UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549



Form 10-K



|(Mark One)
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|OR        
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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 ofincorporation or organization) | (I.R.S. EmployerIdentification 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% Senior 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  ̈     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  ̈     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  ̈.



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  ̈     No  ̈



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



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



The aggregate market
value of common stock held by non-affiliates of the Registrant on June 29, 2012 based on the closing price on that date of $16.49
on the Nasdaq Global Select Market was approximately $124.9 million. For the purposes of calculating this amount only, all directors
and executive officers of the Registrant have been treated as affiliates. There were 9,571,053 shares of the Registrant’s
common stock outstanding as of March 1, 2013.



Documents Incorporated
by Reference: Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2013 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, 2012



TABLE OF CONTENTS



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











PART I



In this annual
report on Form 10-K, except where the context suggests otherwise, the terms “we,” “us,” “our”
and “Horizon Technology Finance” refer to Horizon Technology Finance Corporation and its consolidated subsidiaries;
and “Horizon Technology Finance Management LLC” or the “Advisor” or the “Administrator”
refer to Horizon Technology Finance Management LLC. 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 discussed 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 (collectively, our “Target Industries”). Our investment objective is to generate
current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured
loans (“Venture Loans”) to companies backed by established venture capital and private equity firms in our Target
Industries (“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 loan 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 business development
company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). 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.



Our predecessor company,
Compass Horizon Finance Company LLC, A Delaware limited liability company (“Compass Horizon”), commenced operations
in March 2008. We were formed in March 2010 as a Delaware corporation for the purpose of acquiring Compass Horizon and continuing
its business as a public entity.



From our inception
and through December 31, 2012, we funded 85 portfolio companies and invested $476.9 million in loans (including 40 loans
that have been repaid). As of December 31, 2012, our total investment portfolio consisted of 45 loans which totaled $220.3 million,
and our net assets were $145.0 million. All of our existing loans are secured by all or a portion of the tangible and intangible
assets of the applicable portfolio company. The loans in our loan portfolio will generally not be rated by any rating agency.
If the individual loans in our portfolio were rated, they would be rated below “investment grade” because they are
subject to many risks, including volatility, intense competition, shortened product life cycles and periodic downturns.



For the year ended
December 31, 2012, our loan portfolio had a dollar-weighted average annualized yield of approximately 14.2% (excluding any yield
from warrants). As of December 31, 2012, our loan portfolio had a dollar-weighted average term of approximately 41 months
from inception and a dollar-weighted average remaining term of approximately 33 months. In addition, we held warrants to
purchase either common stock or preferred stock in 62 portfolio companies. As of December 31, 2012, substantially all of our loans
had an original committed principal amount of between $1 million and $15 million, repayment terms of between 20 and
48 months and bore current pay interest at annual interest rates of between 9% and 13%.



3







We have elected to
be treated for federal income tax purposes as a regulated investment company (“RIC”), under Subchapter M of the Internal
Revenue Code (the “Code”). As a RIC, we generally will not have to pay corporate-level federal income taxes on any
net ordinary income or capital gains that we distribute to our stockholders if we meet certain source-of-income, distribution,
asset diversification and other requirements.



We are externally
managed and advised by our Advisor. Our Advisor manages our day-to-day operations and also provides all administrative services
necessary for us to operate.



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 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 (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.



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 a
Delaware limited liability company that is a registered investment advisor under the Investment Advisers Act of 1940 (the “Advisers
Act”). The principal executive address of our Advisor is 312 Farmington Avenue, Farmington, Connecticut 06032.



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 loans we make and capital appreciation
from the warrants we receive when making such loans. 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 amortizing loans. The secured
                                                                 amortizing 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 loan 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 loans primarily through regularly
                                                                 scheduled payments of principal and interest and, if necessary,
                                                                 liquidation of the collateral supporting the loan upon a default.
                                                                 Only the potential gains from warrants depend upon equity investments
                                                                 exits.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4







| | • | “Enterprise Value”
                                                                 Lending.  We and our Advisor take an enterprise
                                                                 value approach to the loan structuring and underwriting process.
                                                                 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 (“ETPs”), pre-payment fees and
                                                                 non-utilization fees. We believe we have developed pricing tools,
                                                                 structuring techniques and valuation metrics that satisfy our
                                                                 portfolio companies’ requirements while mitigating risk
                                                                 and maximizing returns on our investments.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Opportunity for Enhanced Returns.  To
                                                                 enhance our loan portfolio returns, in addition to interest and
                                                                 fees, we obtain warrants to purchase the equity of our portfolio
                                                                 companies, as additional consideration for making loans. 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | 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
                                                                 currently use leverage to increase returns on equity through
                                                                 credit facilities provided by Wells Fargo Capital Finance, LLC
                                                                 (the “Wells Facility”) and Fortress Credit Co LLC
                                                                 (the “Fortress Facility” and collectively with the
                                                                 Wells Facility, the “Credit Facilities”) and through
                                                                 our 7.375% senior notes due 2019 (the “Senior Notes”).
                                                                 See “Item 7 — Management’s Discussion and Analysis
                                                                 of Financial Condition and Results of Operations —
                                                                 Liquidity and Capital Resources” for additional information
                                                                 about the Credit Facilities and the Senior Notes. 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.



5







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 loan support provided by
                                                                 cash proceeds from equity capital invested by venture capital
                                                                 and private equity firms;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | • | senior ranking to equity and
                                                                 collateralization of loans 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------



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 closing Venture Loans. Our Advisor has directly originated, underwritten
and managed more than 150 Venture Loans with an aggregate original principal amount over $975 million since it commenced
operations in 2004. In our experience, prospective portfolio companies prefer lenders that have a demonstrated ability to deliver
on their commitments.



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. Our Advisor’s brand name recognition in our market has resulted
in a steady flow of high quality investment opportunities that are consistent with the strategic vision and expectations of our
Advisor’s senior management.



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. The strength and breadth of our Advisor’s venture capital and private
equity relationships would take other firms considerable time and expense to develop and we believe this represents a significant
barrier to entry.



6







Well-Known
Brand Name.  Our Advisor has originated Venture Loans to more than 150 companies in our Target Industries under
the “Horizon Technology Finance” brand. We believe that the “Horizon Technology Finance” brand as a competent,
knowledgeable and active participant in the Venture Lending marketplace will continue to result in a significant number of referrals
and prospective investment opportunities in our Target Industries.



Competition



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. 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 highly 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 to or lower than our rates.
For additional information concerning the 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 make investments
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.



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.



7







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 of directors (“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.



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 including its Chief Executive Officer, Chief
Financial Officer, Chief Scientific or Technology Officer, principal marketing or sales professional and other key managers. 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.



8







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 Board delegates authority for all investment decisions to our Advisor’s 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 Uniform Commercial Code 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. Our Advisor also typically receives copies of bank and security statements, as well
as any other information required to verify reported financial information. This allows our Advisor to identify any unexpected
developments in the financial performance or condition of a portfolio company.



Our Advisor
has developed a proprietary credit rating system to analyze the quality of our loans. 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.



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.



9







The table below 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 hitting 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. All new loans are 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 — Loan Portfolio 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.



We may receive fees
for these services, though we may reimburse our Advisor for its direct expenses related to providing such services on our behalf.



10







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. As of December 31, 2012, our Advisor had 19 employees, including investment and portfolio management professionals,
operations and accounting professionals, legal counsel and administrative staff. In addition, we reimburse our Advisor for our
allocable portion of expenses incurred by it in performing its obligations under the administration agreement with Horizon Technology
Finance Management LLC, as Administrator (the “Administration Agreement”), 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
our Investment Management Agreement with our Advisor (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 is calculated at an annual rate of 2.00% of our gross assets, 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.



Incentive
Fee.  The incentive fee has two parts, as follows:



The first part 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 that we receive 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 income will be 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, our Advisor receives no incentive fee until our 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 a 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 where
we incur a loss. For example, if we receive pre-incentive fee net investment income in excess of the quarterly minimum hurdle
rate, we pay the applicable incentive fee 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 pro-rated for any period of less
than three months and adjusted for any share issuances or repurchases during the current quarter.



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 will be 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% 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 for Each Fiscal Quarter



Alternative 1



Assumptions:

Investment income (including interest,
dividends, 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.



12







Alternative 2



Assumptions:

Investment income (including interest,
dividends, 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,
dividends, 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%.



---



| | (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: 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”)



13







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)



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.



---



14







| | (1) | As illustrated in Year 3 of Alternative 1 above, if we
                                                                   were to be wound up on a date other than its 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, without limitation, 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 management fee;
| | - | -----------------------------------------------------------------------------------------------------------------------------



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



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



| | • | the allocated costs incurred
                                                                    by 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;
| | - | ------



| | • | 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | our allocable portion of 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15







We reimburse our
Advisor for costs and expenses incurred by our Advisor for office space rental, office equipment and utilities allocable to the
performance by our Advisor of its duties under the Investment Management Agreement, as well as any costs and expenses incurred
by our Advisor relating to any non-investment advisory, administrative or operating services provided by our Advisor to us or
in the form of managerial assistance to portfolio companies that request it.



Generally, our expenses
will be expensed as incurred in accordance with GAAP. To the extent we incur costs that should be capitalized and amortized into
expense we will 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 3, 2012, in order to consider and approve our Investment Management Agreement for another twelve month
period. In its consideration of the Investment Management Agreement, the Board focused on information it had received relating
to, among other things: (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 operating 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 the discussions, the Board, including a majority of the non-interested directors, concluded that the investment management
fee rates were reasonable in relation to the services to be provided.



Duration and Termination



The Investment Management
Agreement was approved by our Board on October 25, 2010 and was renewed on August 3, 2012. Following its initial two-year
term, unless terminated, the Investment Management Agreement will remain in effect from year to year if approved annually by either
(1) our Board, including approval by a majority of our directors who are not interested persons, or (2) the affirmative vote of
the holders of a majority of our outstanding voting securities. 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 are dependent upon senior management personnel of our Advisor
for our 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.



16







Administration Agreement



We have entered into
an Administration Agreement with the Administrator, to provide administrative services to us. For providing these services, facilities
and personnel, 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 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. The 1940 Act also requires that a majority of the directors
of the BDC 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: (i) 67% or more of such company’s outstanding
voting securities present at a meeting if more than 50% of the outstanding voting securities of such company are present and represented
by proxy or (ii) 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 (the “Securities Act”). Our intention
is to not write (sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio
companies, except that we may enter into hedging transactions to manage the risks associated with interest rate fluctuations to
the extent that we are permitted to engage in such hedging transactions under the 1940 Act and applicable commodities laws. We
may also purchase or otherwise receive warrants to purchase the common stock of our portfolio companies in connection with acquisition
financing or other investments. Similarly, in connection with an acquisition, we may acquire rights to require the issuers of
acquired securities or their affiliates to repurchase them under certain circumstances.



We also 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 is fundamental and any may be changed without stockholder approval.



17







We may also be prohibited
under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our
Board 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18







| | • | 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” above. 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 (“NAV”) per share. We may, however, issue
and sell our common stock, at a price below the current NAV of the common stock, or issue and sell warrants, options or rights
to acquire such common stock, at a price below the current NAV 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.



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
money market funds, 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.



19







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 or emergency 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 will 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. Each code of ethics is attached
as an exhibit to this annual report on Form 10-K, and is available on the SEC’s Internet site at http://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. 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.



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.



20







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.



Sarbanes-Oxley Act of 2002



The Sarbanes-Oxley
Act of 2002 (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 (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



The NASDAQ Global
Select Market 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.



21







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 at least 90% of the sum of our ordinary income and realized
net short-term capital gains (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 at least equal to the sum of (1) 98% of our ordinary income for
the calendar year, (2) 98.2% of our capital gain net income 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 (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 (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 and 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 will be subject to U.S. federal
income tax at the regular corporate rates on any income or capital gain not distributed (or deemed distributed) to our stockholders.



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 pay 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, 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.



22







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 distributees
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.



23







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 NAV 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 have a limited operating history
and may not be able to achieve our investment objective or generate sufficient revenue to make or sustain distributions
to our stockholders and your investment in us could decline substantially.



We commenced operations
in March 2008 and became a public company on October 28, 2010. As a result of our limited operating history, we are subject to
certain business risks and uncertainties associated with any recently formed business enterprise, including the risk that we will
not achieve our investment objective and that the value of your investment in us could decline substantially. As a public company,
we are subject to the regulatory requirements of the SEC, in addition to the specific regulatory requirements applicable to BDCs
under the 1940 Act and RICs under the Code. Our management and our Advisor have limited experience operating under this regulatory
framework, and we may incur substantial additional costs, and expend significant time or other resources, to do so. From time
to time our Advisor may pursue investment opportunities, like equity investments, in which our Advisor has more limited experience.
In addition, we may be unable to generate sufficient revenue from our operations to make or sustain distributions to our stockholders.



We and our Advisor have limited
experience operating under the constraints imposed on a BDC or managing an investment company, which may affect
our ability to manage our business and impair your ability to assess our prospects.



Prior to becoming
a public company in October 2010, we did not operate as a BDC or manage an investment company under the 1940 Act. As a result,
we have limited operating results under this regulatory framework that can demonstrate to you either its effect on our business
or our ability to manage our business within this framework. The 1940 Act imposes numerous constraints on the operations of BDCs.
For example, BDCs are required to invest at least 70% of their total assets in specified types of securities, primarily securities
of “eligible portfolio companies” (as defined in the 1940 Act), cash, cash equivalents, U.S. government securities
and other high quality debt investments that mature in one year or less. See “Regulation” in Item 1 above. Our
Advisor’s lack of experience in managing a portfolio of assets under these constraints may hinder our ability to take advantage
of attractive investment opportunities and, as a result, could impair our ability to achieve our investment objective. Furthermore,
if we are unable to comply with the requirements imposed on BDCs by the 1940 Act, the SEC could bring an enforcement action against
us and/or we could be exposed to claims of private litigants. In addition, we could be regulated as a closed-end management investment
company under the 1940 Act, which could further decrease our operating flexibility and may prevent us from operating our business,
either of which could have a material adverse effect on our business, results of operations or financial condition.



24







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



We depend on 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 in the Company or our Advisor,
and are not replaced by individuals satisfactory to Wells Fargo Capital Finance, LLC (“Wells”) within ninety days,
Wells could, absent a waiver or cure, demand repayment of any outstanding obligations under the Wells Facility. If both Mr. Pomeroy
and Mr. Michaud cease to be employed by us, and they are not replaced by individuals satisfactory to Fortress Credit Co LLC (“Fortress”)
within ninety days, then Fortress could, absent a waiver or cure, demand repayment of any outstanding obligations under the Fortress
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. Moreover, we cannot assure you that our Advisor
will remain our investment advisor or that we will continue to have access to our Advisor’s investment professionals or
its relationships. For example, 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.



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.



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. We borrow from and issue senior debt securities to banks and other lenders. Such senior debt securities include those under
the Credit Facilities. 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 dividend 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.



25







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) |  |                                                       | -20.62










|(1) | Assumes $240 million in total assets, $89 million
    in outstanding debt, $145 million in net assets, and an average cost of borrowed funds of 6.62% at December 31, 2012.
    Actual interest payments may be different.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Based on our outstanding indebtedness
of $89 million as of December 31, 2012 and the average cost of borrowed funds of 6.62% as of that date, our investment portfolio
would have been required to experience an annual return of at least 2.54% to cover annual interest payments on the outstanding
debt.



If we are unable to comply with
the covenants or restrictions in our Credit Facilities, make payments when due thereunder or make payments pursuant to our Senior
Notes, our business could be materially adversely affected.



Our Credit Facilities
are secured by a lien on the assets of our wholly owned subsidiaries, Horizon Credit II LLC (“Credit II”) and
Horizon Credit III LLC (“Credit III”), which hold substantially all of our assets. The breach of certain of the covenants
or restrictions or our failure to make payments when due under the Credit Facilities, unless cured within the applicable grace
period, would result in a default under the Credit Facilities that would permit the lenders 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 lenders may exercise
rights available to them, including, without limitation, to the extent permitted under applicable law, the seizure of such assets
without adjudication.



The Credit Facilities
include covenants that, among other things, restrict the ability of Credit II and Credit III to (i) make loans to, or
investments in, third parties (other than Venture Loans and warrants or other equity participation rights), (ii) pay dividends
and distributions, (iii) incur additional indebtedness, (iv) engage in mergers or consolidations, (v) create liens
on the collateral securing the Credit Facilities, (vi) permit additional negative pledges on such collateral, (vii) change
the business currently conducted by them, and (viii) have a change of control.



The Credit Facilities
also require Credit II, Credit III and our Advisor to comply with various financial covenants, including, among other
covenants, 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 Credit Facilities. 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 Credit Facilities could also cause a cross-default or cross-acceleration of another debt instrument
or contractual obligation, which would adversely impact our liquidity. We may not be granted waivers or amendments to the Credit
Facilities or Senior Notes if for any reason we are unable to comply with it, and we may not be able to refinance the Credit Facilities
on terms acceptable to us, or at all.



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



Our
Senior Notesare not secured by any of our assets or any of the assets of our subsidiaries. As a result, the Senior Notes
arc 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 Senior Notes. As of December 31, 2012, we had $46.0 million of
outstanding borrowings under our Wells Facility, and $10.0 million of outstanding borrowings under our Fortress Facility.



26







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



Our
Senior 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 Senior Notes and the Senior 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 Senior 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 Senior 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 Senior 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. As of December 31, 2012, we had $46.0 million of outstanding borrowings under our Wells Facility, and $10.0 million
of outstanding borrowings under our Fortress Facility.



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



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



The
indenture under which the Senior Notes are issued offers limited protection to holders of the Senior Notes. The terms of the indenture
and the Senior 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 Senior Notes.
In particular, the terms of the indenture and the Senior Notes do not place any restrictions on our or our subsidiaries' ability
to:



| | · | 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 Senior Notes,
                                                                                                             (2) any indebtedness
                                                                                                             orotherobligations
                                                                                                             that would besecured
                                                                                                             andtherefore
                                                                                                             rank effectively
                                                                                                             senior inrightof
                                                                                                             payment to the Senior
                                                                                                             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 Senior Notes
                                                                                                             and (4) securities,
                                                                                                             indebtedness or obligations
                                                                                                             issued or incurred
                                                                                                             by oursubsidiariesthat
                                                                                                             would beseniorto
                                                                                                             our equity interests
                                                                                                             inoursubsidiaries
                                                                                                             and therefore rank
                                                                                                             structurallyseniorto
                                                                                                             the Senior 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 Senior 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);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27







| | · | 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 Senior Notes in connection with a change of control or any
other event.



Furthermore,
the terms of the indenture and the Senior Notes do not protect holders of the Senior 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 Senior
Notes may have important consequences for holders of the Senior Notes, including making it more difficult for us to satisfy our
obligations with respect to the Senior Notes or negatively affecting the trading value of the Senior Notes.



Certain
of our current debt instruments include more protections for their holders than the indenture and the Senior Notes. In addition,
other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Senior 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 Senior Notes.



An active trading market for our
Senior Notes may not exist, which could limit your ability to sell our Senior Notes or affect the market price of the Senior Note.



The
Senior Notes are listed on the NYSE under the symbol “HTF”. However, we cannot provide any assurances that an active
trading market tor the Senior Notes will exist in the future or that you will be able to sell your Senior Notes. Even if an active
trading market does exist, the Senior 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 Senior Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the
Senior 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 Senior Notes.



Any
default under the agreements governing our indebtedness, including a default under the Wells Facility, and the Fortress Facility,
or other indebtedness to which we may be a party that is not waived by the required lenders or holders, and the remedies sought
by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Senior Notes and
substantially decrease the market value of the Senior 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 lenders under the Wells Facility, and the Fortress Facility 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 lenders under the Wells Facility, the Fortress Facility, the Senior Notes or other
debt that we may incur in the future to avoid being in default. If we breach our covenants under the Wells Facility, the Fortress
Facility, the Senior Notes 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 lenders under the Wells Facility and the Fortress Facility, could proceed against the collateral securing the debt. Because
the Wells Facility and the Fortress Facility 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.



The impact of recent financial reform
legislation on us is uncertain.



In light of current
conditions in the U.S. and global financial markets and the U.S. and global economy, legislators, the presidential administration
and regulators have increased their focus on the regulation of the financial services industry. The Dodd-Frank Wall Street Reform
and Consumer Protection Act institutes a wide range of reforms that will have an impact on all financial institutions. Many of
these provisions are subject to rule making procedures and studies that will be conducted in the future. Accordingly, we cannot
predict the effect it or its implementing regulations will have on our business, results of operations or financial condition.



Because we distribute all or substantially
all of our income and any realized net short-term capital gains over realized net long-term capital losses to our
stockholders, we will need additional capital to finance our growth, if any. 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 net ordinary income and realized net short-term capital
gains over realized net long-term capital losses except that 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 loan and 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
priced below NAV. 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.



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 Credit Facilities or Senior Notes, in order to obtain funds which
may be made available for investments. We may borrow under the Wells Facility until July 14, 2014, and, after such date,
we must repay the outstanding advances under the Wells Facility in accordance with its terms and conditions. All outstanding advances
under the Wells Facility are due and payable on July 14, 2017, unless such date is extended in accordance with its terms. We may
borrow under the Fortress Facility until August 23, 2016, and, after such date, we must repay the outstanding advances under the
Fortress Facility in accordance with its terms and conditions. All outstanding advances under the Fortress Facility are due and
payable on August 23, 2017 unless such date is extended in accordance with its terms. All outstanding amounts on our Senior Notes
are due and payable on March 15, 2019 unless redeemed prior to that date. 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. Moreover, we have withdrawn our application to the Small Business Administration
(”SBA”) for a license to operate as a small business investment company (“SBIC”), which was originally
filed on December 6, 2010, and, though we may in the future submit a new application, we have no present intention to do so and,
therefore, do not expect to be able to borrow money by issuing SBA-guaranteed debentures.



29







Changes in interest rates may affect our cost of capital
and net investment income.



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. Most of our investments have fixed interest rates, while
our Credit Facilities have floating interest rates. 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, without limitation, 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.



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 loans or securities issued by privately held companies. The fair
value of these investments that are not publicly traded may not be readily determinable. In addition, we are not permitted to
maintain a general reserve for anticipated loan 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 consistent with generally
accepted accounting principles. 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.



Disruption in the capital markets and the credit markets
could adversely affect our business.



Without sufficient
access to the capital markets or credit markets, we may be forced to curtail our business operations or we may not be able to
pursue new investment opportunities. The global capital markets are in a period of disruption and extreme volatility and, accordingly,
there has been and will continue to be uncertainty in the financial markets in general. A
prolonged period of market illiquidity or uncertainty regarding U.S. government spending levels, including negotiation of federal
spending cuts, and implementation of global fiscal austerity measures may have an adverse effect on our business, financial condition,
results of operations and cash flows. 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. These events could limit our investment originations, limit our ability to grow and negatively
impact our operating results.



30







We are unable to
predict when economic and market conditions may become more favorable. Even if these conditions improve significantly over the
long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.



We may not realize gains from our equity investments.



We may make non-control,
equity co-investments in companies in conjunction with private equity sponsors. The equity interests we receive may not appreciate
in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any
gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business,
refinancing or public offering, which would allow us to sell the underlying equity interests. In addition, our Advisor’s
significant experience in Venture Lending may not result in returns on our equity investments.



From time to time
we may also acquire equity participation rights in connection with an investment which will allow us, at our option, to participate
in future rounds of equity financing through direct capital investments in our portfolio companies. Our Advisor determines whether
to exercise any of these rights. Accordingly, you will have no control over whether or to what extent these rights are exercised,
if at all. If we exercise these rights, we will be making an additional investment completely in the form of equity which will
subject us to significantly more risk than our Venture Loans and we may not receive the returns that are anticipated with respect
to these 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.



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 ratio, 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 dividends
or issue additional senior securities. 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. See Note 6 to Consolidated Financial Statements for additional
information regarding borrowings.



As a BDC, we generally
are not able to issue our common stock at a price below NAV without first obtaining the approval of our stockholders and our independent
directors, and we may seek such approval to sell our common stock below NAV in the future. 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.



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, diversification and other requirements contained in Subchapter M of the
Code and maintain our election to be regulated as a BDC under the 1940 Act. We must also meet the Annual Distribution Requirement
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.



31







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.



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 net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.
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 as 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.



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 loans.



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 “Regulation.”



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 loans. Because in certain cases we may recognize taxable income before or without receiving
cash representing such income, we may have difficulty meeting the requirement that we distribute an amount equal to at least 90%
of our net ordinary income and realized net short-term capital gains in excess of realized long-term capital losses, if any.



32







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 net investment income and our realized gains and losses, that resulted from the portion
of original issue discount not received in cash for the years ended December 31, 2012, 2011 and 2010 was 7.9%, 7.4% and 9.1%,
respectively.



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 unless, at the time of and after giving effect to such acquisition,
at least 70% of our total assets are qualifying assets. Substantially all of our assets are 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, which would have a material adverse effect on our business, financial condition and results of operations.



Changes in laws or regulations governing
our business could adversely affect our business, results of operations and financial condition.



Changes in the laws
or regulations or the interpretations of the laws and regulations that govern BDC, RICs, or non-depository commercial lenders
could significantly affect our operations, our cost of doing business and our investment strategy. We are subject to federal,
state and local laws and regulations and judicial and administrative decisions that affect our operations, including our loan
originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions,
collection and foreclosure procedures, portfolio composition and other trade practices. If these laws, regulations or decisions
change, or if we expand our business into jurisdictions that have adopted more stringent requirements, we may incur significant
expenses to comply with these laws, regulations or decisions or we might have to restrict our operations or alter our investment
strategy. In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the
conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect
upon our business, results of operations or financial condition.



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.



33







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 dividends. Our governing documents do not limit the number of loans we may make with deferred interest features or the proportion
of our income we derive from such loans.



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.



34







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 dividends or cause you to lose all or part of your investment in us.



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 loans, 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.



35







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, 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 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.



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 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.



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 Securities Exchange Act of 1934, as amended, as well as additional corporate
governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC.



Efforts to comply 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.



36







Terrorist attacks and other catastrophic
events may disrupt the businesses in which we invest and harm our operations and our profitability.



Terrorist attacks
and threats, escalation of military activity or acts of war may significantly harm our results of operations and your investment.
We cannot assure you that there will not be further terrorist attacks against the United States or United States businesses. Such
attacks or armed conflicts in the United States or elsewhere may impact the businesses in which we invest directly or indirectly,
by undermining economic conditions in the United States or elsewhere. In addition, because many of our portfolio companies operate
and rely on network infrastructure and enterprise applications and internal technology systems for development, marketing, operational,
support and other business activities, a disruption or failure of any or all of these systems in the event of a major telecommunications
failure, cyber-attack, fire, earthquake, severe weather conditions or other catastrophic event could cause system interruptions,
delays in product development and loss of critical data and could otherwise disrupt their business operations. Losses resulting
from terrorist attacks are generally uninsurable.



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.



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.



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.



37







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 loans 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 loans 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.



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 loan portfolio 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 loan losses. Decreases in the fair values of our investments are recorded as unrealized
depreciation. Any unrealized depreciation in our loan portfolio could be an indication of a portfolio company’s inability
to meet its repayment obligations to us with respect to the affected loans. This could result in realized losses in the future
and ultimately reduces our income available for distribution in future periods.



38







If the assets securing the loans
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 loans 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 loans 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 loan. Consequently, although such loan is secured, we may
not receive principal and interest payments according to the loan’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 loan 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 loan 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.



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 loans 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.



39







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



We plan to invest
primarily in loans issued by our portfolio companies. Some of our portfolio companies are permitted to have other debt that ranks
equally with, or senior to, our loans 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 loans. 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 loans, 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 loans 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 loans, 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.



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 loans 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.



40







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.



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.



41







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.



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 loans. 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.



42







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.



Risks Related to Our Common Stock



There is a risk that investors in our equity securities
may not receive dividends or that our dividends 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 dividends 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, that could reduce the amount available
for distribution.



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 there is a return of capital, investors will be required to reduce their basis in our stock for
U.S. federal income tax purposes, which will 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. In the future, our distributions may include a return of capital.



We cannot assure you that the market price of shares
of our common stock will not decline.



Our common stock
is listed for trading on the NASDAQ Global Select Market. We cannot predict the prices at which our common stock will trade. Shares
of closed-end management investment companies have in the past frequently traded at discounts to their NAVs, and our common stock
has been and may continue to be discounted in the market. This characteristic of closed-end management 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. If our common stock trades below its NAV, we will generally not be able to sell additional shares
of our common stock without first obtaining the approval of our stockholders (including our unaffiliated stockholders) and our
independent directors.



43







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;
|  |                                                                                                                                                                                      
|• | 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;                                                       
|  |                                                                                                                                                                                      
|• | 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.



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 the net proceeds 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.



44







Anti-takeover provisions in our
charter documents and other agreements and certain provisions of the Delaware General Corporation Law (“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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | limit the calling of special
                                                                    meetings of stockholders;
| | - | --------------------------------------------------------------------------------------------------------------------------



| | • | provide that our directors
                                                                    may be removed only for cause;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | • | 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 Credit Facilities 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
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,
Wells or Fortress could accelerate our repayment obligations under, and/or terminate, our Credit Facilities.



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 dividends 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 dividends or other 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.



45







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 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 dividends payable
to stockholders that are participants in our dividend reinvestment plan (“DRIP”) are automatically reinvested in shares
of our common stock. As a result, stockholders that do not participate in the dividend reinvestment plan will experience dilution
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;
| | - | --------------------------------------------------------------------------------------------------------------------------------



| | • | 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.



46







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 stockholders 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. In addition, because shares owned by HTF-CHF Holdings
LLC, an entity that is primarily owned by certain of our officers, are being registered for resale, a negative perception could
be created in the market about the Company’s prospects by such registration.



Item 1B.Unresolved Staff Comments



None



Item 2.Properties



As of December 31,
2012, we did not own any real estate or other physical properties materially important to our operation. Our
executive offices are located at 312 Farmington Avenue, Farmington, Connecticut 06032 and are provided by our Administrator in
accordance with the terms of the Administration Agreement.We believe that the office facilities of our Administrator are
suitable and adequate for our business as it is conducted.



Item 3.Legal Proceedings



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



Item 4.Mine Safety
Disclosures



Not applicable



47







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 our IPO, the range of high and low sales prices of our common stock as reported on the NASDAQ Global Select Market,
the sale price is a percentage of our NAV and the distributions declared by us for each quarter.



|                             |  |        |       |  |                     |   |       |          |  |   | Premium/ |  |  | Premium/ |     |   |               | 
|---------------------------- |  | ------ | ----- |  | ------------------- | - | ----- | -------- |  | - | -------- |  |  | -------- | --- | - | ------------- | 
|                             |  |        |       |  |                     |   |       |          |  |   | Discount |  |  | Discount |     |   |               | 
|                             |  |        |       |  |                     |   |       |          |  |   | of High  |  |  | of Low   |     |   | Cash          | 
|                             |  |        |       |  |                     |   |       |          |  |   | Sales    |  |  | Sales    |     |   | Distributions | 
|                             |  |        |       |  | Closing Sales Price |   |       | Price to |  |   | Price to |  |  | per      |    
|                             |  | NAV(1) |       |  | High                |   |       | Low      |  |   | NAV(2)   |  |  | NAV(2)   |     |   | Share(3)      | 
|Year ended December 31, 2013 |  |        |       |  |                     |   |       |          |  |   |          |  |  |          |     |   |               | 
|First quarter (4)            |  |        | N/A   |  |                     | $ | 15.93 |          |  | $ | 14.61    |  |  |          | N/A |   |               | 
|Year ended December 31, 2012 |  |        |       |  |                     |   |       |          |  |   |          |  |  |          |     |   |               | 
|Fourth quarter               |  | $      | 15.15 |  |                     | $ | 16.58 |          |  | $ | 13.56    |  |  |          | 109 | % |               | 
|Third quarter                |  | $      | 16.41 |  |                     | $ | 16.84 |          |  | $ | 15.93    |  |  |          | 103 | % |               | 
|Second quarter               |  | $      | 16.73 |  |                     | $ | 17.12 |          |  | $ | 15.03    |  |  |          | 102 | % |               | 
|First quarter                |  | $      | 16.89 |  |                     | $ | 17.05 |          |  | $ | 16.05    |  |  |          | 101 | % |               | 
|Year ended December 31, 2011 |  |        |       |  |                     |   |       |          |  |   |          |  |  |          |     |   |               | 
|Fourth quarter               |  | $      | 17.01 |  |                     | $ | 16.32 |          |  | $ | 14.40    |  |  |          | 96  | % |               | 
|Third quarter                |  | $      | 17.36 |  |                     | $ | 16.25 |          |  | $ | 13.88    |  |  |          | 94  | % |               | 
|Second quarter               |  | $      | 17.40 |  |                     | $ | 16.17 |          |  | $ | 15.21    |  |  |          | 93  | % |               | 
|First quarter                |  | $      | 17.23 |  |                     | $ | 16.25 |          |  | $ | 14.90    |  |  |          | 94  | % |               | 
|Year ended December 31, 2010 |  |        |       |  |                     |   |       |          |  |   |          |  |  |          |     |   |               | 
|Fourth quarter(5)            |  | $      | 16.75 |  |                     | $ | 15.59 |          |  | $ | 13.83    |  |  |          | 93  | % |               | 

____________



|(1) | NAV per share 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
    shown are based on outstanding shares at the end of each period.                                                                                                                                                                     
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|(2) | Calculated as of the respective high or low closing sales price
    divided by the quarter end NAV.                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|(3) | Represents the distribution paid in the specified quarter. We
    have adopted an “opt out” dividend reinvestment plan 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 dividend reinvestment plan so as to receive cash distributions.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|(4) | Through March
    1, 2013.                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|(5) | From October 29, 2010 (initial public offering) to December 31,
    2010.                                                                                                                                                                                                                                                                                                                                                  



The last reported
price for our common stock on March 1, 2013 was $15.06 per share. As of March 1, 2013 we had four 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 securities during the year ended December 31, 2012.



48







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 dividend payment carefully and should not assume that the source of any distribution is
our ordinary income or gains.



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 at least 90% 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 as the Annual Distribution Requirement
in this annual report on Form 10-K. Additionally, we must distribute
at least 98% of our ordinary income and 98.2% of our capital gain net income on an annual basis and any net ordinary income and
net capital gains 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 excise tax. 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.



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 dividend 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.”



In January 2010,
the Internal Revenue Service extended a revenue procedure that temporarily allows a RIC to distribute its own stock as a dividend
for the purpose of fulfilling its distribution requirements. Pursuant to this revenue procedure, a RIC may treat a distribution
of its own stock as a dividend if (1) the stock is publicly traded on an established securities market, (2) the distribution
is declared on or before December 31, 2012 with respect to a taxable year ending on or before December 31, 2011 and
(3) each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a
limitation on the aggregate amount of cash to be distributed to all stockholders, which must be at least 10% of the aggregate
declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash will receive
a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder electing to receive
cash receive less than 10% of his or her entire distribution in cash. We have not elected to distribute stock as a dividend pursuant
to this procedure, but reserve the right to do so if the provisions of this revenue procedure are available in future years.



We have adopted an
“opt out” dividend reinvestment plan 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 opts out of
the dividend reinvestment plan. 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 in the same
manner as cash distributions, stockholders participating in our dividend reinvestment plan do not receive any corresponding cash
distributions with which to pay any such applicable taxes.



49







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



|Record Dates                 |  | Payment Date      |  | Dividends Declared |      
|---------------------------- |  | ----------------- |  | ------------------ | -----
|Year ended December 31, 2012 |  |                   |  |                    |      
|February 21, 2013            |  | March 15, 2013    |  | $                  | 0.115
|January 18, 2013             |  | February 15, 2013 |  | $                  | 0.115
|December 20, 2012            |  | January 15, 2013  |  | $                  | 0.115
|November 16, 2012            |  | November 30, 2012 |  | $                  | 0.450
|August 17, 2012              |  | August 31, 2012   |  | $                  | 0.450
|May 17, 2012                 |  | May 31, 2012      |  | $                  | 0.450
|March 23, 2012               |  | March 30, 2012    |  | $                  | 0.450
|Total                        |  |                   |  | $                  | 2.145
|                             |  |                   |  |                    |      
|Year ended December 31, 2011 |  |                   |  |                    |      
|November 23, 2011            |  | November 30, 2011 |  | $                  | 0.450
|August 23, 2011              |  | August 30, 2011   |  | $                  | 0.400
|May 19, 2011                 |  | May 26, 2011      |  | $                  | 0.330
|Total                        |  |                   |  | $                  | 1.180
|                             |  |                   |  |                    |      
|Year ended December 31, 2010 |  |                   |  |                    |      
|December 28, 2010            |  | December 31, 2010 |  | $                  | 0.220
|Total                        |  |                   |  | $                  | 0.220



On March 8, 2013, our Board declared a
monthly dividend of $0.115 per share payable as set forth in the table below.



|Record Dates   |  | Payment
                                                                                                                                                                                              Date |  | Dividends Declared |      
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -----
|May 20, 2013   |  | June 17, 2013                                                                                                                                                                                              |  | $                  | 0.115
|April 18, 2013 |  | May 15, 2013                                                                                                                                                                                               |  | $                  | 0.115
|March 20, 2013 |  | April 15, 2013                                                                                                                                                                                             |  | $                  | 0.115



50







Stock Performance Graph



The following graph
compares the return on our common stock with that of the Standard & Poor’s 500 Stock Index and the NASDAQ Financial
Services Index, for the period from October 28, 2010 (the date of the initial public offering) through December 31,
2012. The graph assumes that, on October 29, 2010, a person invested $100 in each of our common stock, the S&P 500 Index,
and the NASDAQ Financial Services Index. The graph measures total stockholder return, which takes into account both changes in
stock price and dividends. It assumes that dividends 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.







51







Item 6.Selected Financial Data



The following selected
consolidated financial data of Horizon Technology Finance Corporation as of December 31, 2012, 2011, 2010 and 2009, and for the
years ended December 31, 2012 and 2011, the period from October 29, 2010 to December 31, 2010, the period from January 1, 2010
to October 28, 2010, the year ended December 31, 2009, and the period from March 4, 2008 (Inception) to December 31, 2008 are
derived from the consolidated financial statements that have been audited by McGladrey LLP, an independent registered public accounting
firm. For the periods prior to October 29, 2010, the financial data refer to Compass Horizon Funding Company LLC. This 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-IPO as a Business DevelopmentCompany |         |   | Pre-IPO Prior to becoming aBusiness Development Company |  
|----------------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | ------------------------------------------------------- | -
|(In thousands, except per share data)                                               |  | Year EndedDecember 31,2012                |         |   | Year EndedDecember 31,2011                              |  
|Statement of Operations Data:                                                       |  |                                           |         |   |                                                         |  
|Total investment income                                                             |  | $                                         | 26,664  |   |                                                         | $
|Base management fee                                                                 |  |                                           | 4,208   |   |                                                         |  
|Performance based incentive fee                                                     |  |                                           | 2,847   |   |                                                         |  
|All other expenses                                                                  |  |                                           | 7,382   |   |                                                         |  
|Net investment income before excise tax                                             |  |                                           | 12,227  |   |                                                         |  
|Provision for excise tax                                                            |  |                                           | (231    | ) |                                                         |  
|Net investment income                                                               |  |                                           | 11,996  |   |                                                         |  
|Net realized gain on investments                                                    |  |                                           | 108     |   |                                                         |  
|Provision for excise tax                                                            |  |                                           | —       |   |                                                         |  
|Net unrealized (depreciation) appreciation on investments                           |  |                                           | (8,113  | ) |                                                         |  
|Credit (provision) for loan losses                                                  |  |                                           | —       |   |                                                         |  
|Net increase in net assets resulting from operations                                |  | $                                         | 3,991   |   |                                                         | $
|Per Share Data:                                                                     |  |                                           |         |   |                                                         |  
|Net asset value                                                                     |  | $                                         | 15.15   |   |                                                         |  
|Net investment income                                                               |  |                                           | 1.41    |   |                                                         |  
|Net realized gain on investments                                                    |  |                                           | 0.01    |   |                                                         |  
|Net change in unrealized
    (depreciation) appreciation on investments             |  |                                           | (0.95   | ) |                                                         |  
|Net increase in net assets resulting from operations                                |  |                                           | 0.47    |   |                                                         |  
|Per share dividends declared                                                        |  |                                           | 2.15    |   |                                                         |  
|Dollar amount of dividends declared                                                 |  | $                                         | 18,777  |   |                                                         | $
|Statement of Assets and Liabilities Data  at
    Period End:                        |  |                                           |         |   |                                                         |  
|Investments, at fair value/book value                                               |  | $                                         | 228,613 |   |                                                         | $
|Other assets                                                                        |  |                                           | 11,045  |   |                                                         |  
|Total assets                                                                        |  |                                           | 239,658 |   |                                                         |  
|Total liabilities                                                                   |  |                                           | 94,686  |   |                                                         |  
|Total net assets/members’ capital                                                   |  | $                                         | 144,972 |   |                                                         | $
|Other data:                                                                         |  |                                           |         |   |                                                         |  
|Weighted average annualized
    yield on income producing investments at fair value |  |                                           | 14.2    | % |                                                         |  
|Number of portfolio companies at period end                                         |  |                                           | 45      |   |                                                         |  



52







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



In this section,
except where the context suggests otherwise, the terms “we,” “us,” “our” and “Horizon
Technology Finance” refer to Horizon Technology Finance Corporation and its consolidated subsidiaries. The information contained
in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere
in this annual report on Form 10-K. For periods prior to October 28, 2010, the consolidated financial statements and
related footnotes reflect the performance of our predecessor, Compass Horizon, and its wholly owned subsidiary, Horizon Credit
I LLC, both of which were formed in January 2008 and commenced operations in March 2008. Amounts are stated in thousands,
except shares and per share data and where otherwise noted.



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 loans 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 (“SBIC”);
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



53







We use words such
as “anticipates,” “believes,” “expects,” “intends,” “seeks” and similar
expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as
our actual results could differ materially from those projected in the forward-looking statements for any reason, including the
factors in “Risk Factors” and elsewhere in 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.



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 the technology, life science, healthcare information
and services and cleantech industries, which we refer to as our “Target Industries.” Our investment objective is to
generate current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We
make secured loans, which we refer to as “Venture Loans,” to companies backed by established venture capital and private
equity firms in our Target Industries, which we refer to as “Venture Lending.” We also selectively lend to publicly
traded companies in our Target Industries.



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.
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.



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.



Portfolio Composition and Investment Activity



The following table
shows our portfolio by asset class as of December 31, 2012 and 2011:



|                  |  | December 31, 2012                                                                                                                                                                                                                 |    |  | December 31, 2011 |  
|----------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- |  | ----------------- | -
|                  |  | #
                                                                                                                                                                                                                 of Investments |    |  | Fair Value        |  
|Term loans        |  |                                                                                                                                                                                                                                   | 41 |  |                   | $
|Revolving loans   |  |                                                                                                                                                                                                                                   | 4  |  |                   |  
|Equipment loans   |  |                                                                                                                                                                                                                                   | —  |  |                   |  
|Total loans       |  |                                                                                                                                                                                                                                   | 45 |  |                   |  
|Warrants          |  |                                                                                                                                                                                                                                   | 62 |  |                   |  
|Other investments |  |                                                                                                                                                                                                                                   | 1  |  |                   |  
|Equity            |  |                                                                                                                                                                                                                                   | 2  |  |                   |  
|Total             |  |                                                                                                                                                                                                                                   |    |  |                   | $



54







Total portfolio investment
activity as of and for the years ended December 31, 2012 and 2011 was as follows:



|                                                     |  | December 31, |        
|---------------------------------------------------- |  | ------------ | -------
|                                                     |  | 2012         |        
|Beginning portfolio                                  |  | $            | 178,013
|New loan funding                                     |  |              | 184,202
|Less refinanced balances and
    participation       |  |              | (45,295
|Net new loan funding                                 |  |              | 138,907
|Principal and stock payments received on investments |  |              | (39,092
|Early pay-offs                                       |  |              | (42,291
|Accretion of loan fees                               |  |              | 2,531  
|New loan fees                                        |  |              | (1,676 
|New equity                                           |  |              | —      
|Sales of investments                                 |  |              | (306   
|Net realized gain on investments                     |  |              | 108    
|Net depreciation on investments                      |  |              | (8,113 
|Other                                                |  |              | 532    
|Ending Portfolio                                     |  | $            | 228,613



We receive payments
in our loan portfolio based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some
of our loans 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 loan portfolio by industry sector as of December 31, 2012 and 2011:



|                                    |  | December 31, 2012   |         |  | December 31, 2011                 | 
|----------------------------------- |  | ------------------- | ------- |  | --------------------------------- | 
|                                    |  | Loans at Fair Value |         |  | Percentage of Total
    Portfolio | 
|Life Science                        |  |                     |         |  |                                   | 
|Biotechnology                       |  | $                   | 38,018  |  |                                   | 
|Medical Device                      |  |                     | 23,446  |  |                                   | 
|Technology                          |  |                     |         |  |                                   | 
|Consumer-Related Technologies       |  |                     | —       |  |                                   | 
|Networking                          |  |                     | —       |  |                                   | 
|Software                            |  |                     | 54,358  |  |                                   | 
|Data Storage                        |  |                     | —       |  |                                   | 
|Internet and Media                  |  |                     | 9,763   |  |                                   | 
|Communications                      |  |                     | —       |  |                                   | 
|Semiconductors                      |  |                     | 25,795  |  |                                   | 
|Power Management                    |  |                     | 15,792  |  |                                   | 
|Cleantech                           |  |                     |         |  |                                   | 
|Energy Efficiency                   |  |                     | 12,950  |  |                                   | 
|Waste Recycling                     |  |                     | 2,197   |  |                                   | 
|Alternative Energy                  |  |                     | 8,586   |  |                                   | 
|Healthcare Information and Services |  |                     |         |  |                                   | 
|Diagnostics                         |  |                     | 21,340  |  |                                   | 
|Other Healthcare Related Services   |  |                     | 2,655   |  |                                   | 
|Software                            |  |                     | 5,397   |  |                                   | 
|Total                               |  | $                   | 220,297 |  |                                   | 



The largest loans
may vary from year to year as new loans are recorded and repaid. Our five largest loans represented approximately 23% and 28%
of total loans outstanding as of December 31, 2012 and 2011, respectively. No single loan represented more than 10% of our total
loans as of December 31, 2012 or 2011.



55







Loan Portfolio Asset Quality



We use a credit rating
system which rates each loan 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 or 1 represents a deteriorating credit quality and increased risk. See “Item 1 —
Business” for more detailed descriptions. The following table shows the classification of our loan portfolio by credit rating
as of December 31, 2012 and 2011:



|              |  | December 31, 2012   |         |  | December 31, 2011                | 
|------------- |  | ------------------- | ------- |  | -------------------------------- | 
|              |  | Loans at Fair Value |         |  | Percentage of Loan
    Portfolio | 
|              |  |                     |         |  |                                  | 
|Credit Rating |  |                     |         |  |                                  | 
|4             |  | $                   | 30,818  |  |                                  | 
|3             |  |                     | 181,019 |  |                                  | 
|2             |  |                     | 3,560   |  |                                  | 
|1             |  |                     | 4,900   |  |                                  | 
|Total         |  | $                   | 220,297 |  |                                  | 



As of December 31,
2012 and 2011 our loan portfolio had a weighted average credit rating of 3.2 and 3.1, respectively. As of December 31, 2012, there
were three investments on non-accrual status with an approximate cost of $12.9 million and fair value of approximately $4.9 million.
There were no loans on non-accrual status as of December 31, 2011.



Consolidated Results of Operations



The consolidated
results of operations set forth below include historical financial information of our predecessor, Compass Horizon, prior to our
election to become a BDC and our election to be treated as a RIC. As a BDC and a RIC for U.S. federal income tax purposes,
we are also subject to certain constraints on our operations, including limitations imposed by the 1940 Act and the Code. Also,
the management fee that we pay to our Advisor under the Investment Management Agreement is determined by reference to a formula
that differs materially from the management fee paid by Compass Horizon in prior periods. For these and other reasons, the results
of operations described below may not be indicative of the results we report in future periods.



Consolidated operating
results for the years ended December 31, 2012, 2011 and 2010:



|                                           |  | 2012 |         |   | 2011 |   |         | 2010 | 
|------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- | 
|Total investment income                    |  | $    | 26,664  |   |      | $ | 24,054  |      | 
|Total expenses                             |  |      | 14,437  |   |      |   | 13,332  |      | 
|Net investment income before excise tax    |  |      | 12,227  |   |      |   | 10,722  |      | 
|Provision for excise tax                   |  |      | (231    | ) |      |   | (211    | )    | 
|Net investment income                      |  |      | 11,996  |   |      |   | 10,511  |      | 
|Net realized gains                         |  |      | 108     |   |      |   | 6,316   |      | 
|Provision for excise tax                   |  |      | —       |   |      |   | (129    | )    | 
|Net unrealized (depreciation) appreciation |  |      | (8,113  | ) |      |   | (5,702  | )    | 
|Credit for loan losses                     |  |      | —       |   |      |   | —       |      | 
|Net income                                 |  | $    | 3,991   |   |      | $ | 10,996  |      | 
|Average investments, at fair value         |  | $    | 187,760 |   |      | $ | 164,437 |      | 
|Average debt outstanding                   |  | $    | 62,973  |   |      | $ | 78,106  |      | 



Net income 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 income may not be meaningful.



56







Investment Income



Investment income
increased by $2.6 million, or 10.9%, for the year ended December 31, 2012 as compared to the year ended December 31,
2011. For the year ended December 31, 2012, total investment income consisted primarily of $25.3 million in interest
income from investments, which included $5.0 million in income from the accretion of origination fees and ETPs. Interest
income on investments and other investment income increased primarily due to the increased average size of the loan portfolio.
Fee income on investments was primarily comprised of prepayment fees collected from our portfolio companies.



Investment income
increased by $5.8 million, or 32.1%, for the year ended December 31, 2011 as compared to the year ended December 31,
2010. For the year ended December 31, 2011, total investment income consisted primarily of $22.9 million in interest
income from investments, which included $3.6 million in income from the accretion of origination fees and ETPs. Interest
income on investments and other investment income increased primarily due to the increased average size of the loan portfolio.
Fee income on investments was primarily comprised of a one-time success fee received upon the completion of an acquisition of
one of our portfolio companies and from prepayment fees collected from our portfolio companies.



For the years ended
December 31, 2012, 2011 and 2010, our dollar-weighted average annualized yield on average loans was approximately 14.2%, 14.6%
and 14.6%, respectively.



Investment income,
consisting of interest income and fees on loans, can fluctuate significantly upon repayment of large loans. Interest income from
the five largest loans accounted for approximately 22%, 21% and 22% of investment income for the years ended December 31, 2012,
2011 and 2010, respectively.



As of December 31,
2012 and 2011, interest receivable was $2.8 million and $3.0 million, respectively, which represents one month of accrued
interest income on substantially all our loans and accreted ETPs.



Expenses



Total expenses increased
by $1.1 million, or 8.3%, to $14.4 million for the year ended December 31, 2012 as compared to the year ended December 31,
2011. Total expenses increased by $5.5 million, or 70.4%, to $13.3 million for the year ended December 31, 2011
as compared to the year ended December 31, 2010. Total operating expenses for each period consisted principally of management
fees, incentive and administrative fees, interest expense and, to a lesser degree, professional fees and general and administrative
expenses.



Interest expense,
which includes the amortization of debt issuance costs, increased in 2012 from 2011 primary due to an increase in borrowings under
the Wells Facility and Fortress Facility, and the issuance of our Senior Notes, offset by repayment of the WestLB Facility. Interest
expense decreased in 2011 from 2010 primarily due to a lower effective interest rate in 2011.



Management fee expense
for the year ended December 31, 2012 remained flat compared to the year ended December 31, 2011 primarily due to our average assets
remaining relatively consistent. Management fee expense for the year ended December 31, 2011 increased by approximately $1.5 million
compared to the year ended December 31, 2010 primarily due to the higher management fee base.



Performance based
incentive fees for the year ended December 31, 2012 remained flat compared to the year ended December 31, 2011 primarily due to
part one of the incentive fee increasing as pre-incentive fee net investment income increased year over year, offset by a decrease
in part two of the incentive fee in 2012. Incentive fees for the year ended December 31, 2011 increased compared to the year ended
December 31, 2010 due to a full twelve months of expense in 2011 compared to only two months in 2010. The incentive fees for the
year ended December 31, 2012 consisted of approximately $2.8 million for the incentive fee on income. The incentive fees for the
year ended December 31, 2011 consisted of approximately $2.7 million and $0.3 million for the incentive fee on income and capital
gains, respectively. There were no incentive fees prior to the IPO.



Administrative fee
expense for the year ended December 31, 2012 remained flat compared to the year ended December 31, 2011. The administrative fee
increased for the year ended December 31, 2011 compared to the year ended December 31, 2010 due to a full twelve months of expense
in 2011 compared to only two months in 2010.



57







Professional fees
and general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses for the
year ended December 31, 2012 remained flat compared to the year ended December 31, 2011. These expenses for the year ended December
31, 2011 increased by approximately $1.7 million compared to the year ended December 31, 2010 primarily due to the increased cost
of being a public company.



In 2012 and 2011
we elected to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4%
excise tax on such income. At December 31, 2012 and 2011, we recorded an excise tax payable of approximately $0.2 million and
$0.3 million on approximately $5.9 million and $8.5 million of undistributed earnings from operations and capital gains, respectively.



Net Realized Gains 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 and includes 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, 2012, we recognized realized gains totaling approximately $0.1 million primarily due to the sale of warrants of one
portfolio company. During the year ended December 31, 2011, we recognized realized gains totaling approximately $6.3 million primarily
due to the sale of warrants of three portfolio companies. We recognized realized gains of approximately $0.7 million during the
year ended December 31, 2010 primarily due to the sale of warrants of two portfolio companies.



During the year ended
December 31, 2012, net unrealized depreciation on investments totaled approximately $8.1 million which was primarily due to the
unrealized depreciation on the three debt investments on non-accrual status. During the year ended December 31, 2011, net unrealized
depreciation on investments totaled approximately $5.7 million which was primarily due to $4.0 million in reversal of unrealized
appreciation on the sale of warrants and $2.7 million of unrealized depreciation on six debt investments partially offset by unrealized
appreciation on investments. During the year ended December 31, 2010, net unrealized appreciation on investments totaled approximately
$2.9 million which was primarily due to fair value appreciation on some of our warrants.



Credit or Provision for Loan Losses



For the period from
January 1, 2010 through October 28, 2010, the credit for loan losses was $0.7 million. The credit was primarily
due to improved portfolio asset quality during 2010 across all credit ratings within the loan portfolio. The loan portfolio had
a weighted average credit rating of 3.1 as of October 28, 2010. Since October 28, 2010, the date of our election to be treated
as a BDC, we do not record a credit or provision for loan losses. We record each individual loan and investment on a quarterly
basis at fair value. Changes in fair value are recorded through our statement of operations.



Liquidity and Capital Resources



As of December 31,
2012 and 2011, we had cash and investments in money market funds of $3.6 million and $14.8 million, respectively. These
amounts are available to fund new investments, reduce borrowings under the Wells Facility and the Fortress Facility (collectively,
the “Credit Facilities”), pay operating expenses and pay dividends. We had a revolving credit facility (the “WestLB
Facility”) with WestLB, AG, New York Branch (“WestLB”) which all obligations under the WestLB Facility were
paid and the WestLB Facility was terminated. Our primary sources of capital have been from our private and public common stock
offerings, use of our Credit Facilities and issuance of our Senior Notes.



As of December 31,
2012, the outstanding principal balance under the Wells Facility was $46.0 million. As of December 31, 2012, we had available
borrowing capacity of approximately $29.0 million under our Wells Facility, subject to existing terms and advance rates.



58







As of December 31,
2012, the outstanding principal balance under the Fortress Facility was $10.0 million. As of December 31, 2012, we had available
borrowing capacity of approximately $65.0 million under our Fortress Facility, subject to existing terms and advance rates.



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 Senior Notes for net proceeds of approximately
$31.7 million, and the completion of a follow-on public offering of 1.9 million shares of common stock for net proceeds of approximately
$29.5 million. These increases from investing activities were partially offset by repayments of $8.6 million of debt under the
Credit Facilities and $15.1 million dividends paid.



Our operating activities
used cash of $4.0 million for the year ended December 31, 2011 and our financing activities used cash of $32.4 million
for the same period. Our operating activities used cash primarily for investing in portfolio companies. Such cash was provided
primarily from proceeds from our IPO and draws under the WestLB Facility and Wells Facility.



Our operating activities
used cash of $38.1 million for the year ended December 31, 2010 and our financing activities provided net cash proceeds
of $75.0 million for the same period. Our operating activities used cash primarily for investing in portfolio companies.
Such cash was provided primarily from proceeds from our IPO and draws under the WestLB Facility.



Our primary use of
available funds is to make 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 through future
equity offerings, issuances of senior securities and/or future borrowings, 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 income
except for certain net capital gains. In addition, as a BDC, we are required to meet a coverage ratio of 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 Credit Facilities
will be sufficient to meet our working capital and capital expenditure commitments for at least the next 12 months.



Current Borrowings



A summary of our
borrowings as of December 31, 2012 and 2011 is as follows:



|                    |  | December 31, 2012 |        
|------------------- |  | ----------------- | -------
|                    |  | Total Commitment  |        
|Wells Facility      |  | $                 | 75,000 
|Fortress Facility   |  |                   | 75,000 
|WestLB Facility (2) |  |                   | —      
|Senior Notes        |  |                   | 33,000 
|Total               |  | $                 | 183,000



|                    |  | December 31, 2011 |        
|------------------- |  | ----------------- | -------
|                    |  | Total Commitment  |        
|WestLB Facility (2) |  | $                 | 46,722 
|Wells Facility      |  |                   | 75,000 
|Total               |  | $                 | 121,722

____________



|(1) | Average outstanding is calculated over the period
    for which the borrowings were outstanding.
|--- | ------------------------------------------------------------------------------------------------
|    |                                                                                                 
|(2) | All obligations under the WestLB Facility were paid, and the
    WestLB Facility was terminated.



59







We, through our wholly
owned subsidiary, Credit II entered into the Wells Facility on July 14, 2011. The interest rate is based upon the one-month LIBOR
plus a spread of 4.00%, with a LIBOR floor of 1.00%. The interest rate was 5.00% as of December 31, 2012 and 2011.



We may request advances
under the Wells Facility through July 14, 2014 (the “Revolving Period”). After the Revolving Period, we may not request
new advances, and we must repay the outstanding advances under the Wells 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 Wells Facility, particularly the condition that the
principal balance of the Wells Facility does not exceed fifty percent (50%) of the aggregate principal balance of our eligible
loans to our portfolio companies. All outstanding advances under the Wells Facility are due and payable on July 14, 2017.



The Wells Facility
is collateralized by loans held by Credit II and permits an advance rate of up to 50% of eligible loans held by Credit II. The
Wells Facility contains covenants that, among other things, require us to maintain a minimum net worth, to restrict the loans
securing the Wells Facility to certain criteria for qualified loans and to comply with portfolio company concentration limits
as defined in the related loan agreement.



On March 23, 2012,
we issued and sold $30 million aggregate principal amount 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, we sold an additional $3 million of such notes.
The Senior 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 Senior 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 Senior Notes are our direct, unsecured obligations and rank (1) pari passu with our future senior unsecured indebtedness;
(2) senior to any of our future indebtedness that expressly provides it is subordinated to the Senior Notes; (3) 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) structurally subordinated to all
existing and future indebtedness and other obligations of any of our subsidiaries. As
of December 31, 2012 we were in material compliance with the terms of the Senior Notes.The Senior Notes are listed
on the New York Stock Exchange 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
is 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, 2012.



We may request advances
under the Fortress Facility through August 23, 2016 (the “Draw Period”). After the Draw Period, we may not request
new advances and we must repay the outstanding advances under the Fortress 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 Fortress Facility, particularly the condition
that the principal balance of the Fortress Facility does not exceed approximately sixty-six percent (66%) of the aggregate principal
balance of our eligible loans to our portfolio companies. All outstanding advances under the Fortress Facility are due and payable
on August 23, 2017.



The Fortress Facility
is collateralized by loans held by Credit III and permits an advance rate of up to approximately 66% of eligible loans held by
Credit III. The Fortress Facility contains covenants that, among other things, require 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.



As of December 31,
2012 and 2011, other assets were $4.6 million and $2.0 million, respectively, which is primarily comprised of debt issuance
costs and prepaid expenses. The increase was due to the debt issuance costs of approximately $1.3 million and $1.7 million incurred
related to our Senior Notes and the Fortress Facility, respectively.



Equity Offerings



On July 18, 2012,
we completed a follow-on public offering of 1,909,000 shares (including 249,000 shares of our common stock that was issued pursuant
to the underwriters’ option to purchase additional shares) of our common stock at a public offering price of $16.20 per
share, raising approximately $30.9 million in gross proceeds.



60







Contractual Obligations and Off-Balance Sheet
Arrangements



A summary of our
significant contractual payment obligations and off-balance sheet arrangements as of December 31, 2012 are as follows:



|                     |  | Payments due by period |        
|-------------------- |  | ---------------------- | -------
|                     |  | Total                  |        
|Borrowings           |  | $                      | 89,020 
|Unfunded commitments |  |                        | 24,643 
|Total                |  | $                      | 113,663



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, 2012,
we had unfunded commitments of approximately $24.6 million. These commitments will be subject to the same underwriting and ongoing
portfolio maintenance as are the balance sheet financial instruments that we hold. Since these commitments may expire without
being drawn upon, the total commitment amount does not necessarily represent future cash requirements.



In addition to the
Wells Facility and Fortress 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 —
a base management fee and an incentive fee. Payments under the Investment Management Agreement are equal to (1) a base management
fee equal to a percentage of the value of our average gross assets 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 obligation under the agreement, including rent,
fees and other expenses inclusive of our allocable portion of the compensation of our Chief Financial Officer and Chief Compliance
Officer and their respective staffs. See Note 3 to our Consolidated Financial Statements for additional information regarding
our Investment Management Agreement and our Administration Agreement.



Distributions



In order to qualify
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
at least 90% 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. Additionally, we must distribute at least 98% of our ordinary income and 98.2% of our capital
gain net income on an annual basis and any net ordinary income and net capital gains 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 excise tax. We
intend to distribute monthly dividends 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 dividend payment carefully and should not assume that the source of any distribution
is our ordinary income or gains.



61







We have adopted an
“opt out” dividend reinvestment plan 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 dividend reinvestment plan. 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 in the same manner as cash distributions, stockholders participating in our dividend
reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.



Related Party Transactions



We have entered into a number of business
relationships with affiliated or related parties, including the following:



| | • | We entered into the Investment
                                                                    Management Agreement with our Advisor. Mr. Robert Pomeroy,
                                                                    our chairman, is a manager of the Advisor, and Mr. Gerald
                                                                    Michaud, our President, is a manager of our Advisor.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Our advisor provides us with
                                                                    the office facilities and administrative services necessary
                                                                    to conduct day-to day operations pursuant to our Administration
                                                                    Agreement.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | We have entered into a license
                                                                    agreement with the predecessor of the Advisor, pursuant to
                                                                    which it has granted us a non-exclusive, royalty-free license
                                                                    to use the name “Horizon Technology Finance”.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our Advisor
may manage other investment vehicles (“Advisor Funds”) with the same investment strategy as us. Our 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 may be 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
directors as defined in the 1940 Act.



Critical Accounting Policies



The discussion of
our financial condition and results of operation is based upon our financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles, or “GAAP.” The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates
could cause actual results to differ. In addition to the discussion below, we describe our significant accounting policies in
the notes to our consolidated financial statements.



We have identified
the following items as critical accounting policies.



Valuation of Investments



Investments are recorded
at fair value. Our Board determines the fair value of our portfolio investments. We apply fair value to substantially all of our
investments in accordance with relevant 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:



62







|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 approximately 25% (based
on fair value) of our valuation of portfolio companies that do not have a readily available market quotations subject to review
by an independent valuation firm.



Income Recognition



Interest on loan
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. When a loan becomes 90 days
or more past due, or if we otherwise do not expect to receive interest and principal repayments, the loan is placed on non-accrual
status and the recognition of interest income is discontinued. Interest payments received on loans that are on non-accrual status
are treated as reductions of principal until the principal is repaid.



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 and prepayment fees. In a limited number of cases, we may also receive a non-refundable deposit earned
upon the termination of a transaction. Loan 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 loan. Fees for counterparty loan
commitments with multiple loans are allocated to each loan based upon each loan’s relative fair value. When a loan is placed
on non-accrual status, the amortization of the related fees and unearned income is discontinued until the loan is returned to
accrual status.



Certain loan agreements
also require the borrower to make an ETP that is accrued into income over the life of the loan 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 also record as unearned loan income on the grant date. The unearned income is recognized as interest income over the contractual
life of the related loan in accordance with our income recognition policy. Subsequent to loan 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 warrants. Gains from the disposition of the warrants or stock acquired from the exercise of warrants
are recognized as realized gains on warrants.



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 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.



63







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 dividend
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 dividend distributions, we will accrue
excise tax, if any, on estimated excess taxable income as taxable income is earned.



We evaluate tax positions
taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not”
to be sustained by the applicable tax authority. 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, 2012 and 2011.



Recently Issued Accounting Standards



In May 2011, the
FASB issued Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements
in U.S. GAAP and IFRs, (ASU 2011-04). ASU 2011-04 converges the fair value measurement guidance in U.S. GAAP and International
Financial Reporting Standards (IFRSs). Some of the amendments clarify the application of existing fair value measurement requirements,
while other amendments change a particular principle in existing guidance. In addition, ASU 2011-04 requires additional fair value
disclosures. We adopted ASU 2011-04 in the quarter ended March 31, 2012.



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 loans within our portfolio were mostly at fixed rates and we expect that our loans in the future will also have primarily
fixed interest rates. The initial commitments to lend to our portfolio companies are usually based on a floating LIBOR index and
typically have interest rates that are fixed at the time of the loan funding and remain fixed for the term of the loan.



Assuming that the
consolidated statement of assets and liabilities as of December 31, 2012 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 Senior
Notes bear interest at a fixed rate, our Credit Facilities have a floating interest rate provision based on a LIBOR index which
resets daily, and we expect that 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.



64







Item 8.  Consolidated
Financial Statements and Supplementary Data



Index to Consolidated Financial Statements



|                                                                                                                                                                                                                         | Page
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----
|Management’s Report on Internal Control over Financial Reporting                                                                                                                                                         | 66  
|Report of Independent Registered Public Accounting Firm                                                                                                                                                                  | 67  
|Report of Independent Registered Public
    Accounting Firm on Internal Control over Financial Reporting                                                                                                                 | 68  
|Consolidated Statements of Assets and Liabilities as of December 31, 2012 and 2011                                                                                                                                       | 69  
|Consolidated Statements of Operations for
    the Years Ended December 31, 2012 and 2011, the Period from October 29, 2010 to December 31, 2010, and the Period
    from January 1, 2010 to October 28, 2010             | 70  
|Consolidated Statements of Changes in Net
    Assets for the Years Ended December 31, 2012 and 2011, the Period  from October 29, 2010 to December 31,
    2010, and the Period from January 1, 2010 to October 28, 2010 | 71  
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2012 and 2011, the Period from October 29, 2010 to December 31, 2010, and the Period
    from January 1, 2010 to October 28, 2010             | 72  
|Consolidated Schedules of Investments as of December 31, 2012 and 2011                                                                                                                                                   | 73  
|Notes to the Consolidated Financial Statements                                                                                                                                                                           | 80  



65







Management’s Report on Internal
Control over Financial Reporting



Management is responsible
for establishing and maintaining adequate internal control over 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, 2012. 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. Based on the assessment, management believes that, as of December 31, 2012, 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, 2012, which appears in this annual report
on Form 10-K.



66







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, 2012 and 2011, and the related consolidated statements of operations,
changes in net assets, and cash flows for the years ended December 31, 2012 and 2011, the period from October 29, 2010 to December
31, 2010 and the period from January 1, 2010 to October 28, 2010. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes 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, 2012 and 2011,
by correspondence with custodian or borrower. Our audits also involved performing such other procedures as we considered necessary
in the circumstances. 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, 2012 and 2011, and the results of their operations and their cash flows for the years ended
December 31, 2012 and 2011, the period from October 29, 2010 to December 31, 2010, and the period from January 1, 2010 to October
28, 2010, 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, 2012, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
March 12, 2013 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 12, 2013



67







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, 2012,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. 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, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.



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, 2012 and 2011, and for the years ended December 31, 2012 and
2011, the period from October 29, 2010 to December 31, 2010, and the period from January 1, 2010 to October 28, 2010, and our
report dated March 12, 2013 expressed an unqualified opinion.



/s/McGladrey LLP



New Haven, Connecticut

March 12, 2013



68







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Assets and
Liabilities

(In thousands, except share data)



|                                                                                                                                                         |  | December 31, |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                                                                                         |  | 2012         |        
|                                                                                                                                                         |  |              |        
|Assets                                                                                                                                                   |  |              |        
|Non-affiliate investments at fair value (cost
    of $239,385 and $180,651, respectively) (Note 4)                                                       |  | $            | 228,613
|Investment in money market funds                                                                                                                         |  |              | 2,560  
|Cash                                                                                                                                                     |  |              | 1,048  
|Interest receivable                                                                                                                                      |  |              | 2,811  
|Other assets                                                                                                                                             |  |              | 4,626  
|Total assets                                                                                                                                             |  | $            | 239,658
|                                                                                                                                                         |  |              |        
|Liabilities                                                                                                                                              |  |              |        
|Borrowings (Note 6)                                                                                                                                      |  | $            | 89,020 
|Dividends payable                                                                                                                                        |  |              | 3,301  
|Base management fee payable (Note 3)                                                                                                                     |  |              | 402    
|Incentive fee payable (Note 3)                                                                                                                           |  |              | 855    
|Other accrued expenses                                                                                                                                   |  |              | 1,108  
|Total liabilities                                                                                                                                        |  |              | 94,686 
|                                                                                                                                                         |  |              |        
|Net assets                                                                                                                                               |  |              |        
|Preferred stock, par value $0.001 per share, 1,000,000 shares authorized,
    zero shares issued and outstanding as of December 31, 2012 and 2011        |  |              | —      
|Common stock, par value $0.001 per share, 100,000,000 shares authorized,
    9,567,225 and 7,636,532 shares outstanding as of December 31, 2012 and 2011 |  |              | 10     
|Paid-in capital in excess of par                                                                                                                         |  |              | 154,384
|Accumulated undistributed net investment income                                                                                                          |  |              | 1,428  
|Net unrealized depreciation on investments                                                                                                               |  |              | (10,772
|Net realized (loss) gains on investments                                                                                                                 |  |              | (78    
|Total net assets                                                                                                                                         |  |              | 144,972
|Total liabilities
    and net assets                                                                                                                     |  | $            | 239,658
|Net asset value per common share                                                                                                                         |  | $            | 15.15  



See Notes to Consolidated Financial Statements



69







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Operations

(In thousands, except share data)



|                                                           |  | Post-IPO as a Business
    Development Company |           |   | Pre-IPO Prior
    to becoming a Business Development Company |  
|---------------------------------------------------------- |  | ---------------------------------------------- | --------- | - | ------------------------------------------------------------ | -
|                                                           |  |                                                |           |   |                                                              |  
|                                                           |  | Year Ended                                     |           |   | Year Ended                                                   |  
|                                                           |  | December 31,                                   |           |   | December 31,                                                 |  
|                                                           |  | 2012                                           |           |   | 2011                                                         |  
|Investment income                                          |  |                                                |           |   |                                                              |  
|Interest income on non-affiliate investments               |  | $                                              | 25,289    |   |                                                              | $
|Interest income on money market funds                      |  |                                                | —         |   |                                                              |  
|Fee income on non-affiliate investments                    |  |                                                | 1,375     |   |                                                              |  
|Total investment
    income                                |  |                                                | 26,664    |   |                                                              |  
|Expenses                                                   |  |                                                |           |   |                                                              |  
|Interest expense                                           |  |                                                | 4,283     |   |                                                              |  
|Base management fee (Note 3)                               |  |                                                | 4,208     |   |                                                              |  
|Performance based incentive fee (Note 3)                   |  |                                                | 2,847     |   |                                                              |  
|Administrative fee (Note 3)                                |  |                                                | 1,082     |   |                                                              |  
|Professional fees                                          |  |                                                | 1,027     |   |                                                              |  
|General and administrative                                 |  |                                                | 990       |   |                                                              |  
|Total expenses                                             |  |                                                | 14,437    |   |                                                              |  
|Net investment
    income before excise tax                |  |                                                | 12,227    |   |                                                              |  
|Provision for excise tax (Note 7)                          |  |                                                | (231      | ) |                                                              |  
|Net investment
    income                                  |  |                                                | 11,996    |   |                                                              |  
|Credit for loan losses                                     |  |                                                | —         |   |                                                              |  
|Net realized and unrealized (loss) gain
    on investments |  |                                                |           |   |                                                              |  
|Net realized gain on investments                           |  |                                                | 108       |   |                                                              |  
|Provision for excise tax (Note 7)                          |  |                                                | —         |   |                                                              |  
|Net unrealized (depreciation) appreciation on investments  |  |                                                | (8,113    | ) |                                                              |  
|Net realized and
    unrealized (loss) gain on investments |  |                                                | (8,005    | ) |                                                              |  
|Net increase
    in net assets resulting from operations   |  | $                                              | 3,991     |   |                                                              | $
|Net investment income per common
    share                 |  | $                                              | 1.41      |   |                                                              | $
|Change in net assets per common
    share                  |  | $                                              | 0.47      |   |                                                              | $
|Weighted average shares outstanding                        |  |                                                | 8,481,604 |   |                                                              |  



See Notes to Consolidated Financial Statements



70







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Changes in
Net Assets

(In thousands, except share data)



|                                                         |  | Members’ |         |   | AccumulatedOtherComprehensive |   |      |        |  |  | Common    |  |  | Paid-InCapital inExcess of |    |  | AccumulatedUndistributed(distributions inexcess of)Net Investment |   |         | Net UnrealizedAppreciation(Depreciation) on |  |   | Net RealizedGains on |     |  | Total Net |        
|-------------------------------------------------------- |  | -------- | ------- | - | ----------------------------- | - | ---- | ------ |  |  | --------- |  |  | -------------------------- | -- |  | ----------------------------------------------------------------- | - | ------- | ------------------------------------------- |  | - | -------------------- | --- |  | --------- | -------
|                                                         |  | Capital  |         |   | Loss                          |   |      | Shares |  |  | Amount    |  |  | Par                        |    |  | Income                                                            |   |         | Investments                                 |  |   | Investments          |     |  | Assets    |        
|Balance
    at December 31, 2009                         |  | $        | 60,261  |   |                               | $ | (768 | )      |  |  | —         |  |  | $                          | —  |  |                                                                   | $ | —       |                                             |  | $ | —                    |     |  | $         | —      
|Comprehensive
    income:                                |  |          |         |   |                               |   |      |        |  |  |           |  |  |                            |    |  |                                                                   |   |         |                                             |  |   |                      |     |  |           |        
|Net income                                               |  |          | 11,314  |   |                               |   | —    |        |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | —                    |     |  |           | —      
|Unrealized
    gain on interest rate swaps               |  |          | —       |   |                               |   | 409  |        |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | —                    |     |  |           | —      
|Total
    comprehensive income                           |  |          | —       |   |                               |   | —    |        |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | —                    |     |  |           | —      
|Cash
    distribution                                    |  |          | (18,000 | ) |                               |   | —    |        |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | —                    |     |  |           | —      
|Balance
    at October 28, 2010                          |  |          | 53,575  |   |                               |   | (359 | )      |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | —                    |     |  |           | —      
|Election to
    business development company (1)         |  |          | (53,575 | ) |                               |   | 359  |        |  |  | 2,645,124 |  |  |                            | 3  |  |                                                                   |   | 52,456  |                                             |  |   | —                    |     |  |           | 1,594  
|Issuance of
    common stock, net of offering costs (2)  |  |          | —       |   |                               |   | —    |        |  |  | 4,910,000 |  |  |                            | 5  |  |                                                                   |   | 70,815  |                                             |  |   | —                    |     |  |           | —      
|Net increase
    in net assets resulting from operations |  |          | —       |   |                               |   | —    |        |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | 1,359                |     |  |           | 1,449  
|Issuance of
    common stock as stock dividend           |  |          | —       |   |                               |   | —    |        |  |  | 38,297    |  |  |                            | —  |  |                                                                   |   | 565     |                                             |  |   | —                    |     |  |           | —      
|Dividends
    declared                                   |  |          | —       |   |                               |   | —    |        |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | (1,502               | )   |  |           | —      
|Balance
    at December 31, 2010                         |  |          | —       |   |                               |   | —    |        |  |  | 7,593,421 |  |  |                            | 8  |  |                                                                   |   | 123,836 |                                             |  |   | (143                 | )   |  |           | 3,043  
|Net increase
    in net assets resulting from operations |  |          | —       |   |                               |   | —    |        |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | 10,511               | (3) |  |           | (5,702 
|Issuance of
    common stock as stock dividend           |  |          | —       |   |                               |   | —    |        |  |  | 43,111    |  |  |                            | —  |  |                                                                   |   | 676     |                                             |  |   | —                    |     |  |           | —      
|Dividends
    declared                                   |  |          | —       |   |                               |   | —    |        |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | (5,403               | )   |  |           | —      
|Balance
    at December 31, 2011                         |  |          | —       |   |                               |   | —    |        |  |  | 7,636,532 |  |  |                            | 8  |  |                                                                   |   | 124,512 |                                             |  |   | 4,965                |     |  |           | (2,659 
|Issuance of
    common stock, net of offering costs (4)  |  |          | —       |   |                               |   | —    |        |  |  | 1,909,000 |  |  |                            | 2  |  |                                                                   |   | 29,523  |                                             |  |   | —                    |     |  |           | —      
|Net increase
    in net assets resulting from operations |  |          | —       |   |                               |   | —    |        |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | 11,996               |     |  |           | (8,113 
|Issuance of
    common stock as stock dividend           |  |          | —       |   |                               |   | —    |        |  |  | 21,693    |  |  |                            | —  |  |                                                                   |   | 349     |                                             |  |   | —                    |     |  |           | —      
|Dividends
    declared                                   |  |          | —       |   |                               |   | —    |        |  |  | —         |  |  |                            | —  |  |                                                                   |   | —       |                                             |  |   | (15,533              | )   |  |           | —      
|Balance
    at December 31, 2012                         |  | $        | —       |   |                               | $ | —    |        |  |  | 9,567,225 |  |  | $                          | 10 |  |                                                                   | $ | 154,384 |                                             |  | $ | 1,428                |     |  | $         | (10,772

____________



|(1) | Reclassification from members’ capital to net
                              assets and net unrealized appreciation on investments upon election. Immediately prior to the initial
                              public offering (“IPO”), the members of Compass Horizon Funding Company LLC (“CHF”)
                              exchanged their membership interests for 2,645,124 shares of common stock of the Company and
                              CHF became a wholly owned subsidiary of the Company. Concurrent with the IPO, Compass Horizon Partners,
                              LP, one of CHF’s owners, sold 1,340,000 shares.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|(2) | On October 28, 2010, the Company priced its IPO,
                              offering 6,250,000 shares of its common stock at a public offering price of $16.00 per share.
                              Of the 6,250,000 shares offered, 4,910,000 shares were sold by the Company and 1,340,000 shares
                              were sold by Compass Horizon Partners, LP, one of CHF’s owners. Total offering costs were
                              $7,740.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|(3) | Net of excise tax.
|--- | ------------------
|    |                   

|(4) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See Notes to Consolidated Financial Statements



71







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Cash Flows

(In thousands)



|                                                                                                                            |  | Post-IPO as a Business
    Development Company |          |   | Pre-IPO Prior to
    becoming a Business 
    Development 
    Company |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------- | -------- | - | ---------------------------------------------------------------------- | -
|                                                                                                                            |  |                                                |          |   |                                                                        |  
|                                                                                                                            |  | Year Ended                                     |          |   | Year Ended                                                             |  
|                                                                                                                            |  | December 31,                                   |          |   | December 31,                                                           |  
|                                                                                                                            |  | 2012                                           |          |   | 2011                                                                   |  
|Cash flows from operating activities:                                                                                       |  |                                                |          |   |                                                                        |  
|Net increase in net assets resulting
    from operations                                                                    |  | $                                              | 3,991    |   |                                                                        | $
|Adjustments to reconcile net increase in net assets
    resulting from operations to net cash used in operating activities: |  |                                                |          |   |                                                                        |  
|Credit for loan losses                                                                                                      |  |                                                | —        |   |                                                                        |  
|Amortization of debt issuance costs                                                                                         |  |                                                | 471      |   |                                                                        |  
|Net realized gain on investments                                                                                            |  |                                                | (82      | ) |                                                                        |  
|Net unrealized depreciation (appreciation) on investments                                                                   |  |                                                | 8,113    |   |                                                                        |  
|Purchase of investments                                                                                                     |  |                                                | (138,907 | ) |                                                                        |  
|Principal payments received on investments                                                                                  |  |                                                | 81,383   |   |                                                                        |  
|Proceeds from sale of investments                                                                                           |  |                                                | 281      |   |                                                                        |  
|Stock received in settlement of fee income                                                                                  |  |                                                | —        |   |                                                                        |  
|Changes in assets and liabilities:                                                                                          |  |                                                |          |   |                                                                        |  
|Net decrease (increase) in investments in money
    market funds                                                            |  |                                                | 10,958   |   |                                                                        |  
|(Increase) decrease in interest receivable                                                                                  |  |                                                | (98      | ) |                                                                        |  
|Increase in end-of-term payments                                                                                            |  |                                                | (260     | ) |                                                                        |  
|Decrease in unearned loan income                                                                                            |  |                                                | (855     | ) |                                                                        |  
|Increase in other assets                                                                                                    |  |                                                | (93      | ) |                                                                        |  
|(Decrease) increase in other accrued expenses                                                                               |  |                                                | (152     | ) |                                                                        |  
|Increase (decrease) in base management fee payable                                                                          |  |                                                | 72       |   |                                                                        |  
|(Decrease) increase in incentive
    fee payable                                                                            |  |                                                | (911     | ) |                                                                        |  
|Net cash used in operating
    activities                                                                                   |  |                                                | (36,089  | ) |                                                                        |  
|Cash flows from financing activities:                                                                                       |  |                                                |          |   |                                                                        |  
|Proceeds from shares sold, net of offering costs                                                                            |  |                                                | 29,525   |   |                                                                        |  
|Proceeds from issuance of senior notes                                                                                      |  |                                                | 33,000   |   |                                                                        |  
|Dividends and distributions paid                                                                                            |  |                                                | (15,128  | ) |                                                                        |  
|Net (decrease) increase in Credit Facilities                                                                                |  |                                                | (8,551   | ) |                                                                        |  
|Debt issuance costs                                                                                                         |  |                                                | (3,007   | ) |                                                                        |  
|Net cash provided by (used in)
    financing activities                                                                     |  |                                                | 35,839   |   |                                                                        |  
|Net (decrease) increase in cash                                                                                             |  |                                                | (250     | ) |                                                                        |  
|Cash:                                                                                                                       |  |                                                |          |   |                                                                        |  
|Beginning of period                                                                                                         |  |                                                | 1,298    |   |                                                                        |  
|End of period                                                                                                               |  | $                                              | 1,048    |   |                                                                        | $
|Supplemental disclosure of cash flow information:                                                                           |  |                                                |          |   |                                                                        |  
|Cash paid for interest                                                                                                      |  | $                                              | 3,002    |   |                                                                        | $
|Supplemental non-cash investing and financing activities:                                                                   |  |                                                |          |   |                                                                        |  
|Warrant investments received & recorded as
    unearned loan income                                                         |  | $                                              | 1,998    |   |                                                                        | $
|Dividends Payable                                                                                                           |  | $                                              | 3,301    |   |                                                                        | $
|Receivables resulting from sale of investments                                                                              |  | $                                              | 25       |   |                                                                        | $
|Stock received in settlement of investments                                                                                 |  | $                                              | —        |   |                                                                        | $
|Decrease in interest rate swap liability                                                                                    |  | $                                              | —        |   |                                                                        | $
|Reclassification of receivables to investments                                                                              |  | $                                              | 532      |   |                                                                        | $



See Notes to Consolidated Financial Statements



72







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2012

(In thousands)



|                                                |  |                    |  |                                                         |  | Principal |       |  | Cost of             |   |        | Fair  | 
|----------------------------------------------- |  | ------------------ |  | ------------------------------------------------------- |  | --------- | ----- |  | ------------------- | - | ------ | ----- | 
|Portfolio
    Company (1)                       |  | Sector             |  | Type
    of Investment (3)(4)(7)                        |  | Amount    |       |  | Investments
    (6) |   |        | Value | 
|Debt Investments — 152.0% (9)                   |  |                    |  |                                                         |  |           |       |  |                    
|Debt Investments — Life
    Science — 42.4% (9)
|ACT Biotech Corporation (8)                     |  | Biotechnology      |  | Term Loan (13.10% cash, 8.00%
    ETP, Due 9/1/14)      |  | $         | 3,947 |  |                     | $ | 3,906  |       | 
|Ambit Biosciences Corporation (2)               |  | Biotechnology      |  | Term Loan (12.25% cash, 3.00% ETP, Due 10/1/13)         |  |           | 2,206 |  |                     |   | 2,197  |       | 
|Anacor Pharmaceuticals, Inc. (2)(5)             |  | Biotechnology      |  | Term Loan (9.41% cash, 5.50% ETP, Due 4/1/15)           |  |           | 2,671 |  |                     |   | 2,644  |       | 
|                                                |  |                    |  | Term Loan (9.67% cash, 5.50% ETP, Due 4/1/15)           |  |           | 2,139 |  |                     |   | 2,109  |       | 
|                                                |  |                    |  | Term Loan (9.47% cash, 5.50% ETP, Due 4/1/15)           |  |           | 3,762 |  |                     |   | 3,708  |       | 
|Celsion Corporation (2)(5)                      |  | Biotechnology      |  | Term Loan (11.75% cash, Due 10/1/15)                    |  |           | 2,500 |  |                     |   | 2,466  |       | 
|N30 Pharmaceuticals, LLC (2)                    |  | Biotechnology      |  | Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)          |  |           | 1,679 |  |                     |   | 1,657  |       | 
|                                                |  |                    |  | Term Loan (11.25% cash, 3.00% ETP, Due 7/1/15)          |  |           | 2,500 |  |                     |   | 2,450  |       | 
|Revance Therapeutics, Inc.                      |  | Biotechnology      |  | Convertible Note (8.00% ETP, Due 2/10/13)               |  |           | 71    |  |                     |   | 71     |       | 
|Sample6 Technologies, Inc. (2)                  |  | Biotechnology      |  | Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16)          |  |           | 2,500 |  |                     |   | 2,454  |       | 
|Sunesis Pharmaceuticals, Inc. (2)(5)            |  | Biotechnology      |  | Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)          |  |           | 2,000 |  |                     |   | 1,984  |       | 
|                                                |  |                    |  | Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)          |  |           | 3,000 |  |                     |   | 2,911  |       | 
|Supernus Pharmaceuticals, Inc. (2)(5)           |  | Biotechnology      |  | Term Loan (11.00% cash, 3.00% ETP, Due 8/1/14)          |  |           | 2,090 |  |                     |   | 2,079  |       | 
|                                                |  |                    |  | Term Loan (11.00% cash, 2.50% ETP, Due 1/1/15)          |  |           | 5,962 |  |                     |   | 5,915  |       | 
|Xcovery Holding Company, LLC (2)                |  | Biotechnology      |  | Term Loan (12.50% cash, Due 8/1/15)                     |  |           | 918   |  |                     |   | 915    |       | 
|                                                |  |                    |  | Term Loan (12.50% cash, Due 8/1/15)                     |  |           | 1,444 |  |                     |   | 1,439  |       | 
|                                                |  |                    |  | Term Loan (12.50% cash, Due 10/1/15)                    |  |           | 250   |  |                     |   | 249    |       | 
|Direct Flow Medical, Inc. (2)                   |  | Medical Device     |  | Term Loan (11.00% cash, 3.00% ETP, Due 7/1/16)          |  |           | 5,000 |  |                     |   | 4,831  |       | 
|Mitralign, Inc. (2)                             |  | Medical Device     |  | Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15)         |  |           | 1,714 |  |                     |   | 1,655  |       | 
|                                                |  |                    |  | Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15)         |  |           | 1,143 |  |                     |   | 1,119  |       | 
|OraMetrix, Inc. (2)                             |  | Medical Device     |  | Term Loan (11.50% cash, 3.00% ETP, Due 4/1/14)          |  |           | 2,468 |  |                     |   | 1,966  |       | 
|                                                |  |                    |  | Revolver (11.50% (Prime + 8250%) cash, Due
    12/1/15) |  |           | 2,000 |  |                     |   | 2,449  |       | 
|PixelOptics, Inc. (2)                           |  | Medical Device     |  | Term Loan (10.75% cash, 3.00% ETP, Due 11/1/14)         |  |           | 7,900 |  |                     |   | 7,865  |       | 
|Tengion, Inc. (2)(5)                            |  | Medical Device     |  | Term Loan (13.00% cash,
    Due 5/1/14)                 |  |           | 3,660 |  |                     |   | 3,560  |       | 
|Total Debt Investments —
    Life Science       |  |                    |  |                                                         |  |           |       |  |                     |   | 62,599 |       | 
|Debt Investments — Technology
    — 72.9% (9)   |  |                    |  |                                                         |  |           |       |  |                     |  
|Avalanche Technology, Inc. (2)                  |  | Semiconductors     |  | Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)          |  |           | 4,000 |  |                     |   | 3,866  |       | 
|Luxtera, Inc. (2)                               |  | Semiconductors     |  | Term Loan (10.25% cash, 8.00% ETP, Due 12/1/15)         |  |           | 3,333 |  |                     |   | 3,290  |       | 
|                                                |  |                    |  | Term Loan (10.25% cash, 8.00% ETP, Due 3/1/16)          |  |           | 1,667 |  |                     |   | 1,642  |       | 
|Newport Media, Inc. (2)                         |  | Semiconductors     |  | Term Loan (11.00% cash, 2.14% ETP, Due 1/1/16)          |  |           | 3,500 |  |                     |   | 3,445  |       | 
|                                                |  |                    |  | Term Loan (11.00% cash, 2.14% ETP, Due 1/1/16)          |  |           | 3,500 |  |                     |   | 3,445  |       | 
|Xtera Communications, Inc. (2)                  |  | Semiconductors     |  | Term Loan (11.50% cash, Due 12/1/14)                    |  |           | 8,222 |  |                     |   | 8,136  |       | 
|                                                |  |                    |  | Term Loan (11.50% cash, Due 7/1/15)                     |  |           | 2,000 |  |                     |   | 1,972  |       | 
|Grab Networks, Inc. (2)                         |  | Internet and Media |  | Term Loan (12.00% cash, Due 1/1/16)                     |  |           | 2,500 |  |                     |   | 2,387  |       | 
|Optaros, Inc. (2)                               |  | Internet and Media |  | Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)         |  |           | 2,000 |  |                     |   | 1,976  |       | 
|                                                |  |                    |  | Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)          |  |           | 500   |  |                     |   | 495    |       | 
|SimpleTuition, Inc. (2)                         |  | Internet and Media |  | Term Loan (11.75% cash, Due 3/1/16)                     |  |           | 5,000 |  |                     |   | 4,905  |       | 
|Construction Software Technologies, Inc. (2)    |  | Software           |  | Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)         |  |           | 4,200 |  |                     |   | 4,156  |       | 
|                                                |  |                    |  | Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)         |  |           | 4,200 |  |                     |   | 4,156  |       | 
|Courion Corporation (2)                         |  | Software           |  | Term Loan (11.45% cash, Due 10/1/15)                    |  |           | 3,500 |  |                     |   | 3,481  |       | 
|                                                |  |                    |  | Term Loan (11.45% cash, Due 10/1/15)                    |  |           | 3,500 |  |                     |   | 3,481  |       | 
|Fiberlink Communications Corporation (2)        |  | Software           |  | Term Loan (11.50% cash, 5.00% ETP, Due 7/1/16)          |  |           | 5,000 |  |                     |   | 4,920  |       | 
|Kontera Technologies, Inc. (2)                  |  | Software           |  | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)         |  |           | 4,000 |  |                     |   | 3,917  |       | 
|                                                |  |                    |  | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)         |  |           | 4,000 |  |                     |   | 3,917  |       | 
|Netuitive, Inc. (2)                             |  | Software           |  | Term Loan (11.75% cash, Due 1/1/16)                     |  |           | 3,000 |  |                     |   | 2,939  |       | 
|Seapass Solutions, Inc. (2)                     |  | Software           |  | Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)          |  |           | 5,000 |  |                     |   | 4,933  |       | 
|                                                |  |                    |  | Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)          |  |           | 5,000 |  |                     |   | 4,933  |       | 
|StreamBase Systems, Inc. (2)                    |  | Software           |  | Term Loan (12.51% cash, Due 11/1/13)                    |  |           | 1,360 |  |                     |   | 1,353  |       | 
|                                                |  |                    |  | Term Loan (12.50% cash, Due 6/1/14)                     |  |           | 558   |  |                     |   | 553    |       | 
|                                                |  |                    |  | Term Loan (12.50% cash, Due 12/1/15)                    |  |           | 1,500 |  |                     |   | 1,477  |       | 
|Sys-Tech Solutions, Inc. (2)                    |  | Software           |  | Term Loan (11.65% cash, Due 6/1/16)                     |  |           | 7,500 |  |                     |   | 7,193  |       | 
|Vidsys, Inc. (2)                                |  | Software           |  | Term Loan (11.00% cash, 5.00% ETP, Due 6/1/16)          |  |           | 3,000 |  |                     |   | 2,948  |       | 



See Notes to Consolidated Financial Statements



73





Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2012

(In thousands)



|                                                                       |  |                    |  |                                                         |  | Principal |        |  | Cost of             |  |         | Fair  |       
|---------------------------------------------------------------------- |  | ------------------ |  | ------------------------------------------------------- |  | --------- | ------ |  | ------------------- |  | ------- | ----- | ------
|Portfolio
    Company (1)                                              |  | Sector             |  | Type
    of Investment (3)(4)(7)                        |  | Amount    |        |  | Investments
    (6) |  |         | Value |       
|Aquion Energy, Inc. (2)                                                |  | Power Management   |  | Term Loan (10.25% cash, 4.00%
    ETP, Due 3/1/16)      |  |           | 3,333  |  |                     |  | 3,312   |       |       
|                                                                       |  |                    |  | Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)          |  |           | 3,333  |  |                     |  | 3,312   |       |       
|                                                                       |  |                    |  | Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16)          |  |           | 3,333  |  |                     |  | 3,309   |       |       
|Xtreme Power, Inc. (2)                                                 |  | Power Management   |  | Term Loan (10.75% cash,
    3.50% ETP, Due 5/1/16)      |  |           | 6,000  |  |                     |  | 5,859   |       |       
|Total Debt Investments —
    Technology                                |  |                    |  |                                                         |  |           |        |  |                     |  | 105,708 |       |       
|Debt Investments —
    Cleantech — 16.4% (9)                           |  |                    |  |                                                         |  |           |        |  |                     |  |         |      
|Renmatix, Inc. (2)                                                     |  | Alternative Energy |  | Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)          |  |           | 2,500  |  |                     |  | 2,402   |       |       
|                                                                       |  |                    |  | Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)          |  |           | 2,500  |  |                     |  | 2,473   |       |       
|Semprius, Inc. (2)                                                     |  | Alternative Energy |  | Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)          |  |           | 3,750  |  |                     |  | 3,712   |       |       
|Cereplast, Inc. (5)(8)                                                 |  | Waste Recycling    |  | Term Loan (12.00% cash, Due 8/1/14)                     |  |           | 1,683  |  |                     |  | 1,515   |       |       
|                                                                       |  |                    |  | Term Loan (12.00% cash, Due 8/1/14)                     |  |           | 1,806  |  |                     |  | 1,787   |       |       
|                                                                       |  |                    |  | Term Loan (15.00% cash, Due 4/4/13)                     |  |           | 75     |  |                     |  | 75      |       |       
|                                                                       |  |                    |  | Term Loan (15.00% cash, Due 4/4/13)                     |  |           | 125    |  |                     |  | 125     |       |       
|Aurora Algae, Inc. (2)                                                 |  | Energy Efficiency  |  | Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)          |  |           | 2,075  |  |                     |  | 2,062   |       |       
|Satcon Technology Corporation (5)(8)                                   |  | Energy Efficiency  |  | Term Loan (12.58% cash, Due 1/1/14)                     |  |           | 5,278  |  |                     |  | 5,278   |       |       
|Solarbridge Technologies, Inc. (2)                                     |  | Energy Efficiency  |  | Term Loan (11.65% cash, Due 4/1/16)                     |  |           | 7,000  |  |                     |  | 6,826   |       |       
|Tigo Energy, Inc.  (2)                                                 |  | Energy Efficiency  |  | Term Loan (11.00% cash, Due 8/1/14)                     |  |           | 2,326  |  |                     |  | 2,306   |       |       
|                                                                       |  |                    |  | Revolver (10.75% (Prime
    + 7.50%) cash, Due 1/1/14)  |  |           | 1,859  |  |                     |  | 1,821   |       |       
|Total Debt Investments —
    Cleantech                                 |  |                    |  |                                                         |  |           |        |  |                     |  | 30,382  |       |       
|Debt Investments —
    Healthcare information and services — 20.3% (9) |  |                    |  |                                                         |  |           |        |  |                     | 
|Accumetrics, Inc. (2)                                                  |  | Diagnostics        |  | Term Loan (10.90% cash, 5.00% ETP, Due 6/1/16)          |  |           | 4,000  |  |                     |  | 3,853   |       |       
|BioScale, Inc. (2)                                                     |  | Diagnostics        |  | Term Loan (11.51% cash, Due 1/1/14)                     |  |           | 2,643  |  |                     |  | 2,630   |       |       
|Radisphere National Radiology Group, Inc.
    (2)                      |  | Diagnostics        |  | Revolver (11.25% (Prime + 8.00%) cash, Due
    10/1/15) |  |           | 15,000 |  |                     |  | 14,856  |       |       
|Recondo Technology, Inc. (2)                                           |  | Software           |  | Term Loan (11.50% cash, 3.00% ETP, Due 4/1/15)          |  |           | 2,000  |  |                     |  | 1,968   |       |       
|                                                                       |  |                    |  | Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)          |  |           | 2,500  |  |                     |  | 2,460   |       |       
|                                                                       |  |                    |  | Revolver (10.50% (Prime + 7.25%) cash, Due
    4/1/15)  |  |           | 1,000  |  |                     |  | 968     |       |       
|Singulex, Inc.                                                         |  | Other Healthcare   |  | Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14)          |  |           | 1,602  |  |                     |  | 1,593   |       |       
|                                                                       |  |                    |  | Term Loan (11.00% cash,
    3.00% ETP, Due 3/1/14)      |  |           | 1,068  |  |                     |  | 1,064   |       |       
|Total Debt Investments — Healthcare information and services           |  |                    |  |                                                         |  |           |        |  | 29,392              |  |         |       | 29,392
|Total
    Debt Investments                                             |  |                    |  |                                                         |  |           |        |  |                     |  | 228,081 |       |       
|Warrant Investments
    — 3.8% (9)                                     |  |                    |  |                                                         |  |           |        |  |                     |  |         |      
|Warrants —
    Life Science — 1.1% (9)                                 |  |                    |  |                                                         |  |           |        |  |                     |  |         |      
|ACT Biotech Corporation                                                |  | Biotechnology      |  | 1,390,910 Preferred Stock Warrants                      |  |           | —      |  |                     |  | 83      |       |       
|Ambit Biosciences, Inc. (2)                                            |  | Biotechnology      |  | 1,075,083 Preferred Stock Warrants                      |  |           | —      |  |                     |  | 143     |       |       
|Anacor Pharmaceuticals, Inc. (2)(5)                                    |  | Biotechnology      |  | 84,583 Common Stock Warrants                            |  |           | —      |  |                     |  | 93      |       |       
|Anesiva, Inc.                                                          |  | Biotechnology      |  | 198,898 Common Stock Warrants                           |  |           | —      |  |                     |  | 18      |       |       
|Celsion Corporation (2)(5)                                             |  | Biotechnology      |  | 25,685 Common Stock Warrants                            |  |           | —      |  |                     |  | 15      |       |       
|N30 Pharmaceuticals, LLC (2)                                           |  | Biotechnology      |  | 214,200 Preferred Stock Warrants                        |  |           | —      |  |                     |  | 122     |       |       
|Novalar Pharmaceuticals, Inc.                                          |  | Biotechnology      |  | 84,845 Preferred Stock Warrants                         |  |           | —      |  |                     |  | 69      |       |       
|Revance Therapeutics, Inc.                                             |  | Biotechnology      |  | 199,470 Preferred Stock Warrants                        |  |           | —      |  |                     |  | 224     |       |       
|Sample6 Technologies, Inc. (2)                                         |  | Biotechnology      |  | 200,582 Preferred Stock Warrants                        |  |           | —      |  |                     |  | 27      |       |       
|Sunesis Pharmaceuticals, Inc. (2)(5)                                   |  | Biotechnology      |  | 116,203 Common Stock Warrants                           |  |           | —      |  |                     |  | 83      |       |       
|Supernus Pharmaceuticals, Inc. (2)(5)                                  |  | Biotechnology      |  | 42,083 Preferred Stock Warrants                         |  |           | —      |  |                     |  | 94      |       |       
|Tranzyme, Inc. (2)(5)                                                  |  | Biotechnology      |  | 77,902 Common Stock Warrants                            |  |           | —      |  |                     |  | 6       |       |       
|Direct Flow Medical, Inc. (2)                                          |  | Medical Device     |  | 176,922 Preferred Stock Warrants                        |  |           | —      |  |                     |  | 145     |       |       
|EnteroMedics, Inc. (5)                                                 |  | Medical Device     |  | 141,026 Common Stock Warrants                           |  |           | —      |  |                     |  | 347     |       |       
|Mitralign, Inc. (2)                                                    |  | Medical Device     |  | 295,238 Common Stock Warrants                           |  |           | —      |  |                     |  | 49      |       |       
|OraMetrix, Inc. (2)                                                    |  | Medical Device     |  | 812,348 Preferred Stock Warrants                        |  |           | —      |  |                     |  | 78      |       |       
|PixelOptics, Inc. (2)                                                  |  | Medical Device     |  | 381,612 Preferred Stock Warrants                        |  |           | —      |  |                     |  | 96      |       |       
|Tengion, Inc. (2)(5)                                                   |  | Medical Device     |  | 1,716,339 Common Stock Warrants                         |  |           | —      |  |                     |  | 124     |       |       
|ViOptix, Inc.                                                          |  | Medical Device     |  | 375,763 Preferred Stock
    Warrants                    |  |           | —      |  |                     |  | 13      |       |       
|Total Warrants —
    Life Science                                      |  |                    |  |                                                         |  |           |        |  |                     |  | 1,829   |       |       



See Notes to Consolidated Financial Statements



74





Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2012

(In thousands)



|                                                              |  |                               |  |                                      |  | Principal |       |  | Cost of             |  |       | Fair  | 
|------------------------------------------------------------- |  | ----------------------------- |  | ------------------------------------ |  | --------- | ----- |  | ------------------- |  | ----- | ----- | 
|Portfolio
    Company (1)                                     |  | Sector                        |  | Type
    of Investment (3)(4)(7)     |  | Amount    |       |  | Investments
    (6) |  |       | Value | 
|Warrants —
    Technology — 1.9% (9)                          |  |                               |  |                                      |  |           |       |  |                     |  |       |      
|OpenPeak, Inc.                                                |  | Communications                |  | 18,997 Preferred Stock Warrants      |  |           | —     |  |                     |  | 89    |       | 
|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     |  |           | —     |  |                     |  | 27    |       | 
|Avalanche Technology, Inc. (2)                                |  | Semiconductors                |  | 201,835 Preferred Stock Warrants     |  |           | —     |  |                     |  | 45    |       | 
|Impinj, Inc.                                                  |  | Semi-conductor                |  | 1 Preferred Stock Warrants           |  |           | —     |  |                     |  | 7     |       | 
|Luxtera, Inc. (2)                                             |  | Semiconductors                |  | 1,827,485 Preferred Stock Warrants   |  |           | —     |  |                     |  | 34    |       | 
|Newport Media, Inc. (2)                                       |  | Semiconductors                |  | 188,764 Preferred Stock Warrants     |  |           | —     |  |                     |  | 40    |       | 
|Xtera Communications, Inc. (2)                                |  | Semiconductors                |  | 983,607 Preferred Stock Warrants     |  |           | —     |  |                     |  | 206   |       | 
|XIOtech, Inc.                                                 |  | Data Storage                  |  | 2,217,979 Preferred Stock Warrants   |  |           | —     |  |                     |  | 22    |       | 
|Cartera Commerce, Inc.                                        |  | Internet and media            |  | 90,909 Preferred Stock Warrants      |  |           | —     |  |                     |  | 16    |       | 
|Grab Networks, Inc.  (2)                                      |  | Internet and media            |  | 1,493,681 Preferred Stock Warrants   |  |           | —     |  |                     |  | 194   |       | 
|Optaros, Inc. (2)                                             |  | Internet and media            |  | 477,403 Preferred Stock Warrants     |  |           | —     |  |                     |  | 20    |       | 
|SimpleTuition, Inc. (2)                                       |  | Internet and media            |  | 189,573 Preferred Stock Warrants     |  |           | —     |  |                     |  | 63    |       | 
|IntelePeer, Inc.                                              |  | Networking                    |  | 141,549 Preferred Stock Warrants     |  |           | —     |  |                     |  | 39    |       | 
|Motion Computing, Inc.                                        |  | Networking                    |  | 260,707 Preferred Stock Warrants     |  |           | —     |  |                     |  | 7     |       | 
|Clarabridge, Inc.                                             |  | Software                      |  | 104,503 Preferred Stock Warrants     |  |           | —     |  |                     |  | 28    |       | 
|Construction Software Technologies, Inc. (2)                  |  | Software                      |  | 386,415 Preferred Stock Warrants     |  |           | —     |  |                     |  | 69    |       | 
|Courion Corporation (2)                                       |  | Software                      |  | 772,543 Preferred Stock Warrants     |  |           | —     |  |                     |  | 107   |       | 
|DriveCam, Inc.                                                |  | Software                      |  | 71,639 Preferred Stock Warrants      |  |           | —     |  |                     |  | 19    |       | 
|Kontera Technologies, Inc. (2)                                |  | Software                      |  | 99,476 Preferred Stock Warrants      |  |           | —     |  |                     |  | 101   |       | 
|Netuitive, Inc. (2)                                           |  | Software                      |  | 748,453 Preferred Stock Warrants     |  |           | —     |  |                     |  | 75    |       | 
|Seapass Solutions, Inc. (2)                                   |  | Software                      |  | 202,892 Preferred Stock Warrants     |  |           | —     |  |                     |  | 113   |       | 
|StreamBase Systems, Inc. (2)                                  |  | Software                      |  | 306,041 Preferred Stock Warrants     |  |           | —     |  |                     |  | 83    |       | 
|Sys-Tech Solutions, Inc. (2)                                  |  | Software                      |  | 375,000 Preferred Stock Warrants     |  |           | —     |  |                     |  | 242   |       | 
|Vidsys, Inc. (2)                                              |  | Software                      |  | 178,802 Preferred Stock Warrants     |  |           | —     |  |                     |  | 23    |       | 
|Aquion Energy, Inc. (2)                                       |  | Power Management              |  | 82,644 Preferred Stock Warrants      |  |           | —     |  |                     |  | 7     |       | 
|Xtreme Power, Inc. (2)                                        |  | Power Management              |  | 182,723 Preferred Stock
    Warrants |  |           | —     |  |                     |  | 76    |       | 
|Total Warrants —
    Technology                               |  |                               |  |                                      |  |           |       |  |                     |  | 1,844 |       | 
|Warrants —
    Cleantech — 0.2% (9)                           |  |                               |  |                                      |  |           |       |  |                     |  |       |      
|Renmatix, Inc. (2)                                            |  | Alternative Energy            |  | 52,296 Preferred Stock Warrants      |  |           | —     |  |                     |  | 69    |       | 
|Semprius, Inc. (2)                                            |  | Alternative Energy            |  | 519,981 Preferred Stock Warrants     |  |           | —     |  |                     |  | 25    |       | 
|Cereplast, Inc. (5)                                           |  | Waste Recycling               |  | 365,000 Common Stock Warrants        |  |           | —     |  |                     |  | 175   |       | 
|Enphase Energy, Inc. (5)                                      |  | Energy Efficiency             |  | 161,959 Common Stock Warrants        |  |           | —     |  |                     |  | 176   |       | 
|Satcon Technology Corporation (5)                             |  | Energy Efficiency             |  | 493,097 Common Stock Warrants        |  |           | —     |  |                     |  | 285   |       | 
|Solarbridge Technologies, Inc. (2)                            |  | Energy Efficiency             |  | 1,761,051 Preferred Stock Warrants   |  |           | —     |  |                     |  | 125   |       | 
|Tigo Energy, Inc. (2)                                         |  | Energy Efficiency             |  | 190,901 Preferred Stock
    Warrants |  |           | —     |  |                     |  | 101   |       | 
|Total Warrants —
    Cleantech                                |  |                               |  |                                      |  |           |       |  |                     |  | 956   |       | 
|Warrants —
    Healthcare information and services — 0.6% (9) |  |                               |  |                                      |  |           |       |  |                     |  |       |      
|Accumetrics, Inc. (2)                                         |  | Diagnostics                   |  | 1,028,57 Preferred Stock Warrants    |  |           | —     |  |                     |  | 107   |       | 
|BioScale, Inc. (2)                                            |  | Diagnostics                   |  | 315,618 Preferred Stock Warrants     |  |           | —     |  |                     |  | 55    |       | 
|Precision Therapeutics, Inc.                                  |  | Diagnostics                   |  | 561,409 Preferred Stock Warrants     |  |           | —     |  |                     |  | 73    |       | 
|Radisphere National Radiology Group, Inc.
    (2)             |  | Diagnostics                   |  | 519,943 Preferred Stock Warrants     |  |           | —     |  |                     |  | 378   |       | 
|Recondo Technology, Inc. (2)                                  |  | Software                      |  | 360,645 Preferred Stock Warrants     |  |           | —     |  |                     |  | 60    |       | 
|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   |       | 
|Total Warrants —
    Healthcare information and services      |  |                               |  |                                      |  |           | 1,086 |  |                     |  | 901   |      
|Total
    Warrants                                            |  |                               |  |                                      |  |           |       |  |                     |  | 5,715 |       | 
|Other Investments —
    1.4% (9)                              |  |                               |  |                                      |  |           |       |  |                     |  |       |       | 
|Vette Technology, LLC                                         |  | Data Storage                  |  | Royalty Agreement Due
    4/18/2019  |  |           | —     |  |                     |  | 4,880 |       | 
|Total
    Other Investments                                   |  |                               |  |                                      |  |           |       |  |                     |  | 4,880 |       | 



See Notes to Consolidated Financial Statements



75







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2012

(In thousands)



|                                                           |  |                |  |                                  |  | Principal |         |   | Cost of             |    |         | Fair  |      
|---------------------------------------------------------- |  | -------------- |  | -------------------------------- |  | --------- | ------- | - | ------------------- | -- | ------- | ----- | -----
|Portfolio
    Company (1)                                  |  | Sector         |  | Type
    of Investment (3)(4)(7) |  | Amount    |         |   | Investments
    (6) |    |         | Value |      
|Equity — 0.5% (9)                                          |  |                |  |                                  |  |           |         |   |                     |    |         |       |      
|Insmed Incorporated (5)                                    |  | Biotechnology  |  | 33,208 Common Stock              |  |           | —       |   |                     |    | 227     |       |      
|Overture Networks Inc.                                     |  | Communications |  | 386,191 Preferred Stock          |  |           | —       |   |                     |    | 482     |       |      
|Total Equity                                               |  |                |  |                                  |  |           |         |   |                     |    | 709     |       |      
|Total
    Portfolio Investment Assets — 157.7%	 (9)        |  |                |  |                                  |  | $         | 239,385 |   |                     | $  | 228,613 |      
|Short Term Investments —
    Money Market Funds — 1.8% (9) |  |                |  |                                  |  |           |         |   |                     |    |        
|Blackrock Liquid Fed Funds Institutional (Fund #30)        |  |                |  |                                  |  |           |         | $ | 2,197               |    |         | $     | 2,197
|Fidelity Prime Money Market (Class I Fund #690)            |  |                |  |                                  |  | 91        |         |   |                     | 91 |        
|US Bank Money Market                                       |  |                |  |                                  |  |           |         |   |                     |    | 272     |       |      
|Total
    Short Term Investments — Money Market Funds      |  |                |  |                                  |  | $         | 2,560   |   |                     | $  | 2,560   |      

_____________________________



| | (1) | All of our investments are in entities which are domiciled in
                                                            the United States or the company’s principal place of business
                                                            is in the United States.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Has been pledged as collateral under the Credit Facilities.
| | --- | -----------------------------------------------------------

| | (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 loan, unless otherwise indicated. For each debt investment,
                                                            we have provided the current interest rate in effect as of December
                                                            31, 2012.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (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 is on non-accrual status at December 31, 2012, and is therefore
                                                            considered non-income producing.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (9) | Value as a percent of net assets.
| | --- | ---------------------------------



See Notes to Consolidated Financial Statements



76







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of InvestmentsDecember 31, 2011(In thousands)



|                                                |  |                               |  |                                                      |  | Principal |        |  | Cost of             |   |        | Fair  | 
|----------------------------------------------- |  | ----------------------------- |  | ---------------------------------------------------- |  | --------- | ------ |  | ------------------- | - | ------ | ----- | 
|Portfolio
    Company (1)                       |  | Sector                        |  | Type
    of Investment (3)(4)(7)                     |  | Amount    |        |  | Investments
    (6) |   |        | Value | 
|Debt Investments
    — 133.4% (8)               |  |                               |  |                                                      |  |           |        |  |                    
|Debt Investments —
    Life Science — 45.5% (8) |  |                               |  |                                                      |  |           |        |  |                     |   |       
|ACT Biotech Corporation (2)                     |  | Biotechnology                 |  | Term Loan (13.10% cash, 12.86%
    ETP, Due 12/1/13) |  | $         | 913    |  |                     | $ | 894    |       | 
|                                                |  |                               |  | Term Loan (13.01% cash, 12.86% ETP, Due 12/1/13)     |  |           | 913    |  |                     |   | 906    |       | 
|                                                |  |                               |  | Term Loan (13.01% cash, 12.86% ETP, Due 12/1/13)     |  |           | 1,410  |  |                     |   | 1,378  |       | 
|Ambit Biosciences Corporation (2)               |  | Biotechnology                 |  | Term Loan (12.25% cash, 3.00% ETP, Due 10/1/13)      |  |           | 4,574  |  |                     |   | 4,530  |       | 
|Anacor Pharmaceuticals, Inc. (2)(5)             |  | Biotechnology                 |  | Term Loan (9.41% cash, 5.50% ETP, Due 4/1/15)        |  |           | 3,333  |  |                     |   | 3,240  |       | 
|                                                |  |                               |  | Term Loan (9.67% cash, 5.50% ETP, Due 4/1/15)        |  |           | 2,667  |  |                     |   | 2,608  |       | 
|GenturaDx, Inc. (2)                             |  | Biotechnology                 |  | Term Loan (11.25% cash, 3.00% ETP, Due 4/1/14)       |  |           | 1,824  |  |                     |   | 1,800  |       | 
|N30 Pharmaceuticals, LLC (2)                    |  | Biotechnology                 |  | Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)       |  |           | 2,500  |  |                     |   | 2,447  |       | 
|                                                |  |                               |  | Term Loan (11.25% cash, 3.00% ETP, Due 7/1/15)       |  |           | 2,500  |  |                     |   | 2,413  |       | 
|Pharmasset, Inc. (2)(5)                         |  | Biotechnology                 |  | Term Loan (12.50% cash, Due 10/1/12)                 |  |           | 1,111  |  |                     |   | 1,107  |       | 
|Revance Therapeutics, Inc. (2)                  |  | Biotechnology                 |  | Convertible Note (8.00% cash, Due 2/10/13)           |  |           | 62     |  |                     |   | 66     |       | 
|Sunesis Pharmaceuticals, Inc. (2)(5)            |  | Biotechnology                 |  | Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)       |  |           | 2,000  |  |                     |   | 1,943  |       | 
|Supernus Pharmaceuticals, Inc. (2)              |  | Biotechnology                 |  | Term Loan (11.00% cash, 3.00% ETP, Due 8/1/14)       |  |           | 3,000  |  |                     |   | 2,972  |       | 
|                                                |  |                               |  | Term Loan (11.00% cash, 2.50% ETP, Due 1/1/15)       |  |           | 7,000  |  |                     |   | 6,902  |       | 
|Tranzyme, Inc. (2)(5)                           |  | Biotechnology                 |  | Term Loan (10.75% cash, 4.00% ETP, Due 1/1/14)       |  |           | 4,104  |  |                     |   | 4,088  |       | 
|Xcovery Holding Company, LLC (2)                |  | Biotechnology                 |  | Term Loan (12.00% cash, Due 10/1/13)                 |  |           | 1,444  |  |                     |   | 1,440  |       | 
|                                                |  |                               |  | Term Loan (12.00% cash, Due 7/1/14)                  |  |           | 1,500  |  |                     |   | 1,480  |       | 
|OraMetrix, Inc. (2)                             |  | Medical Device                |  | Term Loan (11.50% cash, 3.00% ETP, Due 4/1/14)       |  |           | 4,340  |  |                     |   | 4,282  |       | 
|PixelOptics, Inc. (2)                           |  | Medical Device                |  | Term Loan (10.75% cash, 3.00% ETP, Due 11/1/14)      |  |           | 10,000 |  |                     |   | 9,921  |       | 
|Tengion, Inc. (2)(5)                            |  | Medical Device                |  | Term Loan (11.75% cash, Due 1/1/14)                  |  |           | 5,000  |  |                     |   | 4,958  |       | 
|ViOptix, Inc. (2)                               |  | Medical Device                |  | Term Loan (13.55% cash,
    Due 5/1/12)              |  |           | 418    |  |                     |   | 417    |       | 
|Total Debt
    Investments — Life Science       |  |                               |  |                                                      |  |           | 59,792 |  |                     |   | 59,135 |      
|Debt Investments —
    Technology — 34.2% (8)   |  |                               |  |                                                      |  |           |        |  |                     |   |       
|OpenPeak, Inc. (2)                              |  | Communications                |  | Term Loan (11.86% cash, Due 12/1/13)                 |  |           | 5,486  |  |                     |   | 5,431  |       | 
|Starcite, Inc. (2)                              |  | Consumer-related Technologies |  | Term Loan (12.05% cash, 10.00% ETP, Due 9/1/12)      |  |           | 1,225  |  |                     |   | 1,225  |       | 
|Tagged, Inc. (2)                                |  | Consumer-related Technologies |  | Term Loan (12.78% cash, Due 5/1/12)                  |  |           | 343    |  |                     |   | 343    |       | 
|                                                |  |                               |  | Term Loan (11.46% cash, Due 8/1/12)                  |  |           | 195    |  |                     |   | 194    |       | 
|Xtera Communications, Inc.                      |  | Semiconductors                |  | Term Loan (11.50% cash, Due 12/1/14)                 |  |           | 10,000 |  |                     |   | 9,814  |       | 
|                                                |  |                               |  | Term Loan (11.50% cash, Due 7/1/15)                  |  |           | 2,000  |  |                     |   | 1,951  |       | 
|Vette Corp. (2)                                 |  | Data Storage                  |  | Term Loan (11.75% cash, Due 7/1/14)                  |  |           | 5,000  |  |                     |   | 4,937  |       | 
|IntelePeer, Inc. (2)                            |  | Networking                    |  | Term Loan (12.43% cash, Due 4/1/12)                  |  |           | 139    |  |                     |   | 139    |       | 
|                                                |  |                               |  | Term Loan (12.33% cash, Due 6/1/12)                  |  |           | 214    |  |                     |   | 214    |       | 
|                                                |  |                               |  | Term Loan (12.33% cash, Due 10/1/12)                 |  |           | 573    |  |                     |   | 570    |       | 
|Construction Software Technologies, Inc. (2)    |  | Software                      |  | Term Loan (11.75% cash,
    4.00% ETP, Due 12/1/14)  |  |           | 4,000  |  |                     |   | 3,947  |       | 
|                                                |  |                               |  | Term Loan (11.75% cash, 5.00% ETP, Due 6/1/14)       |  |           | 2,000  |  |                     |   | 1,972  |       | 
|Courion Corporation (2)                         |  | Software                      |  | Term Loan (11.45% cash, Due 9/1/14)                  |  |           | 7,000  |  |                     |   | 6,904  |       | 
|Seapass Solutions, Inc. (2)                     |  | Software                      |  | Term Loan (11.75% cash, 5.00% ETP, Due 11/1/14)      |  |           | 5,000  |  |                     |   | 4,933  |       | 
|StreamBase Systems, Inc. (2)                    |  | Software                      |  | Term Loan (12.51% cash, Due 11/1/13)                 |  |           | 2,816  |  |                     |   | 2,787  |       | 
|                                                |  |                               |  | Term Loan (12.50% cash,
    Due 6/1/14)              |  |           | 896    |  |                     |   | 884    |       | 
|Total Debt
    Investments — Technology         |  |                               |  |                                                      |  |           | 46,245 |  |                     |   | 44,448 |      
|Debt Investments —
    Cleantech — 21.8% (8)    |  |                               |  |                                                      |  |           |        |  |                     |   |        |      
|Cereplast, Inc. (2)(5)                          |  | Waste Recycling               |  | Term Loan (12.00% cash, Due 4/1/14)                  |  |           | 2,356  |  |                     |   | 2,313  |       | 
|                                                |  |                               |  | Term Loan (12.00% cash, Due 6/1/14)                  |  |           | 2,500  |  |                     |   | 2,451  |       | 
|Aurora Algae, Inc. (2)                          |  | Energy Efficiency             |  | Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)       |  |           | 2,500  |  |                     |   | 2,476  |       | 
|Enphase Energy, Inc. (2)                        |  | Energy Efficiency             |  | Term Loan (12.60% cash, Due 10/1/13)                 |  |           | 5,342  |  |                     |   | 5,286  |       | 
|                                                |  |                               |  | Term Loan (10.75% cash, Due 4/1/15)                  |  |           | 2,000  |  |                     |   | 1,972  |       | 
|                                                |  |                               |  | Term Loan (10.75% cash, Due 4/1/15)                  |  |           | 3,000  |  |                     |   | 2,945  |       | 
|Satcon Technology Corporation (2)(5)            |  | Energy Efficiency             |  | Term Loan (12.58% cash, Due 1/1/14)                  |  |           | 7,882  |  |                     |   | 7,740  |       | 
|Tigo Energy, Inc. (2)                           |  | Energy Efficiency             |  | Term Loan (11.00% cash,
    Due 8/1/14)              |  |           | 3,500  |  |                     |   | 3,371  |       | 
|Total Debt Investments —
    Cleantech          |  |                               |  |                                                      |  |           |        |  |                     |   | 28,554 |       | 



See Notes to Consolidated Financial Statements



77







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of InvestmentsDecember 31, 2011 — (Continued)(In thousands)



|                                                                       |  |                               |  |                                                     |  | Principal |        |  | Cost of             |  |         | Fair  | 
|---------------------------------------------------------------------- |  | ----------------------------- |  | --------------------------------------------------- |  | --------- | ------ |  | ------------------- |  | ------- | ----- | 
|Portfolio
    Company (1)                                              |  | Sector                        |  | Type
    of Investment (3)(4)(7)                    |  | Amount    |        |  | Investments
    (6) |  |         | Value | 
|Debt Investments —
    Healthcare information and services — 31.9% (8) |  |                               |  |                                                     |  |           |        |  |                     |  |         |      
|BioScale, Inc. (2)                                                     |  | Diagnostics                   |  | Term Loan (12.00% cash, Due 8/1/12)                 |  |           | 962    |  |                     |  | 960     |       | 
|                                                                       |  |                               |  | Term Loan (11.51% cash, Due 1/1/14)                 |  |           | 5,000  |  |                     |  | 4,953   |       | 
|Precision Therapeutics, Inc.                                           |  | Diagnostics                   |  | Term Loan (10.25% cash, Due 12/1/14)                |  |           | 7,000  |  |                     |  | 6,958   |       | 
|Radisphere National Radiology Group, Inc.
    (2)                      |  | Diagnostics                   |  | Term Loan (12.75% cash, Due 1/1/14)                 |  |           | 8,546  |  |                     |  | 8,476   |       | 
|Recondo Technology, Inc. (2)                                           |  | Software                      |  | Term Loan (11.50% cash, 3.00% ETP, Due 4/1/15)      |  |           | 2,000  |  |                     |  | 1,927   |       | 
|Aperio Technologies, Inc.                                              |  | Other Healthcare              |  | Term Loan (9.64% cash, 5.00% ETP, Due 5/1/15)       |  |           | 5,000  |  |                     |  | 4,937   |       | 
|Patientkeeper, Inc.                                                    |  | Other Healthcare              |  | Term Loan (10.50% cash, 2.00% ETP, Due 12/1/14)     |  |           | 5,500  |  |                     |  | 5,257   |       | 
|Singulex, Inc. (2)                                                     |  | Other Healthcare              |  | Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14)      |  |           | 2,736  |  |                     |  | 2,709   |       | 
|                                                                       |  |                               |  | Term Loan (11.00% cash, 3.00% ETP, Due 3/1/14)      |  |           | 1,824  |  |                     |  | 1,806   |       | 
|Talyst, Inc. (2)                                                       |  | Other Healthcare              |  | Term Loan (12.10% cash, 5.00% ETP, Due 12/1/13)     |  |           | 1,765  |  |                     |  | 1,739   |       | 
|                                                                       |  |                               |  | Term Loan (12.05% cash,
    5.00% ETP, Due 12/1/13) |  |           | 1,764  |  |                     |  | 1,736   |       | 
|Total Debt
    Investment — Healthcare information and services        |  |                               |  |                                                     |  |           | 41,458 |  |                     |  | 41,458  |      
|Total Debt Investments                                                 |  |                               |  |                                                     |  |           |        |  |                     |  | 176,049 |       | 
|                                                                       |  |                               |  |                                                     |  |           |        |  |                     |  |         |       | 
|Warrant Investments —3.2%
    (8)                                      |  |                               |  |                                                     |  |           |        |  |                     |  |         |       | 
|Warrants — Life
    Science —0.9% (8)                                  |  |                               |  |                                                     |  |           |        |  |                     |  |         |       | 
|ACT Biotech Corporation (2)                                            |  | Biotechnology                 |  | 1,232,562 Preferred Stock Warrants                  |  |           | —      |  |                     |  | 71      |       | 
|Ambit Biosciences, Inc. (2)                                            |  | Biotechnology                 |  | 1,075,083 Preferred Stock Warrants                  |  |           | —      |  |                     |  | 143     |       | 
|Anacor Pharmaceuticals, Inc. (2)(5)                                    |  | Biotechnology                 |  | 56,508 Common Stock Warrants                        |  |           | —      |  |                     |  | 67      |       | 
|Anesiva, Inc. (2)(5)                                                   |  | Biotechnology                 |  | 198,898 Common Stock Warrants                       |  |           | —      |  |                     |  | 18      |       | 
|GenturaDx, Inc. (2)                                                    |  | Biotechnology                 |  | 1,161,290 Preferred Stock Warrants                  |  |           | —      |  |                     |  | 63      |       | 
|N30 Pharmaceuticals, LLC (2)                                           |  | Biotechnology                 |  | 2,142 Preferred Stock Warrants                      |  |           | —      |  |                     |  | 122     |       | 
|Novalar Pharmaceuticals, Inc. (2)                                      |  | Biotechnology                 |  | 84,845 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 69      |       | 
|Revance Therapeutics, Inc. (2)                                         |  | Biotechnology                 |  | 199,470 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 224     |       | 
|Sunesis Pharmaceuticals, Inc. (2)(5)                                   |  | Biotechnology                 |  | 77,220 Common Stock Warrants                        |  |           | —      |  |                     |  | 9       |       | 
|Supernus Pharmaceuticals, Inc. (2)                                     |  | Biotechnology                 |  | 168,333 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 93      |       | 
|Tranzyme, Inc. (2) (5)                                                 |  | Biotechnology                 |  | 14,959 Common Stock Warrants                        |  |           | —      |  |                     |  | 1       |       | 
|EnteroMedics, Inc. (2)(5)                                              |  | Medical Device                |  | 141,026 Common Stock Warrants                       |  |           | —      |  |                     |  | 347     |       | 
|OraMetrix, Inc. (2)                                                    |  | Medical Device                |  | 649,878 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 78      |       | 
|PixelOptics, Inc. (2)                                                  |  | Medical Device                |  | 381,612 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 96      |       | 
|Tengion, Inc. (2)(5)                                                   |  | Medical Device                |  | 81,608 Common Stock Warrants                        |  |           | —      |  |                     |  | 62      |       | 
|ViOptix, Inc. (2)                                                      |  | Medical Device                |  | 375,763 Preferred Stock
    Warrants                |  |           | —      |  |                     |  | 13      |       | 
|Total Warrants —
    Life Science                                      |  |                               |  |                                                     |  |           |        |  |                     |  | 1,476   |       | 
|Warrants —
    Technology — 1.5% (8)                                   |  |                               |  |                                                     |  |           |        |  |                     |  |         |      
|OpenPeak, Inc. (2)                                                     |  | Communications                |  | 18,997 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 89      |       | 
|Everyday Health, Inc. (2)                                              |  | Consumer-related Technologies |  | 65,674 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 69      |       | 
|SnagAJob.com, Inc. (2)                                                 |  | Consumer-related Technologies |  | 365,396 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 23      |       | 
|Tagged, Inc. (2)                                                       |  | Consumer-related Technologies |  | 168,909 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 17      |       | 
|Xtera Communications, Inc.                                             |  | Semiconductors                |  | 983,607 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 206     |       | 
|Vette Corp. (2)                                                        |  | Data Storage                  |  | 509,099 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 75      |       | 
|XIOtech, Inc. (2)                                                      |  | Data Storage                  |  | 2,217,979 Preferred Stock Warrants                  |  |           | —      |  |                     |  | 22      |       | 
|Cartera Commerce, Inc. (2)                                             |  | Internet and media            |  | 90,909 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 16      |       | 
|Grab Networks, Inc. (2)                                                |  | Networking                    |  | 793,681 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 74      |       | 
|IntelePeer, Inc. (2)                                                   |  | Networking                    |  | 141,549 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 39      |       | 
|Motion Computing, Inc. (2)                                             |  | Networking                    |  | 260,707 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 7       |       | 
|Impinj, Inc. (2)                                                       |  | Semi-conductor                |  | 109,362 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 7       |       | 
|Clarabridge, Inc. (2)                                                  |  | Software                      |  | 104,503 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 28      |       | 
|Construction Software Technologies, Inc. (2)                           |  | Software                      |  | 196,226 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 45      |       | 
|Courion Corporation (2)                                                |  | Software                      |  | 559,428 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 85      |       | 
|DriveCam, Inc. (2)                                                     |  | Software                      |  | 71,639 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 20      |       | 
|Netuitive, Inc. (2)                                                    |  | Software                      |  | 168,796 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 27      |       | 
|Seapass Solutions, Inc.  (2)                                           |  | Software                      |  | 67,631 Preferred Stock Warrants                     |  |           | —      |  |                     |  | 43      |       | 
|StreamBase Systems, Inc. 
    (2)                                      |  | Software                      |  | 235,416 Preferred Stock
    Warrants                |  |           | —      |  |                     |  | 67      |       | 
|Total Warrants —
    Technology                                        |  |                               |  |                                                     |  |           |        |  |                     |  | 959     |       | 



See Notes to Consolidated Financial Statements



78







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of InvestmentsDecember 31, 2011 — (Continued)(In thousands)



|                                                              |  |                               |       |                                      |   | Principal |         |  | Cost of             |        |         | Fair  |      
|------------------------------------------------------------- |  | ----------------------------- | ----- | ------------------------------------ | - | --------- | ------- |  | ------------------- | ------ | ------- | ----- | -----
|Portfolio
    Company (1)                                     |  | Sector                        |       | Type
    of Investment (3)(4)(7)     |   | Amount    |         |  | Investments
    (6) |        |         | Value |      
|Warrants —
    Cleantech — 0.2% (8)                           |  |                               |       |                                      |   |           |         |  |                     |        |         |      
|Cereplast, Inc. (2)(5)                                        |  | Waste Recycling               |       | 140,000 Common Stock Warrants        |   |           | —       |  |                     |        | 112     |       |      
|Enphase Energy, Inc. (2)                                      |  | Energy Efficiency             |       | 1,470,589 Preferred Stock Warrants   |   |           | —       |  |                     |        | 175     |       |      
|Satcon Technology Corporation (2)(5)                          |  | Energy Efficiency             |       | 493,097 Common Stock Warrants        |   |           | —       |  |                     |        | 285     |       |      
|Tigo Energy, Inc. (2)                                         |  | Energy Efficiency             |       | 190,901 Preferred Stock
    Warrants |   |           | —       |  |                     |        | 101     |       |      
|Total Warrants —
    Cleantech                                |  |                               |       |                                      |   |           |         |  |                     |        | 673     |       |      
|Warrants —
    Healthcare information and services — 0.6% (8) |  |                               |       |                                      |   |           |         |  |                     |        |         |      
|BioScale, Inc. (2)                                            |  | Diagnostics                   |       | 315,618 Preferred Stock Warrants     |   |           | —       |  |                     |        | 54      |       |      
|Precision Therapeutics, Inc.                                  |  | Diagnostics                   |       | 561,409 Preferred Stock Warrants     |   |           | —       |  |                     |        | 73      |       |      
|Radisphere National Radiology Group, Inc.
    (2)             |  | Diagnostics                   |       | 248,788 Preferred Stock Warrants     |   |           | —       |  |                     |        | 167     |       |      
|Recondo Technology, Inc. (2)                                  |  | Software                      |       | 280,000 Preferred Stock Warrants     |   |           | —       |  |                     |        | 47      |       |      
|Aperio Technologies, Inc.                                     |  | Other Healthcare              |       | 197,473 Preferred Stock Warrants     |   |           | —       |  |                     |        | 34      |       |      
|Patientkeeper, Inc.                                           |  | Other Healthcare              |       | 396,410 Preferred Stock Warrants     |   |           | —       |  |                     |        | 269     |       |      
|Singulex, Inc.  (2)                                           |  | Other Healthcare              |       | 259,576 Preferred Stock Warrants     |   |           | —       |  |                     |        | 39      |       |      
|Talyst, Inc.  (2)                                             |  | Other Healthcare              |       | 300,360 Preferred Stock
    Warrants |   |           | —       |  |                     |        | 100     |       |      
|Total Warrants —
    Healthcare information and services      |  |                               |       |                                      |   |           | 783     |  |                     |        | 749     |      
|Total
    Warrants                                            |  |                               |       |                                      |   |           |         |  |                     |        | 3,891   |       |      
|Equity — 0.5% (8)                                             |  |                               |       |                                      |   |           |         |  |                     |        |         |       |      
|Insmed Incorporated (2)(5)                                    |  | Biotechnology                 |       | 33,208 Common Stock                  |   |           | —       |  |                     |        | 227     |       |      
|Overture Networks Inc. (2)                                    |  | Communications                |       | 386,191 Preferred Stock              |   |           | —       |  |                     |        | 482     |       |      
|Active Networks (2)(5)                                        |  | Consumer-related Technologies |       | 128 Common Stock                     |   |           | —       |  |                     |        | 2       |       |      
|Total
    Equity                                              |  |                               |       |                                      |   |           |         |  |                     |        | 711     |       |      
|Total
    Portfolio Investment Assets — 137.1% (8)            |  |                               |       |                                      |   | $         | 180,651 |  |                     | $      | 178,013 |      
|Short Term
    Investments — Money Market Funds — 10.4% (8)   |  |                               |       |                                      |   |           |         |  |                     |        |         |      
|Blackrock Liquid Fed Funds Institutional
    (Fund #30)       |  | $                             | 9,861 |                                      |   | $         | 9,861   | 
|First American Prime Obligations Fund (Class D)               |  |                               |       |                                      |   |           |         |  | 2,966               |        |         |       | 2,966
|Fidelity
    Prime Money Market (Class I Fund #690)           |  |                               |       |                                      |   | 691       |         |  |                     | 691    |        
|Total
    Short Term Investments — Money Market Funds         |  |                               |       |                                      | $ | 13,518    |         |  | $                   | 13,518 |        

_____________________________



| | (1) | All of our investments are in entities which are domiciled in
                                                            the United States or the company’s principal place of business
                                                            is in the United States.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Has been pledged as collateral under the Credit Facilities.
| | --- | -----------------------------------------------------------



| | (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 investment, such as deferred interest,
                                                            commitment fees or prepayment fees. All debt investments are at fixed
                                                            rates for the term of the loan, unless otherwise indicated. For each
                                                            debt investment, we have provided the current interest rate in effect
                                                            as of December 31, 2011.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Portfolio company is a public company.
| | --- | --------------------------------------



| | (6) | For debt investments, represents principal balance less unearned
                                                            income.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Preferred and common stock warrants and equity interests are non-income
                                                            producing.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Value as a percent of net assets.
| | --- | ---------------------------------



See Notes to Consolidated Financial Statements



79







Horizon Technology
Finance Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



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 (“1940 Act”). In addition, for tax purposes,
the Company has elected to be treated as a regulated investment company (“RIC”) as defined in Subtitle A, Chapter 1,
under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, the Company is not subject
to federal income tax on the portion of its taxable income and capital gains the Company distributes to the stockholders. The
Company primarily makes secured loans to development-stage companies in the technology, life science, healthcare information and
services and cleantech industries.



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 with 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 the sole
equity member. Credit I is a special purpose bankruptcy remote entity and is reported herein as a wholly owned subsidiary of the
Company. Credit I is a separate legal entity from the Company and CHF and the assets conveyed to Credit I are not available to
creditors of the Company or any other entity other than Credit I’s lenders.



Horizon Credit II
LLC (“Credit II”) was formed as a Delaware limited liability company on June 28, 2011, with the Company as the 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’s
investment strategy is to maximize the investment portfolio’s return by generating current income from the debt investments
made and the capital appreciation from the warrants received when making such debt investments. The Company has entered into an
investment management agreement (the “Investment Management Agreement”) with Horizon Technology Finance Management
LLC (“HTFM” or the “Advisor”), under which the Advisor will manage the day-to-day operations of, and provide
investment advisory services to, the Company.





80









Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



Note 2.  Basis of Presentation and Significant
Accounting Policies



Election to become a Business Development Company
and Basis of Financial Statement Presentation



The results of operations
for the years ended December 31, 2012 and 2011 reflect the Company’s results as a BDC under the 1940 Act, whereas the results
of operations for 2010 are divided into two periods. The period from January 1, 2010 through October 28, 2010, reflects
the Company’s results prior to operating as a BDC under the 1940 Act. The period from October 29, 2010 through December 31,
2010, reflects the Company’s results as a BDC under the 1940 Act. Accounting principles used in the preparation of the consolidated
financial statements beginning October 29, 2010 are different than those of prior periods and, therefore, the financial position
and results of operations of these periods are not directly comparable. The primary differences in accounting principles relate
to the carrying value of loan investments and classification of hedging activity — see corresponding sections below
for further discussion.



Cumulative Effect of Business Development
Company Election



|Effect of recording loans at fair value  |  | $ | (348  | )
|---------------------------------------- |  | - | ----- | -
|Elimination of allowance for loan losses |  |   | 1,185 |  
|Total cumulative effect of BDC election  |  | $ | 837   |  



In addition, the
balance of the unrealized loss on interest rate swaps included in accumulated other comprehensive loss at October 28, 2010
of $359 was reclassified to Paid-In Capital in Excess of Par and subsequent to October 28, 2010, changes in the fair value
of the interest rate swaps are recorded in operations.



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. 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 permitted under
Regulation S-X and the AICPA Audit and Accounting Guide for Investment Companies, the Company will generally not consolidate
its investment in a company other than 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.



81









Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



Fair Value



The Company applies
fair value to substantially all of its investments 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.



In May 2011, the
FASB issued Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements
in U.S. GAAP and IFRSs, (ASU 2011-04). ASU 2011-04 converges the fair value measurement guidance in U.S. GAAP and IFRSs. Some
of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular
principle in existing guidance. In addition, ASU 2011-04 requires additional fair value disclosures. The Company has adopted ASU
2011-04 and included additional disclosures in Note 5.



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



Investments



Investments are recorded
at fair value. The Company’s board of directors (“Board”) determines the fair value of its portfolio investments.
Prior to the Company’s election to become a BDC, loan investments were stated at current unpaid principal balances adjusted
for the allowance for loan losses, unearned income and any unamortized deferred fees or costs. The Company has the intent to hold
its loans for the foreseeable future or until maturity or payoff.



Interest on loan
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 loan becomes
90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the loan
is placed on non-accrual status and the recognition of interest income is discontinued. Interest payments received on loans that
are on non-accrual status are treated as reductions of principal until the principal is repaid. As of December 31, 2012, there
were three investments on non-accrual status with an approximate cost of $12.9 million and approximate fair value of $4.9 million.
There were no loans on non-accrual status as of December 31, 2011.



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 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. Loan 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 loan. Fees for counterparty
loan commitments with multiple loans are allocated to each loan based upon each loan’s relative fair value. When a loan
is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the loan is returned
to accrual status.



82









Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



Certain loan agreements
also require the borrower to make an end-of-term payment (“ETP”), that is accrued into interest income over the life
of the loan 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 loan income on the grant date. The unearned income is recognized as interest income
over the contractual life of the related loan in accordance with the Company’s income recognition policy. Subsequent to
loan 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.



Allowance for Loan Losses



Prior to the Company’s
election to become a BDC, the allowance for loan losses represented management’s estimate of probable loan losses inherent
in the loan portfolio as of the balance sheet date. The estimation of the allowance was based on a variety of factors, including
past loan loss experience, the current credit profile of the Company’s borrowers, adverse situations that had occurred that
may affect individual borrowers’ ability to repay, the estimated value of underlying collateral and general economic conditions.
The loan portfolio is comprised of large balance loans that are evaluated individually for impairment and are risk-rated based
upon a borrower’s individual situation, current economic conditions, collateral and industry-specific information that management
believes is relevant in determining the potential occurrence of a loss event and in measuring impairment. The allowance for loan
losses was sensitive to the risk rating assigned to each of the loans and to corresponding qualitative loss factors that the Company
used to estimate the allowance. Those factors were applied to the outstanding loan balances in estimating the allowance for loan
losses. If necessary, based on performance factors related to specific loans, specific allowances for loan losses were established
for individual impaired loans. Increases or decreases to the allowance for loan losses were charged or credited to current period
earnings through the provision (credit) for loan losses. Amounts determined to be uncollectible were charged against the allowance
for loan losses, while amounts recovered on previously charged-off loans increased the allowance for loan losses.



A loan was considered
impaired when, based on current information and events, it was probable that the Company was unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment included payment status, collateral value and the probability of collecting scheduled principal and interest
payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as
impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest
owed. Impairment was measured on a loan by loan basis by either the present value of expected future cash flows discounted at
the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the
loan was collateral dependent.



Impaired loans also
included loans modified in troubled debt restructurings where concessions had been granted to borrowers experiencing financial
difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of
principal, forbearance or other actions intended to maximize collection.



83









Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



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 credit
facility. The unamortized balance of debt issuance costs as of December 31, 2012 and 2011, included in other assets, was $3.7
million and $1.1 million, respectively. The accumulated amortization balances as of December 31, 2012 and 2011 was $0.6 million
and $0.1 million, respectively. The amortization expense for the years ended December 31, 2012 and 2011, the period from October 29,
2010 to December 31, 2010, and the period from January 1, 2010 to October 28, 2010 relating to debt issuance costs
was $0.5 million, $0.3 million, $0.2 million and $1.0 million, respectively.



Income Taxes



The Company 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 timely distribute to its stockholders at least 90% of investment company taxable income, as defined
by the Code, for each 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 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
dividend 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 dividend distributions,
the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the years ended December
31, 2012 and 2011, $0.2 million and $0.3 million was recorded for U.S. federal excise tax, respectively. For the year ended December
31, 2010, no amount 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. There were no material uncertain tax positions
at December 31, 2012 and 2011. The 2011, 2010, and 2009 tax years remain subject to examination by U.S. federal and state
tax authorities.



Prior to the Company’s
election to become a BDC, the Company was a limited liability company treated as a partnership for U.S. federal income tax
purposes and, as a result, all items of income and expense were passed through to, and are generally reportable on, the tax returns
of the respective members of the limited liability company. Therefore, no federal or state income tax provision has been recorded
for the period from January 1, 2010 to October 28, 2010 and the years ended December 31, 2009 and 2008.



Dividends



Dividends to common
stockholders are recorded on the declaration date. The amount to be paid out as a dividend 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 dividend,
then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically
reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividend. 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 in connection with the obligations under the plan.



84









Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)





Interest Rate Swaps and Hedging Activities



The Company entered
into interest rate swap agreements to manage interest rate risk. The Company does not hold or issue interest rate swap agreements
or other derivative financial instruments for speculative purposes.



Subsequent to the
Company’s election to become a BDC, the interest rate swaps are recorded at fair value with changes in fair value reflected
in net unrealized appreciation or depreciation of investments during the reporting period. The Company records the accrual of
periodic interest settlements of interest rate swap agreements in net unrealized appreciation or depreciation of investments and
subsequently records the amount as a net realized gain or loss on investments on the interest settlement date. Cash payments received
or paid for the termination of an interest rate swap agreement would be recorded as a realized gain or loss upon termination in
the consolidated statements of operations.



Prior to the Company’s
election to become a BDC, the Company recognized its interest rate swap derivatives on the balance sheet as either an asset or
liability measured at fair value. Changes in the derivatives’ fair value were recognized in income unless specific hedge
accounting criteria were met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset
related results on the hedged item in the statement of operations and required the Company to formally document, designate and
assess effectiveness of transactions that receive hedge accounting. Derivatives that are not hedges are adjusted to fair value
through earnings. If the derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in fair value of hedged assets, liabilities, or firm commitments through earnings, or recognized
in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s
change in fair value, if any, would have been recognized as interest expense.



Transfers of Financial Assets



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.



Reclassifications



Certain 2011 amounts
were reclassified to conform with the 2012 financial statement presentation. Such reclassifications had no impact on the 2011
Statements of Operations.



Note 3.  Related Party Transactions



Investment Management Agreement



On October 28,
2010, the Company entered into the Investment Management Agreement with the Advisor, under which the Advisor manages the day-to-day
operations of, and provides investment advisory services to, the Company. Under the terms of the Investment Management Agreement,
the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the
investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments
the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors
and administers the investments the Company makes, including the exercise of any voting or consent rights.



85









Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



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 SEC. The Advisor receives fees for providing services, consisting of two components, a base management fee and an incentive
fee.



The base management
fee under the Investment Management Agreement is calculated at an annual rate of 2.00% of the Company’s gross assets, 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. The management fee payable as of December 31, 2012 and 2011 was $0.4 million and $0.3
million, respectively. The base management fee expense was $4.2 million, $4.2 million and $0.7 million for the years ended December
31, 2012 and 2011, and the period from October 29, 2010 through December 31, 2010, respectively.



The incentive fee has two parts, as follows:



The first
part 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 operating 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 that we have not yet received in cash. The incentive fee with respect to the pre-incentive fee net 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 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 a 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 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.



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 aggregate 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 through the end of such year, less all previous amounts
paid in respect of the capital gain incentive fee.



86









Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)





The performance based
incentive fee expense was $2.8 million, $3.0 million and $0.4 million for the years ended December 31, 2012 and 2011, and the
period from October 29, 2010 through December 31, 2010, respectively. The incentive fee payable as of December 31, 2012 and 2011
was $0.9 million and $1.8 million, respectively. The entire incentive fee payable as of December 31, 2012 represents part one
of the incentive fee. The incentive fee payable as of December 31, 2011 includes $1.4 million for part one and $0.4 million for
part two of the incentive fee.



Prior to the Company’s
election to become a BDC, the Advisor served as the Advisor for CHF under a Management and Services Agreement which provided for
management fees to be paid monthly at a rate of 2.00% per annum of the gross investment assets of CHF. Total management fee expense
under this agreement was $2.0 million for the period from January 1, 2010 to October 28, 2010.



Administration Agreement



The Company entered
into an Administration Agreement with the Advisor to provide administrative services to the Company. For providing these services,
facilities and personnel, the Company will reimburse 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.
For the years ended December 31, 2012 and 2011, and for the period from October 29, 2010 to December 31, 2010, $1.1
million, $1.2 million and $0.1 million were charged to operations under this agreement, respectively.



Note 4.  Investments



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



|                                |  | December 31, 2012 |         |  | December 31, 2011 |  
|------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                |  | Cost              |         |  | Fair Value        |  
|Money market funds              |  | $                 | 2,560   |  |                   | $
|Non-affiliate investments       |  |                   |         |  |                   |  
|Debt                            |  | $                 | 228,081 |  |                   | $
|Warrants                        |  |                   | 5,715   |  |                   |  
|Other Investments               |  |                   | 4,880   |  |                   |  
|Equity                          |  |                   | 709     |  |                   |  
|Total non-affiliate investments |  | $                 | 239,385 |  |                   | $



87









Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



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



|                                    |  | December 31, 2012 |         |  | December 31, 2011 |  
|----------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                    |  | Cost              |         |  | Fair Value        |  
|Life Science                        |  |                   |         |  |                   |  
|Biotechnology                       |  | $                 | 40,358  |  |                   | $
|Medical Device                      |  |                   | 24,296  |  |                   |  
|Technology                          |  |                   |         |  |                   |  
|Consumer-Related Technologies       |  |                   | 118     |  |                   |  
|Networking                          |  |                   | 46      |  |                   |  
|Software                            |  |                   | 55,220  |  |                   |  
|Data Storage                        |  |                   | 4,901   |  |                   |  
|Internet and Media                  |  |                   | 10,056  |  |                   |  
|Communications                      |  |                   | 571     |  |                   |  
|Semiconductors                      |  |                   | 26,128  |  |                   |  
|Power Management                    |  |                   | 15,875  |  |                   |  
|Cleantech                           |  |                   |         |  |                   |  
|Energy Efficiency                   |  |                   | 18,914  |  |                   |  
|Waste Recycling                     |  |                   | 3,744   |  |                   |  
|Alternative Energy                  |  |                   | 8,680   |  |                   |  
|Healthcare Information and Services |  |                   |         |  |                   |  
|Diagnostics                         |  |                   | 21,952  |  |                   |  
|Other Healthcare Related Services   |  |                   | 3,067   |  |                   |  
|Software                            |  |                   | 5,459   |  |                   |  
|Total non-affiliate investments     |  | $                 | 239,385 |  |                   | $



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.
| | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



88







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



| | 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 that have been engaged at the direction of the 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 a valuation policy and a consistently applied
valuation process. This valuation process is conducted at the end of each fiscal quarter, with approximately 25% (based on fair
value) of the Company’s valuation of portfolio companies without readily available market quotations subject to review by
an independent valuation firm.



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 both December 31, 2012 and 2011, the discount rates used ranged from 8% to 25%. Significant
increases (decreases) in this unobservable input would result in a significantly lower (higher) fair value measurements. 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 guideline publicly traded companies
                                                                    within indices similar in nature to the underlying company
                                                                    issuing the warrant. A total of seven such indices were used.
                                                                    The weighted average volatility assumptions used for the warrant
                                                                    valuation at December 31, 2012 and 2011 were 21% and 24%,
                                                                    respectively. Significant increases (decreases) in this unobservable
                                                                    input would result in a significantly higher (lower) fair
                                                                    value investment.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | 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. The risk free
                                                                    rates used for the warrant valuations at December 31, 2012
                                                                    and 2011 ranged from 0.16% to 0.72% and from 0.12% to 0.83%,
                                                                    respectively.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



89







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



| | • | Other adjustments, including
                                                                    a marketability discount on private company warrants, are
                                                                    estimated based on management’s judgment about the general
                                                                    industry environment. The marketability discount used for
                                                                    the warrant valuation at December 31, 2012 and 2011 was 20%.
                                                                    Significant increases (decreases) in this unobservable input
                                                                    would result in significantly lower (higher) fair value measurement.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Historical portfolio experience
                                                                    on cancellations and exercises of our 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. The estimated time to exit
                                                                    used for the warrant valuation at December 31, 2012 and 2011
                                                                    ranged from 1 to 10 years and from 1 to 5 years, respectively.
                                                                    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 with 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. These assets are recorded at fair value on a recurring basis.



90







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



The following table
provides a summary of quantitative information about the Company’s Level 3 fair value measurements of our investments as
of December 31, 2012. In addition to the techniques and inputs noted in the table below, according to our valuation policy we
may also use other valuation techniques and methodologies when determining our fair value measurements. The table below 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.



|                          |  |            |         |  | Valuation Techniques/ |                                               | Unobservable |                             |       | 
|------------------------- |  | ---------- | ------- |  | --------------------- | --------------------------------------------- | ------------ | --------------------------- | ----- | 
|Investment Type           |  | Fair Value |         |  | Methodologies         |                                               | Input        |                             | Range | 
|Debt
    investments      |  | $          | 220,297 |  |                       | Discounted Expected Future Cash
    Flows     |              | Hypothetical Market Yield   |       | 
|                          |  |            |         |  |                       | Multiple Probability Weighted Cash Flow Model |              | Discount Rate               |       | 
|                          |  |            |         |  |                       |                                               |              | Probability Weighting       |       | 
|                          |  |            |         |  |                       |                                               |              |                             |       | 
|Warrant investments       |  |            | 4,914   |  |                       | Black-Scholes Valuation Model                 |              | Price per share             |       | 
|                          |  |            |         |  |                       |                                               |              | Average Industry Volatility |       | 
|                          |  |            |         |  |                       |                                               |              | Marketability Discount      |       | 
|                          |  |            |         |  |                       |                                               |              | Estimated Time to Exit      |       | 
|                          |  |            |         |  |                       |                                               |              |                             |       | 
|Other
    investments     |  |            | 2,100   |  |                       | Multiple Probability Weighted Cash Flow Model |              | Discount Rate               |       | 
|                          |  |            |         |  |                       |                                               |              | Probability Weighting       |       | 
|                          |  |            |         |  |                       |                                               |              |                             |       | 
|Equity
    investments    |  |            | 526     |  |                       | Market Comparable Companies                   |              | Revenue Multiple            |       | 
|Total Level 3 investments |  | $          | 227,837 |  |                       |                                               |              |                             |       | 



Borrowings:  The
carrying amount of borrowings under the Credit Facilities approximates fair value due to the variable interest rate of the Credit
Facilities and are 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 our fixed rate Senior Notes (See Note
6 below) is based on the closing public share price on the date of measurement. At December 31, 2012, the Senior Notes were trading
on the New York Stock Exchange for $25.50 per note, or $33.7 million. Therefore, the Company has categorized this borrowing as
Level 1 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.



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, 2012 and 2011, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the
fair value:



|                    |  | December 31, 2012 |        
|------------------- |  | ----------------- | -------
|                    |  | Total             |        
|Money market funds  |  | $                 | 2,560  
|Debt investments    |  | $                 | 220,297
|Warrant investments |  | $                 | 5,468  
|Other investments   |  | $                 | 2,100  
|Equity investments  |  | $                 | 748    



|                    |  | December 31, 2011 |        
|------------------- |  | ----------------- | -------
|                    |  | Total             |        
|Money market funds  |  | $                 | 13,518 
|Debt investments    |  | $                 | 173,286
|Warrant investments |  | $                 | 4,098  
|Equity investments  |  | $                 | 629    



91







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



The following tables
show a reconciliation of the beginning and ending balances for Level 3 assets:



|                                                                |  | December 31, 2012 |        
|--------------------------------------------------------------- |  | ----------------- | -------
|                                                                |  | Debt Investments  |        
|Level 3 assets, beginning of period                             |  | $                 | 173,286
|Purchase of investments                                         |  |                   | 138,907
|Warrants and equity received and classified as Level 3          |  |                   | —      
|Principal payments received on investments                      |  |                   | (81,383
|Sales of investments                                            |  |                   | —      
|Net realized gain on investments                                |  |                   | —      
|Unrealized (depreciation) appreciation included in
    earnings |  |                   | (7,902 
|Transfer out of Level 3                                         |  |                   | —      
|Transfer from debt to other investments                         |  |                   | (2,000 
|Other                                                           |  |                   | (611   
|Level 3 assets, end of period                                   |  | $                 | 220,297



The Company’s
transfers between levels are recognized at the end of the reporting period. During the year ended December 31, 2012, there were
no transfers between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in two portfolio companies with
a value of $0.3 million that were transferred into Level 2 due to the portfolio companies becoming public companies during the
year ended December 31, 2012. Because the fair value of the portfolio company warrants held are 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, 2012.



|                                                                |  | December 31, 2011 |        
|--------------------------------------------------------------- |  | ----------------- | -------
|                                                                |  | Debt Investments  |        
|Level 3 assets, beginning of period                             |  | $                 | 130,234
|Purchase of investments                                         |  |                   | 97,673 
|Warrants and equity received and classified as Level 3          |  |                   | —      
|Principal payments received on investments                      |  |                   | (51,442
|Proceeds from sale of investments                               |  |                   | —      
|Net realized gain on investments                                |  |                   | —      
|Unrealized (depreciation) appreciation included in
    earnings |  |                   | (2,715 
|Other                                                           |  |                   | (464   
|Level 3 assets, end of period                                   |  | $                 | 173,286



During the year ended
December 31, 2011, there were no transfers between levels.



The change in unrealized
depreciation included in the consolidated statement of operations attributable to Level 3 investments still held at December
31, 2012 includes $7.9 million unrealized depreciation on loans and $0.5 million unrealized depreciation on warrants.



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.



92







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



The fair value amounts
for 2012 and 2011 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.



As of December 31,
2012 and 2011, the recorded book balances equaled fair values of all the Company’s financial instruments, except for the
Company’s Senior 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 loans and by investing in securities with terms that mitigate the Company’s
overall interest rate risk.



Note 6.  Borrowings



A summary of our
borrowings as of December 31, 2012 and 2011 is as follows:



|                    |  | December 31, 2012 |        
|------------------- |  | ----------------- | -------
|                    |  | Total Commitment  |        
|Wells Facility      |  | $                 | 75,000 
|Fortress Facility   |  |                   | 75,000 
|WestLB Facility (2) |  |                   | —      
|Senior Notes        |  |                   | 33,000 
|Total               |  | $                 | 183,000



|                    |  | December 31, 2011 |        
|------------------- |  | ----------------- | -------
|                    |  | Total Commitment  |        
|WestLB Facility (2) |  | $                 | 46,722 
|Wells Facility      |  |                   | 75,000 
|Total               |  | $                 | 121,722








|(1) | Average outstanding is calculated over the period
    for which the borrowings were outstanding.                                                                                                                         
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                          
|(2) | The Company had a revolving credit facility (the “WestLB
    Facility”) with WestLB, AG, New York Branch (“WestLB”) which all obligations were settled and the facility
    was closed during the fourth quarter of 2012.



In accordance with
the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that the asset coverage, as
defined in the 1940 Act, is at least 200% after such borrowings. As of December 31, 2012, the asset coverage for borrowed amounts
was 253%.



The Company entered
into a revolving credit facility (the “Wells Facility”) with Wells Fargo Capital Finance, LLC (“Wells”)
effective July 14, 2011. The Wells Facility has an accordion feature which allows for an increase in the total loan commitment
to $150 million from the current $75 million commitment provided by Wells. The Wells 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 Wells Facility contains
covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the
Wells Facility to certain criteria for qualified loans and includes portfolio company concentration limits as defined in the related
loan agreement. The Wells Facility has a three year revolving term followed by a three year amortization period and matures on
July 14, 2017. The interest rate is based upon the one-month LIBOR plus a spread of 4.00%, with a LIBOR floor of 1.00%. The rate
at December 31, 2012 and 2011 was 5.0%, and the average rate for the years ended December 31, 2012 and 2011 was 5.0%.



93







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



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 “Senior Notes”). The Senior 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 Senior 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 Senior Notes are the Company’s direct unsecured
obligations and rank (i) pari passu with the Company’s future senior unsecured indebtedness; (ii) senior to any of the Company’s
future indebtedness that expressly provides it is subordinated to the Senior Notes; (iii) effectively subordinated to all of the
Company’s 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 (iv) structurally subordinated to all
existing and future indebtedness and other obligations of any of the Company’s subsidiaries. As
of December 31, 2012 the Company was in material compliance with the terms of the Senior Notes.The Senior Notes are
listed on the New York Stock Exchange under the symbol “HTF.”



The Company entered
into a term loan credit facility (the “Fortress Facility”) with Fortress Credit Co LLC (“Fortress”) effective
August 23, 2012. The Fortress Facility is collateralized by all loans and warrants held by Credit III. The Fortress Facility contains
covenants that, among other things, require the Company to maintain a minimum net worth and to restrict 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, has a three-year term subject to two one-year extensions with
a draw period of up to four years. The Fortress Facility requires the payment of an unused line fee of 1.00% annually beginning
October 1, 2012 and has an effective advance rate of approximately 66% against eligible loans. The Fortress Facility generally
bears 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, 2012
was 7.00%, and the average rate for the period within the year ended December 31, 2012, in which the loan was outstanding, was
7.00%.



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.



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



|                                                          |  | Year Ended December 31,
    2012 |        |  | Year Ended December 31,
    2011 |   |        | October 29, 2010 to
    December 31, 2010 | 
|--------------------------------------------------------- |  | -------------------------------- | ------ |  | -------------------------------- | - | ------ | ----------------------------------------- | 
|Net increase in net assets resulting
    from operations  |  | $                                | 3,991  |  |                                  | $ | 10,996 |                                           | 
|Net unrealized depreciation (appreciation) on investments |  |                                  | 8,113  |  |                                  |   | 5,702  |                                           | 
|Other book-tax differences                                |  |                                  | 869    |  |                                  |   | 526    |                                           | 
|Taxable income before deductions
    for distributions    |  | $                                | 12,973 |  |                                  | $ | 17,224 |                                           | 





94







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)





The tax character
of distributions paid are as follows:



|                        |  | Year Ended December 31,
    2012 |        |  | Year Ended December 31,
    2011 |   |       | October 29, 2010 to
    December 31, 2010 | 
|----------------------- |  | -------------------------------- | ------ |  | -------------------------------- | - | ----- | ----------------------------------------- | 
|Ordinary income         |  | $                                | 12,232 |  |                                  | $ | 5,403 |                                           | 
|Long-term capital gains |  |                                  | 3,244  |  |                                  |   | 3,580 |                                           | 
|Total                   |  | $                                | 15,476 |  |                                  | $ | 8,983 |                                           | 



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



|                                       |  | As of December 31,
    2012 |        |   | As of December 31,
    2011 |   |        | As of December 31,
    2010 | 
|-------------------------------------- |  | --------------------------- | ------ | - | --------------------------- | - | ------ | --------------------------- | 
|Undistributed ordinary income          |  | $                           | 6,139  |   |                             | $ | 5,505  |                             | 
|Undistributed long-term gain           |  |                             | 52     |   |                             |   | 3,187  |                             | 
|Unrealized (depreciation) appreciation |  |                             | (8,113 | ) |                             |   | (5,702 | )                           | 
|Total                                  |  | $                           | (1,922 | ) |                             | $ | 2,990  |                             | 



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
dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. In 2012 and 2011 the Company
elected to carry forward taxable income in excess of current year dividend distributions and recorded an excise tax payable of
approximately $0.2 and $0.3 million on approximately $5.9 and $8.5 million of undistributed earnings from operations and capital
gains, respectively. The Company did not make such an election in 2010 and therefore no such payable was recorded.



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 approximately $24.6 million and $22.5 million as of December 31, 2012 and 2011, 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.



Note 9.  Concentrations
of Credit Risk



The Company’s
loan portfolio consists 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.



95







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



The largest loans
may vary from year to year as new loans are recorded and repaid. The Company’s five largest loans represented approximately
23% and 28% of total loans outstanding as of December 31, 2012 and 2011, respectively. No single loan represents more than 10%
of the total loans as of December 31, 2012 and 2011. Loan income, consisting of interest and fees, can fluctuate significantly
upon repayment of large loans. Interest income from the five largest loans accounted for approximately 22%, 21% and 22% of total
loan interest and fee income for the years ended December 31, 2012, 2011 and 2010, respectively.



Note 10.  Interest Rate Swaps and Hedging
Activities



On October 14,
2008, the Company entered into two interest rate swap agreements (collectively, the “Swap”) with WestLB, fixing the
rate of $10 million at 3.58% and $15 million at 3.20% on the first advances of a like amount of variable rate Credit
Facility borrowings. The $15 million interest rate swap expired in October 2010 and the $10 million expired in October
2011. The objective of the Swap was to hedge the risk of changes in cash flows associated with the future interest payments on
the first $25 million of the variable rate Credit Facility debt with a combined notional amount of $25 million.



During the year ended
December 31, 2011, approximately $0.3 million of net unrealized appreciation from the Swap was recorded in the consolidated statement
of operations, and approximately $0.3 million of net realized losses from the Swap was recorded in the consolidated statement
of operations.



During the period
from October 29, 2010 to December 31, 2010, approximately $0.1 million of net unrealized appreciation from the Swap was recorded
in the statement of operations, and approximately $0.1 million of net realized losses from the Swap was recorded in the statement
of operations.



Prior to the Company’s
election to become a BDC, the Swap was designated as a hedging instrument and the Company applied cash flow hedge accounting.
The Swap was recorded in the consolidated statement of assets and liabilities at fair value, and any related increases or decreases
in the fair value were recognized within accumulated other comprehensive income.



Prior to the Company’s
election to become a BDC, the Company assessed the effectiveness of the Swap on a quarterly basis. The Company had considered
the impact of the then current credit crisis in the United States in assessing the risk of counterparty default. As most of the
critical terms of the hedging instruments and hedged items matched, the hedging relationship was considered to be highly effective.
No ineffectiveness on the Swap was recognized during the year ended December 31, 2010.



96







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



Note 11. Dividends and Distributions



The Company’s
dividends and distributions are recorded on the record date. The following table summarizes the Company’s dividend declaration
and distribution activity since inception:



|Date Declared                |  | Record Date |  | Payment Date |  | Amount Per Share |       |  | Cash Distribution |   |        | DRIP Shares Issued |  |  | DRIP Share Value | 
|---------------------------- |  | ----------- |  | ------------ |  | ---------------- | ----- |  | ----------------- | - | ------ | ------------------ |  |  | ---------------- | 
|Year Ended December 31, 2012 |  |             |  |              |  |                  |       |  |                   |   |        |                    |  |  |                  | 
|11/27/12                     |  | 2/21/13     |  | 3/15/13      |  | $                | 0.115 |  |                   | $ | —      |                    |  |  | —                | 
|11/27/12                     |  | 1/18/13     |  | 2/15/13      |  | $                | 0.115 |  |                   | $ | —      |                    |  |  | —                | 
|11/27/12                     |  | 12/20/12    |  | 1/15/13      |  | $                | 0.115 |  |                   | $ | 1,056  |                    |  |  | 2,930            | 
|11/2/12                      |  | 11/16/12    |  | 11/30/12     |  | $                | 0.450 |  |                   | $ | 4,243  |                    |  |  | 4,269            | 
|8/7/12                       |  | 8/17/12     |  | 8/31/12      |  | $                | 0.450 |  |                   | $ | 4,105  |                    |  |  | 11,608           | 
|5/3/12                       |  | 5/17/12     |  | 5/31/12      |  | $                | 0.450 |  |                   | $ | 3,402  |                    |  |  | 2,299            | 
|3/12/12                      |  | 3/23/12     |  | 3/30/12      |  | $                | 0.450 |  |                   | $ | 3,378  |                    |  |  | 3,517            | 
|                             |  |             |  |              |  | $                | 2.145 |  |                   | $ | 16,184 |                    |  |  | 24,623           | 
|Year Ended December 31, 2011 |  |             |  |              |  |                  |       |  |                   |   |        |                    |  |  |                  | 
|                             |  |             |  |              |  |                  |       |  |                   |   |        |                    |  |  |                  | 
|11/8/11                      |  | 11/23/11    |  | 11/30/11     |  | $                | 0.450 |  |                   | $ | 3,281  |                    |  |  | 9,814            | 
|8/9/11                       |  | 8/23/11     |  | 8/30/11      |  | $                | 0.400 |  |                   | $ | 2,836  |                    |  |  | 13,193           | 
|5/10/11                      |  | 5/19/11     |  | 5/26/11      |  | $                | 0.330 |  |                   | $ | 2,190  |                    |  |  | 20,104           | 
|                             |  |             |  |              |  | $                | 1.180 |  |                   | $ | 8,307  |                    |  |  | 43,111           | 
|Year Ended December 31, 2010 |  |             |  |              |  |                  |       |  |                   |   |        |                    |  | 
|12/15/10                     |  | 12/28/10    |  | 12/31/10     |  | $                | 0.220 |  |                   | $ | 1,097  |                    |  |  | 38,297           | 



On March 8, 2013, the Board declared a
monthly dividend of $0.115 per share payable as set forth in the table below.



|Record Dates   |  | Payment Date   |  | Dividends Declared |      
|-------------- |  | -------------- |  | ------------------ | -----
|May 20, 2013   |  | June 17, 2013  |  | $                  | 0.115
|April 18, 2013 |  | May 15, 2013   |  | $                  | 0.115
|March 20, 2013 |  | April 15, 2013 |  | $                  | 0.115



97







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



Note 12.  Financial Highlights



The financial highlights
for the Company are as follows:



|                                                          |  | Year Ended December 31,
    2012 |           |   | Year Ended December 31,
    2011 |   |           | October 29, 2010 to
    December 31, 2010 | 
|--------------------------------------------------------- |  | -------------------------------- | --------- | - | -------------------------------- | - | --------- | ----------------------------------------- | 
|                                                          |  |                                  |           |   |                                  |   |           |                                           | 
|Per share data:                                           |  |                                  |           |   |                                  |   |           |                                           | 
|Net asset value at beginning of period                    |  | $                                | 17.01     |   |                                  | $ | 16.75     |                                           | 
|Net investment income                                     |  |                                  | 1.41      |   |                                  |   | 1.38      |                                           | 
|Realized gain on investments                              |  |                                  | 0.01      |   |                                  |   | 0.81      |                                           | 
|Unrealized (depreciation) appreciation
    on investments |  |                                  | (0.95     | ) |                                  |   | (0.75     | )                                         | 
|Net increase in net assets resulting from operations      |  |                                  | 0.47      |   |                                  |   | 1.44      |                                           | 
|Net dilution from issuance of common stock                |  |                                  | (0.28     | ) |                                  |   | —         |                                           | 
|Issuance of common stock and capital contributions        |  |                                  | —         |   |                                  |   | —         |                                           | 
|Offering costs                                            |  |                                  | —         |   |                                  |   | —         |                                           | 
|Dividends declared                                        |  |                                  | (2.15     | ) |                                  |   | (1.18     | )                                         | 
|Other (3)                                                 |  |                                  | 0.10      |   |                                  |   | —         |                                           | 
|Net asset value at end of
    period                      |  | $                                | 15.15     |   |                                  | $ | 17.01     |                                           | 
|Per share market value, end of period                     |  | $                                | 14.92     |   |                                  | $ | 16.32     |                                           | 
|Total return based on a market value                      |  |                                  | 2.5       | % |                                  |   | 21.2      | %                                         | 
|Shares outstanding at end of period                       |  |                                  | 9,567,225 |   |                                  |   | 7,636,532 |                                           | 
|Ratios to average net assets:                             |  |                                  |           |   |                                  |   |           |                                           | 
|Expenses without incentive fees                           |  |                                  | 8.4       | % |                                  |   | 7.9       | %                                         | 
|Incentive fees                                            |  |                                  | 2.1       | % |                                  |   | 2.3       | %                                         | 
|Total expenses                                            |  |                                  | 10.5      | % |                                  |   | 10.2      | %                                         | 
|Net investment income with incentive fees                 |  |                                  | 8.7       | % |                                  |   | 8.1       | %                                         | 
|Average net asset value                                   |  | $                                | 137,741   |   |                                  | $ | 130,385   |                                           | 








|(1) | Annualized.                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The total return for the years ended December 31, 2012 and 2011,
    and the period ended December 31, 2010, equals the change in the ending market value over the beginning of period price per
    share plus dividends paid per share during the period, divided by the beginning price.
|(3) | 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.           



98







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except shares and per
share data)



Note 13.  Selected Quarterly Financial Data
(Unaudited)



|                                                                   |  | December 31, 2012 |        |   | September 30, 2012 |   |       | June 30, 2012 |  |   | March 31, 2012 |  
|------------------------------------------------------------------ |  | ----------------- | ------ | - | ------------------ | - | ----- | ------------- |  | - | -------------- | -
|Total investment income                                            |  | $                 | 7,938  |   |                    | $ | 6,619 |               |  | $ | 5,482          |  
|Net investment income                                              |  |                   | 3,417  |   |                    |   | 2,969 |               |  |   | 2,258          |  
|Net realized and unrealized (loss) gain                            |  |                   | (7,827 | ) |                    |   | 677   |               |  |   | (42            | )
|Net (decrease) increase in net asset resulting from
    operations |  |                   | (4,410 | ) |                    |   | 3,646 |               |  |   | 2,216          |  
|Earnings per share (1)                                             |  |                   | (0.46  | ) |                    |   | 0.40  |               |  |   | 0.29           |  
|Net asset value per share at period end (2)                        |  | $                 | 15.15  |   |                    | $ | 16.41 |               |  | $ | 16.73          |  



|                                                    |  | December 31, 2011 |        |   | September 30, 2011 |   |       | June 30, 2011 |  |   | March 31, 2011 | 
|--------------------------------------------------- |  | ----------------- | ------ | - | ------------------ | - | ----- | ------------- |  | - | -------------- | 
|Total investment income                             |  | $                 | 6,183  |   |                    | $ | 6,441 |               |  | $ | 5,970          | 
|Net investment income                               |  |                   | 3,310  |   |                    |   | 2,993 |               |  |   | 1,980          | 
|Net realized and unrealized (loss) gain             |  |                   | (2,524 | ) |                    |   | (234  | )             |  |   | 1,843          | 
|Net increase in net asset resulting from operations |  |                   | 786    |   |                    |   | 2,759 |               |  |   | 3,823          | 
|Earnings per share (1)                              |  |                   | 0.10   |   |                    |   | 0.36  |               |  |   | 0.50           | 
|Net asset value per share at period end (2)         |  | $                 | 17.01  |   |                    | $ | 17.36 |               |  | $ | 17.40          | 



|(1) | Based on weighted average shares outstanding for
    the respective period.
|--- | ---------------------------------------------------------------------------
|(2) | Based on shares outstanding at the end of the respective period.           



99







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,
2012, 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 the 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 2013 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 2013 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 2013 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.



100







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 2013 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 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 2013 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 2013 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 65.



(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)                                                                                                                                                                                                          
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|4.3        |  | 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)                                                                                                                     
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.1       |  | Form of Investment Management Agreement
    (Incorporated by reference to exhibit (g) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement
    on Form N-2, filed on July 2, 2010)                                                                                                                                                                                               
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|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)                                                                                                                                                                                                   
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|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       |  | Credit and Security Agreement by and
    among Horizon Credit I LLC, WestLB AG, New York Branch, U.S. Bank National Association, as custodian and paying agent, and
    WestLB AG, New York Branch, as agent, dated as of March 4, 2008 (Incorporated by reference to exhibit (f)(1) of the Company’s
    Pre-effective Amendment No. 1 to the Registration Statement on Form N-2, filed on June 4, 2010)



101







|10.6  |  | First Amendment of Transaction
    Documents by and among Horizon Credit I LLC, WestLB AG, New York Branch, U.S. Bank National Association, as custodian and
    paying agent, WestLB AG, New York Branch, as agent, Horizon Technology Finance Management LLC, and Lyon Financial Services,
    Inc., dated as of September 30, 2008 (Incorporated by reference to exhibit (f)(2) of the Company’s Pre-effective Amendment
    No. 1 to the Registration Statement on Form N-2, filed on June 4, 2010)
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.7  |  | Second Amendment of Transaction Documents
    by and among Horizon Credit I LLC, WestLB AG, New York Branch, as the lender and agent, and U.S. Bank National Association,
    as custodian, dated as of October 7, 2008 (Incorporated by reference to exhibit (f)(3) of the Company’s Pre-effective
    Amendment No. 1 to the Registration Statement on Form N-2, filed on June 4, 2010)                                                                                                              
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.8  |  | Third Amendment of Transaction Documents
    by and among Horizon Credit I LLC, Compass Horizon Funding Company LLC, WestLB AG, New York Branch, as the lender and agent,
    and U.S. Bank National Association, as custodian, dated as of June 25, 2010 (Incorporated by reference to exhibit (f)(4) of
    the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                                                                            
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.9  |  | 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)                                                                                                                                                                                       
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.10 |  | 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)                                                                                                                                                                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.11 |  | Loan and Security Agreement by and among
    Horizon Credit II LLC and Wells Fargo Capital Finance, LLC, as arranger and administrative agent, dated as of July 14, 2011
    (Incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on July 18, 2011)                                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.12 |  | Sale and Servicing Agreement by and
    among Horizon Credit II LLC, Horizon Technology Finance Management LLC, U.S. Bank National Association, Wells Fargo Capital
    Finance, LLC and the Company dated as of July 14, 2011 (Incorporated by reference to exhibit 10.2 of the Company’s Current
    Report on Form 8-K, filed on July 18, 2011)                                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.13 |  | Form of Indenture (Incorporated by reference
    to Exhibit 10.13 of the Company’s Registration Statement on Form N-2, File No. 333-178516, filed on December 15, 2011)                                                                                                                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.14 |  | Indenture, dated as of March 23, 2012,
    between the Company and U.S. Bank National Association. (Incorporated by reference to Exhibit 10.14 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)                                                                                                                                                                                                            
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.15 |  | First Supplemental Indenture, dated
    as of March 23, 2012, between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit 10.15 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)                                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.16 |  | Form of 7.375% Senior Notes due 2019
    (included as part of Exhibit 10.16)                                                                                                                                                                                                                                                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.17 |  | Loan and Security Agreement, dated as
    of August 23, 2012, by and among Horizon Credit III LLC, as the borrower, the Lenders that are signatories thereto, as the
    lenders, and Fortress Credit Co LLC, as the administrative agent. (Incorporated by reference to exhibit 10.1 of the Company’s
    Current Report on Form 8-K, filed on August 23, 2012)                                                                                                                                       
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.18 |  | Sale and Servicing Agreement, dated
    August 23, 2012, by and among Horizon Credit III LLC, as the buyer, Horizon Technology Finance Corporation, as the originator,
    Horizon Technology Finance Management LLC, as the servicer, U.S. Bank National Association, as the collateral custodian and
    back-up servicer, and Fortress Credit Co LLC, as the agent. (Incorporated by reference to exhibit 10.2 of the Company’s
    Current Report on Form 8-K, filed on August 23, 2012)           
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|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)                                                                                                                                                                                                                                                                                                   



102







|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
|      |  |                                                                                                                                                          
|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                                                                                                                            








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





103







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
| | --------------------------------------
| |                                       
| | By:                                   
| |                                       
| |                                       



Date: March 12, 2013



POWER OF ATTORNEY



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 12, 2013
|                                |  |                                                               |  |               
|/s/
    Christopher M. Mathieu  |  | Chief Financial Officer and                                   |  |               
|Christopher M.
    Mathieu      |  | Treasurer (Principal Financial and Accounting
    Officer)    |  | March 12, 2013
|                                |  |                                                               |  |               
|/s/
    Gerald A. Michaud       |  |                                                               |  |               
|Gerald A. Michaud               |  | President and Director                                        |  | March 12, 2013
|                                |  |                                                               |  |               
|/s/
    James J. Bottiglieri    |  |                                                               |  |               
|James J. Bottiglieri            |  | Director                                                      |  | March 12, 2013
|                                |  |                                                               |  |               
|/s/
    Edmund V. Mahoney       |  |                                                               |  |               
|Edmund V. Mahoney               |  | Director                                                      |  | March 12, 2013
|                                |  |                                                               |  |               
|/s/
    Elaine A. Sarsynski     |  |                                                               |  |               
|Elaine A. Sarsynski             |  | Director                                                      |  | March 12, 2013
|                                |  |                                                               |  |               
|/s/
    Christopher B. Woodward |  |                                                               |  |               
|Christopher B.
    Woodward     |  | Director                                                      |  | March 12, 2013
|                                |  |                                                               |  |               



104