any other person or entity affiliated with our Advisor for liabilities incurred by them in connection with their services
to us (including any liabilities associated with an action or suit by or in the right of us or our stockholders), but excluding
liabilities for acts or omissions constituting willful misfeasance, bad faith or gross negligence or reckless disregard of their
duties under the Investment Management Agreement subject to certain conditions.



Board approval of the Investment Management Agreement



Our Board held an
in-person meeting on August 1, 2014, at which it considered and approved an amended and restated Investment Management Agreement
which (i) removed cash and cash equivalents from gross assets when calculating the base management fee payable and (ii) placed
a fee cap and deferral mechanism on the portion of the incentive fee based on Pre-Incentive Fee Net Investment Income. In its consideration
of the Investment Management Agreement, our Board focused on information it had received relating to (a) the nature, quality
and extent of the advisory and other services to be provided to us by our Advisor; (b) comparative data with respect to advisory
fees or similar expenses paid by other BDCs with similar investment objectives; (c) our projected expenses and expense ratio
compared to BDCs with similar investment objectives; (d) any existing and potential sources of indirect income to our Advisor
or the Administrator from their relationships with us and the profitability of those relationships; (e) information about
the services to be performed and the personnel performing such services under the Investment Management Agreement; (f) the
organizational capability and financial condition of our Advisor and its affiliates; (g) our Advisor’s practices regarding
the selection and compensation of brokers that may execute our portfolio transactions and the brokers’ provision of brokerage
and research services to our Advisor; and (h) the possibility of obtaining similar services from other third party service
providers or through an internally managed structure.



Based on the information
reviewed and its discussions related thereto, our Board, including a majority of the directors who are not interested persons of
us, concluded that the investment management fee rates were reasonable in relation to the services to be provided.



17







Duration and termination



The Investment Management
Agreement, as amended and restated, was approved by our Board on August 1, 2014. Unless terminated earlier as described below,
it will continue in effect from year to year thereafter if approved annually by our Board including a majority of our directors
who are not interested persons or by the affirmative vote of the holders of a majority of our outstanding voting securities and
a majority of our directors who are not interested persons. The Investment Management Agreement will automatically terminate in
the event of its assignment. The Investment Management Agreement may be terminated by either party without penalty by delivering
notice of termination upon not more than 60 days’ written notice to the other. See “Item 1A — Risk Factors —
Risks related to our business and structure — Our Advisor can resign on 60 days’ notice, and we may not be
able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our
business, results of operations or financial condition.” We depend upon senior management personnel of our Advisor for our
future success, and if our Advisor is unable to hire and retain qualified personnel or if our Advisor loses any member of its senior
management team, our ability to achieve our investment objective could be significantly harmed.



Administration Agreement



The Administration
Agreement was approved by our Board on October 25, 2010 and was most recently reapproved on August 1, 2014. Under the Administration
Agreement, the Administrator furnishes us with office facilities and equipment, provides us clerical, bookkeeping and record keeping
services at such facilities and provides us with other administrative services necessary to conduct our day-to-day operations.
We 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, the fees and expenses associated with performing compliance
functions and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer and our Chief
Financial Officer and their respective staffs.



License agreement



We have entered into
a license agreement with Horizon Technology Finance, LLC, or HTF, pursuant to which we were granted a non-exclusive, royalty-free
right and license to use the service mark “Horizon Technology Finance.” Under this agreement, we have a right to use
the “Horizon Technology Finance” service mark for so long as the Investment Management Agreement with our Advisor is
in effect. Other than with respect to this limited license, we have no legal right to the “Horizon Technology Finance”
service mark.



Regulation



We have elected to
be regulated as a BDC under the 1940 Act and elected to be treated as a RIC under Subchapter M of the Code. As with other companies
regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. The 1940 Act contains prohibitions
and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers),
principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons
other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we
may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by “a
majority of our outstanding voting securities” as defined in the 1940 Act. A majority of the outstanding voting securities
of a company is defined under the 1940 Act as the lesser of: (1) 67% or more of such company’s shares present at a meeting
if more than 50% of the outstanding shares of such company are present or represented by proxy or (2) more than 50% of the
outstanding shares of such company. Our bylaws provide for the calling of a special meeting of stockholders at which such action
could be considered upon written notice of not less than ten or more than sixty days before the date of such meeting.



We may invest up to
100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities,
we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act
of 1933, as amended, or the Securities Act. We do not intend to acquire securities issued by any investment company that exceed
the limits imposed by the 1940 Act. Under these limits, except for registered money market funds, we generally cannot acquire more
than 3% of the voting stock of any investment company, invest more than 5% of the value of our total assets in the securities of
one investment company or invest more than 10% of the value of our total assets in the securities of more than one investment company.
With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such
investments might subject our stockholders to additional expenses. None of our investment policies are fundamental and any may
be changed without stockholder approval.



18







We may also be prohibited
under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors
who are not interested persons and, in some cases, prior approval by the SEC. For example, under the 1940 Act, absent receipt of
exemptive relief from the SEC, we and our affiliates may be precluded from co-investing in private placements of securities. As
a result of one or more of these situations, we may not be able to invest as much as we otherwise would in certain investments
or may not be able to liquidate a position as quickly.



We expect to be periodically
examined by the SEC for compliance with the 1940 Act.



We are required to
provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore,
as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from
willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s
office.



We and our Advisor
have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities
laws and review these policies and procedures annually for their adequacy and the effectiveness of their implementation. We and
our Advisor have designated a chief compliance officer to be responsible for administering the policies and procedures.



Qualifying assets



Under the 1940 Act,
a BDC may not acquire any asset other than assets of the type listed in section 55(a) of the 1940 Act, which are referred
to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s
total assets. The principal categories of qualifying assets relevant to our proposed business are the following:



| | • | Securities purchased in transactions not involving any public offering from the issuer of such
securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or
has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person,
subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | is organized under the laws of, and has its principal place of business in, the United States;
| | - | ----------------------------------------------------------------------------------------------



| | • | is not an investment company (other than a small business investment company wholly owned by the
BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | satisfies any of the following:
| | - | -------------------------------



| | • | has a market capitalization of less than $250 million or does not have any class of securities
listed on a national securities exchange;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| | • | is controlled by a BDC or a group of companies including a BDC, the BDC actually exercises a controlling
influence over the management or policies of the eligible portfolio company, and, as a result thereof, the BDC has an affiliated
person who is a director of the eligible portfolio company; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | is a small and solvent company having total assets of not more than $4 million and capital
and surplus of not less than $2 million.
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| | • | Securities of any eligible portfolio company which we control.
| | - | --------------------------------------------------------------



| | • | Securities purchased in a private transaction from a U.S. issuer that is not an investment
company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject
to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they
came due without material assistance other than conventional lending or financing arrangements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19







| | • | Securities of an eligible portfolio company purchased from any person in a private transaction
if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Securities received in exchange for or distributed on or with respect to securities described above,
or pursuant to the exercise of warrants or rights relating to such securities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing
in one year or less from the time of investment.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



The regulations defining
qualifying assets may change over time. We may adjust our investment focus as needed to comply with and/or take advantage of any
regulatory, legislative, administrative or judicial actions in this area.



Managerial assistance to portfolio companies



A BDC must have been
organized and have its principal place of business in the United States and must be operated for the purpose of making investments
in the types of securities described in “— Qualifying Assets.” However, in order to count portfolio securities
as qualifying assets for the purpose of the 70% test, the BDC must either control the issuer of the securities or must offer to
make available to the issuer of the securities (other than small and solvent companies described above) significant managerial
assistance. Where the BDC purchases such securities in conjunction with one or more other persons acting together, the BDC will
satisfy this test if one of the other persons in the group makes available such managerial assistance. Making available managerial
assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to
provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business
objectives and policies of a portfolio company.



Issuance of additional shares



We are not generally
able to issue and sell our common stock at a price below net asset value per share. We may, however, issue and sell our common
stock, at a price below the current net asset value of the common stock, or issue and sell warrants, options or rights to acquire
such common stock, at a price below the current net asset value of the common stock if our Board determines that such sale is in
our best interest and in the best interests of our stockholders, and our stockholders have approved our policy and practice of
making such sales within the preceding 12 months. In any such case, the price at which our securities are to be issued and
sold may not be less than a price which, in the determination of our Board, closely approximates the market value of such securities.
We have stockholder approval to sell shares of our common stock below its net asset value, which approval will expire on January
21, 2016. We intend to seek approval from our stockholders to offer shares of our common stock below its net asset value in the
future.



Temporary investments



Pending investment
in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. Government
securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively,
as temporary investments, so that 70% of our assets are qualifying assets. Typically, we invest in highly rated commercial paper,
U.S. Government agency notes, U.S. Treasury bills or in repurchase agreements relating to such securities that are fully
collateralized by cash or securities issued by the U.S. Government or its agencies. A repurchase agreement involves the purchase
by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon
future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There
is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, subject
to certain exceptions, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would
not meet the diversification tests in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter
into repurchase agreements with a single counterparty in excess of this limit. Our Advisor monitors the creditworthiness of the
counterparties with which we enter into repurchase agreement transactions.



20







Senior securities; Derivative securities



We are permitted,
under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our
asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while
any senior securities are outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase
of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase.
We may also borrow amounts up to 5% of the value of our total assets for temporary purposes without regard to asset coverage. For
a discussion of the risks associated with leverage, see “Item 1A — Risk Factors — Risks related to our business
and structure — We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase
the risk of investing in us.”



The 1940 Act also
limits the amount of warrants, options and rights to common stock that we may issue and the terms of such securities.



Code of ethics



We and our Advisor
have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act, respectively,
that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject
to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held
by us, so long as such investments are made in accordance with the code’s requirements. You
may read and copy the code of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on
the operation of the Public Reference Room by calling the SEC at (202) 942-8090. In addition, each code of ethics is attached as
an exhibit to our Pre-effective Amendment No. 3 to the registration statement on Form N-2 (File No. 333-165570 filed with the SEC
on July 19, 2010 as Exhibits (r)(1) and (r)(2)), which is available on the SEC’s Internet site at www.sec.gov. You may also
obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov,
or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.



Proxy voting policies and procedures



We have delegated
our proxy voting responsibility to our Advisor. The proxy voting policies and procedures of our Advisor are set forth below. The
guidelines are reviewed periodically by our Advisor and our independent directors and, accordingly, are subject to change.



Introduction



Our Advisor is registered
with the SEC as an investment adviser under the Advisers Act. As an investment adviser registered under the Advisers Act, our Advisor
has fiduciary duties to us. As part of this duty, our Advisor recognizes that it must vote client securities in a timely manner
free of conflicts of interest and in our best interests and the best interests of our stockholders. Our Advisor’s proxy voting
policies and procedures have been formulated to ensure decision-making is consistent with these fiduciary duties.



These policies and
procedures for voting proxies are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.



Proxy policies



Our Advisor votes
proxies relating to our portfolio securities in what our Advisor perceives to be the best interest of our stockholders. Our Advisor
reviews on a case-by-case basis each proposal submitted to a stockholder vote to determine its effect on the portfolio securities
held by us. Although our Advisor generally votes against proposals that may have a negative effect on our portfolio securities,
our Advisor may vote for such a proposal if there exist compelling long-term reasons to do so.



Our Advisor’s
proxy voting decisions are made by those senior officers who are responsible for monitoring each of our investments. To ensure
that a vote is not the product of a conflict of interest, our Advisor requires that (1) anyone involved in the decision-making
process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she
has had with any interested party regarding a proxy vote and (2) employees involved in the decision-making process or vote
administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from
interested parties.



21







Proxy voting records



You may obtain information about
how we voted proxies by making a written request for proxy voting information to: Chief Compliance Officer, Horizon Technology
Finance Corporation, 312 Farmington Avenue, Farmington, Connecticut 06032 or by calling (860) 676-8654.



Sarbanes-Oxley Act of 2002



The Sarbanes-Oxley
Act of 2002, or the Sarbanes-Oxley Act, imposes a wide variety of regulatory requirements on publicly held companies and their
insiders. Many of these requirements affect us. For example:



| | • | pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended, or the Exchange
Act, our principal executive officer and principal financial officer must certify the accuracy of the financial statements contained
in our periodic reports;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | pursuant to Item 307 under Regulation S-K, our periodic reports must disclose our conclusions about
the effectiveness of our disclosure controls and procedures;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | pursuant to Rule 13a-15 under the Exchange Act, our management must prepare an annual report regarding
its assessment of our internal control over financial reporting, which must be audited by our independent registered public accounting
firm; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | pursuant to Item 308 of Regulation S-K and Rule 13a-15 under the Exchange Act, our periodic reports
must disclose whether there were significant changes in our internal controls over financial reporting or in other factors that
could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Sarbanes-Oxley
Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the
regulations promulgated thereunder. We will continue to monitor our compliance with all regulations under the Sarbanes-Oxley Act
and intend to take actions necessary to ensure that we are in compliance therewith.



NASDAQ Global Select Market corporate governance
regulations



NASDAQ has adopted
corporate governance regulations with which listed companies must comply with. We intend to be in compliance with these corporate
governance listing standards. We intend to monitor our compliance with all future listing standards and to take all necessary actions
to ensure that we are in compliance therewith.



Privacy principles



We are committed to
maintaining the privacy of stockholders and to safeguarding our non-public personal information. The following information is provided
to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may
share information with select other parties.



Generally, we do not
receive any nonpublic personal information relating to our stockholders, although certain nonpublic personal information of our
stockholders may become available to us. We do not disclose any nonpublic personal information about our stockholders or former
stockholders, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer
agent or third party administrator).



We restrict access
to nonpublic personal information about our stockholders to our Advisor’s employees with a legitimate business need for the
information. We maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information
of our stockholders.



22







Election to be taxed as a RIC



We have elected to
be taxed, and intend to qualify annually to maintain our election to be taxed, as a RIC under Subchapter M of the Code. To maintain
RIC tax benefits, we must, among other requirements, meet certain source-of-income and quarterly asset diversification requirements
(as described below). We also must annually distribute dividends of an amount generally at least equal to 90% of the sum of our
ordinary income and our realized net short-term capital gains, or investment company taxable income, (i.e. net short-term capital
gains in excess of net long term losses), if any, out of the assets legally available for distribution, which we refer to as the
“Annual Distribution Requirement.” Although not required for us to maintain our RIC tax status, in order to preclude
the imposition of a 4% nondeductible federal excise tax imposed on RICs, we may distribute during each calendar year an amount
generally at least equal to the sum of (1) 98% of our ordinary income (taking into account certain deferrals and elections)
for the calendar year, (2) 98.2% of the excess of our capital gains over our capital losses, or capital gain net income (adjusted
for certain ordinary losses) for the one-year period ending on October 31 of the calendar year and (3) any ordinary income
and net capital gains for preceding years that were not distributed during such years and on which we previously did not pay U.S.
federal corporate income tax, or the Excise Tax Avoidance Requirement. In addition, although we may distribute realized net capital
gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually out of the assets legally
available for such distributions, we may decide to retain such net capital gains or ordinary income to provide us with additional
liquidity. In order to qualify as a RIC for federal income tax purposes under Section 851(a) of the Code, we must:



| | • | maintain an election to be treated as a BDC under the 1940 Act at all times during each taxable
year;
| | - | -----------------------------------------------------------------------------------------------------



| | • | meet any applicable securities law requirements, including capital structure requirements;
| | - | ------------------------------------------------------------------------------------------



| | • | derive in each taxable year at least 90% of our gross income from distributions, interest, payments
with respect to certain securities loans, gains from the sale of stock or other securities, net income from certain qualified publicly
traded partnerships or other income derived with respect to our business of investing in such stock or securities; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | diversify our holdings so that at the end of each quarter of the taxable year:
| | - | ------------------------------------------------------------------------------



| | • | at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government
securities, securities of other RICs, and other securities if such other securities of any one issuer neither represent more than
5% of the value of our assets nor more than 10% of the outstanding voting securities of the issuer; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | no more than 25% of the value of our assets is invested in the securities, other than U.S. government
securities or securities of other RICs, of one issuer or of two or more issuers that are controlled, as determined under applicable
tax rules, by us and that are engaged in the same or similar or related trades or businesses or in certain qualified publicly traded
partnerships, or the Diversification Tests.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Taxation as a RIC



If we qualify as a
RIC under Section 851(a) of the Code, and satisfy the Annual Distribution Requirement, then we will not be subject to federal
income tax on the portion of our investment company taxable income as well as any net capital gain (i.e., realized net long-term
capital gains in excess of realized net short-term capital losses) we distribute to stockholders. We may retain for investment
all or a portion of our net capital gain. However, if we retain any ordinary income and net short-term capital gains, or investment
company taxable income, and satisfy the Annual Distribution Requirement, we will be subject to tax at regular corporate rates on
any amounts retained. If we fail to qualify as a RIC for a period greater than two consecutive taxable years, to qualify as a RIC
in a subsequent taxable year, we may be subject to regular corporate rates on any net built-in gains with respect to certain of
our assets (that is, the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized
with respect to such assets if we had sold the property at fair market value at the end of the taxable year) that we elect to recognize
on requalification or when recognized over the next ten taxable years.



We may be required
to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are
treated under applicable tax rules as having original issue discount (such as debt instruments with payment in kind interest or,
in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original
issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by
us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income
for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution
Requirement or the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount.



Gain or loss realized
by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as
capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant.



23







Although we do not
presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements.
However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other
senior securities are outstanding unless certain “asset coverage” tests are met. Moreover, our ability to dispose of
assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other
requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the
Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment
standpoint, are not advantageous.



Failure to qualify as a RIC



If we fail to satisfy
the Annual Distribution Requirement or fail to qualify as a RIC in any taxable year, assuming we do not qualify for or take advantage
of certain remedial provisions, we will be subject to tax in that year on all of our taxable income, regardless of whether we make
any distributions to our stockholders. In that case, all of our income will be subject to corporate-level federal income tax, reducing
the amount available to be distributed to our stockholders. In contrast, assuming we qualify as a RIC, our corporate-level federal
income tax liability should be substantially reduced or eliminated. See “Election to be taxed as a RIC” above.



If we are unable to
maintain our status as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not
be able to deduct distributions to stockholders, nor would they be required to be made. Distributions would generally be taxable
to our stockholders as ordinary distribution income eligible for the 15% or 20% maximum rate to the extent of our current and accumulated
earnings and profits. Subject to certain limitations under the Code, dividends paid by us to corporate distributes would be eligible
for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated
first as a return of capital to the extent of the stockholder’s tax basis in our common stock, and any remaining distributions
would be treated as a capital gain.



24







Item 1A.Risk Factors



Investing in our
securities involves a high degree of risk. In addition to the other information contained in this annual report on Form 10-K,
you should consider carefully the following information before making an investment in our securities. The risks
set out below are not the only risks we face. If any of the following events occur, our business, financial condition and
results of operations could be materially and adversely affected. In such case, our net asset value, or NAV, per share and
the trading price of our common stock could decline, and you may lose part or all of your investment.



Risks related to our business and structure



We are dependent upon key personnel of our Advisor and
our Advisor’s ability to hire and retain qualified personnel.



We do not have any
employees and are dependent upon the members of our Advisor’s senior management, particularly Mr. Pomeroy, our Chairman
and Chief Executive Officer, and Mr. Michaud, our President, as well as other key personnel for the identification, evaluation,
final selection, structuring, closing and monitoring of our investments. These employees have critical industry experience and
relationships that we rely on to implement our business plan to originate Venture Loans in our Target Industries. Our future success
depends on the continued service of Mr. Pomeroy and Mr. Michaud as well as the other senior members of our Advisor’s
management team. If our Advisor were to lose the services of either Mr. Pomeroy or Mr. Michaud or any of the other senior
members of our Advisor’s management team, we may not be able to operate our business as we expect, and our ability to compete
could be harmed, either of which could cause our business, results of operations or financial condition to suffer. In addition,
if more than one of Mr. Pomeroy, Mr. Michaud or Mr. Mathieu, our Chief Financial Officer, cease to be actively involved
with us or our Advisor, and are not replaced by individuals satisfactory to Key within 90 days, Key could, absent a waiver or cure,
demand repayment of any outstanding obligations under the Key Facility.



Our future success
also depends, in part, on our Advisor’s ability to identify, attract and retain sufficient numbers of highly skilled employees.
Absent exemptive or other relief granted by the SEC and for so long as we remain externally managed, the 1940 Act prevents us from
granting options to our employees and adopting a profit sharing plan, which may make it more difficult for us to attract and retain
highly skilled employees. If we are not successful in identifying, attracting and retaining these employees, we may not be able
to operate our business as we expect. In addition, our Advisor may in the future manage investment funds with investment objectives
similar to ours thereby diverting the time and attention of its investment professionals that we rely on to implement our business
plan.



Our Advisor may change or be restructured.



We cannot assure you
that the Advisor will remain our investment advisor or that we will continue to have access to our Advisor’s investment professionals
or its relationships. We would be required to obtain shareholder approval for a new investment management agreement in the event
that (1) the Advisor resigns as our investment advisor or (2) a change of control or deemed change of control of the Advisor occurs.
We cannot provide assurance that a new investment management agreement or new investment advisor would provide the same or equivalent
services on the same or on as favorable of terms as the Investment Management Agreement or the Advisor.



We operate in a highly competitive
market for investment opportunities, and if we are not able to compete effectively, our business, results of operations
and financial condition may be adversely affected and the value of your investment in us could decline.



We compete for investments
with a number of investment funds and other BDCs, as well as traditional financial services companies such as commercial banks
and other financing sources. Some of our competitors are larger and have greater financial, technical, marketing and other resources
than we have. For example, some competitors may have a lower cost of funds and access to funding sources that are not available
to us. This may enable these competitors to make commercial loans with interest rates that are comparable to, or lower than, the
rates we typically offer. We may lose prospective portfolio companies if we do not match our competitors’ pricing, terms
and structure. If we do match our competitors’ pricing, terms or structure, we may experience decreased net interest income
and increased risk of credit losses. In addition, some of our competitors may have higher risk tolerances or different risk assessments,
which could allow them to consider a wider variety of investments, establish more relationships than us and build their market
shares. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as
a BDC or that the Code imposes on us as a RIC. If we are not able to compete effectively, we may not be able to identify and take
advantage of attractive investment opportunities that we identify and may not be able to fully invest our available capital. If
this occurs, our business, financial condition and results of operations could be materially adversely affected.



25







We borrow money, which magnifies
the potential for gain or loss on amounts invested and may increase the risk of investing in us.



Leverage is generally
considered a speculative investment technique, and we intend to continue to borrow money as part of our business plan. The use
of leverage magnifies the potential for gain or loss on amounts invested and, therefore, increases the risks associated with investing
in us. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operation —
Liquidity and capital resources.” Lenders of senior debt securities have fixed dollar claims on our assets that are superior
to the claims of our common stockholders. If the value of our assets increases, then leveraging would cause the NAV attributable
to our common stock to increase more sharply than it would have had we not leveraged. However, any decrease in our income would
cause net income to decline more sharply than it would have had we not leveraged. This decline could adversely affect our ability
to make common stock distribution payments. In addition, because our investments may be illiquid, we may be unable to dispose of
them or unable to do so at a favorable price in the event we need to do so, if we are unable to refinance any indebtedness upon
maturity, and, as a result, we may suffer losses.



Our ability to service
any debt that we incur depends largely on our financial performance and is subject to prevailing economic conditions and competitive
pressures. Moreover, as our Advisor’s management fee is payable to our Advisor based on our gross assets, including those
assets acquired through the use of leverage, our Advisor may have a financial incentive to incur leverage which may not be consistent
with our stockholders’ interests. In addition, holders of our common stock bear the burden of any increase in our expenses,
as a result of leverage, including any increase in the management fee payable to our Advisor.



In addition to the
leverage described above, we have securitized a large portion of our debt investments to generate cash for funding new investments
and may seek to securitize additional debt investments in the future. To securitize additional debt investments in the future,
we may create a wholly-owned subsidiary and sell and/or contribute a pool of debt investments to such subsidiary. This could include
the sale of interests in the subsidiary on a non-recourse basis to purchasers, who we would expect to be willing to accept a lower
interest rate to invest in investment grade loan pools. We would retain all or a portion of the equity in any such securitized
pool of loans. An inability to securitize part of our debt investments in the future could limit our ability to grow our business,
fully execute our business strategy and increase our earnings. Moreover, certain types of securitization transactions may expose
us to greater risk of loss than would other types of financing.



Illustration:The
following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns,
net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing
in the table below:



|                                       |  | Assumed Return on Our Portfolio (Net of Expenses) |       
|-------------------------------------- |  | ------------------------------------------------- | ------
|                                       |  | -10%                                              |       
|Corresponding return to stockholder(1) |  |                                                   | -19.41

____________



| | (1) | Assumes $225 million in total assets, $82 million in outstanding debt, $138 million
in net assets, and an average cost of borrowed funds of 5.23% at December 31, 2014. Actual interest payments may be different.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Based on our outstanding
indebtedness of $82 million as of December 31, 2014 and the average cost of borrowed funds of 5.23% as of that date, our investment
portfolio would have been required to experience an annual return of at least 2.14% to cover annual interest payments on the outstanding
debt.



If we are unable to comply with the
covenants or restrictions in the Key Facility or make payments when due thereunder, our business could be materially
adversely affected.



Our Key Facility is
secured by a lien on the assets of our wholly owned subsidiary, Credit II. The breach of certain of the covenants or restrictions
or our failure to make payments when due under the Key Facility, unless cured within the applicable grace period, would result
in a default under the Key Facility that would permit the lender thereunder to declare all amounts outstanding to be due and payable.
In such an event, we may not have sufficient assets to repay such indebtedness and the lender may exercise rights available to
them, including to the extent permitted under applicable law, the seizure of such assets without adjudication.



26







The Key Facility also
requires Credit II and our Advisor to comply with various financial covenants, including maintenance by our Advisor of a minimum
tangible net worth and limitations on the value of, and modifications to, the loan collateral that secures the Key Facility. Complying
with these restrictions may prevent us from taking actions that we believe would help us to grow our business or are otherwise
consistent with our investment objective. These restrictions could also limit our ability to plan for or react to market conditions,
meet extraordinary capital needs or otherwise restrict corporate activities, and could result in our failing to qualify as a RIC
resulting in our becoming subject to corporate-level income tax. See “Item 7 — Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Liquidity and capital resources” for additional information
regarding our credit arrangements.



An event of default
or acceleration under the Key Facility could also cause a cross-default or cross-acceleration of other debt instruments or contractual
obligations, which would adversely impact our liquidity. We may not be granted waivers or amendments to the Key Facility, if for
any reason we are unable to comply with the terms of the Key Facility and we may not be able to refinance the Key Facility on terms
acceptable to us, or at all.



Our 2019 Notes are unsecured and
therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future.



Our
2019 Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the 2019 Notes are effectively
subordinated to any secured indebtedness we or our subsidiaries have currently incurred and may incur in the future (or any indebtedness
that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness.
In any liquidation,dissolution,bankruptcy or other similar proceeding,the
holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights
against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets
may be used to pay other creditors, including the holders of the 2019 Notes.



Our 2019 Notes are structurally subordinated
to the indebtedness and other liabilities of our subsidiaries.



Our
2019 Notes are obligations exclusively of Horizon Technology Finance Corporation, and not of any of our subsidiaries. None of our
subsidiaries is a guarantor of the 2019 Notes and the 2019 Notes are not required to be guaranteed by any subsidiaries we may acquire
or create in the future. The assets of such subsidiaries are not directly available to satisfy the claims of our creditors, including
holders of the 2019 Notes.



Except
to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including trade creditors)
and holders of preferred stock, if any, of our subsidiaries have priority over our equity interests in such subsidiaries (and therefore
the claims of our creditors, including holders of the 2019 Notes) with respect to the assets of such subsidiaries. Even if we are
recognized as a creditor of one or more of our subsidiaries, our claims are effectively subordinated to any security interests
in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims.
Consequently, the 2019 Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables)
of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise.



In
addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior
to the 2019 Notes.



The indenture under which our 2019
Notes are issued contains limited protection for holders of our 2019 Notes.



The
indenture under which the 2019 Notes are issued offers limited protection to holders of the 2019 Notes. The terms of the indenture
and the 2019 Notes do not restrict our or any of our subsidiaries' ability to engage in, or otherwise be a party to, a variety
of corporate transactions, circumstances or events that could have a material adverse impact on investments in the 2019 Notes.
In particular, the terms of the indenture and the 2019 Notes do not place any restrictions on our or our subsidiaries’ ability
to:



27







| | · | issue securities or otherwise incur additional indebtedness or other
obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the 2019 Notes, (2)
any indebtedness orotherobligations that would besecured
andtherefore rank effectively senior inrightof
payment to the 2019 Notes to the extent of the valuesofthe
assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is
structurally senior to the 2019 Notes and (4) securities, indebtedness or obligations issued or incurred by oursubsidiariesthat would beseniorto
our equity interests inoursubsidiaries and therefore
rank structurallyseniorto the 2019 Notes withrespectto the assets ofoursubsidiaries,
in each case other than an incurrence of indebtedness or other obligation that would cause a violationofSection 18(a)(l)(A) as modified by Section 61(a)(l) of the 1940 Act or anysuccessorprovisions, whether or not we continue to be subject to such provisionsofthe 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the
SEC (these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt
or the sale of additional debtsecurities,unless our asset
coverage, as defined in the 1940 Act, equals at least 200%aftersuch
borrowings);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | pay dividends on, or purchase or redeem or make any payments in respect of capital stock or other
securities ranking junior in right of payment to the 2019 Notes, including subordinated indebtedness, in each case other than dividends,
purchases, redemptions or payments that would cause a violation of Section 18(a)(I)(13) as modified by Section 61(a)(l) of the
1940 Act or any successor provisions giving effect to any exemptive relief granted to us by the SEC (these provisions generally
prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital
stock unless our asset coverage, as defined in the 1940 Act, equals at least 200% at the time of the declaration of the dividend
or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell
all or substantially all of our assets);
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| | · | enter into transactions with affiliates;
| | - | ----------------------------------------

| | · | create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback
transactions;
| | - | ---------------------------------------------------------------------------------------------------------------

| | · | make investments; or
| | - | --------------------

| | · | create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
| | - | ---------------------------------------------------------------------------------------------



In
addition, the indenture does not require us to offer to purchase the 2019 Notes in connection with a change of control or any other
event.



Furthermore,
the terms of the indenture and the 2019 Notes do not protect holders of the 2019 Notes in the event that we experience changes
(including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require
that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow,
or liquidity.



Our
ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the 2019
Notes may have important consequences for holders of the 2019 Notes, including making it more difficult for us to satisfy our obligations
with respect to the 2019 Notes or negatively affecting the trading value of the 2019 Notes.



Certain
of our current debt instruments include more protections for their holders than the indenture and the 2019 Notes. In addition,
other debt we issue or incur in the future could contain more protections for its holders than the indenture and the 2019 Notes,
including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections
could affect the market for and trading levels and prices of the 2019 Notes.



An active trading market for our
2019 Notes may not exist, which could limit holders’ ability to sell our 2019 Notes or affect the market price of the 2019
Notes.



The
2019 Notes are listed on the New York Stock Exchange, or NYSE, under the symbol “HTF”. However, we cannot provide any
assurances that an active trading market for the 2019 Notes will exist in the future or that you will be able to sell your 2019
Notes. Even if an active trading market does exist, the 2019 Notes may trade at a discount from their initial offering price depending
on prevailing interest rates, the market for similar securities, our credit ratings, if any, general economic conditions, our financial
condition, performance and prospects and other factors. To the extent an active trading market does not exist, the liquidity and
trading price for the 2019 Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in
the 2019 Notes for an indefinite period of time.



28







If we default on our obligations
to pay our other indebtedness, we may not be able to make payments on our 2019 Notes.



Any
default under the agreements governing our indebtedness, including a default under the Key Facility or the 2013-1 Securitization,
or other indebtedness to which we may be a party that is not waived by the required lenders or holders thereunder, and the remedies
sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the 2019 Notes
and substantially decrease the market value of the 2019 Notes. If we are unable to generate sufficient cash flow and are otherwise
unable to obtain funds necessary to meet required payments of principal premium, if any, and interest on our indebtedness, or if
we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing
our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default,
the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with
accrued and unpaid interest, the lender under the Key Facility and our 2013-1 Securitization or other debt we may incur in the
future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our
assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need
to seek to obtain waivers from the required lender under the Key Facility and our 2013-1 Securitization or other debt that we may
incur in the future to avoid being in default. If we breach our covenants under the Key Facility and our 2013-1 Securitization
or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders. If this occurs, we
would be in default and our lenders or debt holders could exercise their rights as described above, and we could be forced into
bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, including the lender under the Key
Facility and our 2013-1 Securitization, could proceed against the collateral securing the debt. Because the Key Facility and our
2013-1 Securitization have, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness
thereunder or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.



We are subject to certain risks as
a result of our interests in connection with the 2013-1 Securitization and our equity interest in the 2013-1 Trust.



On June 28, 2013,
in connection with the 2013-1 Securitization and the offering of the Asset-Backed Notes by the 2013-1 Trust, we sold and/or contributed
to Horizon Funding 2013-1, LLC or the Trust Depositor, certain loans, or the Trust Loans, which the Trust Depositor in turn sold
and/or contributed to the 2013-1 Trust in exchange for 100% of the equity interest in the 2013-1 Trust, cash proceeds and other
consideration. Following these transfers, the 2013-1 Trust, and not the Trust Depositor or us, holds all of the ownership interest
in the Trust Loans.



As a result of the
2013-1 Securitization, we hold, indirectly through the Trust Depositor, 100% of the equity interest of the 2013-1 Trust. As a result,
we consolidate the financial statements of the Trust Depositor and the 2013-1 Trust, as well as our other subsidiaries, in our
consolidated financial statements. Because each of the Trust Depositor and the 2013-1 Trust is disregarded as an entity separate
from its owner for U.S. federal income tax purposes, the sale or contribution by us to the Trust Depositor, and by the Trust Depositor
to the 2013-1 Trust, did not constitute a taxable event for U.S. federal income tax purposes. If the U.S. Internal Revenue Service
were to take a contrary position, there could be a material adverse effect on our business, financial condition, results of operations
or cash flows. Further, a failure of the 2013-1 Trust to be treated as a disregarded entity for U.S. federal income tax purposes
would constitute an event of default pursuant to the indenture under the 2013-1 Securitization, upon which the trustee under the
2013-1 Securitization, or the Trustee, may, and will at the direction of a supermajority of the holders of the Asset-Backed Notes
(collectively, the “Noteholders”), declare the Asset-Backed Notes to be immediately due and payable and exercise remedies
under the indenture, including (i) institute proceedings for the collection of all amounts then payable on the Asset-Backed Notes
or under the indenture, enforce any judgment obtained, and collect from the 2013-1 Trust and any other obligor upon the Asset-Backed
Notes monies adjudged due; (ii) institute proceedings from time to time for the complete or partial foreclosure of the indenture
with respect to the property of the 2013-1 Trust; (iii) exercise any remedies as a secured party under the relevant provisions
of the applicable jurisdiction’s UCC and take other appropriate action under applicable law to protect and enforce the rights
and remedies of the Trustee and the Noteholders; or (iv) sell the property of the 2013-1 Trust or any portion thereof or rights
or interest therein at one or more public or private sales called and conducted in any matter permitted by law. Any such exercise
of remedies could have a material adverse effect on our business, financial condition, results of operations or cash flows.



29







An event of default in connection
with the 2013-1 Securitization could give rise to a cross-default under our other material indebtedness.



The documents governing
our other material indebtedness contain customary cross-default provisions that could be triggered if an event of default occurs
in connection with the 2013-1 Securitization. An event of default with respect to our other indebtedness could lead to the acceleration
of such indebtedness and the exercise of other remedies as provided in the documents governing such other indebtedness. This could
have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in our
inability to make distributions sufficient to maintain our status as a RIC.



We may not receive cash distributions
in respect of our indirect ownership interest in the 2013-1 Trust.



Apart from fees payable
to us in connection with our role as servicer of the Trust Loans and the reimbursement of related amounts under the 2013-1 Securitization
documents, we receive cash in connection with the 2013-1 Securitization only to the extent that the Trust Depositor receives payments
in respect of its equity interest in the 2013-1 Trust. The holder of the equity interest in the 2013-1 Trust is the residual claimant
on distributions, if any, made by the 2013-1 Trust after the Noteholders and other claimants have been paid in full on each payment
date or upon maturity of the Asset-Backed Notes, subject to the priority of payment provisions under the 2013-1 Securitization
documents. To the extent that the value of the 2013-1 Trust’s portfolio of Trust Loans is reduced as a result of conditions
in the credit markets (relevant in the event of a liquidation event), other macroeconomic factors, distressed or defaulted Trust
Loans or the failure of individual portfolio companies to otherwise meet their obligations in respect of the Trust Loans, or for
any other reason, the ability of the 2013-1 Trust to make cash distributions in respect of the Trust Depositor’s equity interest
would be negatively affected and, consequently, the value of the equity interest in the 2013-1 Trust would also be reduced. In
the event that we fail to receive cash indirectly from the 2013-1 Trust, we could be unable to make distributions in amounts sufficient
to maintain our status as a RIC or at all.



The interests of the Noteholders
may not be aligned with our interests.



The Asset-Backed Notes
are debt obligations ranking senior in right of payment to the rights of the holder of the equity interest in the 2013-1 Trust
(currently the Trust Depositor, our wholly owned subsidiary), as residual claimant in respect of distributions, if any, made by
the 2013-1 Trust. As such, there are circumstances in which the interests of the Noteholders may not be aligned with the interests
of the holder of the equity interest in the 2013-1 Trust. For example, under the terms of the documents governing the 2013-1 Securitization,
the Noteholders have the right to receive payments of principal and interest prior to the holder of the equity interest in the
2013-1 Trust.



For as long as the
Asset-Backed Notes remain outstanding, the Noteholders have the right to act in certain circumstances with respect to the Trust
Loans in ways that may benefit their interests but not the interests of holder of the equity interest in the 2013-1 Trust, including
by exercising remedies under the documents governing the 2013-1 Securitization.



If an event of default
occurs, the Noteholders will be entitled to determine the remedies to be exercised, subject to the terms of the documents governing
the 2013-1 Securitization. For example, upon the occurrence of an event of default with respect to the Asset-Backed Notes, the
Trustee may, and will at the direction of the holders of a supermajority of the Asset-Backed Notes, declare the principal, together
with any accrued interest, of the Asset-Backed Note to be immediately due and payable. This would have the effect of accelerating
the principal on such Asset-Backed Note, triggering a repayment obligation on the part of the 2013-1 Trust. The Asset-Backed Notes
then outstanding will be paid in full before any further payment or distribution is made to the holder of the equity interest in
2013-1 Trust. There can be no assurance that there will be sufficient funds through collections on the Trust Loans or through the
proceeds of the sale of the Trust Loans in the event of a bankruptcy or insolvency to repay in full the obligations under the Asset-Backed
Notes, or to make any payment distribution to holder of the equity interest in the 2013-1 Trust.



Remedies pursued by
the Noteholders could be adverse to our interests as the indirect holder of the equity interest in the 2013-1 Trust. The Noteholders
have no obligation to consider any possible adverse effect on such other interests. Thus, there can be no assurance that any remedies
pursued by the Noteholders will be consistent with the best interests of the Trust Depositor or that we will receive, indirectly
through the Trust Depositor, any payments or distributions upon an acceleration of the Asset-Backed Notes. Any failure of the 2013-1
Trust to make distributions in respect of the equity interest that we indirectly hold through the Trust Depositor, whether as a
result of an event of default and the acceleration of payments on the Asset-Backed Notes or otherwise, could have a material adverse
effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions
sufficient to maintain our status as a RIC.



30







Certain events related to the performance
of Trust Loans could lead to the acceleration of principal payments on the Asset-Backed Notes.



The following constitute
rapid amortization events, or Rapid Amortization Events, under the documents governing the 2013-1 Securitization: (i) the aggregate
outstanding principal balance of all delinquent Trust Loans, and restructured Trust Loans that would constitute delinquent Trust
Loans had such Trust Loans not become restructured Trust Loans, exceeds ten percent (10%) of the aggregate outstanding principal
balance of the Trust Loans for a period of three consecutive months; (ii) the aggregate outstanding principal balance of defaulted
Trust Loans exceeds five percent (5%) of the initial aggregate outstanding principal balance of the Trust Loans determined as of
June 28, 2013 for a period of three consecutive months; (iii) the aggregate outstanding principal balance of the Asset-Backed Notes
exceeds the borrowing base (which is a percentage of the outstanding principal balance of the Trust Loans less defaulted, delinquent,
ineligible, and certain restructured Trust Loans and Trust Loans to issuers that exceed given thresholds) for a period of three
consecutive months; (iv) the 2013-1 Trust’s pool of Trust Loans contains Trust Loans to ten or fewer obligors; and (v) the
occurrence of an event of default under the documents governing the 2013-1 Securitization. After a Rapid Amortization Event has
occurred, subject to the priority of payment provisions under the documents governing the 2013-1 Securitization, principal collections
on the Trust Loans will be used to make accelerated payments of principal on the Asset-Backed Notes until the payment of principal
balance of the Asset-Backed Notes is reduced to zero. Such an event could delay, reduce or eliminate the ability of the 2013-1
Trust to make payments or distributions in respect of the equity interest that we indirectly hold, which could have a material
adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make
distributions sufficient to maintain our status as a RIC.



We have certain repurchase obligations
with respect to the Trust Loans transferred in connection with the 2013-1 Securitization.



As part of the 2013-1
Securitization, we entered into a sale and contribution agreement and a sale and servicing agreement under which we would be required
to repurchase any Trust Loan (or participation interest therein) which was sold to the 2013-1 Trust in breach of certain customary
representations and warranties made by us or by the Trust Depositor with respect to such Trust Loan or the legal structure of the
2013-1 Securitization. To the extent that there is such a breach of such representations and warranties and we fail to satisfy
any such repurchase obligation, the Trustee may, on behalf of the 2013-1 Trust, bring an action against us to enforce these repurchase
obligations.



Because we distribute all or substantially
all of our investment company taxable income to our stockholders, we will need additional capital to finance our
growth. If additional funds are unavailable or not available on favorable terms, our ability to grow
will be impaired.



To satisfy the requirements
applicable to a RIC, to avoid payment of excise taxes and to minimize or to avoid payment of corporate-level federal income taxes,
we intend to distribute to our stockholders all or substantially all of our investment company taxable income. However, we may
retain certain net long-term capital gains, pay applicable income taxes with respect thereto, and elect to treat such retained
capital gains as deemed distributions to our stockholders. As a BDC, we generally are required to meet a coverage ratio of total
assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of
at least 200%. This requirement limits the amount that we may borrow. Because we continue to need capital to grow our debt investment
portfolio, this limitation may prevent us from incurring debt and require us to raise additional equity at a time when it may be
disadvantageous to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, or at
all, and debt financings may be restricted by the terms of any of our outstanding borrowings. In addition, as a BDC, we are limited
in our ability to issue equity securities at a price below the then current NAV per share. If additional funds are not available
to us, we could be forced to curtail or cease new lending and investment activities, and our NAV could decline.



31







As a BDC, we generally are not able
to issue our common stock at a price below the then current NAV per share without first obtaining the approval of our stockholders
and our independent directors. If our common stock trades at a price below NAV per share and we do not receive such approval, our
business could be materially adversely affected.



As a BDC, we generally
are not able to issue our common stock at a price below the then current NAV per share without first obtaining the approval of
our stockholders and our independent directors. While we currently have stockholder approval to offer our common stock at a price
below NAV per share, which expires January 21, 2016, if our common stock subsequently trades at a price below NAV per share and
we do not receive approval from our stockholders and our independent directors to issue common stock at a price below NAV per share,
our ability to raise capital through the issuance of equity securities would be curtailed. This could limit our ability: to grow
and make new investments; to attract and retain top investment professionals; to maintain deal flow and relations with top companies
in our Target Industries and related entities such as venture capital and private equity sponsors; and to sustain a minimum efficient
scale for a public company.



If we are unable to obtain additional debt financing,
our business could be materially adversely affected.



We may want to obtain
additional debt financing, or need to do so upon maturity of the Key Facility, Asset-Back Notes or 2019 Notes, in order to obtain
funds which may be made available for investments. We may borrow under the Key Facility until November 4, 2016, and, after
such date, we must repay the outstanding advances under the Key Facility in accordance with its terms and conditions. All outstanding
advances under the Key Facility are due and payable on November 4, 2018, unless such date is extended in accordance with its terms.
All outstanding amounts on our 2019 Notes are due and payable on March 15, 2019 unless redeemed prior to that date. The Asset-Backed
Notes have a stated maturity of May 15, 2018. If we are unable to increase, renew or replace any such facility and enter into a
new debt financing facility on commercially reasonable terms, our liquidity may be reduced significantly. In addition, if we are
unable to repay amounts outstanding under any such facilities and are declared in default or are unable to renew or refinance these
facilities, we may not be able to make new investments or operate our business in the normal course. These situations may arise
due to circumstances that we may be unable to control, such as lack of access to the credit markets, a severe decline in the value
of the U.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially
damage our business.



We are subject to risks associated with the current interest
rate environment that may affect our cost of capital and net investment income.



Since the economic
downturn that began in mid-2007, interest rates have remained low. Because longer-term inflationary pressure is likely to result
from the U.S. government’s fiscal policies and challenges during this time, because of the historically low interest rate
environment and because the Federal Reserve has ended its quantitative easing program, we will likely experience rising interest
rates, rather than falling rates, over our investment horizon.



Because we currently
incur indebtedness to fund our investments, a portion of our income depends upon the difference between the interest rate at which
we borrow funds and the interest rate at which we invest these funds. Many of our investments have fixed interest rates, while
the Key Facility has a floating interest rate. As a result, a significant change in interest rates could have a material adverse
effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce
our net investment income. We may hedge against interest rate fluctuations by using hedging instruments such as swaps, futures,
options and forward contracts, subject to applicable legal requirements, including all necessary registrations (or exemptions from
registration) with the Commodity Futures Trading Commission. These activities may limit our ability to benefit from lower interest
rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions
or any adverse developments from our use of hedging instruments could have a material adverse effect on our business, financial
condition and results of operations. In addition, we may be unable to enter into appropriate hedging transactions when desired
and any hedging transactions we enter into may not be effective.



32







Because many of our investments typically
are not and will not be in publicly traded securities, the value of our investments may not be readily determinable,
which could adversely affect the determination of our NAV.



Our investments consist,
and we expect our future investments to consist, primarily of debt investments or securities issued by privately held companies.
As these investments are not publicly traded, their fair value may not be readily determinable. In addition, we are not permitted
to maintain a general reserve for anticipated debt investment losses. Instead, we are required by the 1940 Act to specifically
value each investment and record an unrealized gain or loss for any asset that we believe has increased or decreased in value.
We value these investments on a quarterly basis, or more frequently as circumstances require, in accordance with our valuation
policy and consistent with GAAP. Our Board employs an independent third-party valuation firm to assist them in arriving at the
fair value of our investments. Our Board discusses valuations and determines the fair value in good faith based on the input of
our Advisor and the third-party valuation firm. The factors that may be considered in fair value pricing our investments include
the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its
indebtedness, the markets in which the portfolio company does business, comparisons to publicly traded companies, discounted cash
flow and other relevant factors. Because such valuations are inherently uncertain and may be based on estimates, our determinations
of fair value may differ materially from the values that would be assessed if a ready market for these securities existed. Our
NAV could be adversely affected if our determinations regarding the fair value of our investments are materially higher than the
values that we ultimately realize upon the disposal of these investments.



Global capital markets could enter
a period of severe disruption and instability. These conditions have historically affected and could again materially and adversely
affect debt and equity capital markets in the United States and around the world and our business.



The
U.S. and global capital markets experienced extreme volatility and disruption during the economic downturn that began in mid-2007,
and the U.S. economy was in a recession for several consecutive calendar quarters during the same period. This economic decline
materially and adversely affected the broader financial and credit markets and has reduced the availability of debt and equity
capital for the market as a whole and to financial firms, in particular. At various times, these disruptions resulted in a lack
of liquidity in parts of the debt capital markets, significant write-offs in the financial services sector relating to subprime
mortgages and the repricing of credit risk in the broadly syndicated market. These disruptions in the capital markets also increased
the spread between the yields realized on risk-free and higher risk securities and reduced the availability of debt and equity
capital for the market as a whole and financial services firms in particular. These conditions may reoccur for a prolonged period
of time again or materially worsen in the future, including as a result of the U.S. government spending cuts that took effect March
1, 2013, the government shutdown in October 2013, or any further spending cuts or shutdowns. Unfavorable economic conditions, including
future recessions, also could affect our investment valuations, increase our funding costs, limit our access to the capital markets
or result in a decision by lenders not to extend credit to us or our portfolio companies. We
may in the future have difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and
instability in the global financial markets or deteriorations in credit and financing conditions may cause us to reduce the volume
of debt investments we originate and/or fund, adversely affect the value of our portfolio investments or otherwise have a material
adverse effect on our business, financial condition, results of operations and cash flows.



Regulations governing our operation
as a BDC affect our ability to, and the way in which, we raise additional capital, which may expose us to
additional risks.



Our business plans
contemplate a need for a substantial amount of capital in addition to our current amount of capital. We may obtain additional capital
through the issuance of debt securities or preferred stock, and we may borrow money from banks or other financial institutions,
which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. If we issue
senior securities, we would be exposed to typical risks associated with leverage, including an increased risk of loss. In addition,
if we issue preferred stock, it would rank senior to common stock in our capital structure and preferred stockholders would have
separate voting rights and may have rights, preferences or privileges more favorable than those of holders of our common stock.



The 1940 Act permits
us to issue senior securities in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each
issuance of senior securities. If our asset coverage ratio is not at least 200%, we are not permitted to pay distributions or issue
additional senior securities. As a result, we may have difficulty meeting the Annual Distribution Requirement necessary to qualify
for and maintain RIC tax treatment under Subchapter M of the Code. Moreover, if the value of our assets declines, we may be unable
to satisfy this asset coverage test. If that happens, we may be required to liquidate a portion of our investments and repay a
portion of our indebtedness at a time when we may be unable to do so or unable to do so on favorable terms.



As a BDC, we generally
are not able to issue our common stock at a price below NAV per share without first obtaining the approval of our stockholders
and our independent directors. We currently have such approval from our stockholders which expires on January 21, 2016. This requirement
does not apply to stock issued upon the exercise of options, warrants or rights that we may issue from time to time. If we raise
additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the
percentage ownership of our stockholders at that time would decrease, and you may experience dilution.



33







Pending legislation may allow us to incur additional leverage.



As a BDC, under the
1940 Act we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage
for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Recent legislation
introduced in the U.S. House of Representatives, if eventually passed, would modify this section of the 1940 Act and increases
the amount of debt that BDCs may incur by modifying the asset coverage requirement from 200% to 150%. As a result, we may be able
to incur additional indebtedness in the future and therefore your risk of an investment in us may increase.



If we are unable to satisfy the requirements
under the Code for qualification as a RIC, we will be subject to corporate-level federal income tax.



To qualify as a RIC
under the Code, we must meet certain source-of-income, asset diversification and distribution requirements contained in Subchapter
M of the Code, as well as maintain our election to be regulated as a BDC under the 1940 Act. We must also meet the Annual Distribution
Requirement (as described below) to avoid corporate-level federal income tax in that year on all of our taxable income, regardless
of whether we make any distributions to our stockholders.



The source-of-income
requirement is satisfied if we derive in each taxable year at least 90% of our gross income from dividends, interest (including
tax-exempt interest), payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, other income (including but not limited to gain from options, futures or forward contracts) derived with
respect to our business of investing in stock, securities or currencies, or net income derived from an interest in a “qualified
publicly traded partnership.” The status of certain forms of income we receive could be subject to different interpretations
under the Code and might be characterized as non-qualifying income that could cause us to fail to qualify as a RIC, assuming we
do not qualify for or take advantage of certain remedial provisions, and, thus, may cause us to be subject to corporate-level federal
income taxes.



To qualify as a RIC,
we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may
result in our having to (1) dispose of certain investments quickly; (2) raise additional capital to prevent the loss
of RIC status; or (3) engage in certain remedial actions that may entail the disposition of certain investments at disadvantageous
prices that could result in substantial losses, and the payment of penalties, if we qualify to take such actions. Because most
of our investments are and will be in development-stage companies within our Target Industries, any such dispositions could be
made at disadvantageous prices and may result in substantial losses. If we raise additional capital to satisfy the asset diversification
requirements, it could take a longer time to invest such capital. During this period, we will invest in temporary investments,
such as money market funds, which we expect will earn yields substantially lower than the interest income that we anticipate receiving
in respect of our investments in secured and amortizing debt investments.



The Annual Distribution
Requirement for a RIC is satisfied if we distribute to our stockholders on an annual basis an amount equal to at least 90% of our
investment company taxable income. If we borrow money, we may be subject to certain asset coverage ratio requirements under the
1940 Act and loan covenants that could, under certain circumstances, restrict us from making distributions necessary to qualify
as a RIC. If we are unable to obtain cash from other sources, we may fail to qualify to the federal income tax benefits allowable
to a RIC, assuming we do not qualify for or take advantage of certain remedial provisions, and, thus, may be subject to corporate-level
income tax.



If we were to fail
to qualify for the federal income tax benefits allowable to RICs for any reason and become subject to a corporate-level federal
income tax, the resulting taxes could substantially reduce our net assets, the amount of income available for distribution to our
stockholders, and the actual amount of our distributions. Such a failure would have a material adverse effect on us, the NAV of
our common stock and the total return, if any, obtainable from your investment in our common stock. In addition, we could be required
to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying as a RIC.
See “Item 1. Business—Regulation.”



34







We may have difficulty paying our required distributions
if we recognize taxable income before or without receiving cash.



We may be required
to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt instruments that are
treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind interest or,
in certain cases, increasing interest rates or issued with warrants), we must include in taxable income each year a portion of
the original issue discount that accrues over the life of the debt instrument, regardless of whether cash representing such income
is received by us in the same taxable year. We do not have a policy limiting our ability to invest in original issue discount instruments,
including payment-in-kind debt investments. Because in certain cases we may recognize taxable income before or without receiving
cash representing such income, we may have difficulty meeting the Annual Distribution Requirement.



Accordingly, we may
need to sell some of our assets at times that we would not consider advantageous, raise additional debt or equity capital or forego
new investment opportunities or otherwise take actions that are disadvantageous to our business (or be unable to take actions that
we believe are necessary or advantageous to our business) in order to satisfy the Annual Distribution Requirement. If we are unable
to obtain cash from other sources to satisfy the Annual Distribution Requirement, we may fail to qualify for the federal income
tax benefits allowable to RICs and, thus, become subject to a corporate-level federal income tax on all our income. The proportion
of our income, consisting of interest and fee income that resulted from the portion of original issue discount classified as such
in accordance with GAAP not received in cash for the years ended December 31, 2014, 2013 and 2012 was 9.5%, 11.5% and 10.3%, respectively.



If we make loans to borrowers or
acquire loans that contain deferred payment features, such as loans providing for the payment of portions of principal and/or interest
at maturity, this could increase the risk of default by our borrowers.



Our investments with
deferred payment features, such as debt investments providing for ETPs, may represent a higher credit risk than debt investments
requiring payments of all principal and accrued interest at regular intervals over the life of the debt investments. For example,
even if the accounting conditions for income accrual were met during the period when the obligation was outstanding, the borrower
could still default when our actual collection is scheduled to occur upon maturity of the obligation. The amount of ETPs due under
our investments having such a feature currently represents a small portion of the applicable borrowers’ total repayment obligations
under such investments. However, deferred payment arrangements increase the incremental risk that we will not receive a portion
of the amount due at maturity. Additionally, because investments with a deferred payment feature may have the effect of deferring
a portion of the borrower’s payment obligation until maturity of the debt investment, it may be difficult for us to identify
and address developing problems with borrowers in terms of their ability to repay us. Any such developments may increase the risk
of default on our debt investments by borrowers.



The borrowing needs of our portfolio
companies are unpredictable, especially during a challenging economic environment. We may not be able to meet our unfunded commitments
to extend credit, which could have a material adverse effect on our business, financial condition and results of operations.



A commitment to extend
credit is a formal agreement to lend funds to our portfolio companies as long as there is no violation of any condition established
under the agreement. The actual borrowing needs of our portfolio companies under these commitments have historically been lower
than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon, and
as such, the total amount of unfunded commitments does not reflect our expected future cash funding requirements. Because of the
credit profile of our portfolio companies, we typically have a substantial amount of total unfunded credit commitments, which amount
is not reflected on our balance sheet. The actual borrowing needs of our portfolio companies may exceed our expected funding requirements,
especially during a challenging economic environment when our portfolio companies may be more dependent on our credit commitments
due to the lack of available credit elsewhere, an increasing cost of credit or the limited availability of financing from venture
capital firms. In addition, limited partner investors of some of our portfolio companies may fail to meet their underlying investment
commitments due to liquidity or other financing issues, which may increase our portfolio companies’ borrowing needs. Any
failure to meet our unfunded credit commitments in accordance with the actual borrowing needs of our portfolio companies may have
a material adverse effect on our business, financial condition and results of operations.



35







If we do not invest a sufficient
portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing
according to our current business strategy.



As a BDC, we are prohibited
from acquiring any assets other than qualifying assets (as defined under the 1940 Act) unless, at the time of and after giving
effect to such acquisition, at least 70% of our total assets are qualifying assets. As of December 31, 2014 and 2013, 100% of our
assets were qualifying assets, and we expect that substantially all of our assets that we may acquire in the future will be qualifying
assets, although we may decide to make other investments that are not qualifying assets to the extent permitted by the 1940 Act.
If we acquire debt or equity securities from an issuer that has outstanding marginable securities at the time we make an investment,
these acquired assets may not be treated as qualifying assets. This result is dictated by the definition of “eligible portfolio
company” under the 1940 Act, which in part looks to whether a company has outstanding marginable securities. See Item 1
above, “Regulation — Qualifying assets.” If we do not invest a sufficient portion of our assets in qualifying
assets, we could lose our status as a BDC. If we do not maintain our status as a BDC, we would be subject to regulation as a registered
closed-end investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially
more regulatory restrictions under the 1940 Act, which would significantly decrease our operating flexibility.



New or modified laws or regulations
governing our operations may adversely affect our business.



We and our portfolio
companies are subject to regulation by laws at the U.S. federal, state and local levels. These laws and regulations, as well as
their interpretation, may change from time to time, and new laws, regulations and interpretations may also come into effect. Any
such new or changed laws or regulations could have a material adverse effect on our business. In particular, on July 21, 2010,
the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, became law. The scope of Dodd-Frank impacts many
aspects of the financial services industry, and it requires the development and adoption of many implementing regulations over
the next several months and years. The effects of Dodd-Frank on the financial services industry will depend, in large part, upon
the extent to which regulators exercise the authority granted to them and the approaches taken in implementing regulations. The
likely impact of Dodd-Frank cannot be ascertained with any degree of certainty.



Additionally, changes
to the laws and regulations governing our operations, including those associated with RICs, may cause us to alter our investment
strategy in order to avail ourselves of new or different opportunities or result in the imposition of corporate-level taxes on
us. Such changes could result in material differences to our strategies and plans and may shift our investment focus from the areas
of expertise of the Advisor to other types of investments in which the Advisor may have little or no expertise or experience. Any
such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.



Our Advisor has significant potential
conflicts of interest with us and our stockholders.



As a result of our
arrangements with our Advisor, there may be times when our Advisor has interests that differ from those of our stockholders, giving
rise to a potential conflict of interest. Our executive officers and directors, as well as the current and future executives and
employees of our Advisor, serve or may serve as officers, directors or principals of entities that operate in the same or a related
line of business as we do. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might
not be in the best interests of our stockholders. In addition, our Advisor may manage other funds in the future that may have investment
objectives that are similar, in whole or in part, to ours. Our Advisor may determine that an investment is appropriate for us and
for one or more of those other funds. In such an event, depending on the availability of the investment and other appropriate factors,
our Advisor will endeavor to allocate investment opportunities in a fair and equitable manner and act in accordance with its written
conflicts of interest policy to address and, if necessary, resolve any conflict of interests. It is also possible that we may not
be given the opportunity to participate in these other investment opportunities.



We pay management
and incentive fees to our Advisor and reimburse our Advisor for certain expenses it incurs. As a result, investors in our common
stock invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in
a lower rate of return than an investor might achieve through direct investments. Also, the incentive fee payable by us to our
Advisor may create an incentive for our Advisor to pursue investments on our behalf that are riskier or more speculative than would
be the case in the absence of such compensation arrangements.



36







We have entered into
a license agreement with Horizon Technology Finance, LLC, pursuant to which it has agreed to grant us a non-exclusive, royalty-free
right and license to use the service mark “Horizon Technology Finance.” Under this agreement, we have a right to use
the “Horizon Technology Finance” service mark for so long as the Investment Management Agreement is in effect between
us and our Advisor. In addition, we pay our Advisor, our allocable portion of overhead and other expenses incurred by our Advisor
in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing
compliance functions, and our allocable portion of the compensation of our Chief Financial Officer and Chief Compliance Officer
and their respective staffs. Any potential conflict of interest arising as a result of our arrangements with our Advisor could
have a material adverse effect on our business, results of operations and financial condition.



Our incentive fee may impact our
Advisor’s structuring of our investments, including by causing our Advisor to pursue speculative investments.



The incentive fee
payable by us to our Advisor may create an incentive for our Advisor to pursue investments on our behalf that are riskier or more
speculative than would be the case in the absence of such compensation arrangement. The incentive fee payable to our Advisor is
calculated based on a percentage of our return on invested capital. This may encourage our Advisor to use leverage to increase
the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would
impair the value of our common stock. In addition, our Advisor receives the incentive fee based, in part, upon net capital gains
realized on our investments. Unlike that portion of the incentive fee based on income, there is no hurdle rate applicable to the
portion of the incentive fee based on net capital gains. As a result, our Advisor may have a tendency to invest more capital in
investments that are likely to result in capital gains as compared to income-producing securities. Such a practice could result
in our investing in more speculative investments than would otherwise be the case, which could result in higher investment losses,
particularly during economic downturns. In addition, the incentive fee may encourage our Advisor to pursue different types of investments
or structure investments in ways that are more likely to result in warrant gains or gains on equity investments, including upon
exercise of equity participation rights, which are inconsistent with our investment strategy and disciplined underwriting process.



The incentive fee
payable by us to our Advisor may also induce our Advisor to pursue investments on our behalf that have a deferred interest feature,
even if such deferred payments would not provide cash necessary to enable us to pay current distributions to our stockholders.
Under these investments, we would accrue interest over the life of the investment but would not receive the cash income from the
investment until the end of the term. Our net investment income used to calculate the income portion of our investment fee, however,
includes accrued interest. Thus, a portion of this incentive fee would be based on income that we have not yet received in cash.
In addition, the “catch-up” portion of the incentive fee may encourage our Advisor to accelerate or defer interest
payable by portfolio companies from one calendar quarter to another, potentially resulting in fluctuations in the timing and amounts
of distributions. Our governing documents do not limit the number of debt investments we may make with deferred interest features
or the proportion of our income we derive from such debt investments.



Our ability to enter into transactions
with our affiliates is restricted.



As a BDC, we are prohibited
under the 1940 Act from participating in certain transactions with our affiliates without the prior approval of our independent
directors and, in some cases, the SEC. Any person that, among other things, owns, directly or indirectly, 5% or more of our outstanding
voting securities is considered our affiliate for purposes of the 1940 Act. We are generally prohibited from buying or selling
any security from or to an affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain
“joint” transactions with an affiliate, which could include investments in the same portfolio company (whether at the
same or different times), without prior approval of our independent directors. If a person acquires more than 25% of our voting
securities, we are prohibited from buying or selling any security from or to that person or certain of that person’s affiliates,
or entering into prohibited joint transactions with those persons, absent the prior approval of the SEC. Similar restrictions limit
our ability to transact business with our officers or directors or their affiliates. These restrictions could limit or prohibit
us from making certain attractive investments that we might otherwise make absent such restrictions.



While we have no current
intention to enter into any principal transactions or joint arrangements with any affiliates, we have considered and evaluated,
and will continue to consider and evaluate, the potential advantages and disadvantages of doing so. If we decide to enter into
any such transactions in the future we will not do so until we have requested and received the requisite exemptive relief under
Section 57 of the 1940 Act, the filing of which our Board has previously authorized.



37







The valuation process for certain
of our portfolio holdings creates a conflict of interest.



The majority of our
portfolio investments are expected to be made in the form of securities that are not publicly traded. As a result, the Board will
determine the fair value of these securities in good faith as described above in “— Because many of our investments
typically are not and will not be in publicly traded securities, the value of our investments may not be readily determinable,
which could adversely affect the determination of our NAV.” In connection with that determination, investment professionals
from the Advisor may provide the Board with portfolio company valuations based upon the most recent portfolio company financial
statements available and projected financial results of each portfolio company. The participation of the Advisor’s investment
professionals in our valuation process could result in a conflict of interest as the Advisor’s management fee is based, in
part, on our average gross assets (including assets acquired with the proceeds of leverage) and our incentive fees will be based,
in part, on unrealized gains and losses.



Our Advisor’s liability is
limited, and we have agreed to indemnify our Advisor against certain liabilities, which may lead our Advisor to act in a riskier
manner on our behalf than it would when acting for its own account.



Under the Investment
Management Agreement, our Advisor does not assume any responsibility to us other than to render the services called for under that
agreement, and it is not responsible for any action of our Board in following or declining to follow our Advisor’s advice
or recommendations. Under the terms of the Investment Management Agreement, our Advisor, its officers, members, personnel and any
person controlling or controlled by our Advisor is not liable to us, any subsidiary of ours, our directors, our stockholders or
any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the Investment
Management Agreement, except those resulting from acts constituting gross negligence, willful misconduct, bad faith or reckless
disregard of our Advisor’s duties under the Investment Management Agreement. In addition, we have agreed to indemnify our
Advisor and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including
reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations
or any action taken or omitted on our behalf pursuant to authority granted by the Investment Management Agreement, except where
attributable to gross negligence, willful misconduct, bad faith or reckless disregard of such person’s duties under the Investment
Management Agreement. These protections may lead our Advisor to act in a riskier manner when acting on our behalf than it would
when acting for its own account.



If we are unable to manage our future
growth effectively, we may be unable to achieve our investment objective, which could adversely affect our business, results of
operations and financial condition and cause the value of your investment in us to decline.



Our ability to achieve
our investment objective depends on our ability to achieve and sustain growth, which depends, in turn, on our Advisor’s direct
origination capabilities and disciplined underwriting process in identifying, evaluating, financing, investing in and monitoring
suitable companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function
of our Advisor’s marketing capabilities, management of the investment process, ability to provide efficient services and
access to financing sources on acceptable terms. In addition to monitoring the performance of our existing investments, our Advisor
may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time may distract them
or slow the rate of investment. If we fail to manage our future growth effectively, our business, results of operations and financial
condition could be materially adversely affected and the value of your investment in us could decrease.



Our Board may change our operating
policies and strategies, including our investment objective, without prior notice or stockholder approval, the effects of which
may adversely affect our business.



Our Board may modify
or waive our current operating policies and strategies, including our investment objectives, without prior notice and without stockholder
approval (provided that no such modification or waiver may change the nature of our business so as to cease to be, or withdraw
our election as a BDC as provided by the 1940 Act without stockholder approval at a special meeting called upon written notice
of not less than ten or more than sixty days before the date of such meeting). We cannot predict the effect any changes to our
current operating policies and strategies would have on our business, results of operations or financial condition or on the value
of our stock. However, the effects of any changes might adversely affect our business, any or all of which could negatively impact
our ability to pay distributions or cause you to lose all or part of your investment in us.



38







Our quarterly and annual operating
results may fluctuate due to the nature of our business.



We could experience
fluctuations in our quarterly and annual operating results due to a number of factors, some of which are beyond our control, including:
our ability to make investments in companies that meet our investment criteria, the interest rate payable on our debt investments,
the default rate on these investments, the level of our expenses, variations in, and the timing of, the recognition of realized
and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. For
example, we have historically experienced greater investment activity during the second and fourth quarters relative to other periods.
As a result of these factors, you should not rely on the results for any prior period as being indicative of our performance in
future periods.



Our business plan and growth strategy
depends to a significant extent upon our Advisor’s referral relationships. If our Advisor is unable to develop new or maintain
existing relationships, or if these relationships fail to generate investment opportunities, our business could be materially adversely
affected.



We have historically
depended on our Advisor’s referral relationships to generate investment opportunities. For us to achieve our future business
objectives, members of our Advisor need to maintain these relationships with venture capital and private equity firms and management
teams and legal firms, accounting firms, investment banks and other lenders, and we rely to a significant extent upon these relationships
to provide us with investment opportunities. If they fail to maintain their existing relationships or develop new relationships
with other firms or sources of investment opportunities, we may not be able to grow our investment portfolio. In addition, persons
with whom our Advisor has relationships are not obligated to provide us with investment opportunities, and, therefore, there is
no assurance that such relationships will lead to the origination of debt or other investments.



Our Advisor can resign on 60 days’
notice and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that
could adversely affect our business, results of operations or financial condition.



Under our Investment
Management Agreement and our Administration Agreement, our Advisor has the right to resign at any time, including during the first
two years following the Investment Management Agreement’s effective date, upon not more than 60 days’ written notice,
whether we have found a replacement or not. If our Advisor resigns, we may not be able to find a new investment advisor or administrator
or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within
60 days, or at all. If we are unable to do so, our operations are likely to be disrupted, our business, results of operations
and financial condition and our ability to pay distributions may be adversely affected and the market price of our shares may decline.
In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify
and reach an agreement with a single institution or group of executives having the expertise possessed by our Advisor and its affiliates.
Even if we are able to retain comparable management, whether internal or external, the integration of new management and their
lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our
business, results of operations or financial condition.



We incur significant costs as a result
of being a publicly traded company.



As a publicly traded
company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable
to a company whose securities are registered under the Exchange Act as well as additional corporate governance requirements, including
requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC.



Compliance with Section 404
of the Sarbanes-Oxley Act may involve significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley
Act may adversely affect us and the market price of our common stock.



Under current SEC
rules, we are required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley
Act and related rules and regulations of the SEC. As a result, we incur additional expenses that may negatively impact our financial
performance and our ability to make distributions. This process also results in a diversion of management’s time and attention.
We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same
on our operations, and we may not be able to ensure that the process is effective or that our internal control over financial reporting
is or will be effective in a timely manner. In the event that we are unable to maintain or achieve compliance with Section 404
of the Sarbanes-Oxley Act and related rules, we and the market price of our securities may be adversely affected.



39







We are highly dependent on information
systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of
our common stock and our ability to pay distributions.



Our business is highly
dependent on the Advisor and its affiliates’ communications and information systems. Any failure or interruption of those
systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or
other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities
may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly
or partially beyond our control and adversely affect our business. There could be:



| | • | sudden electrical or telecommunications outages;
| | - | ------------------------------------------------



| | • | natural disasters such as earthquakes, tornadoes and hurricanes;
| | - | ----------------------------------------------------------------



| | • | disease pandemics;
| | - | ------------------



| | • | events arising from local or larger scale political or social matters, including terrorist acts;
and
| | - | ----------------------------------------------------------------------------------------------------



| | • | cyber-attacks.
| | - | --------------



These events, in turn,
could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our
ability to pay distributions to our stockholders.



Risks related to our investments



We have not yet identified many of the potential investment
opportunities for our portfolio.



We have not yet identified
many of the potential investment opportunities for our portfolio. Our future investments will be selected by our Advisor, subject
to the approval of its investment committee. Our stockholders do not have input into our Advisor’s investment decisions.
As a result, our stockholders are unable to evaluate any of our future portfolio company investments. These factors increase the
uncertainty, and thus the risk, of investing in our securities.



We are a non-diversified investment company within the
meaning of the 1940 Act, and therefore we generally are not limited with respect to the proportion of our assets that may be invested
in securities of a single issuer.



We are classified
as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act
with respect to the proportion of our assets that we may invest in securities of a single issuer, excluding limitations on stake
holdings in investment companies. To the extent that we assume large positions in the securities of a small number of issuers,
our NAV may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial
condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory
occurrence than a diversified investment company. Beyond our income tax diversification requirements, we do not have fixed guidelines
for diversification, and our investments could be concentrated in relatively few portfolio companies.



Our portfolio may be concentrated
in a limited number of portfolio companies and industries, which will subject us to a risk of significant loss if any of these
companies defaults on its obligations under any of its debt instruments or if there is a downturn in a particular industry.



Our portfolio may
be concentrated in a limited number of portfolio companies and industries. As a result, the aggregate returns we realize may be
significantly and adversely affected if a small number of investments perform poorly or if we need to write down the value of any
one investment. Additionally, our investments will be concentrated in relatively few industries. As a result, a downturn in any
particular industry in which we are invested could also significantly impact the aggregate returns we realize. Our Target Industries
are susceptible to changes in government policy and economic assistance, which could adversely affect the returns we receive.



If our investments do not meet our performance expectations,
you may not receive distributions.



We intend to make
distributions of income on a monthly basis to our stockholders. We may not be able to achieve operating results that will allow
us to make distributions at a specific level or increase the amount of these distributions from time to time. In addition, due
to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. Also, restrictions
and provisions in any existing or future credit facilities may limit our ability to make distributions. If we do not distribute
a certain percentage of our income annually, we will suffer adverse tax consequences, including the possible loss of the federal
income tax benefits allowable to RICs.





40











Most of our portfolio companies will need additional capital,
which may not be readily available.



Our portfolio companies
typically require substantial additional financing to satisfy their continuing working capital and other capital requirements and
service the interest and principal payments on our investments. We cannot predict the circumstances or market conditions under
which our portfolio companies will seek additional capital. Each round of institutional equity financing is typically intended
to provide a company with only enough capital to reach the next stage of development. It is possible that one or more of our portfolio
companies will not be able to raise additional financing or may be able to do so only at a price or on terms that are unfavorable
to the portfolio company, either of which would negatively impact our investment returns. Some of these companies may be unable
to obtain sufficient financing from private investors, public capital markets or lenders, thereby requiring these companies to
cease or curtail business operations. Accordingly, investing in these types of companies generally entails a higher risk of loss
than investing in companies that do not have significant incremental capital raising requirements.



Economic recessions or downturns
could adversely affect our business and that of our portfolio companies which may have an adverse effect on our business,
results of operations and financial condition.



General economic conditions
may affect our activities and the operation and value of our portfolio companies. Economic slowdowns or recessions may result in
a decrease of institutional equity investment, which would limit our lending opportunities. Furthermore, many of our portfolio
companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments during these periods.
Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods.
Adverse economic conditions may also decrease the value of collateral securing some of our debt investments and the value of our
equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues,
net income and assets. Unfavorable economic conditions could also increase our funding costs, limit our access to the capital markets
or result in a decision by lenders not to extend credit to us.



A portfolio company’s
failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination
of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the
portfolio company’s ability to meet its obligations under the loans that we hold. We may incur expenses to the extent necessary
to recover our investment upon default or to negotiate new terms with a defaulting portfolio company. These events could harm our
financial condition and operating results.



Our investment strategy focuses on
investments in development-stage companies in our Target Industries, which are subject to many risks, including volatility,
intense competition, shortened product life cycles and periodic downturns, and would be rated below
“investment grade.”



We intend to invest,
under normal circumstances, most of the value of our total assets (including the amount of any borrowings for investment purposes)
in development-stage companies, which may have relatively limited operating histories, in our Target Industries. Many of these
companies may have narrow product lines and small market shares, compared to larger established publicly owned firms, which tend
to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. The
revenues, income (or losses) and valuations of development-stage companies in our Target Industries can and often do fluctuate
suddenly and dramatically. For these reasons, investments in our portfolio companies, if rated by one or more ratings agency, would
typically be rated below “investment grade,” which refers to securities rated by ratings agencies below the four highest
rating categories. These companies may also have more limited access to capital and higher funding costs. In addition, development-stage
technology markets are generally characterized by abrupt business cycles and intense competition, and the competitive environment
can change abruptly due to rapidly evolving technology. Therefore, our portfolio companies may face considerably more risk than
companies in other industry sectors. Accordingly, these factors could impair their cash flow or result in other events, such as
bankruptcy, which could limit their ability to repay their obligations to us and may materially adversely affect the return on,
or the recovery of, our investments in these businesses.



41







Because of rapid technological
change, the average selling prices of products and some services provided by development-stage companies in our Target Industries
have historically decreased over their productive lives. These decreases could adversely affect their operating results and cash
flow, their ability to meet obligations under their debt securities and the value of their equity securities. This could, in turn,
materially adversely affect our business, financial condition and results of operations.



Any unrealized depreciation we experience
on our debt investments may be an indication of future realized losses, which could reduce our income available for distribution.



As a BDC, we are required
to carry our investments at fair value which shall be the market value of our investments or, if no market value is ascertainable,
at the fair value as determined in good faith pursuant to procedures approved by our Board in accordance with our valuation policy.
We are not permitted to maintain a reserve for debt investment losses. Decreases in the fair values of our investments are recorded
as unrealized depreciation. Any unrealized depreciation in our debt investments could be an indication of a portfolio company’s
inability to meet its repayment obligations to us with respect to the affected debt investments. This could result in realized
losses in the future and ultimately reduces our income available for distribution in future periods.



If the assets securing the debt investments
we make decrease in value, we may not have sufficient collateral to cover losses and may experience losses upon foreclosure.



We believe our portfolio
companies generally are and will be able to repay our debt investments from their available capital, from future capital-raising
transactions or from cash flow from operations. However, to mitigate our credit risks, we typically take a security interest in
all or a portion of the assets of our portfolio companies, including the equity interests of their subsidiaries. There is a risk
that the collateral securing our debt investments may decrease in value over time, may be difficult to appraise or sell in a timely
manner and may fluctuate in value based upon the business and market conditions, including as a result of an inability of the portfolio
company to raise additional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In
addition, deterioration of a portfolio company’s financial condition and prospects, including its inability to raise additional
capital, may be accompanied by deterioration of the value of the collateral for the debt investment. Consequently, although such
debt investment is secured, we may not receive principal and interest payments according to the debt investment’s terms and
the value of the collateral may not be sufficient to recover our investment should we be forced to enforce our remedies.



In addition, because
we invest in development-stage companies in our Target Industries, a substantial portion of the assets securing our investment
may be in the form of intellectual property, if any, inventory, equipment, cash and accounts receivables. Intellectual property,
if any, which secures a debt investment could lose value if the company’s rights to the intellectual property are challenged
or if the company’s license to the intellectual property is revoked or expires. In addition, in lieu of a security interest
in a portfolio company’s intellectual property we may sometimes obtain a security interest in all assets of the portfolio
company other than intellectual property and also obtain a commitment by the portfolio company not to grant liens to any other
creditor on the company’s intellectual property. In these cases, we may have additional difficulty recovering our principal
in the event of a foreclosure. Similarly, any equipment securing our debt investments may not provide us with the anticipated security
if there are changes in technology or advances in new equipment that render the particular equipment obsolete or of limited value
or if the company fails to adequately maintain or repair the equipment. Any one or more of the preceding factors could materially
impair our ability to recover principal in a foreclosure.



We may choose to waive or defer enforcement
of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of our investment in these companies.



We structure the debt
investments in our portfolio companies to include business and financial covenants placing affirmative and negative obligations
on the operation of the company’s business and its financial condition. However, from time to time we may elect to waive
breaches of these covenants, including our right to payment, or waive or defer enforcement of remedies, such as acceleration of
obligations or foreclosure on collateral, depending upon the financial condition and prospects of the particular portfolio company.
These actions may reduce the likelihood of our receiving the full amount of future payments of interest or principal and be accompanied
by a deterioration in the value of the underlying collateral as many of these companies may have limited financial resources, may
be unable to meet future obligations and may go bankrupt. These events could harm our financial condition and operating results.



42







The lack of liquidity in our investments
may adversely affect our business, and if we need to sell any of our investments, we may not be able to do so at
a favorable price. As a result, we may suffer losses.



We plan to generally
invest in debt investments with terms of up to four years and hold such investments until maturity, unless earlier prepaid, and
we do not expect that our related holdings of equity securities will provide us with liquidity opportunities in the near-term.
We expect to primarily invest in companies whose securities are not publicly-traded, and whose securities are subject to legal
and other restrictions on resale or are otherwise less liquid than publicly traded securities. The illiquidity of these investments
may make it difficult for us to sell these investments when desired. We may also face other restrictions on our ability to liquidate
an investment in a public portfolio company to the extent that we possess material non-public information regarding the portfolio
company. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less
than the value at which we had previously recorded these investments. As a result, we do not expect to dispose of our investments
in the near term. However, we may be required to do so in order to maintain our qualification as a BDC and as a RIC if we do not
satisfy one or more of the applicable criteria under the respective regulatory frameworks. Because most of our investments are
illiquid, we may be unable to dispose of them, in which case we could fail to qualify as a RIC and/or BDC, or we may not be able
to dispose of them at favorable prices, and as a result, we may suffer losses.



Our portfolio companies may incur
debt that ranks equally with, or senior to, our investments in such companies.



We plan to invest
primarily in debt investments issued by our portfolio companies. Some of our portfolio companies are permitted to have other debt
that ranks equally with, or senior to, our debt investments in the portfolio company. By their terms, these debt instruments may
provide that the holders thereof are entitled to receive payment of interest or principal on or before the dates on which we are
entitled to receive payments in respect of our debt investments. These debt instruments may prohibit the portfolio companies from
paying interest on or repaying our investments in the event of, and during, the continuance of a default under the debt instruments.
In addition, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders
of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in
full before we receive any payment in respect of our investment. After repaying senior creditors, a portfolio company may not have
any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with our debt investments, we
would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation,
dissolution, reorganization or bankruptcy.



There may be circumstances where
our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.



Even though certain
of our investments are structured as senior debt investments, if one of our portfolio companies were to go bankrupt, depending
on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company,
a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors.
We may also be subject to lender liability claims for actions taken by us with respect to a portfolio company’s business,
including in rendering significant managerial assistance, or instances where we exercise control over the portfolio company.



An investment strategy focused primarily
on privately held companies presents certain challenges, including the lack of available information about these companies, a dependence
on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns.



We currently invest,
and plan to invest, primarily in privately held companies. Generally, very little public information exists about these companies,
and we are required to rely on the ability of our Advisor to obtain adequate information to evaluate the potential returns from
investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully
informed investment decision, and we may lose money on our investments. Also, privately held companies frequently have less diverse
product lines and a smaller market presence than larger competitors. Thus, they are generally more vulnerable to economic downturns
and may experience substantial variations in operating results. These factors could affect our investment returns.



In addition, our success
depends, in large part, upon the abilities of the key management personnel of our portfolio companies, who are responsible for
the day-to-day operations of our portfolio companies. Competition for qualified personnel is intense at any stage of a company’s
development. The loss of one or more key managers can hinder or delay a company’s implementation of its business plan and
harm its financial condition. Our portfolio companies may not be able to attract and retain qualified managers and personnel. Any
inability to do so may negatively affect our investment returns.



43







We may hold the debt securities of
leveraged companies that may, due to the significant volatility of such companies, enter into bankruptcy proceedings.



Leveraged companies
may experience bankruptcy or similar financial distress. The bankruptcy process has a number of significant inherent risks. Many
events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the control of
the creditors. A bankruptcy filing by an issuer may adversely and permanently affect the issuer. If the proceeding is converted
to a liquidation, the value of the issuer may not equal the liquidation value that was believed to exist at the time of the investment.
The duration of a bankruptcy proceeding is also difficult to predict, and a creditor’s return on investment can be adversely
affected by delays until the plan of reorganization or liquidation ultimately becomes effective. The administrative costs of a
bankruptcy proceeding are frequently high and would be paid out of the debtor’s estate prior to any return to creditors.
Because the standards for classification of claims under bankruptcy law are vague, our influence with respect to the class of securities
or other obligations we own may be lost by increases in the number and amount of claims in the same class or by different classification
and treatment. In the early stages of the bankruptcy process, it is often difficult to estimate the extent of, or even to identify,
any contingent claims that might be made. In addition, certain claims that have priority by law (for example, claims for taxes)
may be substantial.



Prepayments of our debt investments
by our portfolio companies could adversely impact our results of operations and reduce our return on equity.



We are subject to
the risk that the investments we make in our portfolio companies may be repaid prior to maturity. For example, most of our debt
investments have historically been repaid prior to maturity by our portfolio companies. At the time of a liquidity event, such
as a sale of the business, refinancing or public offering, many of our portfolio companies have availed themselves of the opportunity
to repay our debt investments prior to maturity. Our investments generally allow for repayment at any time subject to certain penalties.
When this occurs, we generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio
companies. These temporary investments have substantially lower yields than the debt being prepaid, and we could experience significant
delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt
that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio
companies elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could
result in a decline in the market price of our common stock.



Our business and growth strategy
could be adversely affected if government regulations, priorities and resources impacting the industries in which our portfolio
companies operate change.



Some of our portfolio
companies operate in industries that are highly regulated by federal, state and/or local agencies. Changes in existing laws, rules
or regulations, or judicial or administrative interpretations thereof, or new laws, rules or regulations could have an adverse
impact on the business and industries of our portfolio companies. In addition, changes in government priorities or limitations
on government resources could also adversely impact our portfolio companies. We are unable to predict whether any such changes
in laws, rules or regulations will occur and, if they do occur, the impact of these changes on our portfolio companies and our
investment returns.



Our portfolio companies operating
in the life science industry are subject to extensive government regulation and certain other risks particular to
that industry.



As part of our investment
strategy, we have invested, and plan to invest in the future, in companies in the life science industry that are subject to extensive
regulation by the Food and Drug Administration and to a lesser extent, other federal and state agencies. If any of these portfolio
companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could materially
and adversely affect their operations. Portfolio companies that produce medical devices or drugs are subject to the expense, delay
and uncertainty of the regulatory approval process for their products and, even if approved, these products may not be accepted
in the marketplace. In addition, new laws, regulations or judicial interpretations of existing laws and regulations might adversely
affect a portfolio company in this industry. Portfolio companies in the life science industry may also have a limited number of
suppliers of necessary components or a limited number of manufacturers for their products, and therefore face a risk of disruption
to their manufacturing process if they are unable to find alternative suppliers when needed. Any of these factors could materially
and adversely affect the operations of a portfolio company in this industry and, in turn, impair our ability to timely collect
principal and interest payments owed to us.



44







Our investments in the clean technology
industry are subject to many risks, including volatility, intense competition, unproven technologies, periodic downturns and potential
litigation.



Our investments in
clean technology, or cleantech, companies are subject to substantial operational risks, such as underestimated cost projections,
unanticipated operation and maintenance expenses, loss of government subsidies, and inability to deliver cost-effective alternative
energy solutions compared to traditional energy products. In addition, energy companies employ a variety of means of increasing
cash flow, including increasing utilization of existing facilities, expanding operations through new construction or acquisitions,
or securing additional long-term contracts. Thus, some energy companies may be subject to construction risk, acquisition risk or
other risks arising from their specific business strategies. Furthermore, production levels for solar, wind and other renewable
energies may be dependent upon adequate sunlight, wind, or biogas production, which can vary from market to market and period to
period, resulting in volatility in production levels and profitability. In addition, our cleantech companies may have narrow product
lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market conditions, as
well as to general economic downturns. The revenues, income (or losses) and valuations of clean technology companies can and often
do fluctuate suddenly and dramatically and the markets in which clean technology companies operate are generally characterized
by abrupt business cycles and intense competition. Demand for cleantech and renewable energy is also influenced by the available
supply and prices for other energy products, such as coal, oil and natural gas. A change in prices in these energy products could
reduce demand for alternative energy. Cleantech companies face potential litigation, including significant warranty and product
liability claims, as well as class action and government claims. Such litigation could adversely affect the business and results
of operations of our cleantech portfolio companies. There is also uncertainty about whether agreements or government programs providing
incentives for reductions in greenhouse gas emissions will continue and whether countries around the world will enact or maintain
legislation that provides incentives for reductions in greenhouse gas emissions, without which some investments in clean technology
dependent portfolio companies may not be economical, and financing for such projects may become unavailable. As a result, these portfolio
company investments face considerable risk, including the risk that favorable regulatory regimes expire or are adversely modified.
This could, in turn, materially adversely affect the value of the clean technology companies in our portfolio.



Cleantech companies are subject to
extensive government regulation and certain other risks particular to the sectors in which they operate and our business and growth
strategy could be adversely affected if government regulations, priorities and resources impacting such sectors change or if our
portfolio companies fail to comply with such regulations.



As part of our investment
strategy we invest in portfolio companies in cleantech sectors that may be subject to extensive regulation by foreign, U.S. federal,
state and/or local agencies. Changes in existing laws, rules or regulations, or judicial or administrative interpretations thereof,
or new laws, rules or regulations could have an adverse impact on the business and industries of our portfolio companies. In addition,
changes in government priorities or limitations on government resources could also adversely impact our portfolio companies. We
are unable to predict whether any such changes in laws, rules or regulations will occur and, if they do occur, the impact of these
changes on our portfolio companies and our investment returns. Furthermore, if any of our portfolio companies fail to comply with
applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect their
operations. Our portfolio companies may be subject to the expense, delay and uncertainty of the regulatory approval process for
their products and, even if approved, these products may not be accepted in the marketplace.



In addition, there
is considerable uncertainty about whether foreign, U.S., state and/or local governmental entities will enact or maintain legislation
or regulatory programs that mandate reductions in greenhouse gas emissions or provide incentives for cleantech companies. Without
such regulatory policies, investments in cleantech companies may not be economical and financing for cleantech companies may become
unavailable, which could materially adversely affect the ability of our portfolio companies to repay the debt they owe to us. Any
of these factors could materially and adversely affect the operations and financial condition of a portfolio company and, in turn,
the ability of the portfolio company to repay the debt they owe to us.



45







If our portfolio companies are unable
to commercialize their technologies, products, business concepts or services, the returns on our investments could
be adversely affected.



The value of our investments
in our portfolio companies may decline if our portfolio companies are not able to commercialize their technology, products, business
concepts or services. Additionally, although some of our portfolio companies may already have a commercially successful product
or product line at the time of our investment, technology-related products and services often have a more limited market or life
span than products in other industries. Thus, the ultimate success of these companies often depends on their ability to innovate
continually in increasingly competitive markets. If they are unable to do so, our investment returns could be adversely affected
and their ability to service their debt obligations to us over the life of a loan could be impaired. Our portfolio companies may
be unable to acquire or develop successful new technologies and the intellectual property they currently hold may not remain viable.
Even if our portfolio companies are able to develop commercially viable products, the market for new products and services is highly
competitive and rapidly changing. Neither our portfolio companies nor we have any control over the pace of technology development.
Commercial success is difficult to predict, and the marketing efforts of our portfolio companies may not be successful.



If our portfolio companies are unable to protect their
intellectual property rights, our business and prospects could be harmed, and if portfolio companies are required to devote significant
resources to protecting their intellectual property rights, the value of our investment could be reduced.



Our future success
and competitive position depends in part upon the ability of our portfolio companies to obtain, maintain and protect proprietary
technology used in their products and services. The intellectual property held by our portfolio companies often represents a substantial
portion of the collateral securing our investments and/or constitutes a significant portion of the portfolio companies’ value
that may be available in a downside scenario to repay our debt investments. Our portfolio companies rely, in part, on patent, trade
secret and trademark law to protect that technology, but competitors may misappropriate their intellectual property, and disputes
as to ownership of intellectual property may arise. Portfolio companies may, from time to time, be required to institute litigation
to enforce their patents, copyrights or other intellectual property rights, protect their trade secrets, determine the validity
and scope of the proprietary rights of others or defend against claims of infringement.



Such litigation could
result in substantial costs and diversion of resources. Similarly, if a portfolio company is found to infringe or misappropriate
a third party’s patent or other proprietary rights, it could be required to pay damages to the third party, alter its products
or processes, obtain a license from the third party and/or cease activities utilizing the proprietary rights, including making
or selling products utilizing the proprietary rights. Any of the foregoing events could negatively affect both the portfolio company’s
ability to service our debt investment and the value of any related debt and equity securities that we own, as well as the value
of any collateral securing our investment.



We do not expect to control any of our portfolio companies.



We do not control,
or expect to control in the future, any of our portfolio companies, even though our debt agreements may contain certain restrictive
covenants that limit the business and operations of our portfolio companies. We also do not maintain, or intend to maintain in
the future, a control position to the extent we own equity interests in any portfolio company. As a result, we are subject to the
risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such
company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our
interests as debt investors. Due to the lack of liquidity of the investments that we typically hold in our portfolio companies,
we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company and we may therefore,
suffer a decrease in the value of our investments.



We may not realize expected returns on warrants received
in connection with our debt investments.



As discussed above,
we generally receive warrants in connection with our debt investments. If we do not receive the returns that are anticipated on
the warrants, our investment returns on our portfolio companies, and the value of your investment in us, may be lower than expected.



46







Risks related to our common stock



There is a risk that investors in our equity securities
may not receive distributions or that our distributions may not grow over time and, a portion of distributions paid to you may
be a return of capital.



We intend to make
distributions on a monthly basis to our stockholders out of assets legally available for distribution. We cannot assure you that
we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases
in cash distributions. Our ability to pay distributions might be adversely affected by, among other things, the impact of one or
more risk factors described in this report. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited
in our ability to make distributions. All distributions will be paid at the discretion of our Board and will depend on our earnings,
our financial condition, maintenance of our RIC status, compliance with BDC regulation and such other factors as our Board may
deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders in the future. Further,
if we invest a greater amount of assets in equity securities that do not pay current dividends, the amount available for distribution
could be reduced.



On an annual basis,
we must determine the extent to which any distributions we made were paid out of current or accumulated earnings, recognized capital
gains or capital. To the extent our future distributions include a return of capital, investors will be required to reduce their
basis in our stock for U.S. federal income tax purposes, which may result in higher tax liability when the shares are sold,
even if they have not increased in value or have lost value. In addition, any return of capital will be net of any sales load and
offering expenses associated with sales of shares of our common stock.



Our common stock price may be volatile and may decrease
substantially.



The trading price
of our common stock may fluctuate substantially and the liquidity of our common stock may be limited, in each case depending on
many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors
include the following:



| | • | price and volume fluctuations in the overall stock market or in the market for BDCs from time to
time;
| | - | ------------------------------------------------------------------------------------------------------



| | • | investor demand for our shares of common stock;
| | - | -----------------------------------------------



| | • | significant volatility in the market price and trading volume of securities of registered closed-end
management investment companies, BDCs or other financial services companies;
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| | • | our inability to raise capital, borrow money or deploy or invest our capital;
| | - | -----------------------------------------------------------------------------



| | • | fluctuations in interest rates;
| | - | -------------------------------



| | • | any shortfall in revenue or net income or any increase in losses from levels expected by investors
or securities analysts;
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| | • | operating performance of companies comparable to us;
| | - | ----------------------------------------------------



| | • | changes in regulatory policies or tax guidelines with respect to RICs or BDCs;
| | - | ------------------------------------------------------------------------------



| | • | losing RIC status;
| | - | ------------------



| | • | actual or anticipated changes in our earnings or fluctuations in our operating results;
| | - | ---------------------------------------------------------------------------------------



| | • | changes in the value of our portfolio of investments;
| | - | -----------------------------------------------------



| | • | general economic conditions, trends and other external factors;
| | - | ---------------------------------------------------------------



| | • | departures of key personnel; or
| | - | -------------------------------



| | • | loss of a major source of funding.
| | - | ----------------------------------



In the past, following
periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought
against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation
in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from
our business.



47







Shares of closed-end investment companies,
including BDCs, frequently trade at a discount to their NAV, and we cannot assure you that the market price of our common stock
will not decline following an offering.



We cannot predict
the price at which our common stock will trade. Shares of closed-end investment companies frequently trade at a discount to their
NAV and our stock may also be discounted in the market. This characteristic of closed-end investment companies is separate and
distinct from the risk that our NAV per share may decline. We cannot predict whether shares of our common stock will trade above,
at or below our NAV. In addition, if our common stock trades below its NAV, we will generally not be able to issue additional shares
of our common stock at its market price without first obtaining the approval of our stockholders and our independent directors.



We currently invest a portion of
our capital in high-quality short-term investments, which generate lower rates of return than those expected from
investments made in accordance with our investment objective.



We currently invest
a portion of our capital in cash, cash equivalents, U.S. government securities, money market funds and other high-quality
short-term investments. These securities may earn yields substantially lower than the income that we anticipate receiving once
these proceeds are fully invested in accordance with our investment objective.



Investing in shares of our common stock may involve an
above average degree of risk.



The investments we
make in accordance with our investment objective may result in a higher amount of risk, volatility or loss of principal than alternative
investment options. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment
in our common stock may not be suitable for investors with lower risk tolerance.



Anti-takeover provisions in our charter
documents and other agreements and certain provisions of the Delaware General Corporation Law, or DGCL, could deter
takeover attempts and have an adverse impact on the price of our common stock.



The DGCL, our certificate
of incorporation and our bylaws contain provisions that may have the effect of discouraging a third party from making an acquisition
proposal for us. Among other things, our certificate of incorporation and bylaws:



| | • | provide for a classified board of directors, which may delay the ability of our stockholders to
change the membership of a majority of our Board;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| | • | authorize the issuance of “blank check” preferred stock that could be issued by our
Board to thwart a takeover attempt;
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| | • | do not provide for cumulative voting;
| | - | -------------------------------------



| | • | provide that vacancies on the Board, including newly created directorships, may be filled only
by a majority vote of directors then in office;
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| | • | limit the calling of special meetings of stockholders;
| | - | ------------------------------------------------------



| | • | provide that our directors may be removed only for cause;
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| | • | require supermajority voting to effect certain amendments to our certificate of incorporation and
our bylaws; and
| | - | -----------------------------------------------------------------------------------------------------------------



| | • | require stockholders to provide advance notice of new business proposals and director nominations
under specific procedures.
| | - | ----------------------------------------------------------------------------------------------------------------------------



These anti-takeover
provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to
realize a premium over the market price of our common stock. It is a default under our Key Facility if (i) a person or group
of persons (within the meaning of the Exchange Act) acquires beneficial ownership of 20% or more of our issued and outstanding
common stock or (ii) during any twelve-month period, individuals who at the beginning of such period constituted our Board
cease for any reason, other than death or disability, to constitute a majority of the directors in office. If either event were
to occur, Key could accelerate our repayment obligations under, and/or terminate, our Key Facility.



48







If we elect to issue preferred stock,
holders of any such preferred stock will have the right to elect members of our Board and have class voting rights on certain matters.



The 1940 Act requires
that holders of shares of preferred stock must be entitled as a class to elect two directors at all times and to elect a majority
of the directors if distributions on such preferred stock are in arrears by two years or more, until such arrearage is eliminated.
In addition, certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred
stock, including changes in fundamental investment restrictions and conversion to open-end status and, accordingly, preferred stockholders
could veto any such changes. Restrictions imposed on the declarations and payment of distributions to the holders of our common
stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, might impair our ability to maintain
our qualification as a RIC for U.S. federal income tax purposes.



Your interest in us may be diluted
if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than
our NAV per share, then you will experience an immediate dilution of the aggregate NAV of your shares.



In the event we issue
subscription rights, stockholders who do not fully exercise their rights should expect that they will, at the completion of a rights
offering, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. Such
dilution is not currently determinable because it is not known what proportion of the shares will be purchased as a result of such
rights offering. Any such dilution will disproportionately affect nonexercising stockholders. If the subscription price per share
is substantially less than the current NAV per share, this dilution could be substantial.



In addition, if the
subscription price is less than our NAV per share, our stockholders would experience an immediate dilution of the aggregate NAV
of their shares as a result of such rights offering. The amount of any decrease in NAV is not predictable because it is not known
at this time what the subscription price and NAV per share will be on the expiration date of the rights offering or what proportion
of the shares will be purchased as a result of such rights offering. Such dilution could be substantial.



Investors in offerings of our common
stock may incur immediate dilution upon the closing of such offering.



If the public offering
price for any offering of shares of our common stock is higher than the book value per share of our outstanding common stock, investors
purchasing shares of common stock in any such offering will pay a price per share that exceeds the tangible book value per share
after such offering.



If we sell common stock at a discount
to our NAV per share, stockholders who do not participate in such sale will experience immediate dilution in an amount that may
be material.



The issuance or sale
by us of shares of our common stock at a discount to NAV poses a risk of dilution to our current stockholders. In particular, stockholders
who do not purchase additional shares at or below the discounted price in proportion to their current ownership will experience
an immediate decrease in NAV per share (as well as in the aggregate NAV of their shares if they do not participate at all). These
stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their
voting power than the increase we experience in our assets, potential earning power and voting interests from such issuance or
sale. In addition, such sales may adversely affect the price at which our common stock trades.



Stockholders will experience dilution
in their ownership percentage if they do not participate in our dividend reinvestment plan.



All distributions
payable to stockholders that are participants in our dividend reinvestment plan, or DRIP, are automatically reinvested in shares
of our common stock. As a result, stockholders that do not participate in the DRIP will experience dilution in their ownership
interest over time.



The trading market or market value
of our publicly issued debt securities that we may issue may fluctuate.



Upon issuance,
any publicly issued debt securities that we may issue will not have an established trading market. We cannot assure you that a
trading market for our publicly issued debt securities will ever develop or, if developed, will be maintained. In addition to our
creditworthiness, many factors may materially adversely affect the trading market for, and market value of, our publicly issued
debt securities. These factors include:



| | • | the time remaining to the maturity of these debt securities;
| | - | ------------------------------------------------------------



49







| | • | the outstanding principal amount of debt securities with terms identical to these debt securities;
| | - | --------------------------------------------------------------------------------------------------



| | • | the supply of debt securities trading in the secondary market, if any;
| | - | ----------------------------------------------------------------------



| | • | the redemption or repayment features, if any, of these debt securities;
| | - | -----------------------------------------------------------------------



| | • | the level, direction and volatility of market interest rates generally; and
| | - | ---------------------------------------------------------------------------



| | • | market rate of interest higher or lower than rate borne by the debt securities.
| | - | -------------------------------------------------------------------------------



You should
also be aware that there may be a limited number of buyers when you decide to sell your debt securities. This too may materially
adversely affect the market value of the debt securities or the trading market for the debt securities.



Terms relating to redemption may
materially adversely affect your return on the debt securities that we may issue.



If we issue
debt securities that are redeemable at our option, we may choose to redeem the debt securities at times when prevailing interest
rates are lower than the interest rate paid on the debt securities. In addition, if such debt securities are subject to mandatory
redemption, we may be required to redeem the debt securities at times when prevailing interest rates are lower than the interest
rate paid on the debt securities. In this circumstance, you may not be able to reinvest the redemption proceeds in a comparable
security at an effective interest rate as high as your debt securities being redeemed.



Credit ratings provided by
third party credit rating agencies may not reflect all risks of an investment in debt securities that we may issue.



Credit ratings
provided by third party credit rating agencies are an assessment by third parties of our ability to pay our obligations. Consequently,
real or anticipated changes in our credit ratings will generally affect the market value of debt securities that we may issue.
Credit ratings provided by third party credit rating agencies, however, may not reflect the potential impact of risks related to
market conditions generally or other factors discussed above on the market value of or trading market for any publicly issued debt
securities that we may issue.



Subsequent
sales in the public market of substantial amounts of our common stock by the selling stockholder may have an adverse effect on
the market price of our common stock, and the registration of a substantial amount of insider shares, whether or not actually sold,
may have a negative impact on the market price of our common stock.



Sales of substantial
amounts of our common stock, or the availability of such common stock for sale, whether or not actually sold, could adversely affect
the prevailing market price of our common stock. If this occurs and continues, it could impair our ability to raise additional
capital through the sale of equity securities should we desire to do so.



Item 1B.Unresolved Staff Comments



None



Item 2.Properties



We do not own any
real estate or other physical properties materially important to our operation. Our
headquarters and our Advisor’s headquarters are currently located at 312 Farmington Avenue, Farmington, Connecticut 06032.
We believe that our office facilities are suitable and adequate to our business.



Item 3.Legal Proceedings



Neither we nor our
Advisor is currently subject to any material legal proceedings.



Item 4.Mine Safety
Disclosures



Not applicable



50







PART II



Item 5.Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



Price range of common stock



Our common stock is
traded on the NASDAQ Global Select Market, under the symbol “HRZN.” The following table sets forth, for each fiscal
quarter since January 1, 2013, the range of high and low closing sales price of our common stock, the closing sales price as a
percentage of our NAV and the distributions declared per share by us for each quarter.





|                             |  |        |       |  | Closing Sales Price |   |       | Premium/ Discount of High Sales Price to |  |   | Premium/ Discount of Low Sales  Price to |  |  | Distributions
Declared Per |   
|---------------------------- |  | ------ | ----- |  | ------------------- | - | ----- | ---------------------------------------- |  | - | ---------------------------------------- |  |  | -------------------------- | --
|Period                       |  | NAV(1) |       |  | High                |   |       | Low                                      |  |   | NAV(2)                                   |  |  | NAV(2)                     |   
|Year ended December 31, 2014 |  |        |       |  |                     |   |       |                                          |  |   |                                          |  |  |                            |   
|Fourth Quarter               |  | $      | 14.36 |  |                     | $ | 14.27 |                                          |  | $ | 13.45                                    |  |  |                            | (1
|Third Quarter                |  | $      | 14.38 |  |                     | $ | 14.72 |                                          |  | $ | 12.90                                    |  |  |                            | 2 
|Second Quarter               |  | $      | 14.23 |  |                     | $ | 14.89 |                                          |  | $ | 12.59                                    |  |  |                            | 5 
|First Quarter                |  | $      | 14.32 |  |                     | $ | 14.61 |                                          |  | $ | 12.43                                    |  |  |                            | 2 
|Year ended December 31, 2013 |  |        |       |  |                     |   |       |                                          |  |   |                                          |  |  |                            |   
|Fourth Quarter               |  | $      | 14.14 |  |                     | $ | 14.34 |                                          |  | $ | 12.95                                    |  |  |                            | 1 
|Third Quarter                |  | $      | 14.95 |  |                     | $ | 14.47 |                                          |  | $ | 13.26                                    |  |  |                            | (3
|Second Quarter               |  | $      | 14.89 |  |                     | $ | 14.69 |                                          |  | $ | 12.93                                    |  |  |                            | (1
|First Quarter                |  | $      | 15.12 |  |                     | $ | 15.93 |                                          |  | $ | 14.38                                    |  |  |                            | 5 














|(1) | The NAV per share presented in the table is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices. The NAVs per share shown is based on outstanding shares at the end of such period.                      
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                         
|(2) | Calculated as of the respective high or low closing sales price divided by the quarter end NAV.                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                         
|(3) | We have adopted an “opt out” DRIP for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions are automatically reinvested in additional shares of our common stock, unless they specifically opt out of the DRIP so as to receive cash distributions.
|    |                                                                                                                                                                                                                                                                                                         
|(4) | $0.115 of which is payable on March 16, 2015.                                                                                                                                                                                                                                                           



The last reported
price for our common stock on March 6, 2015 was $14.08 per share. As of March 6, 2015 we had thirteen stockholders of
record, which did not include stockholders for whom shares are held in nominee or “street” name.



Shares of BDCs may
trade at market price that is less than the NAV that is attributable to those shares. The possibility that our shares of common
stock will trade at a discount from NAV or at a premium that is unsustainable over the long term is separate and distinct from
the risk that our NAV will decrease. It is not possible to predict whether our shares will trade at, above or below NAV in the
future.



Sales of unregistered securities



We did not engage
in any sales of unregistered equity securities during the years ended December 31, 2014, 2013 and 2012.



Distributions



We intend to continue
making monthly distributions to our stockholders. The timing and amount of our monthly distributions, if any, is determined by
our Board. Any distributions to our stockholders are declared out of assets legally available for distribution. We monitor available
net investment income to determine if a tax return of capital may occur for the fiscal year. To the extent our taxable earnings
fall below the total amount of our distributions for any given fiscal year, a portion of those distributions may be deemed to be
a return of capital to our common stockholders for U.S. federal income tax purpose. Thus, the source of 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.



51







In
order to qualify as a RIC and to avoid corporate level tax on the income we distribute to our stockholders, we are required under
the Code to distribute an amount generally at least equal to 90% of the sum of our net ordinary income and net short-term capital
gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. We refer to such amount asthe
Annual Distribution Requirementin this annual report on Form 10-K. Additionally, we
must distribute an amount generally at least equal to the sum of at least 98% of our ordinary income for the calendar year (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 the calendar year; plus any net ordinary income or capital gain net income for preceding
years that were not distributed during such years and on which we previously paid no U.S. federal corporate income tax to avoid
a U.S. federal excise tax. If we do not distribute at least a certain minimum percentage of our income annually, we will suffer
adverse tax consequences, including the possible loss of our qualification as a RIC. We cannot assure stockholders that they will
receive any distributions.



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 undistributed income. Distributions of any such carryover taxable income must
be made through a distribution declared the latter of the filing date of the final tax return related to the year in which such
taxable income was generated or the 15th day of the ninth month following the taxable year, in order to count towards
the satisfaction of the Annual Distribution Requirement in the year in which such income was generated. We can offer no assurance
that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may
be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940
Act or if distributions are limited by the terms of any of our borrowings. See “Item 1. Business — Regulation —
Taxation as a RIC.”



We have adopted an
“opt out” DRIP for our common stockholders. As a result, if we make a distribution, then stockholders’ cash distributions
are automatically reinvested in additional shares of our common stock, unless they specifically opt out of the DRIP. If a stockholder
opts out, that stockholder receives cash distributions. Although distributions paid in the form of additional shares of common
stock are generally subject to U.S. federal, state and local taxes, stockholders participating in our DRIP do not receive any corresponding
cash distributions with which to pay any such applicable taxes. 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.



The following table
reflects the monthly cash distributions, including dividends and returns of capital per share that our Board has declared since
January 1, 2013, including shares issued under our DRIP, on our common stock:



|Record Dates                 |  | Payment Date       |  | Distributions Declared |      
|---------------------------- |  | ------------------ |  | ---------------------- | -----
|Year ended December 31, 2014 |  |                    |  |                        |      
|February 19, 2015            |  | March 16, 2015     |  | $                      | 0.115
|January 20, 2015             |  | February 13, 2015  |  |                        | 0.115
|December 17, 2014            |  | January 15, 2015   |  |                        | 0.115
|November 19, 2014            |  | December 15, 2014  |  |                        | 0.115
|October 20, 2014             |  | November 17, 2014  |  |                        | 0.115
|September 18, 2014           |  | October 15, 2014   |  |                        | 0.115
|August 19, 2014              |  | September 15, 2014 |  |                        | 0.115
|July 21, 2014                |  | August 15, 2014    |  |                        | 0.115
|June 18, 2014                |  | July 17, 2014      |  |                        | 0.115
|May 20, 2014                 |  | June 16, 2014      |  |                        | 0.115
|April 17, 2014               |  | May 15, 2014       |  |                        | 0.115
|March 19, 2014               |  | April 15, 2014     |  |                        | 0.115
|Total                        |  |                    |  | $                      | 1.380



52







|Year ended December 31, 2013 |  |                    |  |   |       | 
|---------------------------- |  | ------------------ |  | - | ----- | 
|February 17, 2014            |  | March 17, 2014     |  | $ | 0.115 | 
|January 20, 2014             |  | February 14, 2014  |  |   | 0.115 | 
|December 16, 2013            |  | January 15, 2014   |  |   | 0.115 | 
|November 19, 2013            |  | December 16, 2013  |  |   | 0.115 | 
|October 17, 2013             |  | November 15, 2013  |  |   | 0.115 | 
|September 18, 2013           |  | October 15, 2013   |  |   | 0.115 | 
|August 19, 2013              |  | September 16, 2013 |  |   | 0.115 | 
|July 17, 2013                |  | August 15, 2013    |  |   | 0.115 | 
|June 20, 2013                |  | July 15, 2013      |  |   | 0.115 | 
|May 20, 2013                 |  | June 17, 2013      |  |   | 0.115 | 
|April 18, 2013               |  | May 15, 2013       |  |   | 0.115 | 
|March 20, 2013               |  | April 15, 2013     |  |   | 0.115 | 
|Total                        |  |                    |  | $ | 1.380 | 



On March 6, 2015, our Board declared distributions
as set forth in the following table:



|Record Dates   |  | Payment Date   |  | Distributions Declared |      
|-------------- |  | -------------- |  | ---------------------- | -----
|May 20, 2015   |  | June 15, 2015  |  | $                      | 0.115
|April 20, 2015 |  | May 15, 2015   |  | $                      | 0.115
|March 20, 2015 |  | April 15, 2015 |  | $                      | 0.115



Stock performance graph



The following graph
compares the return on our common stock with that of the Standard & Poor’s 500 Stock Index, the NASDAQ Financial-100
Index and the S&P BDC Index, for the period from October 29, 2010 (the date that our common stock was first listed on
NASDAQ) through December 31, 2014. The graph assumes that, on October 29, 2010, a person invested $100 in each of our
common stock, the S&P 500 Index, the NASDAQ Financial-100 Index and the S&P BDC Index. The graph measures total stockholder
return, which takes into account both changes in stock price and distributions. It assumes that distributions paid are invested
in like securities. The graph and other information furnished under this Part II Item 5 of Form 10-K shall not be
deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C,
or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in this graph is not necessarily
indicative of future stock price performance.







53







Item 6.Selected Financial Data



The following selected
consolidated financial data of the Company as of December 31, 2014, 2013, 2012, 2011 and 2010, and for the years ended December
31, 2014, 2013, 2012 and 2011, the period from October 29, 2010 to December 31, 2010 and the period from January 1, 2010 to October
28, 2010 are derived from the consolidated financial statements that have been audited by McGladrey LLP, an independent registered
public accounting firm. For the period prior to October 29, 2010, the financial data refer to Compass Horizon, our predecessor
company. These selected financial data should be read in conjunction with our financial statements and related notes thereto and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”



|                                                                            |  | Post-initial
    public offering as a BDC |         |   | Pre-initial
    public offering prior to becoming a BDC |  
|--------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | ------------------------------------------------------- | -
|(In thousands, except per share
    data)                                   |  | Year
    Ended December 31, 2014          |         |   | Year
    Ended December 31, 2013                        |  
|Statement
    of Operations Data:                                           |  |                                           |         |   |                                                         |  
|Total investment
    income                                                 |  | $                                         | 31,254  |   |                                                         | $
|Base management fee                                                         |  |                                           | 4,410   |   |                                                         |  
|Performance based incentive
    fee                                         |  |                                           | 2,005   |   |                                                         |  
|All other expenses                                                          |  |                                           | 13,962  |   |                                                         |  
|Net investment income
    before excise tax                                 |  |                                           | 10,877  |   |                                                         |  
|Provision for excise
    tax                                                |  |                                           | (160    | ) |                                                         |  
|Net investment income                                                       |  |                                           | 10,717  |   |                                                         |  
|Net realized (loss)
    gain on investments                                 |  |                                           | (3,576  | ) |                                                         |  
|Provision for excise
    tax                                                |  |                                           | —       |   |                                                         |  
|Net unrealized appreciation
    (depreciation) on investments               |  |                                           | 8,289   |   |                                                         |  
|Credit for loan losses                                                      |  |                                           | —       |   |                                                         |  
|Net increase in net
    assets resulting from operations                    |  | $                                         | 15,430  |   |                                                         | $
|Per Share Data:                                                             |  |                                           |         |   |                                                         |  
|Net asset value                                                             |  | $                                         | 14.36   |   |                                                         | $
|Net investment income                                                       |  |                                           | 1.11    |   |                                                         |  
|Net realized (loss)
    gain on investments                                 |  |                                           | (0.37   | ) |                                                         |  
|Net change in unrealized
    appreciation (depreciation) on investments     |  |                                           | 0.86    |   |                                                         |  
|Net increase in net
    assets resulting from operations                    |  |                                           | 1.60    |   |                                                         |  
|Per share distributions declared                                            |  |                                           | 1.38    |   |                                                         |  
|Dollar amount of distributions
    declared                                 |  | $                                         | 13,282  |   |                                                         | $
|Statement
    of Assets and Liabilities Data at Period End:                 |  |                                           |         |   |                                                         |  
|Investments, at fair
    value/book value                                   |  | $                                         | 205,101 |   |                                                         | $
|Other assets                                                                |  |                                           | 20,095  |   |                                                         |  
|Total assets                                                                |  |                                           | 225,196 |   |                                                         |  
|Long-term obligations                                                       |  |                                           | 81,753  |   |                                                         |  
|Total liabilities                                                           |  |                                           | 86,948  |   |                                                         |  
|Total net assets/members’
    capital                                       |  | $                                         | 138,248 |   |                                                         | $
|Other
    data:                                                             |  |                                           |         |   |                                                         |  
|Weighted annualized
    yield on income producing investments at fair value |  |                                           | 15.3    | % |                                                         |  
|Number of portfolio
    companies at period end                             |  |                                           | 50      |   |                                                         |  



54







Item 7.Management’s Discussion
and Analysis of Financial Condition and Results of Operations



The information
contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing
elsewhere in this annual report on Form 10-K.



Forward-looking statements



This annual report
on Form 10-K, including 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 annual report on Form 10-K
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 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;
| | - | ----------------------------------------



| | • | 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 “Item 1A – Risk Factors” and elsewhere in this annual report on Form 10-K.



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 annual report on Form 10-K, 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 SEC, including, reports on Form 10-Q and current reports on Form 8-K.



55







You
should understand that under Sections 27A(b)(2)(B) and (D) of the Securities Act and Sections 21E(b)(2)(B) and (D) of the Exchange
Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements
made in connection with this annual report on Form 10-K or any periodic reports we file under the Exchange Act.



Overview



We are a specialty
finance company that lends to and invests in development-stage companies in 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 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 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 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, 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 which a majority of the members are independent
of us. Under 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 the Administration Agreement 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 asset class as of December 31, 2014 and 2013:



|                  |  | December 31, 2014 |    |  | December 31, 2013 |  
|----------------- |  | ----------------- | -- |  | ----------------- | -
|                  |  | # of Investments  |    |  | Fair Value        |  
|                  |  |                   |    |  |                   |  
|Term loans        |  |                   | 49 |  |                   | $
|Revolving loans   |  |                   | 1  |  |                   |  
|Total loans       |  |                   | 50 |  |                   |  
|Warrants          |  |                   | 75 |  |                   |  
|Other investments |  |                   | 1  |  |                   |  
|Equity            |  |                   | 4  |  |                   |  
|Total             |  |                   |    |  |                   | $



56







The following table
shows total portfolio investment activity as of and for the years ended December 31, 2014 and 2013:



|                                               |  | December 31,   |        
|---------------------------------------------- |  | -------------- | -------
|                                               |  | 2014           |        
|                                               |  | (In thousands) |        
|Beginning portfolio                            |  | $              | 221,284
|New debt investments                           |  |                | 95,323 
|Less refinanced balances                       |  |                | —      
|Net new debt investments                       |  |                | 95,323 
|Principal received on investments              |  |                | (42,830
|Early pay-offs                                 |  |                | (66,675
|Accretion of debt investment fees              |  |                | 2,339  
|New debt investment fees                       |  |                | (1,392 
|New equity                                     |  |                | 12     
|Sales of investments                           |  |                | (7,673 
|Net realized loss on investments               |  |                | (3,576 
|Net appreciation (depreciation) on investments |  |                | 8,289  
|Other                                          |  |                | —      
|Ending portfolio                               |  | $              | 205,101



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 December 31, 2014 and 2013:



|                                    |  | December 31, 2014              |         |  | December 31, 2013             | 
|----------------------------------- |  | ------------------------------ | ------- |  | ----------------------------- | 
|                                    |  | Debt investments at Fair Value |         |  | Percentage of Total Portfolio | 
|                                    |  |                                |         |  | (In thousands)                | 
|Life Science                        |  |                                |         |  |                               | 
|Biotechnology                       |  | $                              | 21,253  |  |                               | 
|Medical Device                      |  |                                | 22,225  |  |                               | 
|Technology                          |  |                                |         |  |                               | 
|Communications                      |  |                                | 17,732  |  |                               | 
|Consumer-Related                    |  |                                | 6,337   |  |                               | 
|Internet and Media                  |  |                                | —       |  |                               | 
|Networking                          |  |                                | 981     |  |                               | 
|Power Management                    |  |                                | —       |  |                               | 
|Semiconductors                      |  |                                | 30,355  |  |                               | 
|Software                            |  |                                | 53,583  |  |                               | 
|Cleantech                           |  |                                |         |  |                               | 
|Alternative Energy                  |  |                                | 8,009   |  |                               | 
|Consumer-Related                    |  |                                | 396     |  |                               | 
|Energy Efficiency                   |  |                                | 4,414   |  |                               | 
|Waste Recycling                     |  |                                | —       |  |                               | 
|Healthcare Information and Services |  |                                |         |  |                               | 
|Diagnostics                         |  |                                | 17,637  |  |                               | 
|Other                               |  |                                | 6,946   |  |                               | 
|Software                            |  |                                | 9,312   |  |                               | 
|Total                               |  | $                              | 199,180 |  |                               | 



57







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 24% and 22% of total debt investments outstanding as of December 31, 2014 and 2013, respectively.
No single debt investment represented more than 10% of our total debt investments outstanding as of December 31, 2014 or 2013.



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 increased risk. Our internal credit rating system is not a national credit rating system. See “Item 1
– Business” for a more detailed description of the internal credit rating system. The following table shows the classification
of our debt investment portfolio by credit rating as of December 31, 2014 and December 31, 2013:



|              |  | December 31, 2014             |         |  | December 31, 2013             | 
|------------- |  | ----------------------------- | ------- |  | ----------------------------- | 
|              |  | Debt investment at Fair Value |         |  | Percentage of debt investment | 
|              |  |                               |         |  | (In thousands)                | 
|Credit Rating |  |                               |         |  |                               | 
|4             |  | $                             | 44,082  |  |                               | 
|3             |  |                               | 138,109 |  |                               | 
|2             |  |                               | 11,746  |  |                               | 
|1             |  |                               | 5,243   |  |                               | 
|Total         |  | $                             | 199,180 |  |                               | 



As of December 31,
2014 and 2013, our debt investment had a weighted average credit rating of 3.1 and 3.0, respectively. As of December 31, 2014,
there were two investments with an internal credit rating of 1, with an aggregate cost of $5.4 million and an aggregate fair value
of $5.2 million. As of December 31, 2013, there were five investments with an internal credit rating of 1, with an aggregate cost
of $23.2 million and an aggregate fair value of $13.9 million.



Consolidated results
of operations



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



The following table
shows consolidated results of operations for the years ended December 31, 2014, 2013 and 2012:



|                                                     |  | 2014           |         |   | 2013 |   |         | 2012 | 
|---------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- | 
|                                                     |  | (In thousands) |        
|Total investment income                              |  | $              | 31,254  |   |      | $ | 33,643  |      | 
|Total expenses                                       |  |                | 20,377  |   |      |   | 20,132  |      | 
|Net investment income before excise tax              |  |                | 10,877  |   |      |   | 13,511  |      | 
|Provision for excise tax                             |  |                | (160    | ) |      |   | (240    | )    | 
|Net investment income                                |  |                | 10,717  |   |      |   | 13,271  |      | 
|Net realized (loss) gain                             |  |                | (3,576  | ) |      |   | (7,509  | )    | 
|Net unrealized appreciation (depreciation)           |  |                | 8,289   |   |      |   | (2,254  | )    | 
|Net increase in net assets resulting from operations |  | $              | 15,430  |   |      | $ | 3,508   |      | 
|Average investments, at fair value                   |  | $              | 204,862 |   |      | $ | 233,045 |      | 
|Average debt outstanding                             |  | $              | 102,754 |   |      | $ | 115,562 |      | 



58







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. As a result, annual comparisons of net increase in net
assets resulting from operations may not be meaningful.



Investment income



Total investment income
decreased by $2.4 million, or 7.1%, to $31.2 million for the year ended December 31, 2014 as compared to the year ended
December 31, 2013. For the year ended December 31, 2014, total investment income consisted primarily of $28.6 million
in interest income from investments, which included $6.0 million in income from the accretion of origination fees and ETPs,
and $2.6 million of fee income. Interest income on investments decreased by $3.3 million, or 10.2%, for the year ended December 31,
2014 as compared to the year ended December 31, 2013. Interest income on investments decreased primarily due to a decrease
of $28.2 million, or 12.1%, in the average size of our investment portfolio. Fee income on investments was primarily comprised
of debt investment prepayment fees collected from our portfolio companies and increased by $0.9 million, or 50.5% primarily due
to a larger aggregate amount of principal prepayments for the year ended December 31, 2014.



Total investment income
increased by $7.0 million, or 26.2%, to $33.6 million for the year ended December 31, 2013 as compared to the year ended December
31, 2012. For the year ended December 31, 2013, total investment income consisted primarily of $31.9 million in interest income
from investments, which included $6.4 million in income from the accretion of origination fees and ETPs, and $1.7 million of fee
income. Interest income on investments increased by $6.6 million, or 26.2%, for the year ended December 31, 2013 as compared
to the year ended December 31, 2012. Interest income on investments increased primarily due to an increase of $45.3 million,
or 24.1%, in the average size of our investment portfolio. Fee income on investments was primarily comprised of debt investment
prepayment fees collected from our portfolio companies and increased by $0.4 million, or 26.5% primarily due to a one-time success
fee received upon the completion of an acquisition of one of our portfolio companies.



For the years ended
December 31, 2014, 2013 and 2012, our dollar-weighted annualized yield on average debt investments was 15.3%, 14.4% and 14.2%,
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 may 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 20%, 23% and 22% of investment income for
the years ended December 31, 2014, 2013 and 2012, respectively.



Expenses



Total expenses increased
by $0.2 million, or 1.2%, to $20.4 million for the year ended December 31, 2014 as compared to the year ended December 31,
2013. Total expenses increased by $5.7 million, or 39.4%, to $20.1 million for the year ended December 31, 2013
as compared to the year ended December 31, 2012. 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 increased
by $0.6 million, or 7.2%, to $8.7 million for the year ended December 31, 2014 as compared to the year ended December 31,
2013. Interest expense, which includes the amortization of debt issuance costs, increased primarily due to the acceleration of
$1.1 million of unamortized debt issuance costs and a $0.8 million prepayment fee related to the termination of our Term Loan Facility,
offset by a decrease in average borrowings of $12.8 million, or 11.1%. Interest expense increased by $3.8 million, or 89.7%,
to $8.1 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012. Interest expense
increased primarily due to an increase in average borrowings of $52.6 million, or 83.5%.



Base management fee
expense decreased by $0.8 million, or 15.3%, to $4.4 million for the year ended December 31, 2014 as compared to
the year ended December 31, 2013. Base management fee expense decreased primarily due to (i) a decrease in average gross assets
of $19.6 million, or 7.4%, (ii) our Advisor’s waiver of base management fees of $0.2 million, and (iii) as of July 1, 2014,
the base management fee was calculated on gross assets less cash and cash equivalents. Base management fee expense increased by
$1.0 million, or 23.8%, to $5.2 million for the year ended December 31, 2013 as compared to the year ended December 31,
2012. Base management fee expense increased primarily due to an increase in average gross assets of $56.4 million, or 26.9%.



59







Performance based
incentive fee expense decreased by $1.3 million, or 39.6%, to $2.0 million for the year ended December 31, 2014
as compared to the year ended December 31, 2013. Performance based incentive fee decreased primarily due to lower Pre-Incentive
Fee Net Investment Income as a result of the one-time costs associated with the termination of our Term Loan Facility. Performance
based incentive fee increased by $0.5 million, or 16.5%, to $3.3 million for the year ended December 31, 2013 as
compared to the year ended December 31, 2012. Performance based incentive fee increased primarily due to part one of the incentive
fee increasing as Pre-Incentive Fee Net Investment Income increased year over year.



In 2014 and 2013 we
elected to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax
on such income. For the years ended December 31, 2014 and 2013, the Company elected to carry forward taxable income in excess of
current year distributions of $4.0 million and $6.1 million, respectively, and recorded at both December 31, 2014 and 2013 an excise
tax payable of $0.2 million.



Professional fees
and general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses for the year
ended December 31, 2014 increased compared to the year ended December 31, 2013, due to increased legal fees and other costs associated
with certain non-accrual investments and other assets. We believe there will be no ongoing expenses associated with these non-accrual
investments.



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 year ended
December 31, 2014, we realized net losses totaling $3.6 million primarily due to the resolution of three debt investments that
were previously on non-accrual status which were partially offset by realized gains on the sale of equity received upon the exercise
of warrants. As a result of the resolution of the debt investments that were on non-accrual, we recognized $5.0 million of realized
net losses and $7.6 million of unrealized appreciation. During the year ended December 31, 2013, we realized losses totaling $7.5
million primarily due to two debt investments that were on non-accrual status. During the year ended December 31, 2012, we realized
net gains totaling $0.1 million primarily due to the sale of equity received upon the exercise of warrants of one portfolio company.



During the year ended
December 31, 2014, net unrealized appreciation on investments totaled $8.3 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. During the year ended December 31, 2013, net unrealized depreciation on investments totaled $2.3 million which
was primarily due to the unrealized depreciation on debt investments on non-accrual status offset by the reversal of previously
recorded unrealized depreciation on debt investments that were settled in the period. During the year ended December 31, 2012,
net unrealized depreciation on investments totaled $8.1 million which was primarily due to the unrealized depreciation on the debt
investments on non-accrual status.



Liquidity and capital resources



As of December 31,
2014 and 2013, we had cash and investments in money market funds of $8.4 million and $26.5 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 December 31, 2014 and 2013, we had $2.9 million and $6.0 million, respectively, of restricted investments in
money market funds. Restricted investments in money market funds may be used to make monthly interest and principal payments on
our Asset-Backed Notes. Our primary sources of capital have been from our private and public equity offerings, use of our revolving
credit facilities and issuance of our 2019 Notes and Asset-Backed Notes.



As of December 31,
2014, the outstanding principal balance under the Key Facility was $10.0 million. As of December 31, 2014 and 2013, we had borrowing
capacity under the Key Facility of $40.0 million and $50.0 million, respectively, of which $35.6 million and $4.8 million, respectively,
was available, subject to existing terms and advance rates.



60







Our operating activities
provided cash of $36.7 million for the year ended December 31, 2014, and our financing activities used cash of $53.6 million
for the same period. Our operating activities provided cash primarily from principal payments received on debt investments, partially
offset by investments made in portfolio companies. Our financing activities used cash primarily to pay down borrowings and pay
distributions to our stockholders.



Our operating activities
provided cash of $6.5 million for the year ended December 31, 2013, and our financing activities provided cash of $17.8 million
for the same period. Our operating activities provided cash primarily from principal payments received on debt investments, offset
by investments made in portfolio companies. Our financing activities provided cash primarily from the issuance of our Asset-Backed
Notes. This increase from investing activities was partially offset by repayments of $56.7 million of borrowings and $12.6 million
of distributions paid to our stockholders.



Our operating activities
used cash of $36.1 million for the year ended December 31, 2012, and our financing activities provided cash of $35.8 million
for the same period. Our operating activities used cash primarily for investing in portfolio companies, net of principal payments
received. Our financing activities provided cash primarily from the issuance of our 2019 Notes for net proceeds of $31.7 million,
and the completion of a follow-on public offering of 1.9 million shares of common stock for net proceeds of $29.5 million. These
increases from investing activities were partially offset by repayments of $8.6 million of borrowings and $15.1 million of distributions
paid to our stockholders.



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



In order to 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 December 31, 2014 and 2013:



|                   |  | December 31, 2014 |        
|------------------ |  | ----------------- | -------
|                   |  | Total Commitment  |        
|                   |  | (In thousands)    |        
|Asset-Backed Notes |  | $                 | 38,753 
|Key Facility       |  |                   | 50,000 
|2019 Notes         |  |                   | 33,000 
|Total              |  | $                 | 121,753



|                   |  | December 31, 2013 |        
|------------------ |  | ----------------- | -------
|                   |  | Total Commitment  |        
|                   |  | (In thousands)    |        
|Asset-Backed Notes |  | $                 | 79,343 
|Fortress Facility  |  |                   | 75,000 
|Key Facility       |  |                   | 50,000 
|2019 Notes         |  |                   | 33,000 
|Total              |  | $                 | 237,343



On November 4, 2013,
through our wholly owned subsidiary, Credit II, we renewed and amended our revolving credit facility which, among other things,
assigned all rights and obligations to Key. 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 December 31, 2014
and 2013.



61







The Key Facility has
an accordion feature which allows for an increase in the total loan commitment to $150 million from the current $50 million commitment
provided by Key. The Key Facility is collateralized by loans held by Credit II and permits an advance rate of up to fifty percent
(50%) of eligible loans held by Credit II. The Key Facility contains covenants that, among other things, require us to maintain
a minimum net worth, to restrict the loans securing the Key Facility to certain criteria for qualified loans and to comply with
portfolio company concentration limits as defined in the related loan agreement. We may request advances under the Key Facility
through November 4, 2016, 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 loans to our portfolio companies. All
outstanding advances under the Key Facility are due and payable on November 4, 2018.



On March 23, 2012,
we issued and sold 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 senior 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 December 31, 2014, we were in material compliance with the terms of the 2019 Notes.The 2019 Notes are listed on the
NYSE under the symbol “HTF”.



We, through our wholly
owned subsidiary Credit III entered into 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%. The interest rate was 7.00% as of December
31, 2013.



The Fortress Facility
permitted advances through August 23, 2016, or the Draw Period. After the Draw Period, we would have been required to repay the
outstanding advances under the Fortress Facility as of such date, at such times and in such amounts as were necessary to maintain
compliance with the terms and conditions of the Fortress Facility, particularly the condition that the principal balance of the
Fortress Facility not exceed sixty-six percent (66%) of the aggregate principal balance of our eligible loans to our portfolio
companies. The unused line fee equaled 1.00% of any unborrowed amount available under the Fortress Facility annually. All outstanding
advances under the Fortress Facility were due and payable on August 23, 2017.



The Fortress Facility
was collateralized by loans and warrants held by Credit III and permitted an advance rate of up to 66% of eligible loans held by
Credit III. The Fortress Facility contained covenants that, among other things, required us to maintain a minimum net worth, to
restrict the loans securing the Fortress Facility to certain criteria for qualified loans and to comply with portfolio company
concentration limits as defined in the related loan agreement.



Effective June 17,
2014, we 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, we have no borrowing capacity under the Fortress Facility as of December 31,
2014. Upon termination of the Fortress Facility, we accelerated $1.1 million of unamortized debt issuance cost and paid a $0.8
million prepayment fee.



On June 28, 2013,
we completed a $189.3 million securitization of secured loans which we originated. 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, 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.



62







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 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.



On June 3, 2013, we
entered into a promissory note with Guggenheim Securities, or the Promissory Note, whereby Guggenheim Securities made a term loan
to us in the aggregate principal amount of $15 million, or the Term Loan. We granted Guggenheim Securities a security interest
in all of our assets to secure the Term Loan. On June 28, 2013, we used a portion of the proceeds of the private placement of the
Asset-Backed Notes to repay all of our outstanding obligations under the Term Loan and the security interest of Guggenheim Securities
was released.



As of December 31,
2014 and 2013, other assets were $4.0 million and $5.7 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 December 31, 2014:



|                     |  | Payments due by period |        
|-------------------- |  | ---------------------- | -------
|                     |  | Total                  |        
|                     |  | (In thousands)         |        
|Borrowings           |  | $                      | 81,753 
|Unfunded commitments |  |                        | 25,700 
|Total                |  | $                      | 107,453



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 December 31, 2014,
we had unfunded commitments of $25.7 million. These commitments will be subject to the same underwriting and ongoing portfolio
maintenance as are the financial instruments that we hold on our balance sheet. 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.



63









Distributions



In order to qualify
as a RIC and to avoid corporate level tax on the income we distribute to our stockholders, we are required under the Code to distribute
an amount generally at least equal to 90% of our investment company taxable income to our stockholders on an annual basis. Additionally,
we must distribute or be deemed to have distributed by December 31 of each calendar year an amount generally at least equal to
the sum of 98% of our ordinary income (taking into account certain deferrals and elections) for such calendar year and 98.2% of
the excess of our capital gains over our capital losses (adjusted for certain ordinary losses), generally computed on the basis
of the one-year period ending on October 31 of such calendar year; and 100% of any ordinary income and the excess of capital gains
over capital losses for preceding years that were not distributed during such years and on which we previously paid no U.S. federal
income tax to avoid a U.S. federal corporate excise tax. We intend to make monthly distributions to our stockholders as determined
by our Board.



We may not be able
to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions
from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable
to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse
tax consequences, including the possible loss of our qualification 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” 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 years ended December 31, 2014, 2013 and 2012, we paid the Advisor $6.4 million, $8.5 million and $7.1 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, Messrs. Pomeroy and 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.



64







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



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



65







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 year ended December 31, 2014, we recognized as interest
income interest payments of $0.3 million 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 warrants 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, among other things, we are required to meet certain source of income and asset diversification
requirements, and we must timely distribute to our stockholders at least 90% of 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.



66







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, or ASC. 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 December 31, 2014 and 2013.



Recently issued accounting standards



In June 2013, the
FASB issued Accounting Standards Update 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the
Scope, Measurement and Disclosure Requirements, or ASU 2013-08, containing new guidance on assessing whether an entity is an investment
company, requiring non-controlling ownership interests in investment companies to be measured at fair value and requiring certain
additional disclosures. This guidance is effective for annual and interim periods beginning on or after December 15, 2013. ASU
2013-08 did not have a material impact on our consolidated financial position or disclosures.



Item 7A.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 December 31, 2014 and 2013, 64% and 11%, respectively, of the outstanding
principal amount of our debt investments bore interest at floating rates and 36% and 89%, respectively, of the outstanding principal
amount of our debt investment bore interest at fixed 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 December 31, 2014 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 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.



67







Item 8.  Consolidated
Financial Statements and Supplementary Data



Index to Consolidated Financial Statements



|                                                                                                      | Page
|----------------------------------------------------------------------------------------------------- | ----
|Management’s Report on Internal Control over Financial Reporting                                      | 69  
|Report of Independent Registered Public Accounting Firm                                               | 70  
|Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting  | 71  
|Consolidated Statements of Assets and Liabilities as of December 31, 2014 and 2013                    | 72  
|Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012            | 73  
|Consolidated Statements of Changes in Net Assets for the Years Ended December 31, 2014, 2013 and 2012 | 74  
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012            | 75  
|Consolidated Schedules of Investments as of December 31, 2014 and 2013                                | 76  
|Notes to the Consolidated Financial Statements                                                        | 85  



68







Management’s Report on Internal
Control over Financial Reporting



Management of Horizon
Technology Finance Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control
over the Company’s financial reporting. The Company’s internal control system is a process designed to provide reasonable
assurance to management and the board of directors regarding the preparation and fair presentation of published financial statements.



The Company’s
internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions recorded necessary to permit the preparation of financial statements
in accordance with U.S. generally accepted accounting principles. The Company’s policies and procedures also provide reasonable
assurance that receipts and expenditures are being made only in accordance with authorizations of management and the directors
of the Company, and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the Company’s financial statements.



All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation
of effectiveness as to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.



Management assessed
the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment,
we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control —
Integrated Framework issued in 1992. Based on the assessment, management believes that, as of December 31, 2014, the Company’s
internal control over financial reporting is effective based on those criteria.



The Company’s
independent registered public accounting firm that audited the financial statements has issued an audit report on the effectiveness
of the Company’s internal control over financial reporting as of December 31, 2014, which appears in this annual report on
Form 10-K.

69









Report of Independent Registered Public
Accounting Firm



To the Board of Directors and Stockholders

Horizon Technology Finance Corporation



We have audited the accompanying consolidated
statements of assets and liabilities, including the consolidated schedules of investments, of Horizon Technology Finance Corporation
and Subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations,
changes in net assets, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. Our procedures included confirmation of investments as of December 31, 2014 and 2013, by correspondence with custodians
or borrowers or by other appropriate auditing procedures where replies from custodian or borrowers were not received. We believe
that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Horizon Technology Finance Corporation
and Subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.



We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), Horizon Technology Finance Corporation and Subsidiaries’
internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992, and our report
dated March 10, 2015 expressed an unqualified opinion on the effectiveness of Horizon Technology Finance Corporation’s internal
control over financial reporting.



/s/  McGladrey LLP



New Haven, Connecticut

March 10, 2015



70







Report
of Independent Registered Public Accounting Firm on

Internal
Control over Financial Reporting



To the Board of Directors and Stockholders

Horizon Technology Finance Corporation



We have audited Horizon Technology Finance
Corporation and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2014,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission in 1992. The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.



We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.



A company's internal control over financial
reporting is a process designed 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. A company's internal
control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect
on the financial statements.



Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.



In our opinion, Horizon Technology Finance
Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December
31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 1992.



We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Horizon
Technology Finance Corporation and Subsidiaries as of December 31, 2014 and 2013, and for each of the three years in the period
ended December 31, 2014, 2013 and 2012, and our report dated March 10, 2015 expressed an unqualified opinion.



/s/McGladrey LLP

New Haven, Connecticut

March 10, 2015



71







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Assets and
Liabilities

(In thousands, except share data)



|                                                                                                                                                                   |  | December 31, |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------
|                                                                                                                                                                   |  | 2014         |        
|                                                                                                                                                                   |  |              |        
|Assets                                                                                                                                                             |  |              |        
|Non-affiliate investments at fair value (cost of $209,838 and $234,310, respectively) (Note 4)                                                                     |  | $            | 205,101
|Investment in money market funds                                                                                                                                   |  |              | 27     
|Cash                                                                                                                                                               |  |              | 8,417  
|Restricted investments in money market funds                                                                                                                       |  |              | 2,906  
|Interest receivable                                                                                                                                                |  |              | 4,758  
|Other assets                                                                                                                                                       |  |              | 3,987  
|Total assets                                                                                                                                                       |  | $            | 225,196
|                                                                                                                                                                   |  |              |        
|Liabilities                                                                                                                                                        |  |              |        
|Borrowings (Note 6)                                                                                                                                                |  | $            | 81,753 
|Distribution payable                                                                                                                                               |  |              | 3,322  
|Base management fee payable (Note 3)                                                                                                                               |  |              | 356    
|Incentive fee payable (Note 3)                                                                                                                                     |  |              | 799    
|Other accrued expenses                                                                                                                                             |  |              | 718    
|Total liabilities                                                                                                                                                  |  |              | 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 December 31, 2014 and 2013                      |  |              | —      
|Common stock, par value $0.001 per share, 100,000,000 shares authorized, 9,628,124 and 9,608,949 shares outstanding as of December 31, 2014 and 2013, respectively |  |              | 10     
|Paid-in capital in excess of par                                                                                                                                   |  |              | 155,240
|Accumulated (distributed  in excess of) undistributed net investment income                                                                                        |  |              | (1,102 
|Net unrealized depreciation on investments                                                                                                                         |  |              | (4,737 
|Net realized loss on investments                                                                                                                                   |  |              | (11,163
|Total net assets                                                                                                                                                   |  |              | 138,248
|Total liabilities and net assets                                                                                                                                   |  | $            | 225,196
|Net asset value per common share                                                                                                                                   |  | $            | 14.36  



See Notes to Consolidated Financial Statements



72







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Operations

(In thousands, except share data)



|                                                          |  | Year Ended December 31, |          
|--------------------------------------------------------- |  | ----------------------- | ---------
|                                                          |  | 2014                    |          
|Investment income                                         |  |                         |          
|Interest income on non-affiliate investments              |  | $                       | 28,636   
|Fee income on non-affiliate investments                   |  |                         | 2,618    
|Total investment income                                   |  |                         | 31,254   
|Expenses                                                  |  |                         |          
|Interest expense                                          |  |                         | 8,707    
|Base management fee1 (Note 3)                             |  |                         | 4,410    
|Performance based incentive fee1 (Note 3)                 |  |                         | 2,005    
|Administrative fee (Note 3)                               |  |                         | 1,113    
|Professional fees                                         |  |                         | 3,074    
|General and administrative                                |  |                         | 1,068    
|Total expenses                                            |  |                         | 20,377   
|Net investment income before excise tax                   |  |                         | 10,877   
|Provision for excise tax (Note 7)                         |  |                         | (160     
|Net investment income                                     |  |                         | 10,717   
|                                                          |  |                         |          
|Net realized and unrealized (loss) gain on investments    |  |                         |          
|Net realized (loss) gain on investments                   |  |                         | (3,576   
|Net unrealized appreciation (depreciation) on investments |  |                         | 8,289    
|                                                          |  |                         |          
|Net realized and unrealized gain (loss) on investments    |  |                         | 4,713    
|                                                          |  |                         |          
|Net increase in net assets resulting from operations      |  | $                       | 15,430   
|Net investment income per common share                    |  | $                       | 1.11     
|Net increase in net assets per common share               |  | $                       | 1.60     
|Distributions declared per share                          |  | $                       | 1.38     
|Weighted average shares outstanding                       |  |                         | 9,621,011



|(1) | During the years ended December 31, 2014 and 2013, the Advisor waived $238 and $144 of base management fee, respectively. During the year ended December 31, 2014, the Advisor waived $107 of performance based incentive fee. Had these expenses not been waived, the base management fee for the years ended December 31, 2014 and 2013 would have been $4,648 and $5,353, respectively, and performance based incentive fee for the year ended December 31, 2014 would have been $2,112.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See Notes to Consolidated Financial Statements



73







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Changes in
Net Assets

(In thousands, except share data)



|                                                              |  | Common
    Stock |           |  | Paid-In Capital in
    Excess of |   |    | Accumulated Undistributed
    (distributions in excess of) Net |  |   | Net Unrealized (Depreciation)
    Appreciation on |  |  | Net Realized Gain (Loss)
    on |         |     | Total Net   |  
|------------------------------------------------------------- |  | ---------------- | --------- |  | -------------------------------- | - | -- | -------------------------------------------------------------- |  | - | ------------------------------------------------- |  |  | ------------------------------- | ------- | --- | ----------- | -
|                                                              |  | Shares           |           |  | Amount                           |   |    | Par                                                            |  |   | Investment
    Income                             |  |  | Investments                     |         |     | Investments |  
|Balance
    at December 31, 2011                              |  |                  | 7,636,532 |  |                                  | $ | 8  |                                                                |  | $ | 124,512                                           |  |  | $                               | 4,965   |     |             | $
|Issuance of common stock,
    net of offering costs (1)       |  |                  | 1,909,000 |  |                                  |   | 2  |                                                                |  |   | 29,523                                            |  |  |                                 | —       |     |             |  
|Net increase in net assets
    resulting from operations      |  |                  | —         |  |                                  |   | —  |                                                                |  |   | —                                                 |  |  |                                 | 11,996  | (2) |             |  
|Issuance of common stock
    under dividend reinvestment plan |  |                  | 21,693    |  |                                  |   | —  |                                                                |  |   | 349                                               |  |  |                                 | —       |     |             |  
|Distributions
    declared                                    |  |                  | —         |  |                                  |   | —  |                                                                |  |   | —                                                 |  |  |                                 | (15,533 | )   |             |  
|Balance
    at December 31, 2012                              |  |                  | 9,567,225 |  |                                  |   | 10 |                                                                |  |   | 154,384                                           |  |  |                                 | 1,428   |     |             |  
|Net increase in net assets
    resulting from operations      |  |                  | —         |  |                                  |   | —  |                                                                |  |   | —                                                 |  |  |                                 | 13,271  | (2) |             |  
|Issuance of common stock
    under dividend reinvestment plan |  |                  | 41,724    |  |                                  |   | —  |                                                                |  |   | 591                                               |  |  |                                 | —       |     |             |  
|Distributions
    declared                                    |  |                  | —         |  |                                  |   | —  |                                                                |  |   | —                                                 |  |  |                                 | (13,236 | )   |             |  
|Balance
    at December 31, 2013                              |  |                  | 9,608,949 |  |                                  |   | 10 |                                                                |  |   | 154,975                                           |  |  |                                 | 1,463   |     |             |  
|Net increase in net assets
    resulting from operations      |  |                  | —         |  |                                  |   | —  |                                                                |  |   | —                                                 |  |  |                                 | 10,717  | (2) |             |  
|Issuance of common stock
    under dividend reinvestment plan |  |                  | 19,175    |  |                                  |   | —  |                                                                |  |   | 265                                               |  |  |                                 | —       |     |             |  
|Distributions
    declared                                    |  |                  | —         |  |                                  |   | —  |                                                                |  |   | —                                                 |  |  |                                 | (13,282 | )   |             |  
|Balance
    at December 31, 2014                              |  |                  | 9,628,124 |  |                                  | $ | 10 |                                                                |  | $ | 155,240                                           |  |  | $                               | (1,102  | )   |             | $












|(1) | On July 18, 2012, the Company completed a follow-on public offering of 1,909,000 shares (including 249,000 shares of common stock that was issued pursuant to the underwriters’ options to purchase additional shares) of its common stock at a public offering price of $16.20 per share. Total offering costs were $1.4 million.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                   
|(2) | Net of excise tax.                                                                                                                                                                                                                                                                                                                



See Notes to Consolidated Financial Statements



74







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Cash Flow

(In thousands)



|                                                                                                                                      |  | Year Ended December 31, |        
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                                                      |  | 2014                    |        
|Cash flows from operating activities:                                                                                                 |  |                         |        
|Net increase in net assets resulting from operations                                                                                  |  | $                       | 15,430 
|Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities: |  |                         |        
|Amortization of debt issuance costs                                                                                                   |  |                         | 2,682  
|Net realized loss (gain) on investments                                                                                               |  |                         | 3,576  
|Net unrealized (appreciation) depreciation on investments                                                                             |  |                         | (8,289 
|Purchase of investments                                                                                                               |  |                         | (95,335
|Principal payments received on investments                                                                                            |  |                         | 109,505
|Proceeds from sale of investments                                                                                                     |  |                         | 7,673  
|Changes in assets and liabilities:                                                                                                    |  |                         |        
|Net decrease in investments in money market funds                                                                                     |  |                         | 1,161  
|Net decrease (increase) in restricted investments in money market funds                                                               |  |                         | 3,045  
|Decrease (increase) in interest receivable                                                                                            |  |                         | 89     
|Increase in end-of-term payments                                                                                                      |  |                         | (607   
|Decrease in unearned income                                                                                                           |  |                         | (947   
|(Increase) decrease in other assets                                                                                                   |  |                         | (936   
|Decrease in other accrued expenses                                                                                                    |  |                         | (235   
|(Decrease) increase in base management fee payable                                                                                    |  |                         | (83    
|Decrease in incentive fee payable                                                                                                     |  |                         | (53    
|Net cash provided by (used in) operating activities                                                                                   |  |                         | 36,676 
|                                                                                                                                      |  |                         |        
|Cash flows from financing activities:                                                                                                 |  |                         |        
|Proceeds from shares sold, net of offering costs                                                                                      |  |                         | —      
|Proceeds from issuance of 2019 Notes                                                                                                  |  |                         | —      
|Proceeds from issuance of Asset-Backed Notes                                                                                          |  |                         | —      
|Repayment of Asset-Backed Notes                                                                                                       |  |                         | (40,590
|Distributions paid                                                                                                                    |  |                         | (13,010
|Net decrease in borrowings                                                                                                            |  |                         | —      
|Debt issuance costs                                                                                                                   |  |                         | —      
|Net cash (used in) provided by financing activities                                                                                   |  |                         | (53,600
|Net (decrease) increase in cash                                                                                                       |  |                         | (16,924
|                                                                                                                                      |  |                         |        
|Cash:                                                                                                                                 |  |                         |        
|Beginning of period                                                                                                                   |  |                         | 25,341 
|End of period                                                                                                                         |  | $                       | 8,417  
|Supplemental disclosure of cash flow information:                                                                                     |  |                         |        
|Cash paid for interest                                                                                                                |  | $                       | 6,156  
|Supplemental non-cash investing and financing activities:                                                                             |  |                         |        
|Warrant investments received and recorded as unearned income                                                                          |  | $                       | 835    
|Distribution payable                                                                                                                  |  | $                       | 3,322  
|End of term payments receivable                                                                                                       |  | $                       | 3,785  
|Receivables resulting from sale of investments                                                                                        |  | $                       | —      
|Reclassification of receivables to investments                                                                                        |  | $                       | —      



See Notes to Consolidated Financial Statements



75







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

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  |       | 
|                                            |  |                               |  | 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  |       | 
|New Haven Pharmaceuticals, Inc. (2)         |  | Biotechnology                 |  | Term Loan (11.50% cash (Libor + 11.00%; Floor      |  |           | 1,301 |  |                     |   | 1,292  |       | 
|                                            |  |                               |  | 11.50%), 6.50% ETP, Due 11/1/17)                   |  |           |       |  |                     |   |        |       | 
|                                            |  |                               |  | Term Loan (11.50% cash (Libor + 11.00%; Floor      |  |           | 434   |  |                     |   | 431    |       | 
|                                            |  |                               |  | 11.50%), 6.50% ETP, Due 11/1/17)                   |  |           |       |  |                     |   |        |       | 
|                                            |  |                               |  | Term Loan (10.50% cash (Libor + 10.00%; Floor      |  |           | 2,000 |  |                     |   | 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  |       | 
|                                            |  |                               |  | 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  |       | 
|                                            |  |                               |  | 9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)     |  |           |       |  |                     |   |        |       | 
|                                            |  |                               |  | Term Loan (9.50% cash (Libor + 9.00%; Floor        |  |           | 945   |  |                     |   | 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    |       | 
|                                            |  |                               |  | Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)     |  |           | 1,016 |  |                     |   | 1,008  |       | 
|Xcovery Holding Company, LLC (2)            |  | Biotechnology                 |  | Term Loan (12.50% cash, Due 8/1/15)                |  |           | 292   |  |                     |   | 292    |       | 
|                                            |  |                               |  | Term Loan (12.50% cash, Due 8/1/15)                |  |           | 459   |  |                     |   | 459    |       | 
|                                            |  |                               |  | Term Loan (12.50% cash, Due 10/1/15)               |  |           | 101   |  |                     |   | 101    |       | 
|Accuvein, Inc. (2)                          |  | Medical Device                |  | Term Loan (10.40% cash (Libor + 9.90%; Floor       |  |           | 4,000 |  |                     |   | 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    |       | 
|                                            |  |                               |  | 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  |       | 
|                                            |  |                               |  | 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  |       | 
|                                            |  |                               |  | 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  |       | 
|                                            |  |                               |  | 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  |       | 
|                                            |  |                               |  | 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  |       | 
|                                            |  |                               |  | Due 9/1/16)                                        |  |           |       |  |                     |   |        |       | 
|ZetrOZ, Inc. (2)                            |  | Medical Device                |  | Term Loan (11.00% cash (Libor + 10.50%; Floor      |  |           | 1,500 |  |                     |   | 1,427  |       | 
|                                            |  |                               |  | 11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)    |  |           |       |  |                     |   |        |       | 
|Total Debt Investments — Life Science       |  |                               |  |                                                    |  |           |       |  |                     |   | 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  |       | 
|                                            |  |                               |  | Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     |  |           | 426   |  |                     |   | 422    |       | 
|mBlox, Inc. (2)                             |  | Communications                |  | Term Loan (11.50% cash (Libor + 11.00%; Floor      |  |           | 5,000 |  |                     |   | 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  |       | 
|                                            |  |                               |  | 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  |       | 
|                                            |  |                               |  | 10.75%), 5.75% ETP, Due 12/1/17)                   |  |           |       |  |                     |   |        |       | 
|                                            |  |                               |  | Term Loan (10.75% cash (Libor + 10.25%; Floor      |  |           | 2,052 |  |                     |   | 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  |       | 
|                                            |  |                               |  | 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  |       | 
|                                            |  |                               |  | 11.00%; Ceiling 12.50%), 2.0% ETP, Due 11/1/17)    |  |           |       |  |                     |   |        |       | 
|                                            |  |                               |  | Term Loan (11.00% cash (Libor + 10.50%; Floor      |  |           | 1,000 |  |                     |   | 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    |       | 
|                                            |  |                               |  | 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    |       | 



See Notes to Consolidated Financial Statements



76







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

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 | 
|Avalanche Technology, Inc. (2)          |  | Semiconductors                |  | Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%; |  |           | 1,983 |  |                     |  | 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   |       | 
|                                        |  |                               |  | 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   |       | 
|                                        |  |                               |  | Term Loan (10.75% cash, 2.50% ETP, Due 4/1/18)       |  |           | 2,000 |  |                     |  | 1,983   |       | 
|InVisage Technologies, Inc. (2)         |  | Semiconductors                |  | Term Loan (12.00% cash (Libor + 11.50%; Floor        |  |           | 2,550 |  |                     |  | 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   |       | 
|                                        |  |                               |  | Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)      |  |           | 2,275 |  |                     |  | 2,255   |       | 
|Luxtera, Inc. (2)                       |  | Semiconductors                |  | Term Loan (10.25% cash, 13.00% ETP, Due 7/1/17)      |  |           | 2,632 |  |                     |  | 2,590   |       | 
|                                        |  |                               |  | Term Loan (10.25% cash, 13.00% ETP, Due 7/1/17)      |  |           | 1,469 |  |                     |  | 1,462   |       | 
|NexPlanar Corporation (2)               |  | Semiconductors                |  | Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)      |  |           | 2,368 |  |                     |  | 2,352   |       | 
|                                        |  |                               |  | Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)      |  |           | 1,579 |  |                     |  | 1,564   |       | 
|Xtera Communications, Inc. (2)          |  | Semiconductors                |  | Term Loan (11.50% cash, 15.65% ETP, Due 1/1/17)      |  |           | 5,846 |  |                     |  | 5,708   |       | 
|                                        |  |                               |  | Term Loan (11.50% cash, 21.75% ETP, Due 1/1/17)      |  |           | 1,624 |  |                     |  | 1,584   |       | 
|Courion Corporation (2)                 |  | Software                      |  | Term Loan (11.45% cash, Due 10/1/15)                 |  |           | 1,279 |  |                     |  | 1,277   |       | 
|                                        |  |                               |  | Term Loan (11.45% cash, Due 10/1/15)                 |  |           | 1,279 |  |                     |  | 1,277   |       | 
|Crowdstar, Inc. (2)                     |  | Software                      |  | Term Loan (10.75% cash (Libor + 10.25%; Floor        |  |           | 2,000 |  |                     |  | 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   |       | 
|                                        |  |                               |  | Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)      |  |           | 1,000 |  |                     |  | 986     |       | 
|Lotame Solutions, Inc. (2)              |  | Software                      |  | Term Loan (11.50% cash (Libor + 11.00%; Floor        |  |           | 3,410 |  |                     |  | 3,390   |       | 
|                                        |  |                               |  | 11.50%), 5.25% ETP, Due 9/1/17)                      |  |           |       |  |                     |  |         |       | 
|                                        |  |                               |  | Term Loan (11.50% cash (Libor + 11.00%; Floor        |  |           | 1,500 |  |                     |  | 1,491   |       | 
|                                        |  |                               |  | 11.50%), 5.25% ETP, Due 9/1/17)                      |  |           |       |  |                     |  |         |       | 
|                                        |  |                               |  | Term Loan (11.50% cash (Libor + 11.00%; Floor        |  |           | 2,100 |  |                     |  | 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   |       | 
|Raydiance, Inc. (2)                     |  | Software                      |  | Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)       |  |           | 3,490 |  |                     |  | 3,468   |       | 
|                                        |  |                               |  | Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)       |  |           | 698   |  |                     |  | 688     |       | 
|                                        |  |                               |  | Term Loan (11.50% cash (Libor + 11.00%; Floor        |  |           | 3,000 |  |                     |  | 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   |       | 
|                                        |  |                               |  | Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)       |  |           | 1,000 |  |                     |  | 990     |       | 
|                                        |  |                               |  | Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)       |  |           | 1,000 |  |                     |  | 988     |       | 
|SIGNiX, Inc. (2)                        |  | Software                      |  | Term Loan (11.50% cash (Libor + 11.00%; Floor        |  |           | 3,000 |  |                     |  | 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   |       | 
|                                        |  |                               |  | 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   |       | 
|                                        |  |                               |  | 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   |       | 
|                                        |  |                               |  | 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   |       | 
|                                        |  |                               |  | 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   |       | 
|                                        |  |                               |  | 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   |       | 
|Visage Mobile, Inc. (2)                 |  | Software                      |  | Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)       |  |           | 645   |  |                     |  | 640     |       | 
|Total Debt Investments — Technology     |  |                               |  |                                                      |  |           |       |  |                     |  | 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   |       | 
|                                        |  |                               |  | Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)       |  |           | 1,148 |  |                     |  | 1,145   |       | 
|                                        |  |                               |  | Term Loan (10.25% cash, Due 10/1/16)                 |  |           | 3,488 |  |                     |  | 3,469   |       | 
|Semprius, Inc. (2)(8)                   |  | Alternative Energy            |  | Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)       |  |           | 2,432 |  |                     |  | 2,432   |       | 
|Aurora Algae, Inc. (2)                  |  | Consumer-related Technologies |  | Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)       |  |           | 397   |  |                     |  | 396     |       | 
|Rypos, Inc. (2)                         |  | Energy Efficiency             |  | Term Loan (11.80% cash, Due 1/1/17)                  |  |           | 2,670 |  |                     |  | 2,643   |       | 
|                                        |  |                               |  | Term Loan (11.80% cash, Due 9/1/17)                  |  |           | 1,000 |  |                     |  | 986     |       | 



See Notes to Consolidated Financial Statements



77







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

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 | 
|Tigo Energy, Inc. (2)                                              |  | Energy Efficiency             |  | Term Loan (13.00% cash, 3.16% ETP,
    Due 6/1/15)  |  |           | 786    |  |                     |  | 785     |       | 
|Total Debt Investments — Cleantech                                 |  |                               |  |                                                     |  |           |        |  |                     |  | 13,001  |       | 
|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   |       | 
|                                                                   |  |                               |  | 4.50% ETP, Due 10/1/18)                             |  |           |        |  |                     |  |         |       | 
|LifePrint Group, Inc. (2)                                          |  | Diagnostics                   |  | Term Loan (11.00% cash (Libor + 10.50%; Floor       |  |           | 3,000  |  |                     |  | 2,949   |       | 
|                                                                   |  |                               |  | 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  |       | 
|Watermark Medical, Inc. (2)                                        |  | Other Healthcare              |  | Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)      |  |           | 3,500  |  |                     |  | 3,473   |       | 
|                                                                   |  |                               |  | Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)      |  |           | 3,500  |  |                     |  | 3,473   |       | 
|Recondo Technology, Inc. (2)                                       |  | Software                      |  | Term Loan (11.50% cash (Libor + 11.00%; Floor       |  |           | 1,384  |  |                     |  | 1,379   |       | 
|                                                                   |  |                               |  | 11.50%), 6.60% ETP, Due 12/1/17)                    |  |           |        |  |                     |  |         |       | 
|                                                                   |  |                               |  | Term Loan (11.00% cash (Libor + 10.50%; Floor       |  |           | 2,500  |  |                     |  | 2,490   |       | 
|                                                                   |  |                               |  | 11.00%), 4.50% ETP, Due 12/1/17)                    |  |           |        |  |                     |  |         |       | 
|                                                                   |  |                               |  | Term Loan (10.50% cash (Libor + 10.00%; Floor       |  |           | 2,500  |  |                     |  | 2,490   |       | 
|                                                                   |  |                               |  | 10.50%), 2.75% ETP, Due 12/1/17)                    |  |           |        |  |                     |  |         |       | 
|                                                                   |  |                               |  | Term Loan (10.50% cash (Libor + 10.00%; Floor       |  |           | 3,000  |  |                     |  | 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 |       | 
|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      |       | 
|Celsion Corporation (5)                                            |  | Biotechnology                 |  | 5,708 Common Stock Warrants                         |  |           | —      |  |                     |  | 15      |       | 
|Inotek Pharmaceuticals Corporation                                 |  | Biotechnology                 |  | 33,762 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 17      |       | 
|N30 Pharmaceuticals, Inc.                                          |  | Biotechnology                 |  | 53,550 Common Stock Warrants                        |  |           | —      |  |                     |  | 122     |       | 
|New Haven Pharmaceuticals, Inc. (2)                                |  | Biotechnology                 |  | 55,347 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 42      |       | 
|Palatin Technologies, Inc. (2)(5)                                  |  | Biotechnology                 |  | 333,333 Common Stock Warrants                       |  |           | —      |  |                     |  | 31      |       | 
|Revance Therapeutics, Inc. (5)                                     |  | Biotechnology                 |  | 34,377 Common Stock Warrants                        |  |           | —      |  |                     |  | 68      |       | 
|Sample6, Inc. (2)                                                  |  | Biotechnology                 |  | 351,018 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 45      |       | 
|Supernus Pharmaceuticals, Inc. (2)(5)                              |  | Biotechnology                 |  | 42,083 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 93      |       | 
|Tranzyme, Inc. (2)(5)                                              |  | Biotechnology                 |  | 6,460 Common Stock Warrants                         |  |           | —      |  |                     |  | 6       |       | 
|Accuvein, Inc. (2)                                                 |  | Medical Device                |  | 75,769 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 24      |       | 
|Direct Flow Medical, Inc.                                          |  | Medical Device                |  | 176,922 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 144     |       | 
|EnteroMedics, Inc. (5)                                             |  | Medical Device                |  | 141,026 Common Stock Warrants                       |  |           | —      |  |                     |  | 347     |       | 
|IntegenX, Inc. (2)                                                 |  | Medical Device                |  | 158,006 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 33      |       | 
|Lantos Technologies, Inc. (2)                                      |  | Medical Device                |  | 858,545 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 24      |       | 
|Mederi Therapeutics, Inc. (2)                                      |  | Medical Device                |  | 248,736 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 26      |       | 
|Mitralign, Inc. (2)                                                |  | Medical Device                |  | 641,909 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 52      |       | 
|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      |       | 
|ViOptix, Inc.                                                      |  | Medical Device                |  | 375,763 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 13      |       | 
|Zetroz, Inc. (2)                                                   |  | Medical Device                |  | 475,561 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 25      |       | 
|Total Warrants — Life Science                                      |  |                               |  |                                                     |  |           |        |  |                     |  | 1,459   |       | 
|Warrants — Technology — 2.2%
    (9)                               |  |                               |  |                                                     |  |           |        |  |                     |  |         |       | 
|Ekahau, Inc. (2)                                                   |  | Communications                |  | 978,261 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 33      |       | 
|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      |       | 
|Everyday Health, Inc. (5)                                          |  | Consumer-related Technologies |  | 43,783 Common Stock Warrants                        |  |           | —      |  |                     |  | 69      |       | 
|Gwynnie Bee, Inc. (2)                                              |  | Consumer-related Technologies |  | 268,591 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 68      |       | 
|SnagAJob.com, Inc.                                                 |  | Consumer-related Technologies |  | 365,396 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 23      |       | 
|Tagged, Inc.                                                       |  | Consumer-related Technologies |  | 190,868 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 26      |       | 
|XIOtech, Inc.                                                      |  | Data Storage                  |  | 2,217,979 Preferred Stock Warrants                  |  |           | —      |  |                     |  | 22      |       | 
|Cartera Commerce, Inc.                                             |  | Internet and media            |  | 90,909 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 16      |       | 
|SimpleTuition, Inc.                                                |  | Internet and media            |  | 189,573 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 63      |       | 



See Notes to Consolidated Financial Statements



78







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

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 | 
|IntelePeer, Inc.                                          |  | Networking         |  | 141,549 Preferred Stock Warrants     |  |           | —       |  |                     |   | 39      |       | 
|Nanocomp Technologies, Inc. (2)                           |  | Networking         |  | 272,728 Preferred Stock Warrants     |  |           | —       |  |                     |   | 25      |       | 
|Aquion Energy, Inc.                                       |  | Power Management   |  | 115,051 Preferred Stock Warrants     |  |           | —       |  |                     |   | 7       |       | 
|Avalanche Technology, Inc. (2)                            |  | Semiconductors     |  | 352,828 Preferred Stock Warrants     |  |           | —       |  |                     |   | 101     |       | 
|eASIC Corporation (2)                                     |  | Semiconductors     |  | 40,445 Preferred Stock Warrants      |  |           | —       |  |                     |   | 25      |       | 
|InVisage Technologies, Inc. (2)                           |  | Semiconductors     |  | 165,147 Preferred Stock Warrants     |  |           | —       |  |                     |   | 43      |       | 
|Kaminario, Inc.                                           |  | Semiconductors     |  | 1,087,203 Preferred Stock Warrants   |  |           | —       |  |                     |   | 59      |       | 
|Luxtera, Inc.                                             |  | Semiconductors     |  | 2,087,766 Preferred Stock Warrants   |  |           | —       |  |                     |   | 43      |       | 
|NexPlanar Corporation                                     |  | Semiconductors     |  | 216,001 Preferred Stock Warrants     |  |           | —       |  |                     |   | 36      |       | 
|Soraa, Inc. (2)                                           |  | Semiconductors     |  | 180,000 Preferred Stock Warrants     |  |           | —       |  |                     |   | 80      |       | 
|Xtera Communications, Inc.                                |  | Semiconductors     |  | 983,607 Preferred Stock Warrants     |  |           | —       |  |                     |   | 206     |       | 
|Bolt Solutions, Inc. (2)                                  |  | Software           |  | 202,892 Preferred Stock Warrants     |  |           | —       |  |                     |   | 113     |       | 
|Clarabridge, Inc.                                         |  | Software           |  | 53,486 Preferred Stock Warrants      |  |           | —       |  |                     |   | 14      |       | 
|Courion Corporation                                       |  | Software           |  | 772,543 Preferred Stock Warrants     |  |           | —       |  |                     |   | 107     |       | 
|Crowdstar, Inc. (2)                                       |  | Software           |  | 75,428 Preferred Stock Warrants      |  |           | —       |  |                     |   | 14      |       | 
|Decisyon, Inc. (2)                                        |  | Software           |  | 457,876 Preferred Stock Warrants     |  |           | —       |  |                     |   | 46      |       | 
|DriveCam, Inc.                                            |  | Software           |  | 71,639 Preferred Stock Warrants      |  |           | —       |  |                     |   | 20      |       | 
|Lotame Solutions, Inc. (2)                                |  | Software           |  | 288,115 Preferred Stock Warrants     |  |           | —       |  |                     |   | 23      |       | 
|Netuitive, Inc.                                           |  | Software           |  | 41,569 Preferred Stock Warrants      |  |           | —       |  |                     |   | 48      |       | 
|Raydiance, Inc. (2)                                       |  | Software           |  | 1,051,120 Preferred Stock Warrants   |  |           | —       |  |                     |   | 71      |       | 
|Razorsight Corporation (2)                                |  | Software           |  | 259,404 Preferred Stock Warrants     |  |           | —       |  |                     |   | 43      |       | 
|SIGNiX, Inc. (2)                                          |  | Software           |  | 63,365 Preferred Stock Warrants      |  |           | —       |  |                     |   | 48      |       | 
|Riv Data Corp. (2)                                        |  | Software           |  | 237,361 Preferred Stock Warrants     |  |           | —       |  |                     |   | 13      |       | 
|SpringCM, Inc. (2)                                        |  | Software           |  | 2,385,686 Preferred Stock Warrants   |  |           | —       |  |                     |   | 55      |       | 
|Sys-Tech Solutions, Inc.                                  |  | Software           |  | 375,000 Preferred Stock Warrants     |  |           | —       |  |                     |   | 242     |       | 
|Vidsys, Inc.                                              |  | Software           |  | 37,346 Preferred Stock Warrants      |  |           | —       |  |                     |   | 23      |       | 
|Visage Mobile, Inc.                                       |  | Software           |  | 1,692,047 Preferred Stock Warrants   |  |           | —       |  |                     |   | 19      |       | 
|Total Warrants — Technology                               |  |                    |  |                                      |  |           |         |  |                     |   | 2,061   |       | 
|Warrants — Cleantech — 0.1%
    (9)                       |  |                    |  |                                      |  |           |         |  |                     |   |         |       | 
|Renmatix, Inc.                                            |  | Alternative Energy |  | 52,296 Preferred Stock Warrants      |  |           | —       |  |                     |   | 67      |       | 
|Semprius, Inc.                                            |  | Alternative Energy |  | 519,981 Preferred Stock Warrants     |  |           | —       |  |                     |   | 25      |       | 
|Rypos, Inc. (2)                                           |  | Energy Efficiency  |  | 5,627 Preferred Stock Warrants       |  |           | —       |  |                     |   | 44      |       | 
|Tigo Energy, Inc. (2)                                     |  | Energy Efficiency  |  | 804,604 Preferred Stock Warrants     |  |           | —       |  |                     |   | 99      |       | 
|Total Warrants — Cleantech                                |  |                    |  |                                      |  |           |         |  |                     |   | 235     |       | 
|Warrants — Healthcare information and services — 0.5% (9) |  |                    |  |                                      |  |           |         |  |                     |   |         |      
|Accumetrics, Inc.                                         |  | Diagnostics        |  | 100,928 Preferred Stock Warrants     |  |           | —       |  |                     |   | 107     |       | 
|BioScale, Inc. (2)                                        |  | Diagnostics        |  | 315,618 Preferred Stock Warrants     |  |           | —       |  |                     |   | 55      |       | 
|LifePrint Group, Inc. (2)                                 |  | Diagnostics        |  | 49,000 Preferred Stock Warrants      |  |           | —       |  |                     |   | 29      |       | 
|Interleukin Genetics, Inc. (2)(5)                         |  | Diagnostics        |  | 2,492,523 Common Stock Warrants      |  |           | —       |  |                     |   | 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      |       | 
|Talyst, Inc.                                              |  | Other Healthcare   |  | 300,360 Preferred Stock Warrants     |  |           | —       |  |                     |   | 100     |       | 
|Watermark Medical, Inc.                                   |  | Other Healthcare   |  | 12,216 Preferred Stock Warrants      |  |           | —       |  |                     |   | 67      |       | 
|Recondo Technology, Inc. (2)                              |  | Software           |  | 556,796 Preferred Stock Warrants     |  |           | —       |  |                     |   | 95      |       | 
|Total Warrants — Healthcare information and services      |  |                    |  |                                      |  |           | 1,060   |  |                     |   | 669     |      
|Total Warrants                                            |  |                    |  |                                      |  |           |         |  |                     |   | 4,815   |       | 
|                                                          |  |                    |  |                                      |  |           |         |  |                     |   |         |       | 
|Other Investments — 0.2% (9)                              |  |                    |  |                                      |  |           |         |  |                     |   |         |       | 
|Vette Technology, LLC                                     |  | Data Storage       |  | Royalty Agreement Due 4/18/2019      |  |           | —       |  |                     |   | 4,582   |       | 
|Total Other Investments                                   |  |                    |  |                                      |  |           |         |  |                     |   | 4,582   |       | 
|Equity — 0.7% (9)                                         |  |                    |  |                                      |  |           |         |  |                     |   |         |       | 
|Insmed Incorporated (5)                                   |  | Biotechnology      |  | 33,208 Common Stock                  |  |           | —       |  |                     |   | 239     |       | 
|Revance Therapeutics, Inc.(5)                             |  | Biotechnology      |  | 4,861 Common Stock                   |  |           | —       |  |                     |   | 73      |       | 
|Sunesis Pharmaceuticals, Inc. (5)                         |  | Biotechnology      |  | 78,493 Common Stock                  |  |           | —       |  |                     |   | 83      |       | 
|Overture Networks Inc.                                    |  | Communications     |  | 386,191 Common Stock                 |  |           | —       |  |                     |   | 482     |       | 
|Total Equity                                              |  |                    |  |                                      |  |           |         |  |                     |   | 877     |       | 
|Total Portfolio Investment Assets — 148.4%	 (9)           |  |                    |  |                                      |  | $         | 209,838 |  |                     | $ | 205,101 |      



See Notes to Consolidated Financial Statements





79







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

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 | 
|                                                          |  |        |  |                                      |  |           |       |  |                     |   |       |       | 
|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 |      












|(1)  | All of the Company’s investments 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. 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)  | Preferred and common stock warrants, equity interests and other investments are non-income producing.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(8)  | Debt investment is on non-accrual status at December 31, 2014 and is, therefore, considered non-income producing.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(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) | 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 end-of-term payment and will be recognized as non-cash income until it is actually paid. Therefore, a
portion of the incentive fee will be based on income that the Company has not yet received in cash.                      



See Notes to Consolidated Financial Statements



80













Horizon Technology Finance Corporation and
Subsidiaries



Consolidated Schedule of Investments

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 — 157.5% (9)                |  |                    |  |                                                    |  |           |       |  |                     |  
|Debt Investments — Life Science — 22.9% (9)  |  |                    |  |                                                    |  |           |       |  |                     |  
|Inotek Pharmaceuticals Corporation (2)       |  | Biotechnology      |  | Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)    |  | $         | 3,500 |  |                     | $ | 3,460  |       | 
|N30 Pharmaceuticals, Inc. (2)                |  | Biotechnology      |  | Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)     |  |           | 760   |  |                     |   | 756    |       | 
|                                             |  |                    |  | Term Loan (11.25% cash, 3.00% ETP, Due 10/1/15)    |  |           | 2,230 |  |                     |   | 2,209  |       | 
|New Haven Pharmaceuticals, Inc. (2)          |  | Biotechnology      |  | Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)     |  |           | 1,500 |  |                     |   | 1,476  |       | 
|                                             |  |                    |  | Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)     |  |           | 500   |  |                     |   | 492    |       | 
|Sample6, Inc. (2)                            |  | Biotechnology      |  | Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16)     |  |           | 2,252 |  |                     |   | 2,229  |       | 
|Sunesis Pharmaceuticals, Inc. (2)(5)         |  | Biotechnology      |  | Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)     |  |           | 1,425 |  |                     |   | 1,418  |       | 
|                                             |  |                    |  | Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)     |  |           | 2,138 |  |                     |   | 2,100  |       | 
|Xcovery Holding Company, LLC (2)             |  | Biotechnology      |  | Term Loan (12.50% cash, Due 8/1/15)                |  |           | 781   |  |                     |   | 779    |       | 
|                                             |  |                    |  | Term Loan (12.50% cash, Due 8/1/15)                |  |           | 1,228 |  |                     |   | 1,226  |       | 
|                                             |  |                    |  | Term Loan (12.50% cash, Due 10/1/15)               |  |           | 231   |  |                     |   | 231    |       | 
|Mederi Therapeutics, Inc.                    |  | Medical Device     |  | Term Loan (10.75% cash (Libor + 10.25%; Floor      |  |           | 3,000 |  |                     |   | 2,957  |       | 
|                                             |  |                    |  | 10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)    |  |           |       |  |                     |   |        |       | 
|                                             |  |                    |  | Term Loan (10.75% cash (Libor + 10.25%; Floor      |  |           | 3,000 |  |                     |   | 2,917  |       | 
|                                             |  |                    |  | 10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)    |  |           |       |  |                     |   |        |       | 
|Mitralign, Inc. (2)                          |  | Medical Device     |  | Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15)    |  |           | 1,587 |  |                     |   | 1,571  |       | 
|                                             |  |                    |  | Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15)    |  |           | 1,100 |  |                     |   | 1,089  |       | 
|                                             |  |                    |  | Term Loan (10.50% cash, 3.00% ETP, Due 7/1/16)     |  |           | 1,143 |  |                     |   | 1,115  |       | 
|PixelOptics, Inc. (8)                        |  | Medical Device     |  | Term Loan (10.75% cash, 3.00% ETP, Due 11/1/14)    |  |           | 5,000 |  |                     |   | 4,985  |       | 
|                                             |  |                    |  | Term Loan (10.00% cash, Due 1/31/14)               |  |           | 219   |  |                     |   | 219    |       | 
|Tengion, Inc. (2)(5)                         |  | Medical Device     |  | Term Loan (13.00% cash, Due 5/1/14)                |  |           | 1,382 |  |                     |   | 1,373  |       | 
|Tryton Medical, Inc. (2)                     |  | Medical Device     |  | Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP, |  |           | 3,000 |  |                     |   | 2,962  |       | 
|                                             |  |                    |  | Due 9/1/16)                                        |  |           |       |  |                     |   |        |       | 
|Total Debt Investments — Life Science        |  |                    |  |                                                    |  |           |       |  |                     |   | 35,564 |       | 
|                                             |  |                    |  |                                                    |  |           |       |  |                     |   |        |       | 
|Debt Investments — Technology — 98.3% (9)    |  |                    |  |                                                    |  |           |       |  |                     |  
|Ekahau, Inc.                                 |  | Communications     |  | Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     |  |           | 1,500 |  |                     |   | 1,474  |       | 
|                                             |  |                    |  | Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)     |  |           | 500   |  |                     |   | 490    |       | 
|Overture Networks, Inc. (2)                  |  | Communications     |  | Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)    |  |           | 5,000 |  |                     |   | 4,935  |       | 
|                                             |  |                    |  | Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)    |  |           | 2,500 |  |                     |   | 2,460  |       | 
|Optaros, Inc. (2)                            |  | Internet and Media |  | Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)    |  |           | 1,670 |  |                     |   | 1,660  |       | 
|                                             |  |                    |  | Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)     |  |           | 500   |  |                     |   | 497    |       | 
|SimpleTuition, Inc. (2)                      |  | Internet and Media |  | Term Loan (11.75% cash, Due 3/1/16)                |  |           | 3,909 |  |                     |   | 3,862  |       | 
|Nanocomp Technologies, Inc.                  |  | Networking         |  | Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)    |  |           | 1,000 |  |                     |   | 963    |       | 
|Aquion Energy, Inc. (2)                      |  | Power Management   |  | Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)     |  |           | 2,704 |  |                     |   | 2,693  |       | 
|                                             |  |                    |  | Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)     |  |           | 2,704 |  |                     |   | 2,693  |       | 
|                                             |  |                    |  | Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16)     |  |           | 2,978 |  |                     |   | 2,966  |       | 
|Xtreme Power, Inc. (2)(8)                    |  | Power Management   |  | Term Loan (10.75% cash, 9.00% ETP, Due 5/1/16)     |  |           | 6,000 |  |                     |   | 5,947  |       | 
|Avalanche Technology, Inc. (2)               |  | Semiconductors     |  | Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)     |  |           | 2,996 |  |                     |   | 2,973  |       | 
|                                             |  |                    |  | Term Loan (10.00% cash, 2.00% ETP, Due 1/1/18)     |  |           | 2,500 |  |                     |   | 2,455  |       | 
|eASIC Corporation (2)                        |  | Semiconductors     |  | Term Loan (11.00% cash, 2.50% ETP, Due 4/1/17)     |  |           | 2,000 |  |                     |   | 1,968  |       | 
|Kaminario, Inc. (2)                          |  | Semiconductors     |  | Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)    |  |           | 3,000 |  |                     |   | 2,954  |       | 
|                                             |  |                    |  | Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)    |  |           | 3,000 |  |                     |   | 2,954  |       | 
|Luxtera, Inc. (2)                            |  | Semiconductors     |  | Term Loan (10.25% cash, 8.00% ETP, Due 12/1/15)    |  |           | 2,734 |  |                     |   | 2,714  |       | 
|                                             |  |                    |  | Term Loan (10.25% cash, 8.00% ETP, Due 3/1/16)     |  |           | 1,519 |  |                     |   | 1,506  |       | 
|Newport Media, Inc. (2)                      |  | Semiconductors     |  | Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)    |  |           | 3,500 |  |                     |   | 3,418  |       | 
|                                             |  |                    |  | Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)    |  |           | 3,500 |  |                     |   | 3,418  |       | 
|NexPlanar Corporation (2)                    |  | Semiconductors     |  | Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)    |  |           | 3,000 |  |                     |   | 2,964  |       | 
|                                             |  |                    |  | Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)    |  |           | 2,000 |  |                     |   | 1,967  |       | 
|Xtera Communications, Inc. (2)               |  | Semiconductors     |  | Term Loan (11.50% cash, 14.77% ETP, Due 7/1/15)    |  |           | 6,468 |  |                     |   | 6,441  |       | 
|                                             |  |                    |  | Term Loan (11.50% cash, 13.65% ETP, Due 2/1/16)    |  |           | 1,731 |  |                     |   | 1,718  |       | 
|Bolt Solutions, Inc. (2)                     |  | Software           |  | Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)     |  |           | 4,856 |  |                     |   | 4,819  |       | 
|                                             |  |                    |  | Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)     |  |           | 4,856 |  |                     |   | 4,819  |       | 
|Construction Software Technologies, Inc. (2) |  | Software           |  | Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)    |  |           | 4,200 |  |                     |   | 4,172  |       | 
|                                             |  |                    |  | Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)    |  |           | 4,200 |  |                     |   | 4,172  |       | 
|Courion Corporation (2)                      |  | Software           |  | Term Loan (11.45% cash, Due 10/1/15)               |  |           | 2,662 |  |                     |   | 2,654  |       | 
|                                             |  |                    |  | Term Loan (11.45% cash, Due 10/1/15)               |  |           | 2,662 |  |                     |   | 2,654  |       | 
|Decisyon, Inc. (2)                           |  | Software           |  | Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)     |  |           | 4,000 |  |                     |   | 3,932  |       | 
|Kontera Technologies, Inc. (2)               |  | Software           |  | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)    |  |           | 4,000 |  |                     |   | 3,949  |       | 



81







Horizon Technology
Finance Corporation and Subsidiaries



Consolidated Schedule of Investments

December 31, 2013

(In thousands)



|                                                                   |  |                    |  |                                                     |         | Principal |        |  | Cost of             |  |         | Fair  | 
|------------------------------------------------------------------ |  | ------------------ |  | --------------------------------------------------- | ------- | --------- | ------ |  | ------------------- |  | ------- | ----- | 
|Portfolio
    Company (1)                                          |  | Sector             |  | Type of Investment (3)(4)(7)(10)(11)                |         | Amount    |        |  | Investments
    (6) |  |         | Value | 
|                                                                   |  |                    |  | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     |         |           | 4,000  |  |                     |  | 3,949   |       | 
|Lotame Solutions, Inc. (2)                                         |  | Software           |  | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)     |         |           | 4,000  |  |                     |  | 3,971   |       | 
|                                                                   |  |                    |  | Term Loan (11.50% cash, 3.00% ETP, Due 9/1/16)      |         |           | 1,500  |  |                     |  | 1,486   |       | 
|Netuitive, Inc. (2)                                                |  | Software           |  | Term Loan (11.75% cash, Due 1/1/16)                 |         |           | 2,359  |  |                     |  | 2,330   |       | 
|Raydiance, Inc. (2)                                                |  | Software           |  | Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)      |         |           | 5,000  |  |                     |  | 4,948   |       | 
|                                                                   |  |                    |  | Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)      |         |           | 1,000  |  |                     |  | 975     |       | 
|Razorsight Corporation (2)                                         |  | Software           |  | Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)     |         |           | 1,500  |  |                     |  | 1,477   |       | 
|                                                                   |  |                    |  | Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)      |         |           | 1,500  |  |                     |  | 1,475   |       | 
|                                                                   |  |                    |  | Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)      |         |           | 1,000  |  |                     |  | 980     |       | 
|Sys-Tech Solutions, Inc. (2)                                       |  | Software           |  | Term Loan (11.65% cash, Due 6/1/16)                 |         |           | 7,100  |  |                     |  | 6,919   |       | 
|VBrick Systems, Inc.                                               |  | Software           |  | Term Loan (11.50% cash (Libor + 10.00%; Floor       |         |           | 3,000  |  |                     |  | 2,970   |       | 
|                                                                   |  |                    |  | 10.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)     |         |           |        |  |                     |  |         |       | 
|Vidsys, Inc. (2)                                                   |  | Software           |  | Term Loan (11.00% cash, 6.50% ETP, Due 6/1/16)      |         |           | 3,000  |  |                     |  | 2,970   |       | 
|Visage Mobile, Inc. (2)                                            |  | Software           |  | Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)      |         |           | 974    |  |                     |  | 962     |       | 
|Total Debt Investments — Technology                                |  |                    |  |                                                     |         |           |        |  |                     |  | 134,673 |       | 
|Debt Investments — Cleantech — 17.6% (9)                           |  |                    |  |                                                     |         |           |        |  |                     | 
|Renmatix, Inc. (2)                                                 |  | Alternative Energy |  | Term Loan (10.25% cash, 9.00% ETP, Due 2/1/16)      |         |           | 2,028  |  |                     |  | 2,015   |       | 
|                                                                   |  |                    |  | Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)      |         |           | 2,028  |  |                     |  | 2,015   |       | 
|                                                                   |  |                    |  | Term Loan (10.25% cash, Due 10/1/16)                |         |           | 5,000  |  |                     |  | 4,956   |       | 
|Semprius, Inc. (2)(8)                                              |  | Alternative Energy |  | Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)      |         |           | 3,203  |  |                     |  | 3,183   |       | 
|Aurora Algae, Inc. (2)                                             |  | Energy Efficiency  |  | Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)      |         |           | 1,280  |  |                     |  | 1,276   |       | 
|Rypos, Inc.                                                        |  | Energy Efficiency  |  | Term Loan (11.80% cash, Due 1/1/17)                 |         |           | 3,000  |  |                     |  | 2,928   |       | 
|Solarbridge Technologies, Inc. (2)(8)                              |  | Energy Efficiency  |  | Term Loan (12.15% cash, 3.21% ETP, Due 12/1/16)     |         |           | 7,000  |  |                     |  | 6,785   |       | 
|Tigo Energy, Inc. (2)                                              |  | Energy Efficiency  |  | Term Loan (13.00% cash, 3.16% ETP, Due 6/1/15)      |         |           | 2,214  |  |                     |  | 2,199   |       | 
|Cereplast, Inc. (5)(8)                                             |  | Waste Recycling    |  | Term Loan (12.00% cash, Due 8/1/14)                 |         |           | 1,081  |  |                     |  | 978     |       | 
|                                                                   |  |                    |  | Term Loan (12.00% cash, Due 8/1/14)                 |         |           | 1,160  |  |                     |  | 1,141   |       | 
|Total Debt Investments — Cleantech                                 |  |                    |  |                                                     |         |           |        |  |                     |  | 27,476  |       | 
|Debt Investments — Healthcare information and services — 18.7% (9) |  |                    |  |                                                     |         |           |        |  |                     | 
|BioScale, Inc. (2)                                                 |  | Diagnostics        |  | Term Loan (11.51% cash, Due 1/1/14)                 |         |           | 232    |  |                     |  | 232     |       | 
|Radisphere National Radiology Group, Inc. (2)                      |  | Diagnostics        |  | Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15) |         |           | 12,000 |  |                     |  | 11,908  |       | 
|Watermark Medical, Inc. (2)                                        |  | Other Healthcare   |  | Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)      |         |           | 3,500  |  |                     |  | 3,452   |       | 
|                                                                   |  |                    |  | Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)      |         |           | 3,500  |  |                     |  | 3,452   |       | 
|Recondo Technology, Inc. (2)                                       |  | Software           |  | Term Loan (11.50% cash, 4.14% ETP, Due 4/1/16)      |         |           | 1,384  |  |                     |  | 1,356   |       | 
|                                                                   |  |                    |  | Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)      |         |           | 2,500  |  |                     |  | 2,473   |       | 
|                                                                   |  |                    |  | Term Loan (10.50% cash, 2.50% ETP, Due 1/1/18)      |         |           | 2,500  |  |                     |  | 2,468   |       | 
|Total Debt Investments — Healthcare
    information and services   |  |                    |  |                                                     |         |           |        |  |                     |  | 25,341  |       | 
|Total Debt Investments                                             |  |                    |  |                                                     | 223,054 |           |        |  | 213,754             | 
|Warrant Investments — 4.5% (9)                                     |  |                    |  |                                                     |         |           |        |  |                     | 
|Warrants — Life Science — 2.1% (9)                                 |  |                    |  |                                                     |         |           |        |  |                     | 
|ACT Biotech Corporation                                            |  | Biotechnology      |  | 1,521,820 Preferred Stock Warrants                  |         |           | —      |  |                     |  | 83      |       | 
|Ambit Biosciences, Inc.(5)                                         |  | Biotechnology      |  | 44,795 Common Stock Warrants                        |         |           | —      |  |                     |  | 143     |       | 
|Anacor Pharmaceuticals, Inc. (2)(5)                                |  | Biotechnology      |  | 84,583 Common Stock Warrants                        |         |           | —      |  |                     |  | 93      |       | 
|Celsion Corporation (5)                                            |  | Biotechnology      |  | 5,708 Common Stock Warrants                         |         |           | —      |  |                     |  | 15      |       | 
|Inotek Pharmaceuticals Corporation                                 |  | Biotechnology      |  | 114,387 Preferred Stock Warrants                    |         |           | —      |  |                     |  | 17      |       | 
|N30 Pharmaceuticals, Inc.                                          |  | Biotechnology      |  | 214,200 Preferred Stock Warrants                    |         |           | —      |  |                     |  | 122     |       | 
|New Haven Pharmaceuticals, Inc.                                    |  | Biotechnology      |  | 34,729 Preferred Stock Warrants                     |         |           | —      |  |                     |  | 22      |       | 
|Revance Therapeutics, Inc.                                         |  | Biotechnology      |  | 687,091 Preferred Stock Warrants                    |         |           | —      |  |                     |  | 223     |       | 
|Sample6, Inc.                                                      |  | Biotechnology      |  | 200,582 Preferred Stock Warrants                    |         |           | —      |  |                     |  | 27      |       | 
|Sunesis Pharmaceuticals, Inc. (5)                                  |  | Biotechnology      |  | 116,203 Common Stock Warrants                       |         |           | —      |  |                     |  | 83      |       | 
|Supernus Pharmaceuticals, Inc. (2)(5)                              |  | Biotechnology      |  | 42,083 Preferred Stock Warrants                     |         |           | —      |  |                     |  | 94      |       | 
|Tranzyme, Inc. (5)                                                 |  | Biotechnology      |  | 77,902 Common Stock Warrants                        |         |           | —      |  |                     |  | 6       |       | 
|Direct Flow Medical, Inc.                                          |  | Medical Device     |  | 176,922 Preferred Stock Warrants                    |         |           | —      |  |                     |  | 144     |       | 
|EnteroMedics, Inc. (5)                                             |  | Medical Device     |  | 141,026 Common Stock Warrants                       |         |           | —      |  |                     |  | 347     |       | 
|Mederi Therapeutics, Inc.                                          |  | Medical Device     |  | 248,736 Preferred Stock Warrants                    |         |           | —      |  |                     |  | 26      |       | 
|Mitralign, Inc.                                                    |  | Medical Device     |  | 295,238 Common Stock Warrants                       |         |           | —      |  |                     |  | 49      |       | 
|OraMetrix, Inc. (2)                                                |  | Medical Device     |  | 812,348 Preferred Stock Warrants                    |         |           | —      |  |                     |  | 78      |       | 
|PixelOptics, Inc.                                                  |  | Medical Device     |  | 381,612 Preferred Stock Warrants                    |         |           | —      |  |                     |  | 96      |       | 
|Tengion, Inc. (2)(5)                                               |  | Medical Device     |  | 1,864,876 Common Stock Warrants                     |         |           | —      |  |                     |  | 124     |       | 





82







Horizon Technology
Finance Corporation and Subsidiaries



Consolidated Schedule of Investments

December 31, 2013

(In thousands)



|                                                          |  |                               |  |                                      |  | Principal |   |  | Cost of             |  |       | Fair  | 
|--------------------------------------------------------- |  | ----------------------------- |  | ------------------------------------ |  | --------- | - |  | ------------------- |  | ----- | ----- | 
|Portfolio
    Company (1)                                 |  | Sector                        |  | Type of Investment (3)(4)(7)(10)(11) |  | Amount    |   |  | Investments
    (6) |  |       | Value | 
|Tryton Medical, Inc. (2)                                  |  | Medical Device                |  | 47,977 Preferred Stock Warrants      |  |           | — |  |                     |  | 14    |       | 
|ViOptix, Inc.                                             |  | Medical Device                |  | 375,763 Preferred Stock Warrants     |  |           | — |  |                     |  | 13    |       | 
|Total Warrants — Life Science                             |  |                               |  |                                      |  |           |   |  |                     |  | 1,819 |       | 
|                                                          |  |                               |  |                                      |  |           |   |  |                     |  |       |       | 
|Warrants — Technology — 1.8% (9)                          |  |                               |  |                                      |  |           |   |  |                     | 
|Ekahau, Inc.                                              |  | Communications                |  | 978,261 Preferred Stock Warrants     |  |           | — |  |                     |  | 34    |       | 
|OpenPeak, Inc.                                            |  | Communications                |  | 18,997 Preferred Stock Warrants      |  |           | — |  |                     |  | 89    |       | 
|Overture Networks, Inc.                                   |  | Communications                |  | 344,574 Preferred Stock Warrants     |  |           | — |  |                     |  | 55    |       | 
|Everyday Health, Inc.                                     |  | Consumer-related Technologies |  | 65,674 Preferred Stock Warrants      |  |           | — |  |                     |  | 69    |       | 
|SnagAJob.com, Inc.                                        |  | Consumer-related Technologies |  | 365,396 Preferred Stock Warrants     |  |           | — |  |                     |  | 23    |       | 
|Tagged, Inc.                                              |  | Consumer-related Technologies |  | 190,868 Preferred Stock Warrants     |  |           | — |  |                     |  | 26    |       | 
|XIOtech, Inc.                                             |  | Data Storage                  |  | 2,217,979 Preferred Stock Warrants   |  |           | — |  |                     |  | 22    |       | 
|Cartera Commerce, Inc.                                    |  | Internet and media            |  | 90,909 Preferred Stock Warrants      |  |           | — |  |                     |  | 16    |       | 
|Optaros, Inc.                                             |  | Internet and media            |  | 477,403 Preferred Stock Warrants     |  |           | — |  |                     |  | 21    |       | 
|SimpleTuition, Inc.                                       |  | Internet and media            |  | 189,573 Preferred Stock Warrants     |  |           | — |  |                     |  | 63    |       | 
|IntelePeer, Inc.                                          |  | Networking                    |  | 141,549 Preferred Stock Warrants     |  |           | — |  |                     |  | 39    |       | 
|Motion Computing, Inc.                                    |  | Networking                    |  | 104,283 Preferred Stock Warrants     |  |           | — |  |                     |  | 4     |       | 
|Nanocomp Technologies, Inc.                               |  | Networking                    |  | 204,546 Preferred Stock Warrants     |  |           | — |  |                     |  | 19    |       | 
|Aquion Energy, Inc.                                       |  | Power Management              |  | 115,051 Preferred Stock Warrants     |  |           | — |  |                     |  | 8     |       | 
|Xtreme Power, Inc.                                        |  | Power Management              |  | 2,466,821 Preferred Stock Warrants   |  |           | — |  |                     |  | 76    |       | 
|Avalanche Technology, Inc.                                |  | Semiconductors                |  | 244,649 Preferred Stock Warrants     |  |           | — |  |                     |  | 56    |       | 
|eASIC Corporation                                         |  | Semiconductors                |  | 1,877,799 Preferred Stock Warrants   |  |           | — |  |                     |  | 16    |       | 
|Kaminario, Inc.                                           |  | Semiconductors                |  | 1,087,203 Preferred Stock Warrants   |  |           | — |  |                     |  | 59    |       | 
|Luxtera, Inc.                                             |  | Semiconductors                |  | 1,827,485 Preferred Stock Warrants   |  |           | — |  |                     |  | 34    |       | 
|Newport Media, Inc.                                       |  | Semiconductors                |  | 188,764 Preferred Stock Warrants     |  |           | — |  |                     |  | 40    |       | 
|NexPlanar Corporation                                     |  | Semiconductors                |  | 216,001 Preferred Stock Warrants     |  |           | — |  |                     |  | 36    |       | 
|Xtera Communications, Inc.                                |  | Semiconductors                |  | 983,607 Preferred Stock Warrants     |  |           | — |  |                     |  | 206   |       | 
|Bolt Solutions, Inc.                                      |  | Software                      |  | 202,892 Preferred Stock Warrants     |  |           | — |  |                     |  | 113   |       | 
|Clarabridge, Inc.                                         |  | Software                      |  | 53,486 Preferred Stock Warrants      |  |           | — |  |                     |  | 14    |       | 
|Construction Software Technologies, Inc. (2)              |  | Software                      |  | 386,415 Preferred Stock Warrants     |  |           | — |  |                     |  | 69    |       | 
|Courion Corporation                                       |  | Software                      |  | 772,543 Preferred Stock Warrants     |  |           | — |  |                     |  | 106   |       | 
|Decisyon, Inc.                                            |  | Software                      |  | 314,686 Preferred Stock Warrants     |  |           | — |  |                     |  | 44    |       | 
|DriveCam, Inc.                                            |  | Software                      |  | 71,639 Preferred Stock Warrants      |  |           | — |  |                     |  | 20    |       | 
|Kontera Technologies, Inc. (2)                            |  | Software                      |  | 99,476 Preferred Stock Warrants      |  |           | — |  |                     |  | 102   |       | 
|Lotame Solutions, Inc.                                    |  | Software                      |  | 216,810 Preferred Stock Warrants     |  |           | — |  |                     |  | 4     |       | 
|Netuitive, Inc.                                           |  | Software                      |  | 748,453 Preferred Stock Warrants     |  |           | — |  |                     |  | 75    |       | 
|Raydiance, Inc.                                           |  | Software                      |  | 735,784 Preferred Stock Warrants     |  |           | — |  |                     |  | 51    |       | 
|Razorsight Corporation                                    |  | Software                      |  | 259,404 Preferred Stock Warrants     |  |           | — |  |                     |  | 44    |       | 
|Sys-Tech Solutions, Inc.                                  |  | Software                      |  | 375,000 Preferred Stock Warrants     |  |           | — |  |                     |  | 242   |       | 
|Vidsys, Inc.                                              |  | Software                      |  | 37,346 Preferred Stock Warrants      |  |           | — |  |                     |  | 23    |       | 
|Visage Mobile, Inc.                                       |  | Software                      |  | 1,692,047 Preferred Stock Warrants   |  |           | — |  |                     |  | 20    |       | 
|Total Warrants — Technology                               |  |                               |  |                                      |  |           |   |  |                     |  | 1,938 |       | 
|Warrants — Cleantech — 0.2% (9)                           |  |                               |  |                                      |  |           |   |  |                     | 
|Renmatix, Inc.                                            |  | Alternative Energy            |  | 52,296 Preferred Stock Warrants      |  |           | — |  |                     |  | 68    |       | 
|Semprius, Inc.                                            |  | Alternative Energy            |  | 519,981 Preferred Stock Warrants     |  |           | — |  |                     |  | 26    |       | 
|Enphase Energy, Inc. (5)                                  |  | Energy Efficiency             |  | 161,959 Common Stock Warrants        |  |           | — |  |                     |  | 175   |       | 
|Rypos, Inc.                                               |  | Energy Efficiency             |  | 5,627 Preferred Stock Warrants       |  |           | — |  |                     |  | 44    |       | 
|Solarbridge Technologies, Inc. (2)                        |  | Energy Efficiency             |  | 3,645,302 Preferred Stock Warrants   |  |           | — |  |                     |  | 236   |       | 
|Tigo Energy, Inc. (2)                                     |  | Energy Efficiency             |  | 804,604 Preferred Stock Warrants     |  |           | — |  |                     |  | 100   |       | 
|Cereplast, Inc. (5)                                       |  | Waste Recycling               |  | 365,000 Common Stock Warrants        |  |           | — |  |                     |  | 175   |       | 
|Total Warrants — Cleantech                                |  |                               |  |                                      |  |           |   |  |                     |  | 824   |       | 
|Warrants — Healthcare information and services — 0.4% (9) |  |                               |  |                                      |  |           |   |  |                     | 
|Accumetrics, Inc.                                         |  | Diagnostics                   |  | 100,928 Preferred Stock Warrants     |  |           | — |  |                     |  | 107   |       | 
|BioScale, Inc. (2)                                        |  | Diagnostics                   |  | 315,618 Preferred Stock Warrants     |  |           | — |  |                     |  | 54    |       | 
|Helomics Corporation                                      |  | Diagnostics                   |  | 13,461 Preferred Stock Warrants      |  |           | — |  |                     |  | 73    |       | 
|Radisphere National Radiology Group, Inc. (2)             |  | Diagnostics                   |  | 519,992 Preferred Stock Warrants     |  |           | — |  |                     |  | 378   |       | 
|Patientkeeper, Inc.                                       |  | Other Healthcare              |  | 396,410 Preferred Stock Warrants     |  |           | — |  |                     |  | 269   |       | 
|Singulex, Inc.                                            |  | Other Healthcare              |  | 293,632 Preferred Stock Warrants     |  |           | — |  |                     |  | 44    |       | 
|Talyst, Inc.                                              |  | Other Healthcare              |  | 300,360 Preferred Stock Warrants     |  |           | — |  |                     |  | 100   |       | 
|Watermark Medical, Inc.                                   |  | Other Healthcare              |  | 12,216 Preferred Stock Warrants      |  |           | — |  |                     |  | 66    |       | 



83







Horizon Technology Finance Corporation and
Subsidiaries



Consolidated Schedule of Investments

December 31, 2013

(In thousands)



|                                                          |  |                 |  |                                      |       | Principal |   |   | Cost of             |  |       | Fair  |        
|--------------------------------------------------------- |  | --------------- |  | ------------------------------------ | ----- | --------- | - | - | ------------------- |  | ----- | ----- | -------
|Portfolio
    Company (1)                                 |  | Sector          |  | Type of Investment (3)(4)(7)(10)(11) |       | Amount    |   |   | Investments
    (6) |  |       | Value |        
|Recondo Technology,
    Inc.                              |  | Software        |  | 436,088 Preferred Stock Warrants     |       |           | — |   |                     |  | 73    |       |        
|Total Warrants —
    Healthcare information and services  |  |                 |  |                                      |       |           |   |   |                     |  | 1,164 |       |        
|Total
    Warrants                                        |  |                 |  |                                      |       |           |   |   |                     |  | 5,745 |       |        
|                                                          |  |                 |  |                                      |       |           |   |   |                     |  |       |       |        
|Other Investments — 0.3% (9)                              |  |                 |  |                                      |       |           |   |   |                     | 
|Vette Technology, LLC                                     |  | Data Storage    |  | Royalty Agreement Due 4/18/2019      |       |           | — |   |                     |  | 4,729 |       |        
|Total Other Investments                                   |  |                 |  |                                      | 4,729 |           |   |   | 400                 | 
|Equity — 0.8% (9)                                         |  |                 |  |                                      |       |           |   |   |                     | 
|Insmed Incorporated (5)                                   |  | Biotechnology   |  | 33,208 Common Stock                  |       |           | — |   |                     |  | 227   |       |        
|Revance Therapeutics, Inc.                                |  | Biotechnology   |  | 72,925 Preferred Stock               |       |           | — |   |                     |  | 73    |       |        
|Overture Networks Inc.                                    |  | Communications  |  | 386,191 Common Stock                 |       |           | — |   |                     |  | 482   |       |        
|Cereplast, Inc. (5)                                       |  | Waste Recycling |  | 200,000 Common Stock                 |       |           | — |   |                     |  | —     |       |        
|Total
    Equity                                          |  |                 |  |                                      |       |           |   |   |                     |  | 782   |       |        
|Total Portfolio Investment Assets — 163.1%                |  |                 |  |                                      |       |           |   | $ | 234,310             |  |       | $     | 221,284
|Short Term Investments — Money Market Funds — 0.9% (9)    |  |                 |  |                                      |       |           |   |   |                     |  |       |       |        
|US Bank Money Market Deposit Account                      |  |                 |  |                                      |       |           |   | $ | 1,188               |  |       | $     | 1,188  
|Total Short Term Investments — Money Market Funds         |  |                 |  |                                      |       |           |   | $ | 1,188               |  |       | $     | 1,188  
|Short Term Investments — Restricted Investments— 4.4% (9) |  |                 |  |                                      |       |           |   |   |                     |  |       |       |        
|US Bank Money Market Deposit Account (2)                  |  |                 |  |                                      |       |           |   | $ | 5,951               |  |       | $     | 5,951  
|Total Short Term Investments — Restricted Investments     |  |                 |  |                                      |       |           |   | $ | 5,951               |  |       | $     | 5,951  

________________________



|(1)  |  | All of the Company’s investments 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 Credit Facilities 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. For each debt investment, the current interest rate in effect as of December 31, 2013 is provided.
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(5)  |  | Portfolio company is a public company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(6)  |  | For debt investments, represents principal balance less unearned income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(7)  |  | Preferred and common stock warrants, equity interests and other investments are non-income producing.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(8)  |  | Debt investment is on non-accrual status at December 31, 2013 and is, therefore, considered non-income producing.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(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) |  | 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 investment unless otherwise noted. Interest will accrue during the life of the debt
investment on each end-of-term payment and will be recognized as non-cash income until it is actually paid. Therefore, a portion
of the incentive fee will be based on income that the Company has not yet received in cash.                       



84







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 Investment Company Act of 1940, as amended (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 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 twelve months ended December
31, 2014.



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 special purpose bankruptcy remote entity and is a separate legal entity from the Company. Any assets conveyed
to Credit III are not available to creditors of the Company or any other entity other than Credit III’s lenders.



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 and issuing fixed-rate asset-backed
notes in an aggregate principal amount of $90 million (the “Asset-Backed Notes”).



The Company has also established
wholly owned subsidiaries, each of which is structured as a Delaware limited liability company, to hold portfolio companies assets
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 amended and restated investment management agreement (the “Investment Management Agreement”) with Horizon Technology
Finance Management LLC (the “Advisor”), under which the Advisor manages the day-to-day operations of, and provides
investment advisory services to, the Company.



85







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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-K and Article 6 or 10 of Regulation S-X under the Securities
Act of 1933, as amended (“Regulation S-X”). 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.



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 investment and investment
relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment
segment.



86







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Investments



Investments are recorded
at fair value. The Company’s board of directors (“Board”) determines the fair value of its 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 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. For the year ended December 31, 2014, we recognized
as interest income interest payments of $0.3 million received from one portfolio company whose debt investment was on non-accrual
status. As of December 31, 2013, there were five investments on non-accrual status with a cost of $23.2 million and a fair value
of $13.9 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 end-of-term payment (“ETP”), that is accrued into interest 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.



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 gain or loss on investments. Gains and losses from the disposition of the warrants
or stock acquired from the exercise of warrants are recognized as realized gains and losses on investments.



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



Debt issuance costs



Debt issuance costs are
fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities.
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 December 31, 2014 and 2013, included in other assets, was $2.4 million and
$5.1 million, respectively. The accumulated amortization balances as of December 31, 2014 and 2013 were $3.0 million and $2.0 million,
respectively. The amortization expense for the years ended December 31, 2014, 2013 and 2012 was $2.7 million, $1.5 million and
$0.5 million, respectively.



87







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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, among other things, the Company is required to meet certain source of income
and asset diversification requirements and to timely distribute to its stockholders at least 90% of 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.



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% 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 each of the years ended December 31, 2014, 2013
and 2012, $0.2 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. 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 December 31, 2014 and 2013. The 2013, 2012 and 2011 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.



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.



Transfers of financial assets



Assets related to transactions
that do not meet Accounting Standards Codification (“ASC”) 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 affiliate of the Company).



88







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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 June 2013, the Financial
Accounting Standards Board issued Accounting Standards Update 2013-08, Financial Services — Investment Companies
(Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements, or ASU 2013-08, containing new guidance on assessing
whether an entity is an investment company, requiring non-controlling ownership interest in investment companies to be measured
at fair value and requiring certain additional disclosures. This guidance is effective for annual and interim periods beginning
on or after December 15, 2013. ASU 2013-08 did not have a material impact on the Company’s consolidated financial position
or disclosures.



Note 3.  Related party transactions



Investment Management Agreement



On October 28, 2010,
the Company entered into the Investment Management Agreement with the Advisor, which was amended and restated effective July 1,
2014, under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.
Under the terms of the amended and restated 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 “SEC”). The Advisor receives fees for providing services to the Company
under the Investment Management Agreement, consisting of two components, a base management fee and an incentive fee.



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. During
the first six months of the year ended December 31, 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 for both December
31, 2014 and 2013 was $0.4 million. After giving effect of the waiver, the base management fee expense was $4.4 million, $5.2 million
and $4.2 million for the years ended December 31, 2014, 2013 and 2012, respectively.



89







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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 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.



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.



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.



90







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The performance based
incentive fee expense was $2.0 million, $3.3 million and $2.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The performance based incentive fee payable for December 31, 2014 and 2013 was $0.8 million and $0.9 million, respectively. The
entire incentive fee payable for each of the years ended December 31, 2014 and 2013 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 $1.1 million, $1.2 million and $1.1 million for the years ended
December 31, 2014, 2013 and 2012, respectively.



Note 4.  Investments



Investments, all of which
are with portfolio companies in the United States, consisted of the following:



|                                             |  | December 31, 2014 |         |  | December 31, 2013 |  
|-------------------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                             |  | Cost              |         |  | Fair Value        |  
|                                             |  |                   |         |  | (In thousands)    |  
|Money market funds                           |  | $                 | 27      |  |                   | $
|Restricted investments in money market funds |  | $                 | 2,906   |  |                   | $
|Non-affiliate investments                    |  |                   |         |  |                   |  
|Debt                                         |  | $                 | 199,564 |  |                   | $
|Warrants                                     |  |                   | 4,815   |  |                   |  
|Other Investments                            |  |                   | 4,582   |  |                   |  
|Equity                                       |  |                   | 877     |  |                   |  
|Total non-affiliate investments              |  | $                 | 209,838 |  |                   | $



91







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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



|                                    |  | December 31, 2014 |         |  | December 31, 2013 |  
|----------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                    |  | Cost              |         |  | Fair Value        |  
|                                    |  |                   |         |  | (In thousands)    |  
|Life Science                        |  |                   |         |  |                   |  
|Biotechnology                       |  | $                 | 22,203  |  |                   | $
|Medical Device                      |  |                   | 23,129  |  |                   |  
|Technology                          |  |                   |         |  |                   |  
|Communications                      |  |                   | 18,392  |  |                   |  
|Consumer-Related                    |  |                   | 6,556   |  |                   |  
|Data Storage                        |  |                   | 4,604   |  |                   |  
|Internet and Media                  |  |                   | 79      |  |                   |  
|Networking                          |  |                   | 1,045   |  |                   |  
|Power Management                    |  |                   | 7       |  |                   |  
|Semiconductors                      |  |                   | 30,948  |  |                   |  
|Software                            |  |                   | 54,482  |  |                   |  
|Cleantech                           |  |                   |         |  |                   |  
|Alternative Energy                  |  |                   | 8,283   |  |                   |  
|Consumer-Related                    |  |                   | 396     |  |                   |  
|Energy Efficiency                   |  |                   | 4,557   |  |                   |  
|Waste Recycling                     |  |                   | —       |  |                   |  
|Healthcare Information and Services |  |                   |         |  |                   |  
|Diagnostics                         |  |                   | 18,593  |  |                   |  
|Other                               |  |                   | 7,157   |  |                   |  
|Software                            |  |                   | 9,407   |  |                   |  
|Total non-affiliate investments     |  | $                 | 209,838 |  |                   | $



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.



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.



92







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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



Investments are valued
at fair value as determined in good faith by the Board, based on input of management, the audit committee and independent valuation
firms which are engaged at the direction of the Board to assist in the valuation of each portfolio investment lacking a readily
available market quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied
valuation process. This valuation process is conducted at the end of each fiscal quarter, with 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 year end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the same
remaining maturities. At December 31, 2014 and 2013, the hypothetical market yield used ranged from 9% to 18% and 9% to 25%, respectively.
Significant increases (decreases) in this unobservable input would result in a significantly lower (higher) fair value measurement.
These assets are recorded at fair value on a recurring basis and are categorized as Level 3 within the fair value hierarchy described
above.



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



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



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



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



93







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



| | • | 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. Significant increases (decreases) in this unobservable
input would result in a significantly lower (higher) fair value measurement.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | 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 with the fair value hierarchy described above. The fair value of an equity investment in a publicly traded company is based
upon the closing public share price on the date of measurement. Therefore, the Company has categorized these equity investments
as Level 1 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.



Other investments:Other investments will be 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 December
31, 2014 and 2013. 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.



94







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The following table is
not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s
fair value measurements for the year ended December 31, 2014.



|December
    31, 2014            
|---------------------------------
|                                 
|Investment
    Type              
|(In thousands, except share data)
|Debt
    investments             
|                                 
|                                 
|                                 
|                                 
|Warrant
    investments          
|                                 
|                                 
|                                 
|                                 
|Other
    investments            
|                                 
|                                 
|Equity
    investments           
|Total
    Level 3 investments    



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 for the year ended December 31, 2013.



|December
                                         31, 2013
|----------------------------------------------------------
|                                                          
|Investment Type                                           
|(In thousands, except share data)                         
|Debt investments                                          
|                                                          
|                                                          
|                                                          
|                                                          
|Warrant investments                                       
|                                                          
|                                                          
|                                                          
|                                                          
|Other investments                                         
|                                                          
|                                                          
|Equity
    investments                                    
|Total
    Level 3 investments                             



Borrowings:  The
carrying amount of borrowings under the Credit Facilities (as defined in Note 6) approximates fair value due to the variable interest
rate of the Credit Facilities 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. At December 31, 2014, the 2019
Notes were trading on the New York Stock Exchange for $25.29 per note, or $33.4 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 December 31,
2014, the Asset-Backed Notes (as defined in Note 6) were trading at par value, or $38.8 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.



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.



95







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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 December 31, 2014
and 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:



|                                             |  | December 31, 2014 |        
|-------------------------------------------- |  | ----------------- | -------
|                                             |  | Total             |        
|                                             |  | (In thousands)    |        
|Money market funds                           |  | $                 | 27     
|Restricted investments in money market funds |  | $                 | 2,906  
|Debt investments                             |  | $                 | 199,180
|Warrant investments                          |  | $                 | 4,603  
|Other investments                            |  | $                 | 300    
|Equity investments                           |  | $                 | 1,018  



|                                             |  | December 31, 2013 |        
|-------------------------------------------- |  | ----------------- | -------
|                                             |  | Total             |        
|                                             |  | (In thousands)    |        
|Money market funds                           |  | $                 | 1,188  
|Restricted investments in money market funds |  | $                 | 5,951  
|Debt investments                             |  | $                 | 213,754
|Warrant investments                          |  | $                 | 6,036  
|Other investments                            |  | $                 | 400    
|Equity investments                           |  | $                 | 1,094  



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
year ended December 31, 2014:



|                                                             |  | December 31, 2014 |         
|------------------------------------------------------------ |  | ----------------- | --------
|                                                             |  | Debt Investments  |         
|                                                             |  | (In thousands)    |         
|Level 3 assets, beginning of period                          |  | $                 | 213,754 
|Purchase of investments                                      |  |                   | 95,323  
|Warrants and equity received and classified as Level 3       |  |                   | —       
|Principal payments received on investments                   |  |                   | (109,358
|Proceeds from sale of investments                            |  |                   | —       
|Net realized (loss) gain on investments                      |  |                   | (7,268  
|Unrealized appreciation (depreciation)  included in earnings |  |                   | 8,915   
|Transfer out of Level 3                                      |  |                   | —       
|Transfer from debt to equity investments                     |  |                   | (2,300  
|Other                                                        |  |                   | 114     
|Level 3 assets, end of period                                |  | $                 | 199,180 



The Company’s transfers
between levels are recognized at the end of each reporting period. During the year ended December 31, 2014, there was one transfer
between Level 1 and Level 2. The transfer from Level 2 to Level 1 related to the exercise of warrants held in one public portfolio
company to purchase equity in such portfolio company. 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. Because the fair value of warrants and equity 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, the Company has categorized the warrants and equity as Level 2 within the fair value hierarchy described
above as of December 31, 2014. During the year ended December 31, 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.



96







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The change in unrealized
appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at December
31, 2014 includes $0.4 million in unrealized depreciation for debt investments, $0.3 million in unrealized appreciation on warrants
and $0.3 million in unrealized depreciation on equity.



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
year ended December 31, 2013:



|                                                       |  | December 31, 2013 |        
|------------------------------------------------------ |  | ----------------- | -------
|                                                       |  | Debt Investments  |        
|                                                       |  | (In thousands)    |        
|Level 3 assets, beginning of period                    |  | $                 | 220,297
|Purchase of investments                                |  |                   | 88,362 
|Warrants and equity received and classified as Level 3 |  |                   | —      
|Principal payments received on investments             |  |                   | (87,434
|Sales of investments                                   |  |                   | —      
|Net realized loss on investments                       |  |                   | (6,825 
|Unrealized depreciation included in earnings           |  |                   | (1,428 
|Transfer out of Level 3                                |  |                   | —      
|Transfer from debt to other investments                |  |                   | (73    
|Other                                                  |  |                   | 855    
|Level 3 assets, end of period                          |  | $                 | 213,754



The Company’s transfers
between levels are recognized at the end of the applicable reporting period. During the year ended December 31, 2013, there were
no transfers between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in one portfolio company, with a
value of $0.1 million, that were transferred into Level 2 due to the portfolio company becoming a public company during the year
ended December 31, 2013. Because the fair value of 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, the Company has categorized
the warrants as Level 2 within the fair value hierarchy described above as of December 31, 2013.



The change in unrealized
appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at December
31, 2013 includes $7.9 million unrealized depreciation on debt investments, $0.4 million unrealized depreciation on warrants, $0.1
million unrealized depreciation on equity and $1.6 million unrealized depreciation on other investments.



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 2014 and 2013 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 at year-end.



97







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



As of December 31, 2014
and 2013, 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.



Note 6.  Borrowings



The following table shows
the Company’s borrowings as of December 31, 2014 and 2013:



|                   |  | December 31, 2014 |         |  | December 31, 2013   |  
|------------------ |  | ----------------- | ------- |  | ------------------- | -
|                   |  | Total Commitment  |         |  | Balance Outstanding |  
|                   |  |                   |         |  |                     |  
|Asset-Backed Notes |  | $                 | 38,753  |  |                     | $
|Fortress Facility  |  |                   | —       |  |                     |  
|Key Facility       |  |                   | 50,000  |  |                     |  
|2019 Notes         |  |                   | 33,000  |  |                     |  
|Total              |  | $                 | 121,753 |  |                     | $



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 December 31, 2014, the asset coverage for borrowed amounts
was 269%.



On November 4, 2013, the
Company renewed and amended the revolving credit facility (referred to herein as the “Key Facility”) which it originally
entered into with Wells Fargo Capital Finance LLC and facilitated the assignment of all rights and obligations thereunder to Key
Equipment Finance (“Key”). The Key Facility has an accordion feature which allows for an increase in the total loan
commitment to $150 million from the current $50 million commitment provided by Key. The Key Facility is collateralized by all loans
and warrants held by Credit II and permits an advance rate of up to 50% of eligible loans 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 loans securing the
Key Facility to certain criteria for qualified loans 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 November
4, 2018. 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 rate at December 31, 2014 and 2013 was 4.00%. As of December 31, 2014, the Company had borrowing
capacity of $40.0 million, of which $35.6 million was available, 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 senior 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 December 31, 2014, 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.”



98







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The Company entered into
a term loan facility (the “Fortress Facility” and, together with the Key Facility, the “Credit Facilities”)
with Fortress Credit Co LLC (“Fortress”) effective August 23, 2012. The Fortress Facility was collateralized by all
loans 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 loans securing the Fortress Facility to certain criteria for qualified loans
and includes 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 loans. The Fortress Facility bore interest based upon the one-month LIBOR
plus a spread of 6.00%, with a LIBOR floor of 1.00%. The rate at December 31, 2013 was 7.00%, and the average rate for the period
within the year ended December 31, 2013, in which the loan was outstanding, was 7.00%.



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 December 31, 2014. Upon termination of the Fortress Facility, the Company accelerated $1.1 million of unamortized debt issuance
costs and paid a $0.8 million prepayment fee, which were recorded as interest expense. The Company expects to incur no ongoing
obligations or expenses in connection with the termination and prepayment of the Fortress Facility.



On June 28, 2013, the
Company completed a $189.3 million securitization of secured loans which it originated. 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.



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 “Loans”) and secured by certain assets of such portfolio companies. The pool of loans is to be 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 certain secured loans made to certain portfolio
companies of the Company (the “Loans”). The Company made customary representations, warranties and covenants in the
Sale and Contribution Agreement with respect to the Loans as of the date of the transfer of the 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 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 of 1933, as amended (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.



99







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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 balance of restricted investments in money market funds was $2.9 million and $6.0 million as of December
31, 2014 and December 31, 2013, respectively.



On June 3, 2013, the Company
and Guggenheim Securities entered into a promissory note (the “Promissory Note”) whereby Guggenheim Securities made
a term loan to the Company in the aggregate principal amount of $15 million (the “Term Loan”). The Company granted
Guggenheim Securities a security interest in all of its assets to secure the Term Loan. On June 28, 2013, the Company used a portion
of the proceeds of the private placement of the Asset-Backed Notes to repay all of its outstanding obligations under the Term Loan
and the security interest of Guggenheim Securities was released.



The following table shows
information about our senior securities as of December 31, 2014, 2013, 2012, 2011 and 2010:



|Class and Year        |  | Total AmountOutstandingExclusive ofTreasurySecurities(1) |        |  | Asset Coverageper Unit(2) |   |        | InvoluntaryLiquidationPreferenceper Unit(3) |  |  | AverageMarketValue perUnit(4) | 
|--------------------- |  | -------------------------------------------------------- | ------ |  | ------------------------- | - | ------ | ------------------------------------------- |  |  | ----------------------------- | 
|                      |  | (In thousands, except unit data)                         |       
|Credit Facilities     |  |                                                          |        |  |                           |   |        |                                             |  |  |                               | 
|2014                  |  | $                                                        | 10,000 |  |                           | $ | 22,000 |                                             |  |  | —                             | 
|2013                  |  |                                                          | 10,000 |  |                           |   | 25,818 |                                             |  |  | —                             | 
|2012                  |  |                                                          | 56,020 |  |                           |   | 4,177  |                                             |  |  | —                             | 
|2011                  |  |                                                          | 64,571 |  |                           |   | 3,012  |                                             |  |  | —                             | 
|2010                  |  |                                                          | 87,425 |  |                           |   | 2,455  |                                             |  |  | —                             | 
|2019 Notes            |  |                                                          |        |  |                           |   |        |                                             |  |  |                               | 
|2014                  |  | $                                                        | 33,000 |  |                           | $ | 6,667  |                                             |  |  | —                             | 
|2013                  |  |                                                          | 33,000 |  |                           |   | 7,824  |                                             |  |  | —                             | 
|2012                  |  |                                                          | 33,000 |  |                           |   | 7,091  |                                             |  |  | —                             | 
|2013-1 Securitization |  |                                                          |        |  |                           |   |        |                                             |  |  |                               | 
|2014                  |  | $                                                        | 38,753 |  |                           | $ | 5,677  |                                             |  |  | —                             | 
|2013                  |  |                                                          | 79,343 |  |                           |   | 3,254  |                                             |  |  | —                             | 

____________



|(1) | Total amount of senior securities outstanding at the end of the period presented.                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Asset coverage per unit is the ratio of the original cost less accumulated depreciation, amortization or impairment of the Company’s total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
|(3) | The amount which the holder of such class of senior security would be entitled upon the voluntary liquidation of the applicable issuer in preference to any security junior to it. The “ — ” in this column indicates that the SEC expressly does not require this information to be disclosed for certain types of securities.                                                                                
|(4) | Not applicable to the Company’s Credit Facilities and 2013-1 Securitization because such securities are not registered for public trading.                                                                                                                                                                                                                                                                     



Note 7.  Federal income tax



The Company elected to
be treated as a RIC under Subchapter M of the Code and to distribute substantially all of its respective net taxable income. 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 primarily due to unrealized appreciation on investments as investment gains and losses are
not included in taxable income until they are realized.



100







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The following table reconciles
net increase in net assets resulting from operations to taxable income:



|                                                          |  | Year Ended December 31, |       
|--------------------------------------------------------- |  | ----------------------- | ------
|                                                          |  | 2014                    |       
|                                                          |  | (In thousands)          |       
|Net increase in net assets resulting from operations      |  | $                       | 15,430
|Net unrealized (appreciation) depreciation on investments |  |                         | (8,289
|Other book-tax differences                                |  |                         | 183   
|Capital loss carry forward                                |  |                         | 3,576 
|Taxable income before deductions for distributions        |  | $                       | 10,900



The tax characters of
distributions paid are as follows:

|                        |  | Year Ended December 31, |       
|----------------------- |  | ----------------------- | ------
|                        |  | 2014                    |       
|                        |  | (In thousands)          |       
|Ordinary income         |  | $                       | 13,276
|Long-term capital gains |  |                         | —     
|Total                   |  | $                       | 13,276



The components of undistributed
ordinary income earnings (accumulated losses) on a tax basis were as follows:





|                                      |  | As of December 31, |        
|------------------------------------- |  | ------------------ | -------
|                                      |  | 2014               |        
|                                      |  | (In thousands)     |        
|Undistributed ordinary income         |  | $                  | 3,963  
|Undistributed long-term gain          |  |                    | —      
|Unexpiring capital loss carry forward |  |                    | (11,085
|Unrealized depreciation               |  |                    | (4,737 
|Other temporary differences           |  |                    | (4,187 
|Total                                 |  | $                  | (16,046





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% excise tax on such income, as required. For the years ended December 31, 2014 and 2013, the
Company elected to carry forward taxable income in excess of current year distributions of $4.0 million and $6.1 million, respectively,
and recorded at both December 31, 2014 and 2013 an excise tax payable of $0.2 million.



For federal income tax
purposes, the tax cost of investments at December 31, 2014 and 2013 was $209.8 million and $234.3 million, respectively. The net
unrealized depreciation on investments at December 31, 2014 and 2013 was $4.7 million and $13.0 million, respectively.



Note 8.  Financial instruments with off-balance-sheet
risk



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



The balance of unfunded
commitments to extend credit was $25.7 million and $9.0 million as of December 31, 2014 and 2013, 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. Commitments may also include a financial or non-financial milestone that has to be
achieved before the commitment can be drawn. 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.



101







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Note 9.  Concentrations of
credit risk



The Company’s debt
investments consist primarily of loans to development-stage companies at various stages of development in the technology, life
science, healthcare information and services and 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 year to year as new debt
investments are recorded and repaid. The Company’s five largest debt investments represented 24% and 22% of total debt investments
outstanding as of December 31, 2014 and 2013, respectively. No single debt investment represented more than 10% of the total debt
investments as of December 31, 2014 or 2013. 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 20%, 23% and 22% of total
interest and fee income on investments for the years ended December 31, 2014, 2013 and 2012, respectively.



Note 10. Distributions



The Company’s distributions
are recorded on the declaration date. The following table summarizes the Company’s distribution activity during the years
end 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 data) | 
|Year Ended December 31, 2014 |  |                                   |  |             
|10/31/14                     |  | 2/19/15                           |  | 3/16/15      |  | $                | 0.115 |  |                   | $ | —      |                     |  |  | —                 | 
|10/31/14                     |  | 1/20/15                           |  | 2/13/15      |  |                  | 0.115 |  |                   |   | 1,094  |                     |  |  | 956               | 
|10/31/14                     |  | 12/17/14                          |  | 1/15/15      |  |                  | 0.115 |  |                   |   | 1,096  |                     |  |  | 786               | 
|8/1/14                       |  | 11/19/14                          |  | 12/15/14     |  |                  | 0.115 |  |                   |   | 1,093  |                     |  |  | 1,099             | 
|8/1/14                       |  | 10/20/14                          |  | 11/17/14     |  |                  | 0.115 |  |                   |   | 1,095  |                     |  |  | 850               | 
|8/1/14                       |  | 9/18/14                           |  | 10/15/14     |  |                  | 0.115 |  |                   |   | 1,095  |                     |  |  | 901               | 
|5/1/14                       |  | 8/19/14                           |  | 9/15/14      |  |                  | 0.115 |  |                   |   | 1,095  |                     |  |  | 812               | 
|5/1/14                       |  | 7/21/14                           |  | 8/15/14      |  |                  | 0.115 |  |                   |   | 1,080  |                     |  |  | 2,042             | 
|5/1/14                       |  | 6/18/14                           |  | 7/17/14      |  |                  | 0.115 |  |                   |   | 1,093  |                     |  |  | 784               | 
|3/6/14                       |  | 5/20/14                           |  | 6/16/14      |  |                  | 0.115 |  |                   |   | 1,091  |                     |  |  | 1,128             | 
|3/6/14                       |  | 4/17/14                           |  | 5/15/14      |  |                  | 0.115 |  |                   |   | 1,090  |                     |  |  | 1,174             | 
|3/6/14                       |  | 3/19/14                           |  | 4/15/14      |  |                  | 0.115 |  |                   |   | 1,097  |                     |  |  | 644               | 
|                             |  |                                   |  |              |  | $                | 1.380 |  |                   | $ | 12,019 |                     |  |  | 11,176            | 
|Year Ended December 31, 2013 |  |                                   |  |             
|11/1/13                      |  | 2/17/14                           |  | 3/17/14      |  | $                | 0.115 |  |                   | $ | 1,062  |                     |  |  | 3,444             | 
|11/1/13                      |  | 1/20/14                           |  | 2/14/14      |  |                  | 0.115 |  |                   |   | 1,058  |                     |  |  | 3,249             | 
|11/1/13                      |  | 12/16/13                          |  | 1/15/14      |  |                  | 0.115 |  |                   |   | 1,061  |                     |  |  | 3,048             | 
|8/2/13                       |  | 11/19/13                          |  | 12/16/13     |  |                  | 0.115 |  |                   |   | 1,045  |                     |  |  | 4,225             | 
|8/2/13                       |  | 10/17/13                          |  | 11/15/13     |  |                  | 0.115 |  |                   |   | 937    |                     |  |  | 11,851            | 
|8/2/13                       |  | 9/18/13                           |  | 10/15/13     |  |                  | 0.115 |  |                   |   | 1,051  |                     |  |  | 3,882             | 
|5/3/13                       |  | 8/19/13                           |  | 9/16/13      |  |                  | 0.115 |  |                   |   | 1,057  |                     |  |  | 3,376             | 
|5/3/13                       |  | 7/17/13                           |  | 8/15/13      |  |                  | 0.115 |  |                   |   | 1,060  |                     |  |  | 2,980             | 
|5/3/13                       |  | 6/20/13                           |  | 7/15/13      |  |                  | 0.115 |  |                   |   | 1,070  |                     |  |  | 2,191             | 
|3/8/13                       |  | 5/20/13                           |  | 6/17/13      |  |                  | 0.115 |  |                   |   | 1,086  |                     |  |  | 1,099             | 
|3/8/13                       |  | 4/18/13                           |  | 5/15/13      |  |                  | 0.115 |  |                   |   | 1,087  |                     |  |  | 1,035             | 
|3/8/13                       |  | 3/20/13                           |  | 4/15/13      |  |                  | 0.115 |  |                   |   | 1,046  |                     |  |  | 3,867             | 
|                             |  |                                   |  |              |  | $                | 1.380 |  |                   | $ | 12,620 |                     |  |  | 44,247            | 



102







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



On March 6, 2015, the Board declared monthly
distributions per share, payable as set forth in the following table.



|Record Dates   |  | Payment Date   |  | Distributions Declared |      
|-------------- |  | -------------- |  | ---------------------- | -----
|May 20, 2015   |  | June 15, 2015  |  | $                      | 0.115
|April 20, 2015 |  | May 15, 2015   |  | $                      | 0.115
|March 20, 2015 |  | April 15, 2015 |  | $                      | 0.115



After paying distributions
of $1.38 per share and earning $1.11 per share for the year, the Company’s undistributed spillover income as of December
31, 2014 was $0.41 per share. Spillover income includes any ordinary income and net capital gains from the preceding years that
were not distributed during such years.



Note 11.  Financial highlights



The following table shows
financial highlights for the Company:



|                                                      |  | Year Ended December 31,
2014      |           |   | Year Ended December 31,
2013 |   |           | Year Ended
    December 31, 2012 |  |   | Year Ended
    December 31, 2011 |   |  | October 29, 2010 to December 31, 2010 |          
|----------------------------------------------------- |  | --------------------------------- | --------- | - | ---------------------------- | - | --------- | -------------------------------- |  | - | -------------------------------- | - |  | ------------------------------------- | ---------
|                                                      |  | (In thousands, except share data) |          
|Per share data:                                       |  |                                   |           |   |                              |   |           |                                  |  |   |                                  |   |  |                                       |          
|Net asset value at beginning of period                |  | $                                 | 14.14     |   |                              | $ | 15.15     |                                  |  | $ | 17.01                            |   |  | $                                     | 16.75    
|Net investment income                                 |  |                                   | 1.11      |   |                              |   | 1.38      |                                  |  |   | 1.41                             |   |  |                                       | 1.38     
|Realized (loss) gain on investments                   |  |                                   | (0.37     | ) |                              |   | (0.78     | )                                |  |   | 0.01                             |   |  |                                       | 0.81     
|Unrealized appreciation (depreciation) on investments |  |                                   | 0.86      |   |                              |   | (0.23     | )                                |  |   | (0.95                            | ) |  |                                       | (0.75    
|Net increase in net assets resulting from operations  |  |                                   | 1.60      |   |                              |   | 0.37      |                                  |  |   | 0.47                             |   |  |                                       | 1.44     
|Issuance of common stock and capital contributions    |  |                                   | —         |   |                              |   | —         |                                  |  |   | —                                |   |  |                                       | —        
|Offering costs                                        |  |                                   | —         |   |                              |   | —         |                                  |  |   | —                                |   |  |                                       | —        
|Net dilution from issuance of common stock            |  |                                   | —         |   |                              |   | —         |                                  |  |   | (0.28                            | ) |  |                                       | —        
|Distributions declared(1)                             |  |                                   | (1.38     | ) |                              |   | (1.38     | )                                |  |   | (2.15                            | ) |  |                                       | (1.18    
|From net investment income                            |  |                                   | (1.38     | ) |                              |   | (1.38     | )                                |  |   | (1.72                            | ) |  |                                       | (0.70    
|From net realized gain on investments                 |  |                                   | —         |   |                              |   | —         |                                  |  |   | (0.43                            | ) |  |                                       | (0.48    
|Return of capital                                     |  |                                   | —         |   |                              |   | —         |                                  |  |   | —                                |   |  |                                       | —        
|Other (2)                                             |  |                                   | —         |   |                              |   | —         |                                  |  |   | 0.10                             |   |  |                                       | —        
|Net asset value at end of period                      |  | $                                 | 14.36     |   |                              | $ | 14.14     |                                  |  | $ | 15.15                            |   |  | $                                     | 17.01    
|Per share market value, end of period                 |  | $                                 | 13.99     |   |                              | $ | 14.21     |                                  |  | $ | 14.92                            |   |  | $                                     | 16.32    
|Total return based on a market value (3)              |  |                                   | 8.2       | % |                              |   | 4.5       | %                                |  |   | 2.5                              | % |  |                                       | 21.2     
|Shares outstanding at end of period                   |  |                                   | 9,628,124 |   |                              |   | 9,608,949 |                                  |  |   | 9,567,225                        |   |  |                                       | 7,636,532
|Ratios to average net assets:                         |  |                                   |           |   |                              |   |           |                                  |  |   |                                  |   |  |                                       |          
|Expenses without incentive fees(4)                    |  |                                   | 13.3      | % |                              |   | 11.8      | %                                |  |   | 8.4                              | % |  |                                       | 7.9      
|Incentive fees                                        |  |                                   | 1.5       | % |                              |   | 2.3       | %                                |  |   | 2.1                              | % |  |                                       | 2.3      
|Total expenses(4)                                     |  |                                   | 14.8      | % |                              |   | 14.1      | %                                |  |   | 10.5                             | % |  |                                       | 10.2     
|Net investment income with incentive fees(4)          |  |                                   | 7.8       | % |                              |   | 9.2       | %                                |  |   | 8.7                              | % |  |                                       | 8.1      
|Net assets at the end of the period                   |  | $                                 | 138,248   |   |                              | $ | 135,835   |                                  |  | $ | 144,972                          |   |  | $                                     | 129,884  
|Average net asset value                               |  | $                                 | 137,848   |   |                              | $ | 142,327   |                                  |  | $ | 137,741                          |   |  | $                                     | 130,385  
|Average debt per share                                |  |                                   | 10.68     |   |                              |   | 12.06     |                                  |  |   | 7.42                             |   |  |                                       | 10.26    
|Portfolio turnover ratio                              |  |                                   | 46.5      | % |                              |   | 37.9      | %                                |  |   | 74.0                             | % |  |                                       | 59.4     

____________



|(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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(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) | During the year ended December 31, 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 13.5%, 15.0% and 7.5%, respectively. During the year ended December 31, 2013, the Advisor waived $0.1 million of management fees. Had this expense not been waived, the ratio of expenses without incentive fees to average net assets, the ratio of total expenses to average net assets and the ratio of net investment income with incentive fees to average net assets would have been 11.9%, 14.3% and 9.1% respectively.
|(5) | Annualized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



103







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Note 12.  Selected quarterly financial data (unaudited)



|                                                    |  | December 31, 2014                 |       |   | September 30, 2014 |   |       | June 30, 2014 |  |   | March 31, 2014 | 
|--------------------------------------------------- |  | --------------------------------- | ----- | - | ------------------ | - | ----- | ------------- |  | - | -------------- | 
|                                                    |  | (In thousands, except share data) |      
|Total investment income                             |  | $                                 | 7,284 |   |                    | $ | 7,739 |               |  | $ | 8,697          | 
|Net investment income                               |  |                                   | 3,196 |   |                    |   | 3,201 |               |  |   | 1,836          | 
|Net realized and unrealized (loss) gain             |  |                                   | (91   | ) |                    |   | 1,559 |               |  |   | 599            | 
|Net increase in net asset resulting from operations |  |                                   | 3,105 |   |                    |   | 4,760 |               |  |   | 2,435          | 
|Net investment income per share (1)                 |  |                                   | 0.33  |   |                    |   | 0.33  |               |  |   | 0.19           | 
|Net earnings per share (1)                          |  |                                   | 0.32  |   |                    |   | 0.50  |               |  |   | 0.25           | 
|Net asset value per share at period end (2)         |  | $                                 | 14.36 |   |                    | $ | 14.38 |               |  | $ | 14.23          | 



|                                                               |  | December 31, 2013                 |        |   | September 30, 2013 |   |       | June 30, 2013 |  |   | March 31, 2013 |  
|-------------------------------------------------------------- |  | --------------------------------- | ------ | - | ------------------ | - | ----- | ------------- |  | - | -------------- | -
|                                                               |  | (In thousands, except share data) |       
|Total investment income                                        |  | $                                 | 8,776  |   |                    | $ | 8,712 |               |  | $ | 8,787          |  
|Net investment income                                          |  |                                   | 3,410  |   |                    |   | 3,487 |               |  |   | 3,601          |  
|Net realized and unrealized (loss) gain                        |  |                                   | (7,921 | ) |                    |   | 401   |               |  |   | (2,453         | )
|Net (decrease) increase in net asset resulting from operations |  |                                   | (4,511 | ) |                    |   | 3,888 |               |  |   | 1,148          |  
|Net investment income per share (1)                            |  |                                   | 0.35   |   |                    |   | 0.36  |               |  |   | 0.38           |  
|Net (loss) earnings per share (1)                              |  |                                   | (0.47  | ) |                    |   | 0.41  |               |  |   | 0.12           |  
|Net asset value per share at period end (2)                    |  | $                                 | 14.14  |   |                    | $ | 14.95 |               |  | $ | 14.89          |  



| | (1) | Based on weighted average shares outstanding for the
respective period.
| | --- | -----------------------------------------------------------------------

| | (2) | Based on shares outstanding at the end of the respective
period.
| | --- | ----------------------------------------------------------------



104







Item 9.  Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure



None



Item 9A.Controls and Procedures



(a) Evaluation of disclosure controls and procedures



As of December 31, 2014,
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) of 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) Management’s Report on Internal Control
Over Financial Reporting



Management’s Report
on Internal Control Over Financial Reporting and McGladrey LLP’s Report of Independent Registered Public Accounting Firm
are included in “Item 8. Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.



(c) 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) of 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.



Item 9B.Other Information



None



PART III



We will file a definitive
Proxy Statement for our 2015 Annual Meeting of Stockholders with the SEC, pursuant to Regulation 14A, not later than 120 days
after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3)
to Form 10-K. Only those sections of our definitive Proxy Statement that specifically address the items set forth herein are
incorporated by reference.



Item 10.Directors, Executive Officers and
Corporate Governance



The information required
by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2015 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal
year.



Item 11.Executive Compensation



The information required
by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2015 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal
year.



Item 12.  Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters



The information required
by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2015 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal
year.



105







Item 13.Certain Relationships and Related
Transactions, and Director Independence



The information required
by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2015 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal
year.



Item 14.Principal Accountant Fees and Services



The information required
by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2015 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal
year.



PART IV



Item 15.Exhibits and Financial Statement
Schedules



(a)(1) Financial statements



(1) Financial
statements — Refer to Item 8 starting on page 68.



(2) Financial
statement schedules — None



(3) Exhibits



|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |  |                                                                                                                                                                                                                                                                                                       
|3.1        |  | Amended and Restated Certificate of Incorporation (Incorporated by reference to exhibit (a) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                                                                                          
|           |  |                                                                                                                                                                                                                                                                                                       
|3.2        |  | Amended and Restated Bylaws (Incorporated by reference to exhibit (b) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                                                                                                                
|           |  |                                                                                                                                                                                                                                                                                                       
|4.1        |  | Form of Specimen Certificate (Incorporated by reference to exhibit (d) of the Company’s Pre-effective Amendment No. 3 to the Registration Statement on Form N-2, filed on July 19, 2010)                                                                                                              
|           |  |                                                                                                                                                                                                                                                                                                       
|4.2        |  | Form of Registration Rights Agreement among Compass Horizon Partners, LP, HTF-CHF Holdings LLC and the Company (Incorporated by reference to exhibit (k)(3) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                          
|           |  |                                                                                                                                                                                                                                                                                                       
|4.3        |  | Form of Indenture (Incorporated by reference to Exhibit (d)(4) of the Company’s Registration Statement on Form N-2, File No. 333-178516, filed on December 15, 2011)                                                                                                                                  
|           |  |                                                                                                                                                                                                                                                                                                       
|4.4        |  | Indenture, dated as of March 23, 2012, between the Company and U.S. Bank National Association. (Incorporated by reference to Exhibit (d)(7) of the Company’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2, File No. 333-178516, filed on March 23, 2012)                  
|           |  |                                                                                                                                                                                                                                                                                                       
|4.5        |  | First Supplemental Indenture, dated as of March 23, 2012, between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit (d)(8) of the Company’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2, File No. 333-178516, filed on March 23, 2012)
|           |  |                                                                                                                                                                                                                                                                                                       
|4.6        |  | Form of 7.375% 2019 Notes due 2019 (included as part of Exhibit 4.5)                                                                                                                                                                                                                                  
|           |  |                                                                                                                                                                                                                                                                                                       
|4.7        |  | Indenture, dated as of June 28, 2013, between Horizon Technology Funding Trust 2013-1 and U.S. Bank National Association (Incorporated by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q, filed on August 6, 2013)                                                           
|           |  |                                                                                                                                                                                                                                                                                                       
|10.1       |  | Amended and Restated Investment Management Agreement (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on August 5, 2014)                                                                                                                                 
|           |  |                                                                                                                                                                                                                                                                                                       
|10.2       |  | Form of Custody Agreement (Incorporated by reference to exhibit (j) of the Company’s Pre-effective Amendment No. 3 to the Registration Statement on Form N-2, filed on July 19, 2010)                                                                                                                 
|           |  |                                                                                                                                                                                                                                                                                                       
|10.3       |  | Form of Administration Agreement (Incorporated by reference to exhibit (k)(1) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                                                                                                        



106







|10.4  |  | Form of License Agreement by and between the Company and Horizon Technology Finance, LLC (Incorporated by reference to exhibit (k)(2) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                                                                                                                                                                                                                                                                        
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.5  |  | Sale and Contribution Agreement by and between Compass Horizon Funding Company LLC and Horizon Credit I LLC, dated as of March 4, 2008 (Incorporated by reference to exhibit (f)(5) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.6  |  | Form of Dividend Reinvestment Plan (Incorporated by reference to exhibit (e) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                                                                                                                                                                                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.7  |  | Promissory Note, dated as of June 3, 2013, by and between Horizon Technology Finance Corporation, as the borrower, and Guggenheim Securities, LLC, as the lender (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on June 3, 2013)                                                                                                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.8  |  | Amended and Restated Trust Agreement, dated as of June 28, 2013, by and between Horizon Funding 2013-1 LLC and Wilmington Trust, National Association (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed on August 6, 2013)                                                                                                                                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.9  |  | Sale and Servicing Agreement, dated as of June 28, 2013, by and among the Company, Horizon Funding Trust 2013-1, Horizon Funding 2013-1 LLC and U.S. Bank National Association (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q, filed on August 6, 2013)                                                                                                                                                                                                                            
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.10 |  | Sale and Contribution Agreement, dated as of June 28, 2013, between the Company and Horizon Funding 2013-1 LLC (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q, filed on August 6, 2013)                                                                                                                                                                                                                                                                                            
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.11 |  | Note Purchase Agreement, dated as of June 28, 2013, by and among the Company, Horizon Funding 2013-1 LLC, Horizon Funding Trust 2013-1 and Guggenheim Securities, LLC (Incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q, filed on August 6, 2013)                                                                                                                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.12 |  | Amended and Restated Loan and Security Agreement, dated as of November 4, 2013, by and among Horizon Credit II LLC, as the borrower, the Lenders that are signatories thereto, as the lenders, and Key Equipment Finance Inc,. as the arranger and the agent (Incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K, filed on March 11, 2014)                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.13 |  | Amended and Restated Sale and Servicing Agreement, dated as of November 4, 2013, by and among Horizon Credit II LLC, as the buyer, Horizon Technology Finance Corporation, as the originator and the servicer, Horizon Technology Finance Management LLC, as the sub-servicer, U.S. Bank National Association, as the collateral custodian and backup servicer, and Key Equipment Finance Inc., as the agent (Incorporated by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K, filed on March 11, 2014)
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.14 |  | Agreement Regarding Loan Assignment and Related Matters, dated as of November 4, 2013, by and among Horizon Credit II LLC, Wells Fargo Capital Finance, LLC and Key Equipment Finance Inc. (Incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K, filed on March 11, 2014)                                                                                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|11.1* |  | Computation of per share earnings (included in the notes to the audited financial statements included in this report)                                                                                                                                                                                                                                                                                                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|14.1  |  | Code of Ethics of the Company (Incorporated by reference to exhibit (r)(1) of the Company’s Pre-effective Amendment No. 3 to the Registration Statement on Form N-2, filed on July 19, 2010)                                                                                                                                                                                                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|14.2  |  | Code of Ethics of the Advisor (Incorporated by reference to exhibit (r)(2) of the Company’s Pre-effective Amendment No. 3 to the Registration Statement on Form N-2, filed on July 19, 2010)                                                                                                                                                                                                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|21*   |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|24    |  | Power of Attorney (included on signature page hereto)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|31.1* |  | Certificate of the Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|31.2* |  | Certificate of the Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|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                                                                                                                                                                                                                                                                                                                                                                         



107







|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
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                      
|99.1  |  | Privacy Policy of the Company (Incorporated by reference to Exhibit 99.1 of the Company’s Annual Report on Form 10-K, filed on March 16, 2011)       

__________

|* | Filed herewith
|- | --------------



108







SIGNATURES



Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     | Horizon Technology Finance Corporation
|-------------------- | --------------------------------------
|                     |                                       
|Date: March 10, 2015 | By:                                   
|                     | Name:                                 
|                     | Title:                                



KNOW ALL MEN BY THESE PRESENTS,
that each person whose signature appears below constitutes and appoints Robert D. Pomeroy, Jr., Christopher M. Mathieu and
Gerald A. Michaud as his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities,
to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact
or their substitute or substitutes may do or cause to be done by virtue hereof.



Pursuant to the requirements
of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.



|Signature                       |  | Title                                                         |  | Date          
|------------------------------- |  | ------------------------------------------------------------- |  | --------------
|                                |  |                                                               |  |               
|/s/
    Robert D. Pomeroy, Jr.  |  | Chairman of
    the Board of Directors                        |  |               
|Robert
    D. Pomeroy, Jr.      |  | and Chief
    Executive Officer (Principal Executive Officer) |  | March 10, 2015
|                                |  |                                                               |  |               
|/s/
    Christopher M. Mathieu  |  | Chief Financial
    Officer and                               |  |               
|Christopher
    M. Mathieu      |  | Treasurer
    (Principal Financial and Accounting Officer)    |  | March 10, 2015
|                                |  |                                                               |  |               
|/s/
    Gerald A. Michaud       |  | President and
    Director                                    |  | March 10, 2015
|Gerald
    A. Michaud           |  |                                                               |  |               
|                                |  |                                                               |  |               
|/s/
    James J. Bottiglieri    |  | Director                                                      |  | March 10, 2015
|James
    J. Bottiglieri        |  |                                                               |  |               
|                                |  |                                                               |  |               
|/s/
    Edmund V. Mahoney       |  | Director                                                      |  | March 10, 2015
|Edmund
    V. Mahoney           |  |                                                               |  |               
|                                |  |                                                               |  |               
|/s/
    Elaine A. Sarsynski     |  | Director                                                      |  | March 10, 2015
|Elaine
    A. Sarsynski         |  |                                                               |  |               
|                                |  |                                                               |  |               
|/s/
    Christopher B. Woodward |  | Director                                                      |  | March 10, 2015
|Christopher
    B. Woodward     |  |                                                               |  |               

109