UNITED
STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-K



(Mark One)

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

FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2013



OR



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

FOR
THE TRANSITION PERIOD FROM               TO



COMMISSION FILE
NUMBER: 814-00802



HORIZON
TECHNOLOGY FINANCE CORPORATION

(Exact name of
registrant as specified in its charter)



|DELAWARE                                 |  | 27-2114934         
|---------------------------------------- |  | -------------------
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|incorporation or organization)           |  | Identification No.)
|312 Farmington Avenue,                   |  |                    
|Farmington, CT                           |  | 06032              
|(Address of principal executive offices) |  | (Zip Code)         



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



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



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



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

None



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



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



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



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



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



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



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



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



The aggregate market
value of common stock held by non-affiliates of the Registrant on June 28, 2013 based on the closing price on that date of $13.74
on the Nasdaq Global Select Market was $130.6 million. For the purposes of calculating this amount only, all directors and executive
officers of the Registrant have been treated as affiliates. There were 9,615,246 shares of the Registrant’s common stock
outstanding as of March 6, 2014.



Documents Incorporated
by Reference: Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2014 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, 2013



TABLE OF CONTENTS



|         |                                                                                                                  | Page
|-------- | ---------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                  |     
|         | PART I                                                                                                           |     
|Item 1.  | Business                                                                                                         | 3   
|Item 1A. | Risk Factors                                                                                                     | 24  
|Item 1B. | Unresolved Staff Comments                                                                                        | 49  
|Item 2.  | Properties                                                                                                       | 49  
|Item 3.  | Legal Proceedings                                                                                                | 49  
|Item 4.  | Mine Safety Disclosures                                                                                          | 49  
|         |                                                                                                                  |     
|         | PART II                                                                                                          |     
|Item 5.  | Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities | 50  
|Item 6.  | Selected Financial Data                                                                                          | 54  
|Item 7.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                            | 55  
|Item 7A. | Quantitative And Qualitative Disclosures About Market Risk                                                       | 66  
|Item 8.  | Consolidated Financial Statements and Supplementary Data                                                         | 68  
|Item 9.  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                             | 103 
|Item 9A. | Controls and Procedures                                                                                          | 103 
|Item 9B. | Other Information                                                                                                | 103 
|         |                                                                                                                  |     
|         | PART III                                                                                                         |     
|Item 10. | Directors, Executive Officers and Corporate Governance                                                           | 103 
|Item 11. | Executive  Compensation                                                                                          | 103 
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                   | 103 
|Item 13. | Certain Relationships and Related Transactions, and Director Independence                                        | 104 
|Item 14. | Principal Accountant Fees and Services                                                                           | 104 
|         |                                                                                                                  |     
|         | PART IV                                                                                                          |     
|Item 15. | Exhibits and Financial Statement Schedules                                                                       | 104 
|         | Signatures                                                                                                       | 107 



2







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, a Delaware corporation, and its consolidated
                                         subsidiaries;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | · | “WestLB”
                                         refers to WestLB, AG, New York Branch and “WestLB Facility” refers to a revolving
                                         credit facility we entered into with WestLB on March 4, 2008 that was closed during the
                                         fourth quarter of 2012;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | · | “2019
                                         Notes” refers to our $33 million aggregate principal amount of 7.375% senior unsecured
                                         notes due 2019 on March 23, 2012 and April 18, 2012;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Fortress”
                                         refers to Fortress Credit Co LLC and “Fortress Facility” refers to a term
                                         loan credit facility we entered into with Fortress on August 23, 2012;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Credit
                                         Facilities” refers collectively to the Key Facility and Fortress Facility;
| | - | ---------------------------------------------------------------------------------------------------------------------------



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



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



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



Item 1.Business



General



We are a specialty
finance company that lends to and invests in development-stage companies in the technology, life science, healthcare information
and services and cleantech industries, which we refer to collectively as our “Target Industries.” Our investment objective
is to generate current income from the 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. 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.



3







We are an externally
managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development
company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for U.S. federal income tax
purposes, we have elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue
Code of 1986, as amended, or the Code. As a BDC, we are required to comply with regulatory requirements, including limitations
on our use of debt. We are permitted to, and expect to, finance our investments through borrowings. However, as a BDC, we are
only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after
such borrowing. The amount of leverage that we employ depends on our assessment of market conditions and other factors at the
time of any proposed borrowing. As a RIC, we generally will not have to pay corporate-level federal income taxes on any net ordinary
income or net short-term capital gains that we distribute to our stockholders if we meet certain source-of-income, distribution,
asset diversification and other requirements.



Compass Horizon Funding
Company LLC, a Delaware limited liability company, or Compass Horizon, our predecessor company, commenced operations in March
2008. We were formed in March 2010 for the purpose of acquiring Compass Horizon and continuing its business as a public entity.
When we refer to our historical performance, we include the performance of Compass Horizon.



From our inception
and through December 31, 2013, we funded 103 portfolio companies and invested $565.2 million in loans (including 54 loans,
in the amount $226.9 million, that have been repaid). As of December 31, 2013, our total debt investment portfolio consisted of
49 loans which totaled $213.8 million, and our net assets were $135.8 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
are generally not 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, short product life cycles and
periodic downturns.



For the year ended
December 31, 2013, our loan portfolio had a dollar-weighted average annualized yield of 14.4% (excluding any yield from warrants).
As of December 31, 2013, our loan portfolio had a dollar-weighted average term of 42 months from inception and a dollar-weighted
average remaining term of 29 months. In addition, we held warrants to purchase either common stock or preferred stock in
73 portfolio companies. As of December 31, 2013, substantially all of our loans had an original committed principal amount of
between $2 million and $15 million, repayment terms of between 33 and 48 months and bore current pay interest at
annual interest rates of between 9% and 13%.



Our investment activities
and our day-to-day operations are managed by our Advisor and supervised by our board of directors, or the Board, of which a majority
of the members are independent of us and our Advisor. Under an investment management agreement, or the Investment Management Agreement,
with our Advisor, we have agreed to pay our Advisor a base management fee and an incentive fee for its advisory services to us.
We have also entered into an administration agreement, or the Administration Agreement, with our Advisor under which we have agreed
to reimburse our Advisor for our allocable portion of overhead and other expenses incurred by our Advisor in performing its obligations
under the Administration Agreement.



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



Information Available



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



4







Our Advisor



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



Our Advisor is a
Delaware limited liability company that is a registered investment advisor under the Investment Advisers Act of 1940, as amended,
or 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
                                         loans. The secured debt structure provides a lower risk strategy, as compared to equity
                                         investments, to participate in the emerging technology markets because the debt structures
                                         we typically utilize provide collateral against the downside risk of loss, provide return
                                         of capital in a much shorter timeframe through current-pay interest and amortization
                                         of 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | • | Opportunity for Enhanced Returns.  To
                                         enhance our 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



5







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



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



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



Market Opportunity



We focus our investments
primarily in four key industries of the emerging technology market: technology, life science, healthcare information and services
and cleantech. The technology sectors we focus on include, but are not limited to, 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, but are not limited to, biotechnology, drug delivery, bioinformatics and medical devices. The healthcare
information and services sectors we focus on include, but are not limited to, 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, but are not limited to, alternative energy, water purification, energy efficiency, green building
materials and waste recycling.



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;
| | - | ---------------------------------------------------------------------------------------------------------------------------



6







| | • | 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 managing Venture Loans. Our Advisor and its predecessor have directly
originated, underwritten and managed more than 165 Venture Loans with an aggregate original principal amount over $1.1 billion
since operations commenced 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.



Well-Known
Brand Name.  Our Advisor has originated Venture Loans to more than 165 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 to provide
financing to development-stage companies in our Target Industries with a number of investment funds and other BDCs, as well as
traditional financial services companies such as commercial banks and other financing sources. Some of our competitors are larger
and have greater financial, 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 our competitive position
and competitive risks, see “Item 1A — Risk Factors — Risks Related to Our Business and Structure —
We operate in a highly competitive market for investment opportunities, and if we are not able to compete effectively, our business,
results of operations and financial condition may be adversely affected and the value of your investment in us could decline.”



Investment Criteria



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



7







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.



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



Investment Process



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



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



8







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.



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 applicable Uniform Commercial Code, or UCC, financing statements and,
as applicable, may also include a landlord agreement, patent and trademark security grants, a subordination agreement and other
standard agreements for commercial loans in the Venture Lending industry. Funding requires final approval by our Advisor’s
General Counsel, Chief Executive Officer or President, Chief Financial Officer and Chief Credit Officer.



9







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 internal 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.



The table below describes
each rating level:



|Rating |  | Description of
    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.                                                                                                                                  



10







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.



Employees



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



Investment Management Agreement



Under the terms of
our 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.



11







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.



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 ofPre-Incentive Fee Net Investment Incomeallocated 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%



12







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.



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%))



13







= 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”)



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



14







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.








| | (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;
| | - | ------------------



15







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



Generally, our expenses
will be expensed as incurred in accordance with U.S. generally accepted accounting principles, or GAAP. To the extent we incur
costs that should be capitalized and amortized into expense we 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 2, 2013, 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: (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.



16







Based on the information
reviewed and its discussions, the Board, including a majority of our directors who are not interested persons, 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 most recently renewed on August 2, 2013. 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.



Administration Agreement



The Administration
Agreement was approved by our Board on October 25, 2010 and was most recently renewed on August 2, 2013. The Administrator
provides 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, or HTF, pursuant to which we were granted a non-exclusive, royalty-free
right and license to use the service mark “Horizon Technology Finance.” Under this agreement, we have a right to use
the “Horizon Technology Finance” service mark for so long as the Investment Management Agreement with our Advisor
is in effect. Other than with respect to this limited license, we have no legal right to the “Horizon Technology Finance”
service mark.



Regulation



We have elected to
be regulated as a BDC under the 1940 Act and elected to be treated as a RIC under Subchapter M of the Code. As with other companies
regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. The 1940 Act contains prohibitions
and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers),
principal underwriters and affiliates of those affiliates or underwriters. 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, or 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.



17







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.



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
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18







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



| | • | 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, or NAV. 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.



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.



19







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.



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



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.



20







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.



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



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



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



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



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



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



NASDAQ Global Select Market Corporate Governance
Regulations



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 an amount generally at least equal to the sum of our 90% of
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 (taking into account certain deferrals and elections) 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, or the Excise Tax Avoidance Requirement. In addition, although
we may distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any,
at least annually out of the assets legally available for such distributions, we may decide to retain such net capital gains or
ordinary income to provide us with additional liquidity. In order to qualify as a RIC for federal income tax purposes under Section 851(a)
of the Code, we must:



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



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



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



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



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



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



Taxation as a RIC



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



We may be required
to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are
treated under applicable tax rules as having original issue discount (such as debt instruments with 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 or the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount.



22







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.



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 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 with us or our Advisor, and are
not replaced by individuals satisfactory to Key within ninety days, Key could, absent a waiver or cure, demand repayment of any
outstanding obligations under the Key Facility. If both Mr. Pomeroy and Mr. Michaud cease to be employed by us, and they are not
replaced by individuals satisfactory to Fortress within 90 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. In addition,
our Advisor may in the future manage investment funds with investment objectives similar to ours thereby diverting the time and
attention of its investment professionals that we rely on to implement our business plan.



Our Advisor may change or be restructured.



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



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



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



24







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.



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) |  |                                 | -24.4








| | (1) | Assumes $264 million in total
                                         assets, $122 million in outstanding debt, $136 million in net assets, and an
                                         average cost of borrowed funds of 5.58% at December 31, 2013. Actual interest payments
                                         may be different.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Based on our outstanding indebtedness
of $122 million as of December 31, 2013 and the average cost of borrowed funds of 5.58% as of that date, our investment portfolio
would have been required to experience an annual return of at least 3.02% 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 2019
Notes and 2013-1 Securitization, our business could be materially adversely affected.



Our Credit Facilities
are secured by a lien on the assets of our wholly owned subsidiaries, Credit II and 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 thereunder to declare all amounts outstanding to be due and payable. In such an event, we may not have sufficient
assets to repay such indebtedness and the lenders may exercise rights available to them, including, without limitation, to the
extent permitted under applicable law, the seizure of such assets without adjudication.



25







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, 2019 Notes or 2013-1 Securitization if for any reason we are unable to comply with the terms of the Credit Facilities
and we may not be able to refinance the Credit Facilities on terms acceptable to us, or at all.



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



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



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



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



Except
to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including trade creditors)
and holders of preferred stock, if any, of our subsidiaries have priority over our equity interests in such subsidiaries (and
therefore the claims of our creditors, including holders of the 2019 Notes) with respect to the assets of such subsidiaries. Even
if we are recognized as a creditor of one or more of our subsidiaries, our claims are effectively subordinated to any security
interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our
claims. Consequently, the 2019 Notes are structurally subordinated to all indebtedness and other liabilities (including trade
payables) of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles
or otherwise. As of December 31, 2013, we had $79.3 million of outstanding borrowings under our 2013-1 Securitization, 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 2019 Notes.



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



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



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



26







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



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



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



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



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



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



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



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



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



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



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



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



27







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



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



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



On June 28, 2013,
in connection with the 2013-1 Securitization and the offering of the Asset-Backed Notes by Horizon Funding Trust 2013-1, or 2013-1
Trust, a wholly owned subsidiary of ours, we sold and/or contributed to Horizon Funding 2013-1 LLC, also referred to as Trust
Depositor, certain loans made to certain of our portfolio companies, or Loans, which the Trust Depositor in turn sold and/or contributed
to the 2013-1 Trust in exchange for 100% of the equity interest in the 2013-1 Trust, cash proceeds and other consideration. Following
these transfers, the 2013-1 Trust, and not the Trust Depositor or us, held all of the ownership interest in the Loans.



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



28







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



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



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



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



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



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



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



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



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



29







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



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



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



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



Because we distribute all or substantially
all of our investment company taxable income to our stockholders, we will need additional capital to finance our
growth, if 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 investment company taxable income. However, we may
retain certain net long-term capital gains, pay applicable income taxes with respect thereto, and elect to treat such retained
capital gains as deemed distributions to our stockholders. As a BDC, we generally are required to meet a coverage ratio of total
assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of
at least 200%. This requirement limits the amount that we may borrow. Because we continue to need capital to grow our 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.



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.
If our common stock trades below NAV and we do not receive such approval, our business could be materially adversely affected.



As a BDC, we generally
are not able to issue our common stock at a price below 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. If our common stock trades at a price
below NAV and we do not receive approval from our stockholders and our independent directors to issue common stock at a price
below NAV, our ability to raise capital through the issuance of equity securities would be curtailed. This could limit our ability:
to grow and make new investments; to attract and retain top investment professionals; to maintain deal flow and relations with
top companies in our Target Industries and related entities such as venture capital and private equity sponsors; and to sustain
a minimum efficient scale for a public company.



30







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



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



Since the economic
downturn that began in mid-2007, interest rates have remained low. Because longer-term inflationary pressure is likely to result
from the U.S. government’s fiscal policies and challenges during this time, we will likely experience rising interest rates,
rather than falling rates, over our investment horizon.



Because we currently
incur indebtedness to fund our investments, a portion of our income depends upon the difference between the interest rate at which
we borrow funds and the interest rate at which we invest these funds. 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.



31







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 GAAP.
Our Board employs an independent third-party valuation firm to assist them in arriving at the fair value of our investments. Our
Board discusses valuations and determines the fair value in good faith based on the input of our Advisor and the third-party valuation
firm. The factors that may be considered in fair value pricing our investments include the nature and realizable value of any collateral,
the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio
company does business, comparisons to publicly traded companies, discounted cash flow and other relevant factors. Because such
valuations are inherently uncertain and may be based on estimates, our determinations of fair value may differ materially from
the values that would be assessed if a ready market for these securities existed. Our NAV could be adversely affected if our determinations
regarding the fair value of our investments are materially higher than the values that we ultimately realize upon the disposal
of these investments.



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



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



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



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



The 1940 Act permits
us to issue senior securities in amounts such that our asset coverage 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.



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.



32







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



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



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



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



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



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



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.



33







Accordingly, we may
need to sell some of our assets at times that we would not consider advantageous, raise additional debt or equity capital or forego
new investment opportunities or otherwise take actions that are disadvantageous to our business (or be unable to take actions that
we believe are necessary or advantageous to our business) in order to satisfy the Annual Distribution Requirement. If we are unable
to obtain cash from other sources to satisfy the Annual Distribution Requirement, we may fail to qualify for the federal income
tax benefits allowable to RICs and, thus, become subject to a corporate-level federal income tax on all our income. The proportion
of our income, consisting of interest and fee income that resulted from the portion of original issue discount classified as such
in accordance with GAAP not received in cash for the years ended December 31, 2013, 2012 and 2011 was 11.5%, 10.3% and 9.5%, 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.
If we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under
the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions
under the 1940 Act, which would significantly decrease our operating flexibility.



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



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



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



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



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



34







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.



We have entered into
a license agreement with HTF, 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 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.



35







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.



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



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



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



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



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



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



36







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



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



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.



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



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



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



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



37







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



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



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—Qualifying Assets” in
Item 1 above. Our Advisor’s ability to manage 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.



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.



38







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



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



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



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



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



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



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



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



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



General economic conditions
may affect our activities and the operation and value of our portfolio companies. Economic slowdowns or recessions may result in
a decrease of institutional equity investment, which would limit our lending opportunities. Furthermore, many of our portfolio
companies may be susceptible to economic slowdowns or recessions and may be unable to repay our 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.



39







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.



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.



40







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.



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.



41







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.



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



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



42







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.



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.



43







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.



44







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



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



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



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



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



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, the amount available for distribution
could be reduced.



On an annual basis,
we must determine the extent to which any distributions we made were paid out of current or accumulated earnings, recognized capital
gains or capital. To the extent 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.



45







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 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.



46







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



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



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



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



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



| | • | authorize the issuance of “blank check” preferred stock that could be issued by our
Board to thwart a takeover attempt;
| | - | -----------------------------------------------------------------------------------------------------------------------



| | • | 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
common stock or (ii) during any twelve-month period individuals who at the beginning of such period constituted our Board
cease for any reason, other than death or disability, to constitute a majority of the directors in office. If either event were
to occur, Key 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.



47







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



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



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



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



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



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



The issuance or sale
by us of shares of our common stock at a discount to NAV poses a risk of dilution to our 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, or DRIP, are automatically reinvested in shares of our
common stock. As a result, stockholders that do not participate in the DRIP will experience dilution 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.
| | - | -------------------------------------------------------------------------------



48







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



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



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



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



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



Subsequent
sales in the public market of substantial amounts of our common stock by the selling 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 registered for resale, a negative perception could be created
in the market about our prospects by such registration.



Item 1B.Unresolved Staff Comments



None



Item 2.Properties



As of December 31,
2013, 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



49







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



|                             |  |        |       |  |                     |   |       |          |  |   | Premium/ |  |  | Premium/ |     |   |               | 
|---------------------------- |  | ------ | ----- |  | ------------------- | - | ----- | -------- |  | - | -------- |  |  | -------- | --- | - | ------------- | 
|                             |  |        |       |  |                     |   |       |          |  |   | Discount |  |  | Discount |     |   |               | 
|                             |  |        |       |  |                     |   |       |          |  |   | of High  |  |  | of Low   |     |   | Distributions | 
|                             |  |        |       |  |                     |   |       |          |  |   | Sales    |  |  | Sales    |     |   | Declared      | 
|                             |  |        |       |  | Closing Sales Price |   |       | Price to |  |   | Price to |  |  | Per      |    
|                             |  | NAV(1) |       |  | High                |   |       | Low      |  |   | NAV(2)   |  |  | NAV(2)   |     |   | Share(3)      | 
|Year ended December 31, 2014 |  |        |       |  |                     |   |       |          |  |   |          |  |  |          |     |   |               | 
|First quarter (4)            |  |        | N/A   |  |                     | $ | 14.61 |          |  | $ | 14.14    |  |  |          | N/A |   |               | 
|Year ended December 31, 2013 |  |        |       |  |                     |   |       |          |  |   |          |  |  |          |     |   |               | 
|Fourth quarter               |  | $      | 14.14 |  |                     | $ | 14.34 |          |  | $ | 12.95    |  |  |          | 101 | % |               | 
|Third quarter                |  | $      | 14.95 |  |                     | $ | 14.47 |          |  | $ | 13.26    |  |  |          | 97  | % |               | 
|Second quarter               |  | $      | 14.89 |  |                     | $ | 14.69 |          |  | $ | 12.93    |  |  |          | 99  | % |               | 
|First quarter                |  | $      | 15.12 |  |                     | $ | 15.93 |          |  | $ | 14.38    |  |  |          | 105 | % |               | 
|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(6)            |  | $      | 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) | We have adopted an “opt out” DRIP for our common stockholders. As a result, if we declare a distribution, then
stockholders’ cash distributions are automatically reinvested in additional shares of our common stock, unless they specifically
opt out of the DRIP so as to receive cash distributions.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Through March 6, 2014.
| | --- | ----------------------



| | (5) | $0.115 payable on each of April 15, 2014, May 15, 2014
and June 16, 2014.
| | --- | -------------------------------------------------------------------------



| | (6) | From October 29, 2010 (initial public offering) to December 31, 2010.
| | --- | ---------------------------------------------------------------------



The last reported
price for our common stock on March 6, 2014 was $14.18 per share. As of March 6, 2014 we had five 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.



50







Sales of Unregistered Securities



We did not engage
in any sales of unregistered securities during the years ended December 31, 2013, 2012 and 2011.



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.”



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



51







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, 2013 |  |                    |  |                    |      
|February 17, 2014            |  | March 17, 2014     |  | $                  | 0.115
|January 20, 2014             |  | February 14, 2014  |  | $                  | 0.115
|December 16, 2013            |  | January 15, 2014   |  | $                  | 0.115
|November 19, 2013            |  | December 16, 2013  |  | $                  | 0.115
|October 17, 2013             |  | November 15, 2013  |  | $                  | 0.115
|September 18, 2013           |  | October 15, 2013   |  | $                  | 0.115
|August 19, 2013              |  | September 16, 2013 |  | $                  | 0.115
|July 17, 2013                |  | August 15, 2013    |  | $                  | 0.115
|June 20, 2013                |  | July 15, 2013      |  | $                  | 0.115
|May 20, 2013                 |  | June 17, 2013      |  | $                  | 0.115
|April 18, 2013               |  | May 15, 2013       |  | $                  | 0.115
|March 20, 2013               |  | April 15, 2013     |  | $                  | 0.115
|Total                        |  |                    |  | $                  | 1.380
|                             |  |                    |  |                    |      
|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 6, 2014, 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, 2014   |  | June 16, 2014  |  | $                  | 0.115
|April 17, 2014 |  | May 15, 2014   |  | $                  | 0.115
|March 19, 2014 |  | April 15, 2014 |  | $                  | 0.115



52







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-100
Index, for the period from October 29, 2010 (the date that our common stock was first listed on NASDAQ) through December 31,
2013. 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-100 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.







53







Item 6.Selected Financial Data



The following selected
consolidated financial data of Horizon Technology Finance Corporation as of December 31, 2013, 2012, 2011, 2010 and 2009, and for
the years ended December 31, 2013, 2012 and 2011, the period from October 29, 2010 to December 31, 2010, the period from January
1, 2010 to October 28, 2010 and the year ended December 31, 2009 are derived from the consolidated financial statements that have
been audited by McGladrey LLP, an independent registered public accounting firm. For the period prior to October 29, 2010, the
financial data refer to Compass Horizon, our predecessor company. These selected financial data should be read in conjunction with
our financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”



|                                                                                    |  | Post-IPO as a Business Development Company |         |   | Pre-IPO Prior to 
    becoming a Business Development Company |  
|----------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------------------------------------- | -
|(In thousands, except per share data)                                               |  | Year Ended
    December 31, 2013           |         |   | Year Ended
    December 31, 2012                              |  
|Statement
    of Operations Data:                                                   |  |                                            |         |   |                                                               |  
|Total investment
    income                                                         |  | $                                          | 33,643  |   |                                                               | $
|Base management fee                                                                 |  |                                            | 5,209   |   |                                                               |  
|Performance based incentive
    fee                                                 |  |                                            | 3,318   |   |                                                               |  
|All other expenses                                                                  |  |                                            | 11,605  |   |                                                               |  
|Net investment income
    before excise tax                                         |  |                                            | 13,511  |   |                                                               |  
|Provision for excise
    tax                                                        |  |                                            | (240    | ) |                                                               |  
|Net investment income                                                               |  |                                            | 13,271  |   |                                                               |  
|Net realized (loss)
    gain on investments                                         |  |                                            | (7,509  | ) |                                                               |  
|Provision for excise
    tax                                                        |  |                                            | —       |   |                                                               |  
|Net unrealized (depreciation)
    appreciation on investments                       |  |                                            | (2,254  | ) |                                                               |  
|Credit (provision) for
    loan losses                                              |  |                                            | —       |   |                                                               |  
|Net increase in net
    assets resulting from operations                            |  | $                                          | 3,508   |   |                                                               | $
|Per Share Data:                                                                     |  |                                            |         |   |                                                               |  
|Net asset value                                                                     |  | $                                          | 14.14   |   |                                                               | $
|Net investment income                                                               |  |                                            | 1.38    |   |                                                               |  
|Net realized (loss)
    gain on investments                                         |  |                                            | (0.78   | ) |                                                               |  
|Net change in unrealized
    (depreciation) appreciation on investments             |  |                                            | (0.23   | ) |                                                               |  
|Net increase in net
    assets resulting from operations                            |  |                                            | 0.37    |   |                                                               |  
|Per share dividends declared                                                        |  |                                            | 1.38    |   |                                                               |  
|Dollar amount of dividends
    declared                                             |  | $                                          | 13,236  |   |                                                               | $
|Statement
    of Assets and Liabilities Data  at Period End:                        |  |                                            |         |   |                                                               |  
|Investments, at fair
    value/book value                                           |  | $                                          | 221,284 |   |                                                               | $
|Other assets                                                                        |  |                                            | 42,453  |   |                                                               |  
|Total assets                                                                        |  |                                            | 263,737 |   |                                                               |  
|Long-term obligations                                                               |  |                                            | 122,343 |   |                                                               |  
|Total liabilities                                                                   |  |                                            | 127,902 |   |                                                               |  
|Total net assets/members’
    capital                                               |  | $                                          | 135,835 |   |                                                               | $
|Other
    data:                                                                     |  |                                            |         |   |                                                               |  
|Weighted average annualized
    yield on income producing investments at fair value |  |                                            | 14.4    | % |                                                               |  
|Number of portfolio
    companies at period end                                     |  |                                            | 49      |   |                                                               |  



54







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



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



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.



55







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 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 our Venture Loans to companies backed by established venture capital and private equity firms in our Target Industries.
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.
In addition, for U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. As a
BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and
expect to, finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such
that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we
employ depends on our assessment of market conditions and other factors at the time of any proposed borrowing. As a RIC, we generally
will not have to pay corporate-level federal income taxes on any investment company taxable income that we distribute to our stockholders
if we meet certain source-of-income, distribution, asset diversification and other requirements.



Compass Horizon, our
predecessor company, commenced operations in March 2008. We were formed in March 2010 for the purpose of acquiring Compass Horizon
and continuing its business as a public entity.



Our investment activities,
and our day-to-day operations, are managed by the Advisor and supervised by our Board, of which a majority of the members are independent
of us. Under the Investment Management Agreement, we have agreed to pay the Advisor a base management fee and an incentive fee
for its advisory services to us. We have also entered into the Administration Agreement with the Advisor under which we have agreed
to reimburse the Advisor for our allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations
under the Administration Agreement.



Portfolio Composition and Investment Activity



The following table
shows our portfolio by asset class as of December 31, 2013 and 2012:



|                  |  | December 31, 2013 |    |  | December 31, 2012 |  
|----------------- |  | ----------------- | -- |  | ----------------- | -
|                  |  | # of Investments  |    |  | Fair Value        |  
|Term loans        |  |                   | 48 |  |                   | $
|Revolving loans   |  |                   | 1  |  |                   |  
|Total loans       |  |                   | 49 |  |                   |  
|Warrants          |  |                   | 73 |  |                   |  
|Other investments |  |                   | 1  |  |                   |  
|Equity            |  |                   | 3  |  |                   |  
|Total             |  |                   |    |  |                   | $



56







Total portfolio investment
activity as of and for the years ended December 31, 2013 and 2012 was as follows:



|                                           |  | December 31, |        
|------------------------------------------ |  | ------------ | -------
|                                           |  | 2013         |        
|Beginning portfolio                        |  | $            | 228,613
|New loan funding                           |  |              | 88,362 
|Less refinanced balances and participation |  |              | —      
|Net new loan funding                       |  |              | 88,362 
|Principal received on investments          |  |              | (41,166
|Early pay-offs                             |  |              | (46,331
|Accretion of loan fees                     |  |              | 2,635  
|New loan fees                              |  |              | (1,076 
|New equity                                 |  |              | 73     
|Sales of investments                       |  |              | (200   
|Net realized (loss) gain on investments    |  |              | (7,299 
|Net depreciation on investments            |  |              | (2,254 
|Other                                      |  |              | (73    
|Ending Portfolio                           |  | $            | 221,284



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, 2013 and 2012:



|                                    |  | December 31, 2013   |         |  | December 31, 2012             | 
|----------------------------------- |  | ------------------- | ------- |  | ----------------------------- | 
|                                    |  | Loans at Fair Value |         |  | Percentage of Total Portfolio | 
|Life Science                        |  |                     |         |  |                               | 
|Biotechnology                       |  | $                   | 16,376  |  |                               | 
|Medical Device                      |  |                     | 14,765  |  |                               | 
|Technology                          |  |                     |         |  |                               | 
|Networking                          |  |                     | 963     |  |                               | 
|Software                            |  |                     | 66,583  |  |                               | 
|Internet and Media                  |  |                     | 6,019   |  |                               | 
|Communications                      |  |                     | 9,359   |  |                               | 
|Semiconductors                      |  |                     | 37,450  |  |                               | 
|Power Management                    |  |                     | 13,044  |  |                               | 
|Cleantech                           |  |                     |         |  |                               | 
|Energy Efficiency                   |  |                     | 11,403  |  |                               | 
|Waste Recycling                     |  |                     | 680     |  |                               | 
|Alternative Energy                  |  |                     | 11,771  |  |                               | 
|Healthcare Information and Services |  |                     |         |  |                               | 
|Diagnostics                         |  |                     | 12,140  |  |                               | 
|Other Healthcare Related Services   |  |                     | 6,904   |  |                               | 
|Software                            |  |                     | 6,297   |  |                               | 
|Total                               |  | $                   | 213,754 |  |                               | 



The largest loans
may vary from year to year as new loans are recorded and repaid. Our five largest loans represented 22% and 23% of total loans
outstanding as of December 31, 2013 and 2012, respectively. No single loan represented more than 10% of our total loans as of December
31, 2013 or 2012.



57







Loan Portfolio Asset Quality



We use an internal
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 represents an increased level of risk and while no loss is currently anticipated
for a 2-rated loan, there is potential for future loss of principal. A rating of 1 represents a deteriorating credit quality and
increased risk. Our internal credit rating system is not a national credit rating system. See “Item 1 – Business”
for a more detailed description of the internal credit rating system. The following table shows the classification of our loan
portfolio by credit rating as of December 31, 2013 and December 31, 2012:



|              |  | December 31, 2013   |         |  | December 31, 2012            | 
|------------- |  | ------------------- | ------- |  | ---------------------------- | 
|              |  | Loans at Fair Value |         |  | Percentage of Loan Portfolio | 
|              |  |                     |         |  |                              | 
|Credit Rating |  |                     |         |  |                              | 
|4             |  | $                   | 30,385  |  |                              | 
|3             |  |                     | 167,231 |  |                              | 
|2             |  |                     | 2,199   |  |                              | 
|1             |  |                     | 13,939  |  |                              | 
|Total         |  | $                   | 213,754 |  |                              | 



As of December 31,
2013 and 2012, our loan portfolio had a weighted average credit rating of 3.0 and 3.2, respectively. As of December 31, 2013, there
were five investments with an internal credit rating of 1, and with a cost of $23.2 million and a fair value of $13.9 million.
As of December 31, 2012, there were three investments with an internal credit rating of 1, with a cost of $12.9 million and a fair
value of $4.9 million.



Consolidated Results
of Operations



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



Consolidated results
of operations for the years ended December 31, 2013, 2012 and 2011 were as follows:



|                                        |  | 2013 |         |   | 2012 |   |         | 2011 | 
|--------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- | 
|Total investment income                 |  | $    | 33,643  |   |      | $ | 26,664  |      | 
|Total expenses                          |  |      | 20,132  |   |      |   | 14,437  |      | 
|Net investment income before excise tax |  |      | 13,511  |   |      |   | 12,227  |      | 
|Provision for excise tax                |  |      | (240    | ) |      |   | (231    | )    | 
|Net investment income                   |  |      | 13,271  |   |      |   | 11,996  |      | 
|Net realized (loss) gains               |  |      | (7,509  | ) |      |   | 108     |      | 
|Provision for excise tax                |  |      | —       |   |      |   | —       |      | 
|Net unrealized depreciation             |  |      | (2,254  | ) |      |   | (8,113  | )    | 
|Net income                              |  | $    | 3,508   |   |      | $ | 3,991   |      | 
|Average investments, at fair value      |  | $    | 233,045 |   |      | $ | 187,760 |      | 
|Average debt outstanding                |  | $    | 115,562 |   |      | $ | 62,973  |      | 



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.



Investment Income



Investment income
increased by $7.0 million, or 26.2%, for the year ended December 31, 2013 as compared to the year ended December 31,
2012. For the year ended December 31, 2013, total investment income consisted primarily of $31.9 million in interest
income from investments, which included $6.4 million in income from the accretion of origination fees and ETPs. 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 and a one-time success fee received
upon the completion of an acquisition of one of our portfolio companies.



58







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.



For the years ended
December 31, 2013, 2012 and 2011, our dollar-weighted average annualized yield on average loans was 14.4%, 14.2% and 14.6%, respectively.
We calculate the yield on dollar-weighted average debt investments for any period measured as (1) total investment income during
the period divided by (2) the average of the fair value of debt investments outstanding on (a) the last day of the calendar month
immediately preceding the first day of the period and (b) the last day of each calendar month during the period.



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 23%, 22% and 21% of investment income for the years ended December 31, 2013, 2012 and 2011,
respectively.



As of December 31,
2013 and 2012, interest receivable was $4.2 million and $2.8 million, respectively, which represent accreted ETPs and
one month of accrued interest income on substantially all of our loans.



Expenses



Total expenses increased
by $5.7 million, or 39.4%, to $20.1 million for the year ended December 31, 2013 as compared to the year ended December 31,
2012. Total expenses 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 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 for
the years ended December 31, 2013 and 2012 was $8.1 million and $4.3 million, respectively. Interest expense for the year ended
December 31, 2013 increased compared to the year ended December 31, 2012 primarily due to an increase in average borrowings. Interest
expense for the year ended December 31, 2012 increased compared to the year ended December 31, 2011 primarily due to an increase
in borrowings under the Wells Facility and Fortress Facility, and the issuance of our 2019 Notes, offset by repayment of the WestLB
Facility.



Management fee expense
for the years ended December 31, 2013 and 2012 was $5.2 million and $4.2 million, respectively. Management fee expense for the
year ended December 31, 2013 increased compared to the year ended December 31, 2012 primarily due to an increase in average gross
assets. 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.



Performance based
incentive fees for the year ended December 31, 2013 increased compared to the year ended December 31, 2012 primarily due to part
one of the incentive fee increasing as Pre-Incentive Fee Net Investment Income increased year over year. Performance based incentive
fees for the year ended December 31, 2012 remained relatively 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. The incentive fees for the year ended December 31, 2013 consisted of $3.3 million of
part one of the incentive fee. The incentive fees for the year ended December 31, 2012 consisted of $2.8 million of part one of
the incentive fee.



In 2013 and 2012 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 both December 31, 2013 and 2012, we recorded an excise tax payable of $0.2 million and $0.2 million on $6.1
million and $5.9 million of undistributed earnings from operations and capital gains, respectively.



59







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, 2013, we realized losses totaling $7.5 million primarily due to two debt investments that were on non-accrual. One
was settled for $2.1 million, along with future contingent success payments, which generated a $1.8 million realized loss. We determined
that the other investment was not recoverable, which resulted in a realized loss totaling $5.3 million. During the year ended December
31, 2012, we realized realized gains totaling $0.1 million primarily due to the sale of warrants of one portfolio company. During
the year ended December 31, 2011, we realized realized gains totaling $6.3 million primarily due to the sale of warrants of three
portfolio companies.



During the year ended
December 31, 2013, net unrealized depreciation on investments totaled $2.3 million which was primarily due to the unrealized depreciation
on the five debt investments on non-accrual status offset by the reversal of previously recorded unrealized depreciation on two
debt investments that were settled in the period, as described above. During the year ended December 31, 2012, net unrealized depreciation
on investments totaled $8.1 million which was primarily due to the unrealized depreciation on the three debt investments on non-accrual
status. During the year ended December 31, 2011, net unrealized depreciation on investments totaled $5.7 million which was primarily
due to $4.0 million in reversal of previously recorded unrealized appreciation on the sale of warrants and $2.7 million of previously
recorded unrealized depreciation on six debt investments partially offset by unrealized appreciation on investments.



Liquidity and Capital Resources



As of December 31,
2013 and 2012, we had cash and investments in money market funds of $26.5 million and $3.6 million, respectively. These
amounts are available to fund new investments, reduce borrowings, pay operating expenses and pay dividends. In addition, as of
December 31, 2013 we had $6.0 million of restricted investments in money market funds, which may be used to make monthly interest
and principal payments on the Asset-Backed Notes. Our primary sources of capital have been from our private and public common stock
offerings, use of the Wells Facility and Fortress Facility and issuance of our 2019 Notes and our Asset-Backed Notes.



As of December 31,
2013, there were no outstanding amounts due under the Key Facility. As of December 31, 2013, we had available borrowing capacity
of $50.0 million under our Key Facility, subject to existing terms and advance rates.



As of December 31,
2013, the outstanding principal balance under the Fortress Facility was $10.0 million. As of December 31, 2013, we had available
borrowing capacity of $65.0 million under our Fortress Facility, subject to existing terms and advance rates. As of December
31, 2012, the outstanding principal balance under the Wells Facility and Fortress Facility was $46.0 million and $10.0, respectively.
All obligations under the WestLB Facility were paid, and the WestLB Facility was terminated, during the fourth quarter of 2012.



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



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



60







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 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 (to the extent available). 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, 2013 and 2012 is as follows:

|                   |  | December 31, 2013 |        
|------------------ |  | ----------------- | -------
|                   |  | Total Commitment  |        
|Asset-Backed Notes |  | $                 | 90,000 
|Fortress Facility  |  |                   | 75,000 
|Key Facility       |  |                   | 50,000 
|2019 Notes         |  |                   | 33,000 
|Total              |  | $                 | 248,000



|                  |  | December 31, 2012 |        
|----------------- |  | ----------------- | -------
|                  |  | Total Commitment  |        
|Wells Facility    |  | $                 | 75,000 
|Fortress Facility |  |                   | 75,000 
|2019 Notes        |  |                   | 33,000 
|Total             |  | $                 | 183,000



We, through our wholly
owned subsidiary, Credit II, entered into the Wells Facility on July 14, 2011 and on November 4, 2013 we renewed and amended the
Wells Facility, which among other things, assigned all rights and obligations of Wells to Key. The interest rate on the Key Facility
is based upon the one-month London Interbank Offered Rate, or LIBOR, plus a spread of 3.25%, with a LIBOR floor of 0.75%. The interest
rate was 4.00% and 5.00% as of December 31, 2013 and December 31, 2012, respectively.



The Key Facility has
an accordion feature which allows for an increase in the total loan commitment to $150 million from the current $50 million commitment
provided by Key. The Key Facility is collateralized by loans held by Credit II and permits an advance rate of up to 50% of eligible
loans held by Credit II. The Key Facility contains covenants that, among other things, require us to maintain a minimum net worth,
to restrict the loans securing the Key Facility to certain criteria for qualified loans and to comply with portfolio company concentration
limits as defined in the related loan agreement.  We may request advances under the Key Facility through November 4, 2016,
or the Revolving Period. After the Revolving Period, we may not request new advances, and we must repay the outstanding advances
under the Key Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with the terms
and conditions of the Key Facility, particularly the condition that the principal balance of the Key Facility not exceed fifty
percent (50%) of the aggregate principal balance of our eligible loans to our portfolio companies. All outstanding advances under
the Key Facility are due and payable on November 4, 2018. There were no advances made under the Key Facility for the year ended
December 31, 2013.



61







On March 23, 2012,
we issued and sold an aggregate principal amount of $30 million of the 2019 Notes, and on April 18, 2012, pursuant to the underwriters’
30-day option to purchase additional notes, we sold an additional $3 million of the 2019 Notes. The 2019 Notes will mature on March
15, 2019 and may be redeemed in whole or in part at our option at any time or from time to time on or after March 15, 2015 at a
redemption price of $25 per security plus accrued and unpaid interest. The 2019 Notes bear interest at a rate of 7.375% per year
payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2019 Notes are our direct, unsecured obligations
and rank (1) equally in right of payment with our future senior unsecured indebtedness; (2) senior in right of payment to any of
our future indebtedness that expressly provides it is subordinated to the 2019 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, 2013, we were in material compliance with the terms of the 2019 Notes.The 2019 Notes are listed on the NYSE under the
symbol “HTF”.



We, through our wholly
owned subsidiary, Credit III, entered into the Fortress Facility on August 23, 2012. The interest rate on the Fortress Facility 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, 2013 and December 31, 2012.



We may request advances
under the Fortress Facility through August 23, 2016, or 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 not exceed sixty-six percent (66%) of the aggregate principal balance of our eligible loans to
our portfolio companies. We must pay an unused line fee equal to 1.00% of any unborrowed amount available under the Fortress Facility
annually. All outstanding advances under the Fortress Facility are due and payable on August 23, 2017.



The Fortress Facility
is collateralized by loans and warrants held by Credit III and permits an advance rate of up to 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.



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



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



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



62







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



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



As of December 31,
2013 and 2012, other assets were $5.7 million and $4.6 million, respectively, which is primarily comprised of debt issuance
costs and prepaid expenses. The increase was due to the debt issuance costs of $2.1 million and $0.8 million incurred related to
our 2013-1 Securitization and the Key Facility, respectively.



Contractual Obligations and Off-Balance Sheet
Arrangements



A summary of our significant
contractual payment obligations and off-balance sheet arrangements as of December 31, 2013 are as follows:



|                     |  | Payments due by period |        
|-------------------- |  | ---------------------- | -------
|                     |  | Total                  |        
|Borrowings           |  | $                      | 122,343
|Unfunded commitments |  |                        | 9,000  
|Total                |  | $                      | 131,343



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, 2013,
we had unfunded commitments of $9.0 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
Credit Facilities, 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 obligations under the agreement, including rent, fees and other
expenses inclusive of our allocable portion of the compensation of our Chief Financial Officer and Chief Compliance Officer and
their respective staffs. See Note 3 to our Consolidated Financial Statements for additional information regarding our Investment
Management Agreement and our Administration Agreement.



Distributions



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



63







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.



We have adopted an
“opt out” DRIP for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash
distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts
out” of our DRIP. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid
in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the
same manner as cash distributions, stockholders participating in our DRIP will not receive any corresponding cash distributions
with which to pay any such applicable taxes. We may use newly issued shares to implement the DRIP, or we may purchase shares in
the open market in connection with our obligations under the DRIP.



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, which we refer to as 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 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.



64







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:



| | 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 12-month period under
our valuation policy and a consistently applied valuation process. The Board conducts this valuation process at the end of each
fiscal quarter, with 25% (based on fair value) of our valuation of portfolio companies that do not have a readily available market
quotations subject to review by an independent valuation firm.



Income Recognition



Interest on 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. All other income is recorded into
income when earned. 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.



65







In connection with
substantially all lending arrangements, we receive warrants to purchase shares of stock from the borrower. We record the warrants
as assets at estimated fair value on the grant date using the Black-Scholes valuation model. We consider the warrants loan fees
and record them as unearned 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 investments. Gains from the disposition of the warrants or stock acquired from the exercise of warrants
are recognized as realized gains on investments.



Income taxes



We have elected to
be treated as a RIC under subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to
RICs. In order to qualify as a RIC, among other things, we are required to meet certain source of income and asset diversification
requirements, and we must timely distribute to our stockholders at least 90% of investment company taxable income, as defined by
the Code, for each tax year. We, among other things, have made and intend to continue to make the requisite distributions to our
stockholders, which will generally relieve us from U.S. federal income taxes.



Depending on the level
of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year 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 in accordance with Topic 740, as modified by Topic 946, of the Financial Accounting
Standards Board’s, or FASB’s, Accounting Standards Codification, as amended. Tax benefits of positions not deemed to
meet the more-likely-than-not threshold, or uncertain tax positions, are recorded as a tax expense in the current year. It is our
policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. We had no material
uncertain tax positions at December 31, 2013 and 2012.



Recently Issued Accounting Standards



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



Item 7A.Quantitative And Qualitative
Disclosures About Market Risk



We are subject to
financial market risks, including changes in interest rates. During the periods covered by our financial statements, the interest
rates on the 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, 2013 was to remain constant and no actions were taken to alter
the existing interest rate sensitivity, a hypothetical immediate 1% change in interest rates may affect net income by more than
1% over a one-year horizon. Although management believes that this measure is indicative of our sensitivity to interest rate changes,
it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the consolidated
statement of assets and liabilities and other business developments that could affect net increase in net assets resulting from
operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement
above.



While our 2019 Notes
and Asset-Back 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.



66







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



67







Item 8.  Consolidated
Financial Statements and Supplementary Data



Index to Consolidated Financial Statements



|                                                                                                          | Page
|--------------------------------------------------------------------------------------------------------- | ----
|Management’s Report on Internal Control over Financial Reporting                                          | 69  
|Report of Independent Registered Public Accounting Firm                                                   | 70  
|Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting      | 71  
|Consolidated Statements of Assets and Liabilities as of December 31, 2013 and 2012                        | 72  
|Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011                | 73  
|Consolidated Statements of Changes in Net
    Assets for the Years Ended December 31, 2013, 2012 and 2011 | 74  
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011                | 75  
|Consolidated Schedules of Investments as of December 31, 2013 and 2012                                    | 76  
|Notes to the Consolidated Financial Statements                                                            | 84  



68







Management’s Report on Internal
Control over Financial Reporting



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



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



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



Management assessed
the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment,
we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control —
Integrated Framework issued in 1992. Based on the assessment, management believes that, as of December 31, 2013, 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, 2013, which appears in this annual report on
Form 10-K.



69







Report of Independent Registered Public
Accounting Firm



To the Board of Directors and Stockholders



Horizon Technology Finance Corporation



We have audited the accompanying consolidated
statements of assets and liabilities, including the consolidated schedules of investments, of Horizon Technology Finance Corporation
and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations,
changes in net assets, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.



We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. Our procedures included confirmation of investments as of December
31, 2013 and 2012, by correspondence with custodians or borrowers. 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, 2013 and 2012, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2013, 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, 2013, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992, and our report
dated March 11, 2014 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 11, 2014



70







Report
of Independent Registered Public Accounting Firm on

Internal
Control over Financial Reporting



To the Board of Directors and Stockholders

Horizon Technology Finance Corporation



We have audited Horizon Technology Finance
Corporation and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2013,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission in 1992. The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.



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



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



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



In our opinion, Horizon Technology Finance
Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December
31, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 1992.



We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements of Horizon Technology Finance Corporation and Subsidiaries as of December 31, 2013 and 2012, and for each of the
three years in the period ended December 31, 2013, and our report dated March 11, 2014 expressed an unqualified opinion.



/s/McGladrey LLP

New Haven, Connecticut

March 11, 2014



71







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Assets and
Liabilities

(In thousands, except share data)



|                                                                                                                                                     |  | December 31, |        
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                                                                                     |  | 2013         |        
|                                                                                                                                                     |  |              |        
|Assets                                                                                                                                               |  |              |        
|Non-affiliate investments at fair value (cost of $234,310 and $239,385, respectively) (Note 4)                                                       |  | $            | 221,284
|Investment in money market funds                                                                                                                     |  |              | 1,188  
|Cash                                                                                                                                                 |  |              | 25,341 
|Restricted investments in money market funds                                                                                                         |  |              | 5,951  
|Interest receivable                                                                                                                                  |  |              | 4,240  
|Other assets                                                                                                                                         |  |              | 5,733  
|Total assets                                                                                                                                         |  | $            | 263,737
|                                                                                                                                                     |  |              |        
|Liabilities                                                                                                                                          |  |              |        
|Borrowings (Note 6)                                                                                                                                  |  | $            | 122,343
|Dividends payable                                                                                                                                    |  |              | 3,315  
|Base management fee payable (Note 3)                                                                                                                 |  |              | 439    
|Incentive fee payable (Note 3)                                                                                                                       |  |              | 852    
|Other accrued expenses                                                                                                                               |  |              | 953    
|Total liabilities                                                                                                                                    |  |              | 127,902
|                                                                                                                                                     |  |              |        
|Net assets                                                                                                                                           |  |              |        
|Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of December 31, 2013 and 2012        |  |              | —      
|Common stock, par value $0.001 per share, 100,000,000 shares authorized, 9,608,949 and 9,567,225 shares outstanding as of December 31, 2013 and 2012 |  |              | 10     
|Paid-in capital in excess of par                                                                                                                     |  |              | 154,975
|Accumulated undistributed net investment income                                                                                                      |  |              | 1,463  
|Net unrealized depreciation on investments                                                                                                           |  |              | (13,026
|Net realized loss on investments                                                                                                                     |  |              | (7,587 
|Total net assets                                                                                                                                     |  |              | 135,835
|Total liabilities and net assets                                                                                                                     |  | $            | 263,737
|Net asset value per common share                                                                                                                     |  | $            | 14.14  



See Notes to Consolidated Financial Statements



72







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Operations

(In thousands, except share data)



|                                                       |  | Year Ended December 31, |          
|------------------------------------------------------ |  | ----------------------- | ---------
|                                                       |  | 2013                    |          
|Investment income                                      |  |                         |          
|Interest income on non-affiliate investments           |  | $                       | 31,904   
|Interest income on money market funds                  |  |                         | —        
|Fee income on non-affiliate investments                |  |                         | 1,739    
|Total investment income                                |  |                         | 33,643   
|Expenses                                               |  |                         |          
|Interest expense                                       |  |                         | 8,124    
|Base management fee (Note 3)                           |  |                         | 5,209    
|Performance based incentive fee (Note 3)               |  |                         | 3,318    
|Administrative fee (Note 3)                            |  |                         | 1,169    
|Professional fees                                      |  |                         | 1,464    
|General and administrative                             |  |                         | 848      
|Total expenses                                         |  |                         | 20,132   
|Net investment income before excise tax                |  |                         | 13,511   
|Provision for excise tax (Note 7)                      |  |                         | (240     
|Net investment income                                  |  |                         | 13,271   
|                                                       |  |                         |          
|Net realized and unrealized (loss) gain on investments |  |                         |          
|Net realized (loss) gain on investments                |  |                         | (7,509   
|Provision for excise tax (Note 7)                      |  |                         | —        
|Net unrealized depreciation on investments             |  |                         | (2,254   
|                                                       |  |                         |          
|Net realized and unrealized (loss) gain on investments |  |                         | (9,763   
|                                                       |  |                         |          
|Net increase in net assets resulting from operations   |  | $                       | 3,508    
|Net investment income per common share                 |  | $                       | 1.38     
|Net increase in net assets per common share            |  | $                       | 0.37     
|Dividends declared per share                           |  | $                       | 1.38     
|Weighted average shares outstanding                    |  |                         | 9,583,257



See Notes to Consolidated Financial Statements



73







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Changes in
Net Assets

(In thousands, except share data)



|                                                         |  | Common Stock |           |  | Paid-In
    Capital in Excess of |   |    | Accumulated
    Undistributed (distributions in excess of) Net |  |   | Net Unrealized
    Appreciation (Depreciation) on |  |  | Net Realized
    Gain (Loss) on |         |     | Total Net   |  
|-------------------------------------------------------- |  | ------------ | --------- |  | -------------------------------- | - | -- | -------------------------------------------------------------- |  | - | ------------------------------------------------- |  |  | ------------------------------- | ------- | --- | ----------- | -
|                                                         |  | Shares       |           |  | Amount                           |   |    | Par                                                            |  |   | Investment Income                                 |  |  | Investments                     |         |     | Investments |  
|Balance
    at December 31, 2010                         |  |              | 7,593,421 |  |                                  | $ | 8  |                                                                |  | $ | 123,836                                           |  |  | $                               | (143    | )   |             | $
|Net increase in net assets
    resulting from operations |  |              | —         |  |                                  |   | —  |                                                                |  |   | —                                                 |  |  |                                 | 10,511  | (1) |             |  
|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   |     |             |  
|Issuance of common stock,
    net of offering costs (2)  |  |              | 1,909,000 |  |                                  |   | 2  |                                                                |  |   | 29,523                                            |  |  |                                 | —       |     |             |  
|Net increase in net assets
    resulting from operations |  |              | —         |  |                                  |   | —  |                                                                |  |   | —                                                 |  |  |                                 | 11,996  | (1) |             |  
|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   |     |             |  
|Net increase in net assets
    resulting from operations |  |              | —         |  |                                  |   | —  |                                                                |  |   | —                                                 |  |  |                                 | 13,271  | (1) |             |  
|Issuance of common stock
    as stock dividend           |  |              | 41,724    |  |                                  |   | —  |                                                                |  |   | 591                                               |  |  |                                 | —       |     |             |  
|Dividends
    declared                                   |  |              | —         |  |                                  |   | —  |                                                                |  |   | —                                                 |  |  |                                 | (13,236 | )   |             |  
|Balance
    at December 31, 2013                         |  |              | 9,608,949 |  |                                  | $ | 10 |                                                                |  | $ | 154,975                                           |  |  | $                               | 1,463   |     |             | $



|
|




| | (1) | Net of excise tax.
| | --- | ------------------

| | (2) | 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



74







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Cash Flow

(In thousands)



|                                                                                                                                      |  | Year Ended December 31, |        
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                                                      |  | 2013                    |        
|Cash flows from operating activities:                                                                                                 |  |                         |        
|Net increase in net assets resulting from operations                                                                                  |  | $                       | 3,508  
|Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities: |  |                         |        
|Amortization of debt issuance costs                                                                                                   |  |                         | 1,484  
|Net realized loss (gain) on investments                                                                                               |  |                         | 7,299  
|Net unrealized depreciation on investments                                                                                            |  |                         | 2,254  
|Purchase of investments                                                                                                               |  |                         | (88,362
|Principal payments received on investments                                                                                            |  |                         | 87,497 
|Proceeds from sale of investments                                                                                                     |  |                         | 200    
|Stock received in settlement of fee income                                                                                            |  |                         | —      
|Changes in assets and liabilities:                                                                                                    |  |                         |        
|Net decrease in investments in money market funds                                                                                     |  |                         | 1,372  
|Net increase in restricted investments in money market funds                                                                          |  |                         | (5,951 
|Decrease (increase) in interest receivable                                                                                            |  |                         | 237    
|Increase in end-of-term payments                                                                                                      |  |                         | (1,666 
|Decrease in unearned loan income                                                                                                      |  |                         | (1,559 
|Decrease (increase) in other assets                                                                                                   |  |                         | 307    
|(Decrease) increase in other accrued expenses                                                                                         |  |                         | (155   
|Increase (decrease) in base management fee payable                                                                                    |  |                         | 37     
|(Decrease) increase in incentive fee payable                                                                                          |  |                         | (3     
|Net cash provided by (used in) operating activities                                                                                   |  |                         | 6,499  
|                                                                                                                                      |  |                         |        
|Cash flows from financing activities:                                                                                                 |  |                         |        
|Proceeds from shares sold, net of offering costs                                                                                      |  |                         | —      
|Proceeds from issuance of 2019 Notes                                                                                                  |  |                         | —      
|Proceeds from issuance of Asset-Backed Notes                                                                                          |  |                         | 90,000 
|Dividends paid                                                                                                                        |  |                         | (12,632
|Net decrease in borrowings                                                                                                            |  |                         | (56,677
|Debt issuance costs                                                                                                                   |  |                         | (2,897 
|Net cash provided by (used in) financing activities                                                                                   |  |                         | 17,794 
|Net increase (decrease) in cash                                                                                                       |  |                         | 24,293 
|                                                                                                                                      |  |                         |        
|Cash:                                                                                                                                 |  |                         |        
|Beginning of period                                                                                                                   |  |                         | 1,048  
|End of period                                                                                                                         |  | $                       | 25,341 
|Supplemental disclosure of cash flow information:                                                                                     |  |                         |        
|Cash paid for interest                                                                                                                |  | $                       | 6,707  
|Supplemental non-cash investing and financing activities:                                                                             |  |                         |        
|Warrant investments received & recorded as unearned loan income                                                                       |  | $                       | 704    
|Dividends Payable                                                                                                                     |  | $                       | 3,315  
|Receivables resulting from sale of investments                                                                                        |  | $                       | —      
|Reclassification of receivables to investments                                                                                        |  | $                       | —      



See Notes to Consolidated Financial Statements



75







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2013

(In thousands)



|                                                |  |                    |  |                                                       |  | Principal |       |  | Cost of             |   |        | Fair  | 
|----------------------------------------------- |  | ------------------ |  | ----------------------------------------------------- |  | --------- | ----- |  | ------------------- | - | ------ | ----- | 
|Portfolio Company (1)                           |  | Sector             |  | Type of Investment (3)(4)(7)                          |  | Amount    |       |  | Investments
    (6) |   |        | Value | 
|Debt Investments — 157.5% (9)                   |  |                    |  |                                                       |  |           |       |  |                     |   |        |       | 
|Debt Investments — Life Science —
    22.9% (9) |  |                    |  |                                                       |  |           |       |  |                     |   |        |       | 
|Inotek Pharmaceuticals Corporation (2)          |  | Biotechnology      |  | Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)       |  | $         | 3,500 |  |                     | $ | 3,460  |       | 
|N30 Pharmaceuticals, Inc. (2)                   |  | Biotechnology      |  | Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)        |  |           | 760   |  |                     |   | 756    |       | 
|                                                |  |                    |  | Term Loan (11.25% cash, 3.00% ETP, Due 10/1/15)       |  |           | 2,230 |  |                     |   | 2,209  |       | 
|New Haven Pharmaceuticals, Inc. (2)             |  | Biotechnology      |  | Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)        |  |           | 1,500 |  |                     |   | 1,476  |       | 
|                                                |  |                    |  | Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)        |  |           | 500   |  |                     |   | 492    |       | 
|Sample6, Inc. (2)                               |  | Biotechnology      |  | Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16)        |  |           | 2,252 |  |                     |   | 2,229  |       | 
|Sunesis Pharmaceuticals, Inc. (2)(5)            |  | Biotechnology      |  | Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)        |  |           | 1,425 |  |                     |   | 1,418  |       | 
|                                                |  |                    |  | Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)        |  |           | 2,138 |  |                     |   | 2,100  |       | 
|Xcovery Holding Company, LLC (2)                |  | Biotechnology      |  | Term Loan (12.50% cash, Due 8/1/15)                   |  |           | 781   |  |                     |   | 779    |       | 
|                                                |  |                    |  | Term Loan (12.50% cash, Due 8/1/15)                   |  |           | 1,228 |  |                     |   | 1,226  |       | 
|                                                |  |                    |  | Term Loan (12.50% cash, Due 10/1/15)                  |  |           | 231   |  |                     |   | 231    |       | 
|Mederi Therapeutics, Inc.                       |  | Medical Device     |  | Term Loan (10.75% cash (Floor 10.75%; Ceiling 2.75%), |  |           | 3,000 |  |                     |   | 2,957  |       | 
|                                                |  |                    |  | 4.00% ETP, Due 7/1/17)                                |  |           |       |  |                     |   |        |       | 
|                                                |  |                    |  | Term Loan (10.75% cash (Floor 10.75%; Ceiling 2.75%), |  |           | 3,000 |  |                     |   | 2,917  |       | 
|                                                |  |                    |  | 4.00% ETP, Due 7/1/17)                                |  |           |       |  |                     |   |        |       | 
|Mitralign, Inc. (2)                             |  | Medical Device     |  | Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15)       |  |           | 1,587 |  |                     |   | 1,571  |       | 
|                                                |  |                    |  | Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15)       |  |           | 1,100 |  |                     |   | 1,089  |       | 
|                                                |  |                    |  | Term Loan (10.50% cash, 3.00% ETP, Due 7/1/16)        |  |           | 1,143 |  |                     |   | 1,115  |       | 
|PixelOptics, Inc. (8)                           |  | Medical Device     |  | Term Loan (10.75% cash, 3.00% ETP, Due 11/1/14)       |  |           | 5,000 |  |                     |   | 4,985  |       | 
|                                                |  |                    |  |                                                       |  |           | 219   |  |                     |   | 219    |       | 
|Tengion, Inc. (2)(5)                            |  | Medical Device     |  | Term Loan (13.00% cash, Due 5/1/14)                   |  |           | 1,382 |  |                     |   | 1,373  |       | 
|Tryton Medical, Inc. (2)                        |  | Medical Device     |  | Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,    |  |           | 3,000 |  |                     |   | 2,962  |       | 
|                                                |  |                    |  | Due 9/1/16)                                           |  |           |       |  |                     |   |        |       | 
|Total Debt Investments — Life Science           |  |                    |  |                                                       |  |           |       |  |                     |   | 35,564 |       | 
|                                                |  |                    |  |                                                       |  |           |       |  |                     |   |        |       | 
|Debt Investments — Technology —
    98.3% (9)   |  |                    |  |                                                       |  |           |       |  |                     |   |        |       | 
|Ekahau, Inc.                                    |  | Communications     |  | Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)        |  |           | 1,500 |  |                     |   | 1,474  |       | 
|                                                |  |                    |  | Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)        |  |           | 500   |  |                     |   | 490    |       | 
|Overture Networks, Inc. (2)                     |  | Communications     |  | Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)       |  |           | 5,000 |  |                     |   | 4,935  |       | 
|                                                |  |                    |  | Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)       |  |           | 2,500 |  |                     |   | 2,460  |       | 
|Optaros, Inc. (2)                               |  | Internet and Media |  | Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)       |  |           | 1,670 |  |                     |   | 1,660  |       | 
|                                                |  |                    |  | Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)        |  |           | 500   |  |                     |   | 497    |       | 
|SimpleTuition, Inc. (2)                         |  | Internet and Media |  | Term Loan (11.75% cash, Due 3/1/16)                   |  |           | 3,909 |  |                     |   | 3,862  |       | 
|Nanocomp Technologies, Inc.                     |  | Networking         |  | Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)       |  |           | 1,000 |  |                     |   | 963    |       | 
|Aquion Energy, Inc. (2)                         |  | Power Management   |  | Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)        |  |           | 2,704 |  |                     |   | 2,693  |       | 
|                                                |  |                    |  | Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)        |  |           | 2,704 |  |                     |   | 2,693  |       | 
|                                                |  |                    |  | Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16)        |  |           | 2,978 |  |                     |   | 2,966  |       | 
|Xtreme Power, Inc. (2)(8)                       |  | Power Management   |  | Term Loan (10.75% cash, 9.00% ETP, Due 5/1/16)        |  |           | 6,000 |  |                     |   | 5,947  |       | 
|Avalanche Technology, Inc. (2)                  |  | Semiconductors     |  | Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)        |  |           | 2,996 |  |                     |   | 2,973  |       | 
|                                                |  |                    |  | Term Loan (10.00% cash, 2.00% ETP, Due 1/1/18)        |  |           | 2,500 |  |                     |   | 2,455  |       | 
|eASIC Corporation (2)                           |  | Semiconductors     |  | Term Loan (11.00% cash, 2.50% ETP, Due 4/1/17)        |  |           | 2,000 |  |                     |   | 1,968  |       | 
|Kaminario, Inc. (2)                             |  | Semiconductors     |  | Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)       |  |           | 3,000 |  |                     |   | 2,954  |       | 
|                                                |  |                    |  | Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)       |  |           | 3,000 |  |                     |   | 2,954  |       | 
|Luxtera, Inc. (2)                               |  | Semiconductors     |  | Term Loan (10.25% cash, 8.00% ETP, Due 12/1/15)       |  |           | 2,734 |  |                     |   | 2,714  |       | 
|                                                |  |                    |  | Term Loan (10.25% cash, 8.00% ETP, Due 3/1/16)        |  |           | 1,519 |  |                     |   | 1,506  |       | 
|Newport Media, Inc. (2)                         |  | Semiconductors     |  | Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)       |  |           | 3,500 |  |                     |   | 3,418  |       | 
|                                                |  |                    |  | Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)       |  |           | 3,500 |  |                     |   | 3,418  |       | 
|NexPlanar Corporation (2)                       |  | Semiconductors     |  | Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)       |  |           | 3,000 |  |                     |   | 2,964  |       | 
|                                                |  |                    |  | Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)       |  |           | 2,000 |  |                     |   | 1,967  |       | 
|Xtera Communications, Inc. (2)                  |  | Semiconductors     |  | Term Loan (11.50% cash, 14.77% ETP, Due 7/1/15)       |  |           | 6,468 |  |                     |   | 6,441  |       | 
|                                                |  |                    |  | Term Loan (11.50% cash, 13.65% ETP, Due 2/1/16)       |  |           | 1,731 |  |                     |   | 1,718  |       | 
|Bolt Solutions, Inc. (2)                        |  | Software           |  | Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)        |  |           | 4,856 |  |                     |   | 4,819  |       | 
|                                                |  |                    |  | Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)        |  |           | 4,856 |  |                     |   | 4,819  |       | 
|Construction Software Technologies, Inc. (2)    |  | Software           |  | Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)       |  |           | 4,200 |  |                     |   | 4,172  |       | 
|                                                |  |                    |  | Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)       |  |           | 4,200 |  |                     |   | 4,172  |       | 
|Courion Corporation (2)                         |  | Software           |  | Term Loan (11.45% cash, Due 10/1/15)                  |  |           | 2,662 |  |                     |   | 2,654  |       | 
|                                                |  |                    |  | Term Loan (11.45% cash, Due 10/1/15)                  |  |           | 2,662 |  |                     |   | 2,654  |       | 



See Notes to Consolidated Financial Statements



76







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2013

(In thousands)



|                                                                   |  |                    |  |                                                       |  | Principal |        |  | Cost of             |  |         | Fair  |       
|------------------------------------------------------------------ |  | ------------------ |  | ----------------------------------------------------- |  | --------- | ------ |  | ------------------- |  | ------- | ----- | ------
|Portfolio Company (1)                                              |  | Sector             |  | Type of Investment (3)(4)(7)                          |  | Amount    |        |  | Investments
    (6) |  |         | Value |       
|Decisyon, Inc. (2)                                                 |  | Software           |  | Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)        |  |           | 4,000  |  |                     |  | 3,932   |       |       
|Kontera Technologies, Inc. (2)                                     |  | Software           |  | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)       |  |           | 4,000  |  |                     |  | 3,949   |       |       
|                                                                   |  |                    |  | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)       |  |           | 4,000  |  |                     |  | 3,949   |       |       
|Lotame Solutions, Inc. (2)                                         |  | Software           |  | Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)       |  |           | 4,000  |  |                     |  | 3,971   |       |       
|                                                                   |  |                    |  | Term Loan (11.50% cash, 3.00% ETP, Due 9/1/16)        |  |           | 1,500  |  |                     |  | 1,486   |       |       
|Netuitive, Inc. (2)                                                |  | Software           |  | Term Loan (11.75% cash, Due 1/1/16)                   |  |           | 2,359  |  |                     |  | 2,330   |       |       
|Raydiance, Inc. (2)                                                |  | Software           |  | Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)        |  |           | 5,000  |  |                     |  | 4,948   |       |       
|                                                                   |  |                    |  | Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)        |  |           | 1,000  |  |                     |  | 975     |       |       
|Razorsight Corporation (2)                                         |  | Software           |  | Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)       |  |           | 1,500  |  |                     |  | 1,477   |       |       
|                                                                   |  |                    |  | Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)        |  |           | 1,500  |  |                     |  | 1,475   |       |       
|                                                                   |  | Software           |  | Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)        |  |           | 1,000  |  |                     |  | 980     |       |       
|Sys-Tech Solutions, Inc. (2)                                       |  | Software           |  | Term Loan (11.65% cash, Due 6/1/16)                   |  |           | 7,100  |  |                     |  | 6,919   |       |       
|VBrick Systems, Inc.                                               |  | Software           |  | Term Loan (11.50% cash (Floor 10.50%; Ceiling 3.50%), |  |           | 3,000  |  |                     |  | 2,970   |       |       
|                                                                   |  |                    |  | 5.00% ETP, Due 7/1/17)                                |  |           |        |  |                     |  |         |       |       
|Vidsys, Inc. (2)                                                   |  | Software           |  | Term Loan (11.00% cash, 6.50% ETP, Due 6/1/16)        |  |           | 3,000  |  |                     |  | 2,970   |       |       
|Visage Mobile, Inc. (2)                                            |  | Software           |  | Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)        |  |           | 974    |  |                     |  | 962     |       |       
|Total Debt Investments — Technology                                |  |                    |  |                                                       |  |           |        |  |                     |  | 134,673 |       |       
|                                                                   |  |                    |  |                                                       |  |           |        |  |                     |  |         |       |       
|Debt Investments — Cleantech —
    17.6% (9)                       |  |                    |  |                                                       |  |           |        |  |                     |  |         |       |       
|Renmatix, Inc. (2)                                                 |  | Alternative Energy |  | Term Loan (10.25% cash, 9.00% ETP, Due 2/1/16)        |  |           | 2,028  |  |                     |  | 2,015   |       |       
|                                                                   |  |                    |  | Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)        |  |           | 2,028  |  |                     |  | 2,015   |       |       
|                                                                   |  |                    |  | Term Loan (10.25% cash, Due 10/1/16)                  |  |           | 5,000  |  |                     |  | 4,956   |       |       
|Semprius, Inc. (2)(8)                                              |  | Alternative Energy |  | Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)        |  |           | 3,203  |  |                     |  | 3,183   |       |       
|Aurora Algae, Inc. (2)                                             |  | Energy Efficiency  |  | Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)        |  |           | 1,280  |  |                     |  | 1,276   |       |       
|Rypos, Inc.                                                        |  | Energy Efficiency  |  | Term Loan (11.80% cash, Due 1/1/17)                   |  |           | 3,000  |  |                     |  | 2,928   |       |       
|Solarbridge Technologies, Inc. (2)(8)                              |  | Energy Efficiency  |  | Term Loan (12.15% cash, 3.21 ETP, Due 12/1/16)        |  |           | 7,000  |  |                     |  | 6,785   |       |       
|Tigo Energy, Inc.  (2)                                             |  | Energy Efficiency  |  | Term Loan (13.00% cash, 3.16% ETP, Due 6/1/15)        |  |           | 2,214  |  |                     |  | 2,199   |       |       
|Cereplast, Inc. (5)(8)                                             |  | Waste Recycling    |  | Term Loan (12.00% cash, Due 8/1/14)                   |  |           | 1,081  |  |                     |  | 978     |       |       
|                                                                   |  |                    |  | Term Loan (12.00% cash, Due 8/1/14)                   |  |           | 1,160  |  |                     |  | 1,141   |       |       
|Total Debt Investments — Cleantech                                 |  |                    |  |                                                       |  |           |        |  |                     |  | 27,476  |       |       
|Debt Investments — Healthcare information and services — 18.7% (9) |  |                    |  |                                                       |  |           |        |  |                     |  |         |       |       
|BioScale, Inc. (2)                                                 |  | Diagnostics        |  | Term Loan (11.51% cash, Due 1/1/14)                   |  |           | 232    |  |                     |  | 232     |       |       
|Radisphere National Radiology Group, Inc. (2)                      |  | Diagnostics        |  | Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)   |  |           | 12,000 |  |                     |  | 11,908  |       |       
|Watermark Medical, Inc. (2)                                        |  | Other Healthcare   |  | Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)        |  |           | 3,500  |  |                     |  | 3,452   |       |       
|                                                                   |  |                    |  | Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)        |  |           | 3,500  |  |                     |  | 3,452   |       |       
|Recondo Technology, Inc. (2)                                       |  | Software           |  | Term Loan (11.50% cash, 4.14% ETP, Due 4/1/16)        |  |           | 1,384  |  |                     |  | 1,356   |       |       
|                                                                   |  |                    |  | Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)        |  |           | 2,500  |  |                     |  | 2,473   |       |       
|                                                                   |  | Other Healthcare   |  | Term Loan (10.50% cash, 2.50% ETP, Due 1/1/18)        |  |           | 2,500  |  |                     |  | 2,468   |       |       
|Total Debt Investments — Healthcare information and services       |  |                    |  |                                                       |  |           |        |  | 25,341              |  |         |       | 25,341
|Total Debt Investments                                             |  |                    |  |                                                       |  |           |        |  |                     |  | 223,054 |       |       
|                                                                   |  |                    |  |                                                       |  |           |        |  |                     |  |         |       |       
|Warrant Investments — 4.5% (9)                                     |  |                    |  |                                                       |  |           |        |  |                     |  |         |       |       
|                                                                   |  |                    |  |                                                       |  |           |        |  |                     |  |         |       |       
|Warrants — Life Science — 2.1%
    (9)                             |  |                    |  |                                                       |  |           |        |  |                     |  |         |       |       
|ACT Biotech Corporation                                            |  | Biotechnology      |  | 1,521,820 Preferred Stock Warrants                    |  |           | —      |  |                     |  | 83      |       |       
|Ambit Biosciences, Inc.(5)                                         |  | Biotechnology      |  | 44,795 Common Stock Warrants                          |  |           | —      |  |                     |  | 143     |       |       
|Anacor Pharmaceuticals, Inc. (2)(5)                                |  | Biotechnology      |  | 84,583 Common Stock Warrants                          |  |           | —      |  |                     |  | 93      |       |       
|Celsion Corporation (5)                                            |  | Biotechnology      |  | 5,708 Common Stock Warrants                           |  |           | —      |  |                     |  | 15      |       |       
|Inotek Pharmaceuticals Corporation                                 |  | Biotechnology      |  | 114,387 Preferred Stock Warrants                      |  |           | —      |  |                     |  | 17      |       |       
|N30 Pharmaceuticals, Inc.                                          |  | Biotechnology      |  | 214,200 Preferred Stock Warrants                      |  |           | —      |  |                     |  | 122     |       |       
|New Haven Pharmaceuticals, Inc.                                    |  | Biotechnology      |  | 34,729 Preferred Stock Warrants                       |  |           | —      |  |                     |  | 22      |       |       
|Revance Therapeutics, Inc.                                         |  | Biotechnology      |  | 687,091 Preferred Stock Warrants                      |  |           | —      |  |                     |  | 223     |       |       
|Sample6, Inc.                                                      |  | Biotechnology      |  | 200,582 Preferred Stock Warrants                      |  |           | —      |  |                     |  | 27      |       |       
|Sunesis Pharmaceuticals, Inc. (5)                                  |  | Biotechnology      |  | 116,203 Common Stock Warrants                         |  |           | —      |  |                     |  | 83      |       |       
|Supernus Pharmaceuticals, Inc. (2)(5)                              |  | Biotechnology      |  | 42,083 Preferred Stock Warrants                       |  |           | —      |  |                     |  | 94      |       |       
|Tranzyme, Inc. (5)                                                 |  | Biotechnology      |  | 77,902 Common Stock Warrants                          |  |           | —      |  |                     |  | 6       |       |       
|Direct Flow Medical, Inc.                                          |  | Medical Device     |  | 176,922 Preferred Stock Warrants                      |  |           | —      |  |                     |  | 144     |       |       
|EnteroMedics, Inc. (5)                                             |  | Medical Device     |  | 141,026 Common Stock Warrants                         |  |           | —      |  |                     |  | 347     |       |       
|Mederi Therapeutics, Inc.                                          |  | Medical Device     |  | 248,736 Preferred Stock Warrants                      |  |           | —      |  |                     |  | 26      |       |       
|Mitralign, Inc.                                                    |  | Medical Device     |  | 295,238 Common Stock Warrants                         |  |           | —      |  |                     |  | 49      |       |       
|OraMetrix, Inc. (2)                                                |  | Medical Device     |  | 812,348 Preferred Stock Warrants                      |  |           | —      |  |                     |  | 78      |       |       



See Notes to Consolidated Financial Statements



77







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2013

(In thousands)



|                                                          |  |                               |  |                                    |  | Principal |   |  | Cost of             |  |       | Fair  | 
|--------------------------------------------------------- |  | ----------------------------- |  | ---------------------------------- |  | --------- | - |  | ------------------- |  | ----- | ----- | 
|Portfolio Company (1)                                     |  | Sector                        |  | Type of Investment (3)(4)(7)       |  | Amount    |   |  | Investments
    (6) |  |       | Value | 
|PixelOptics, Inc.                                         |  | Medical Device                |  | 381,612 Preferred Stock Warrants   |  |           | — |  |                     |  | 96    |       | 
|Tengion, Inc. (2)(5)                                      |  | Medical Device                |  | 1,864,876 Common Stock Warrants    |  |           | — |  |                     |  | 124   |       | 
|Tryton Medical, Inc. (2)                                  |  | Medical Device                |  | 47,977 Preferred Stock Warrants    |  |           | — |  |                     |  | 14    |       | 
|ViOptix, Inc.                                             |  | Medical Device                |  | 375,763 Preferred Stock Warrants   |  |           | — |  |                     |  | 13    |       | 
|Total Warrants — Life Science                             |  |                               |  |                                    |  |           |   |  |                     |  | 1,819 |       | 
|                                                          |  |                               |  |                                    |  |           |   |  |                     |  |       |       | 
|Warrants — Technology — 1.8%
    (9)                      |  |                               |  |                                    |  |           |   |  |                     |  |       |       | 
|Ekahau, Inc.                                              |  | Communications                |  | 978,261 Preferred Stock Warrants   |  |           | — |  |                     |  | 34    |       | 
|OpenPeak, Inc.                                            |  | Communications                |  | 18,997 Preferred Stock Warrants    |  |           | — |  |                     |  | 89    |       | 
|Overture Networks, Inc.                                   |  | Communications                |  | 344,574 Preferred Stock Warrants   |  |           | — |  |                     |  | 55    |       | 
|Everyday Health, Inc.                                     |  | Consumer-related Technologies |  | 65,674 Preferred Stock Warrants    |  |           | — |  |                     |  | 69    |       | 
|SnagAJob.com, Inc.                                        |  | Consumer-related Technologies |  | 365,396 Preferred Stock Warrants   |  |           | — |  |                     |  | 23    |       | 
|Tagged, Inc.                                              |  | Consumer-related Technologies |  | 190,868 Preferred Stock Warrants   |  |           | — |  |                     |  | 26    |       | 
|XIOtech, Inc.                                             |  | Data Storage                  |  | 2,217,979 Preferred Stock Warrants |  |           | — |  |                     |  | 22    |       | 
|Cartera Commerce, Inc.                                    |  | Internet and media            |  | 90,909 Preferred Stock Warrants    |  |           | — |  |                     |  | 16    |       | 
|Optaros, Inc.                                             |  | Internet and media            |  | 477,403 Preferred Stock Warrants   |  |           | — |  |                     |  | 21    |       | 
|SimpleTuition, Inc.                                       |  | Internet and media            |  | 189,573 Preferred Stock Warrants   |  |           | — |  |                     |  | 63    |       | 
|IntelePeer, Inc.                                          |  | Networking                    |  | 141,549 Preferred Stock Warrants   |  |           | — |  |                     |  | 39    |       | 
|Motion Computing, Inc.                                    |  | Networking                    |  | 104,283 Preferred Stock Warrants   |  |           | — |  |                     |  | 4     |       | 
|Nanocomp Technologies, Inc.                               |  | Networking                    |  | 204,546 Preferred Stock Warrants   |  |           | — |  |                     |  | 19    |       | 
|Aquion Energy, Inc.                                       |  | Power Management              |  | 115,051 Preferred Stock Warrants   |  |           | — |  |                     |  | 8     |       | 
|Xtreme Power, Inc.                                        |  | Power Management              |  | 2,466,821 Preferred Stock Warrants |  |           | — |  |                     |  | 76    |       | 
|Avalanche Technology, Inc.                                |  | Semiconductors                |  | 244,649 Preferred Stock Warrants   |  |           | — |  |                     |  | 56    |       | 
|eASIC Corporation`                                        |  | Semi-conductor                |  | 1,877,799 Preferred Stock Warrants |  |           | — |  |                     |  | 16    |       | 
|Kaminario, Inc.                                           |  | Semi-conductor                |  | 1,087,203 Preferred Stock Warrants |  |           | — |  |                     |  | 59    |       | 
|Luxtera, Inc.                                             |  | Semiconductors                |  | 1,827,485 Preferred Stock Warrants |  |           | — |  |                     |  | 34    |       | 
|Newport Media, Inc.                                       |  | Semiconductors                |  | 188,764 Preferred Stock Warrants   |  |           | — |  |                     |  | 40    |       | 
|NexPlanar Corporation                                     |  | Semiconductors                |  | 216,001 Preferred Stock Warrants   |  |           | — |  |                     |  | 36    |       | 
|Xtera Communications, Inc.                                |  | Semiconductors                |  | 983,607 Preferred Stock Warrants   |  |           | — |  |                     |  | 206   |       | 
|Bolt Solutions, Inc.                                      |  | Software                      |  | 202,892 Preferred Stock Warrants   |  |           | — |  |                     |  | 113   |       | 
|Clarabridge, Inc.                                         |  | Software                      |  | 53,486 Preferred Stock Warrants    |  |           | — |  |                     |  | 14    |       | 
|Construction Software Technologies, Inc. (2)              |  | Software                      |  | 386,415 Preferred Stock Warrants   |  |           | — |  |                     |  | 69    |       | 
|Courion Corporation                                       |  | Software                      |  | 772,543 Preferred Stock Warrants   |  |           | — |  |                     |  | 106   |       | 
|Decisyon, Inc.                                            |  | Software                      |  | 314,686 Preferred Stock Warrants   |  |           | — |  |                     |  | 44    |       | 
|DriveCam, Inc.                                            |  | Software                      |  | 71,639 Preferred Stock Warrants    |  |           | — |  |                     |  | 20    |       | 
|Kontera Technologies, Inc. (2)                            |  | Software                      |  | 99,476 Preferred Stock Warrants    |  |           | — |  |                     |  | 102   |       | 
|Lotame Solutions, Inc.                                    |  | Software                      |  | 216,810 Preferred Stock Warrants   |  |           | — |  |                     |  | 4     |       | 
|Netuitive, Inc.                                           |  | Software                      |  | 748,453 Preferred Stock Warrants   |  |           | — |  |                     |  | 75    |       | 
|Raydiance, Inc.                                           |  | Software                      |  | 735,784 Preferred Stock Warrants   |  |           | — |  |                     |  | 51    |       | 
|Razorsight Corporation                                    |  | Software                      |  | 259,404 Preferred Stock Warrants   |  |           | — |  |                     |  | 44    |       | 
|Sys-Tech Solutions, Inc.                                  |  | Software                      |  | 375,000 Preferred Stock Warrants   |  |           | — |  |                     |  | 242   |       | 
|Vidsys, Inc.                                              |  | Software                      |  | 37,346 Preferred Stock Warrants    |  |           | — |  |                     |  | 23    |       | 
|Visage Mobile, Inc.                                       |  | Software                      |  | 1,692,047 Preferred Stock Warrants |  |           | — |  |                     |  | 20    |       | 
|Total Warrants — Technology                               |  |                               |  |                                    |  |           |   |  |                     |  | 1,938 |       | 
|                                                          |  |                               |  |                                    |  |           |   |  |                     |  |       |       | 
|Warrants — Cleantech — 0.2%
    (9)                       |  |                               |  |                                    |  |           |   |  |                     |  |       |       | 
|Renmatix, Inc.                                            |  | Alternative Energy            |  | 52,296 Preferred Stock Warrants    |  |           | — |  |                     |  | 68    |       | 
|Semprius, Inc.                                            |  | Alternative Energy            |  | 519,981 Preferred Stock Warrants   |  |           | — |  |                     |  | 26    |       | 
|Enphase Energy, Inc. (5)                                  |  | Energy Efficiency             |  | 161,959 Common Stock Warrants      |  |           | — |  |                     |  | 175   |       | 
|Rypos, Inc.                                               |  | Energy Efficiency             |  | 5,627 Preferred Stock Warrants     |  |           | — |  |                     |  | 44    |       | 
|Solarbridge Technologies, Inc. (2)                        |  | Energy Efficiency             |  | 3,645,302 Preferred Stock Warrants |  |           | — |  |                     |  | 236   |       | 
|Tigo Energy, Inc. (2)                                     |  | Energy Efficiency             |  | 804,604 Preferred Stock Warrants   |  |           | — |  |                     |  | 100   |       | 
|Cereplast, Inc. (5)                                       |  | Waste Recycling               |  | 365,000 Common Stock Warrants      |  |           | — |  |                     |  | 175   |       | 
|Total Warrants — Cleantech                                |  |                               |  |                                    |  |           |   |  |                     |  | 824   |       | 
|                                                          |  |                               |  |                                    |  |           |   |  |                     |  |       |       | 
|Warrants — Healthcare information and services — 0.4% (9) |  |                               |  |                                    |  |           |   |  |                     |  |       |       | 
|Accumetrics, Inc.                                         |  | Diagnostics                   |  | 100,928 Preferred Stock Warrants   |  |           | — |  |                     |  | 107   |       | 
|BioScale, Inc. (2)                                        |  | Diagnostics                   |  | 315,618 Preferred Stock Warrants   |  |           | — |  |                     |  | 54    |       | 
|Precision Therapeutics, Inc.                              |  | Diagnostics                   |  | 13,461 Preferred Stock Warrants    |  |           | — |  |                     |  | 73    |       | 
|Radisphere National Radiology Group, Inc. (2)             |  | Diagnostics                   |  | 519,992 Preferred Stock Warrants   |  |           | — |  |                     |  | 378   |       | 
|Patientkeeper, Inc.                                       |  | Other Healthcare              |  | 396,410 Preferred Stock Warrants   |  |           | — |  |                     |  | 269   |       | 



See Notes to Consolidated Financial Statements



78







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2013

(In thousands)



|                                                           |  |                  |  |                                  |  | Principal |   |   | Cost of             |   |         | Fair  |      
|---------------------------------------------------------- |  | ---------------- |  | -------------------------------- |  | --------- | - | - | ------------------- | - | ------- | ----- | -----
|Portfolio Company (1)                                      |  | Sector           |  | Type of Investment (3)(4)(7)     |  | Amount    |   |   | Investments
    (6) |   |         | Value |      
|Singulex, Inc.                                             |  | Other Healthcare |  | 293,632 Preferred Stock Warrants |  |           | — |   |                     |   | 44      |       |      
|Talyst, Inc.                                               |  | Other Healthcare |  | 300,360 Preferred Stock Warrants |  |           | — |   |                     |   | 100     |       |      
|Watermark Medical, Inc.                                    |  | Other Healthcare |  | 12,216 Preferred Stock Warrants  |  |           | — |   |                     |   | 66      |       |      
|Recondo Technology, Inc.                                   |  | Software         |  | 436,088 Preferred Stock Warrants |  |           | — |   |                     |   | 73      |       |      
|Total Warrants — Healthcare information
    and services   |  |                  |  |                                  |  |           |   |   |                     |   | 1,164   |       |      
|Total Warrants                                             |  |                  |  |                                  |  |           |   |   |                     |   | 5,745   |       |      
|                                                           |  |                  |  |                                  |  |           |   |   |                     |   |         |       |      
|Other Investments — 0.3% (9)                               |  |                  |  |                                  |  |           |   |   |                     |   |         |       |      
|Vette Technology, LLC                                      |  | Data Storage     |  | Royalty Agreement Due 4/18/2019  |  |           | — |   |                     |   | 4,729   |       |      
|Total Other Investments                                    |  |                  |  |                                  |  |           |   |   |                     |   | 4,729   |       |      
|Equity — 0.8% (9)                                          |  |                  |  |                                  |  |           |   |   |                     |   |         |       |      
|Insmed Incorporated (5)                                    |  | Biotechnology    |  | 33,208 Common Stock              |  |           | — |   |                     |   | 227     |       |      
|Revance Therapeutics, Inc.                                 |  | Biotechnology    |  | 72,925 Preferred Stock           |  |           | — |   |                     |   | 73      |       |      
|Overture Networks Inc.                                     |  | Communications   |  | 386,191 Common Stock             |  |           | — |   |                     |   | 482     |       |      
|Cereplast, Inc. (5)                                        |  | Waste Recycling  |  | 200,000 Common Stock             |  |           | — |   |                     |   | —       |       |      
|Total Equity                                               |  |                  |  |                                  |  |           |   |   |                     |   | 782     |       |      
|Total Portfolio Investment
    Assets — 163.1% (9)         |  |                  |  |                                  |  |           |   |   |                     | $ | 234,310 |       |      
|Short Term Investments — Money Market
    Funds — 0.9% (9) |  |                  |  |                                  |  |           |   |   |                     |   |         |       |      
|US Bank Money Market                                       |  |                  |  |                                  |  |           |   |   |                     | $ | 1,188   |       |      
|Total Short Term Investments — Money
    Market Funds      |  |                  |  |                                  |  |           |   |   |                     | $ | 1,188   |       |      
|Short Term Investments — Restricted Investments— 4.4% (9)  |  |                  |  |                                  |  |           |   |   |                     |   |         |       |      
|US Bank Money Market (2)                                   |  |                  |  |                                  |  |           |   |   |                     | $ | 5,951   |       |      
|Total Short Term Investments — Restricted Investments      |  |                  |  |                                  |  |           |   | $ | 5,951               |   |         | $     | 5,951










| | (1) | All of the Company’s investments are in entities which are domiciled in the United States and/or have a principal place
of business in the United States.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Has been pledged as collateral under the Credit Facilities or 2013-1 Securitization.
| | --- | ------------------------------------------------------------------------------------



| | (3) | All investments are less than 5% ownership of the class and ownership of the portfolio company.
| | --- | -----------------------------------------------------------------------------------------------



| | (4) | All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s
debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETP and any additional
fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed
rates for the term of the loan, unless otherwise indicated. For each debt investment, the current interest rate in effect as of
December 31, 2013 is provided.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



| | (8) | Debt is on non-accrual status at December 31, 2013 and is, therefore, considered non-income producing.
| | --- | ------------------------------------------------------------------------------------------------------



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



See Notes to Consolidated Financial Statements



79







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 + 8.25%) 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



80







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



See Notes to Consolidated Financial Statements



81







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 | 
|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   |       | 
|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   |       | 
|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 |       | 



See Notes to Consolidated Financial Statements



82







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 |      
|Short Term Investments — Money Market Funds — 1.8% (9) |  |        |  |                              |  |           |  |   |                     |   |       |       |      
|Blackrock Liquid Fed Funds Institutional (Fund #30)    |  |        |  |                              |  |           |  |   |                     | $ | 2,197 |       |      
|Fidelity Prime Money Market (Class I Fund #690)        |  |        |  |                              |  |           |  |   |                     |   | 91    |       |      
|US Bank Money Market                                   |  |        |  |                              |  |           |  |   |                     |   | 272   |       |      
|Total Short Term Investments — Money Market Funds      |  |        |  |                              |  |           |  | $ | 2,560               |   |       | $     | 2,560



|
|




| | (1) | All of the Company’s investments are in entities which are domiciled in the United States and/or have principal place
of business in the United States.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Has been pledged as collateral under the Wells Facility or Fortress Facility.
| | --- | -----------------------------------------------------------------------------



| | (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



83







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except 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 (the “1940 Act”). In addition, for tax purposes,
the Company has elected to be treated as a regulated investment company (“RIC”) as defined under Subchapter M of the
Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, the Company generally is not subject to corporate-level
federal income tax on the portion of its taxable income and capital gains the Company distributes to the stockholders. The Company
primarily makes secured loans to development-stage companies in the technology, life science, healthcare information and services
and cleantech industries. All of the Company’s debt investments consist of loans secured by all of, or a portion of, the
applicable debtor company’s tangible and intangible assets.



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



Horizon Credit I LLC
(“Credit I”) was formed as a Delaware limited liability company on January 23, 2008, with CHF as the sole equity
member. Credit I is a special purpose bankruptcy remote entity and is a separate legal entity from the Company and CHF. There has
been no activity at Credit I during the twelve months ended December 31, 2013.



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



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



84







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except
share data)



Note 2.  Basis of Presentation and Significant
Accounting Policies



The consolidated financial
statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”)
and pursuant to the requirements for reporting on Form 10-K and Article 6 or 10 of Regulation S-X. In the opinion
of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair
presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated.
Certain prior period amounts have been reclassified to conform to the current period presentation.



Principles of Consolidation



As required under
GAAP and Regulation S-X, the Company will generally 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.



Fair Value



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



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



In May 2011, the Financial
Accounting Standards Board (“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 GAAP and the 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. The Company has adopted ASU
2011-04 and included additional disclosures in Note 5.



See Note
5 for additional information regarding fair value.



85







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands,
except share data)



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.
The Company has the intent to hold its loans for the foreseeable future or until maturity or payoff.



Interest on debt investments
is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined
using a method that results in a level rate of return on principal amounts outstanding. Generally, when a 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, 2013, there were five investments
on non-accrual status with a cost of $23.2 million and a fair value of $13.9 million. As of December 31, 2012, there were three
investments on non-accrual status with a cost of $12.9 million and a fair value of $4.9 million.



The Company receives
a variety of fees from borrowers in the ordinary course of conducting its business, including advisory fees, commitment fees, amendment
fees, non-utilization fees, success fees and prepayment fees. In a limited number of cases, the Company may also receive a non-refundable
deposit earned upon the termination of a transaction. 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. All other income
is recorded into income when earned. 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 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.



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



86







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except
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 debt
financing. The unamortized balance of debt issuance costs as of December 31, 2013 and 2012, included in other assets, was $5.1
million and $3.7 million, respectively. The accumulated amortization balances as of December 31, 2013 and 2012 were $2.0 million
and $0.6 million, respectively. The amortization expense for the years ended December 31, 2013, 2012 and 2011 relating to debt
issuance costs was $1.5 million, $0.5 million and $0.3 million, respectively.



Income Taxes



As a BDC, the Company
also has elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment
applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income
and asset diversification requirements and to timely distribute to its stockholders at least 90% of investment company taxable
income, as defined by the Code, for each 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, 2013,
2012 and 2011, $0.2 million, $0.2 million and $0.3 million was recorded for U.S. federal excise tax, respectively.



The Company evaluates
tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not”
to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold,
or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize
accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no material uncertain tax
positions at December 31, 2013 and 2012. The 2012, 2011, and 2010 tax years remain subject to examination by U.S. federal
and state tax authorities.



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.



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.



The Company’s
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.



87







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share
data)



Transfers of Financial Assets



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



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.



New Accounting Pronouncement



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



Note 3.  Related Party Transactions



Investment Management Agreement



On October 28,
2010, the Company entered into the Investment Management Agreement with the Advisor, 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.



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



88







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except
share data)



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, 2013 and 2012, respectively, was $0.4 million.
The base management fee expense was $5.2 million, $4.2 million and $4.2 million for the years ended December 31, 2013, 2012 and
2011, 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 realized capital gains,
if any, on a cumulative basis from the date of the election to be a BDC through the end of each calendar year, computed net of
all realized capital losses and unrealized capital depreciation on a cumulative basis through the end of such year, less all previous
amounts paid in respect of the capital gain incentive fee.



The performance based incentive fee expense was $3.3
million, $2.8 million and $3.0 million for the years ended December 31, 2013, 2012 and 2011, respectively. The incentive fee payable
for both December 31, 2013 and 2012 was $0.9 million. The entire incentive fee payable for each of the years ended December 31,
2013 and 2012 represents part one of the incentive fee.



89







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share
data)



Administration Agreement



The Company entered
into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services
to the Company. For providing these services, facilities and personnel, the Company 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, 2013, 2012 and 2011, $1.2 million, $1.1 million and $1.2 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, 2013 |         |  | December 31, 2012 |  
|-------------------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                             |  | Cost              |         |  | Fair Value        |  
|Money market funds                           |  | $                 | 1,188   |  |                   | $
|Restricted investments in money market funds |  | $                 | 5,951   |  |                   | $
|Non-affiliate investments                    |  |                   |         |  |                   |  
|Debt                                         |  | $                 | 223,054 |  |                   | $
|Warrants                                     |  |                   | 5,745   |  |                   |  
|Other Investments                            |  |                   | 4,729   |  |                   |  
|Equity                                       |  |                   | 782     |  |                   |  
|Total non-affiliate investments              |  | $                 | 234,310 |  |                   | $



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



|                                    |  | December 31, 2013 |         |  | December 31, 2012 |  
|----------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                    |  | Cost              |         |  | Fair Value        |  
|Life Science                        |  |                   |         |  |                   |  
|Biotechnology                       |  | $                 | 17,604  |  |                   | $
|Medical Device                      |  |                   | 20,079  |  |                   |  
|Technology                          |  |                   |         |  |                   |  
|Consumer-Related Technologies       |  |                   | 118     |  |                   |  
|Networking                          |  |                   | 1,025   |  |                   |  
|Software                            |  |                   | 67,510  |  |                   |  
|Data Storage                        |  |                   | 4,751   |  |                   |  
|Internet and Media                  |  |                   | 6,119   |  |                   |  
|Communications                      |  |                   | 10,019  |  |                   |  
|Semiconductors                      |  |                   | 37,897  |  |                   |  
|Power Management                    |  |                   | 14,382  |  |                   |  
|Cleantech                           |  |                   |         |  |                   |  
|Energy Efficiency                   |  |                   | 13,743  |  |                   |  
|Waste Recycling                     |  |                   | 2,294   |  |                   |  
|Alternative Energy                  |  |                   | 12,263  |  |                   |  
|Healthcare Information and Services |  |                   |         |  |                   |  
|Diagnostics                         |  |                   | 12,752  |  |                   |  
|Other Healthcare Related Services   |  |                   | 7,384   |  |                   |  
|Software                            |  |                   | 6,370   |  |                   |  
|Total non-affiliate investments     |  | $                 | 234,310 |  |                   | $



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.



90







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



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



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



| | Level 1 | Quoted prices in active markets for identical assets
and liabilities.
| | ------- | ---------------------------------------------------------------------



| | Level 2 | Observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, and model-based
valuation techniques for which all significant inputs are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
| | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Investments are valued
at fair value as determined in good faith by the Board, based on input of management, the audit committee and independent valuation
firms that have been engaged at the direction of the Board to assist in the valuation of each portfolio investment lacking a readily
available market quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied
valuation process. This valuation process is conducted at the end of each fiscal quarter, with 25% (based on fair value) of the
Company’s valuation of portfolio companies 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 December 31, 2013 and 2012, the discount rates used ranged from 9% to 25% and 8% to 25%, respectively.
Significant increases (decreases) in this unobservable input would result in a significantly lower (higher) fair value measurement.
These assets are recorded at fair value on a recurring basis and are categorized as Level 3 within the fair value hierarchy described
above.



91







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



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 measurements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price,
is based on indices of publicly traded companies similar in nature to the underlying company issuing the warrant. A total of seven
such indices were used. 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Other adjustments, including a marketability discount on private company warrants, are estimated
based on management’s judgment about the general industry environment. Significant increases (decreases) in this unobservable
input would result in 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.
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.



92







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



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.



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, 2013. 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 for the year ended December 31, 2013.



|                              |  | Fair  |         |  | Valuation Techniques/ |                                               | Unobservable |                             |      
|----------------------------- |  | ----- | ------- |  | --------------------- | --------------------------------------------- | ------------ | --------------------------- | -----
|Investment Type               |  | Value |         |  | Methodologies         |                                               | Input        |                             | Range
|                              |  |       |         |  |                       |                                               |              |                             |      
|Debt investments              |  | $     | 199,815 |  |                       | Discounted Expected Future Cash Flows         |              | Hypothetical Market Yield   |      
|                              |  |       |         |  |                       |                                               |              |                             |      
|                              |  |       | 13,939  |  |                       | Multiple Probability Weighted Cash Flow Model |              | Probability Weighting       |      
|                              |  |       |         |  |                       |                                               |              |                             |      
|Warrant investments           |  |       | 4,579   |  |                       | Black-Scholes Valuation Model                 |              | Price per share             |      
|                              |  |       |         |  |                       |                                               |              | Average Industry Volatility |      
|                              |  |       |         |  |                       |                                               |              | Marketability Discount      |      
|                              |  |       |         |  |                       |                                               |              | Estimated Time to Exit      |      
|                              |  |       |         |  |                       |                                               |              |                             |      
|Other investments             |  |       | 400     |  |                       | Multiple Probability Weighted Cash Flow Model |              | Discount Rate               |      
|                              |  |       |         |  |                       |                                               |              | Probability Weighting       |      
|                              |  |       |         |  |                       |                                               |              |                             |      
|Equity
    investments        |  |       | 529     |  |                       | Most Recent Equity Investment                 |              | Price Per Share             |      
|                              |  |       |         |  |                       |                                               |              |                             |      
|Total
    Level 3 investments |  | $     | 219,262 |  |                       |                                               |              |                             |      



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 for the year ended December 31, 2012.



|                          |  | Fair  |         |  | Valuation Techniques/ |                                       | Unobservable |                             |      
|------------------------- |  | ----- | ------- |  | --------------------- | ------------------------------------- | ------------ | --------------------------- | -----
|Investment Type           |  | Value |         |  | Methodologies         |                                       | Input        |                             | Range
|                          |  |       |         |  |                       |                                       |              |                             |      
|Debt investments          |  | $     | 215,397 |  |                       | Discounted Expected Future Cash Flows |              | Hypothetical Market Yield   |      
|                          |  |       |         |  |                       |                                       |              |                             |      
|                          |  |       | 4,900   |  |                       | Multiple Probability Weighted Cash    |              | Discount Rate               |      
|                          |  |       |         |  |                       | Flow Model                            |              | 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    |              | Discount Rate               |      
|                          |  |       |         |  |                       | Flow Model                            |              | 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 (as defined in Note 6 below) 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 the fixed rate 2019
Notes is based on the closing public share price on the date of measurement. At December 31, 2013, the 2019 Notes were trading
on the New York Stock Exchange for $25.35 per note, or $33.5 million. Therefore, the Company has categorized this borrowing as
Level 1 within the fair value hierarchy described above. Based on market quotations on or around December 31, 2013, the Asset-Backed
Notes were trading at par value, or $90.0 million, and are categorized as Level 3 within the fair value hierarchy described above.
These liabilities are not recorded at fair value on a recurring basis.



93







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



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, 2013 and 2012, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair
value:



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



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



The following table
shows a reconciliation of the beginning and ending balances for Level 3 assets for the year ended December 31, 2013:



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



94







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



The Company’s
transfers between levels are recognized at the end of the applicable reporting period. During the year ended December 31, 2013,
there were no transfers between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in one portfolio company,
with a value of $0.1 million, that were transferred into Level 2 due to the portfolio company becoming a public company during
the year ended December 31, 2013. Because the fair value of warrants held in publicly traded companies is determined based on inputs
that are readily available in public markets or can be derived from information available in public markets, the Company has categorized
the warrants as Level 2 within the fair value hierarchy described above as of December 31, 2013.



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



The following table
shows a reconciliation of the beginning and ending balances for Level 3 assets for the year ended December 31, 2012:



|                                                            |  | 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 applicable 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,
each 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 warrants held in publicly traded companies 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.



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.



The fair value amounts
for 2013 and 2012 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.



95







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



As of December 31,
2013 and 2012, the recorded book balances equaled fair values of all the Company’s financial instruments, except for the
Company’s 2019 Notes, as previously described.



Off-balance-sheet instruments



The Company assumes
interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result,
the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be
either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent
believed necessary to minimize interest rate risk. Management monitors rates and maturities of assets and liabilities and attempts
to minimize interest rate risk by adjusting terms of new 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, 2013 and 2012 is as follows:



|                   |  | December 31, 2013 |        
|------------------ |  | ----------------- | -------
|                   |  | Total             |        
|                   |  | Commitment        |        
|Asset-Backed Notes |  | $                 | 90,000 
|Fortress Facility  |  |                   | 75,000 
|Key Facility       |  |                   | 50,000 
|2019 Notes         |  |                   | 33,000 
|Total              |  | $                 | 248,000



|                  |  | December 31, 2012 |        
|----------------- |  | ----------------- | -------
|                  |  | Total             |        
|                  |  | Commitment        |        
|Wells Facility    |  | $                 | 75,000 
|Fortress Facility |  |                   | 75,000 
|2019 Notes        |  |                   | 33,000 
|Total             |  | $                 | 183,000



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, 2013, the asset coverage for borrowed amounts was 211%.



On November 4, 2013,
the Company renewed and amended the revolving credit facility (“Wells Facility”) previously administered by Wells Fargo
Capital Finance LLC (“Wells”) and facilitated the assignment of all rights and obligations of Wells under the Wells
Facility to Key Equipment Finance ("Key") (here and after referred to as the “Key Facility”). The Key Facility
has an accordion feature which allows for an increase in the total loan commitment to $150 million from the current $50 million
commitment provided by Key. The Key Facility is collateralized by all loans and warrants held by Credit II and permits an advance
rate of up to 50% of eligible loans held by Credit II. The Key Facility contains covenants that, among other things, require the
Company to maintain a minimum net worth and to restrict the loans securing the Key Facility to certain criteria for qualified loans
and includes portfolio company concentration limits as defined in the related loan agreement. The Key Facility has a three-year
revolving period followed by a two-year amortization period and matures on November 4, 2018. The interest rate is based upon the
one-month London Interbank Offered Rate, or LIBOR, plus a spread of 3.25%, with a LIBOR floor of 0.75%. The rate at December 31,
2013 was 4.00%. There were no advances made under the Key Facility for the year ended December 31, 2013.



96







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



The Company entered
into the Wells Facility with Wells effective July 14, 2011. The Wells Facility had an accordion feature which allowed for an increase
in the total loan commitment to $150 million from the $75 million commitment provided by Wells. The Wells Facility was collateralized
by all loans and warrants held by Credit II and permitted an advance rate of up to 50% of eligible loans held by Credit II. The
Wells Facility contained covenants that, among other things, required the Company to maintain a minimum net worth and restricted
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 had a three-year revolving term followed by a three-year amortization
period and matured on July 14, 2017. The interest rate was based upon the one-month LIBOR plus a spread of 4.00%, with a LIBOR
floor of 1.00%. On May 28, 2013, the Company and Wells amended the Wells Facility. As amended, effective May 1, 2013, the stated
interest rate was reduced to one-month LIBOR plus a spread of 3.25%, with a LIBOR floor of 1.00%. In general, all other terms and
conditions of the Wells Facility remain unchanged. The interest rate was 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 was 5.0%. The average rate for the years ended December 31, 2013 and
2012 was 4.8% and 5.0%, respectively. The average amounts of borrowings were $26.2 million and $15.1 million for the year ended
December 31, 2013 and 2012, respectively.



On March 23, 2012,
the Company issued and sold an aggregate principal amount of $30 million of 7.375% senior unsecured notes due in 2019 and on April
18, 2012, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $3 million
of such notes (collectively, the “2019 Notes”). The 2019 Notes will mature on March 15, 2019 and may be redeemed in
whole or in part at the Company’s option at any time or from time to time on or after March 15, 2015 at a redemption price
of $25 per security plus accrued and unpaid interest. The 2019 Notes bear interest at a rate of 7.375% per year payable quarterly
on March 15, June 15, September 15 and December 15 of each year. The 2019 Notes are the Company’s direct unsecured obligations
and rank (i) equally in right of payment with the Company’s future senior unsecured indebtedness; (ii) senior in right of
payment to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2019 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, 2013, the Company was in material compliance with the terms of the 2019 Notes.The 2019 Notes are listed
on the New York Stock Exchange under the symbol “HTF.”



The Company entered
into a term loan credit facility (the “Fortress Facility” and, together with the Key Facility, the “Credit Facilities”)
with Fortress Credit Co LLC (“Fortress”) effective August 23, 2012. The Fortress Facility 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 in an amount equal to 1.00% of unborrowed amounts available under the facility annually and has
an effective advance rate of 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 for both December 31, 2013 and 2012 was 7.00%, and the average
rate for the period within the years ended December 31, 2013 and 2012, in which the loan was outstanding, was 7.00%.



On June 28, 2013,
the Company completed a $189.3 million securitization of secured loans which it originated. 2013-1 Trust, a wholly owned subsidiary
of the Company, issued $90 million in the Asset-Backed Notes, which are rated A2(sf) by Moody’s Investors Service, Inc. The
Company is the sponsor, originator and servicer for the transaction. The Asset-Backed Notes bear interest at a fixed rate of 3.00%
per annum and have a stated maturity of May 15, 2018.



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



97







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



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



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



Under the terms of
the Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through principal collections from the
underlying securitized debt portfolio, which may be used to make monthly interest and principal payments on the Asset-Backed Notes.
The Company has segregated these funds and classified them as restricted investments in money market funds on the Consolidated
Statement of Assets and Liabilities. There was $6.0 million of restricted investments in money market funds as of December 31,
2013.



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, |       
|---------------------------------------------------- |  | ----------------------- | ------
|                                                     |  | 2013                    |       
|Net increase in net assets resulting from operations |  | $                       | 3,508 
|Net unrealized depreciation on investments           |  |                         | 2,254 
|Other book-tax differences                           |  |                         | 113   
|Capital Loss carry forward                           |  |                         | 7,509 
|Taxable income before deductions for distributions   |  | $                       | 13,384



98







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



The tax characters
of distributions paid are as follows:



|                        |  | Year Ended December 31, |       
|----------------------- |  | ----------------------- | ------
|                        |  | 2013                    |       
|Ordinary income         |  | $                       | 13,171
|Long-term capital gains |  |                         | 52    
|Total                   |  | $                       | 13,223



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



|                              |  | As of December 31, |         
|----------------------------- |  | ------------------ | --------
|                              |  | 2013               |         
|Undistributed ordinary income |  |                    | $	6, 338
|Undistributed long-term gain  |  |                    | —       
|Capital Loss carry forward    |  |                    | (7,509  
|Unrealized depreciation       |  |                    | (13,026 
|Total                         |  | $                  | (14,197 



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 2013 and 2012 the Company elected
to carry forward taxable income in excess of current year dividend distributions and recorded an excise tax payable of $0.2 million
and $0.2 million on $6.1 million and $5.9 million of undistributed earnings from operations and capital gains.



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 $9.0 million and $24.6 million as of December 31, 2013 and 2012, 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.



The largest loans
may vary from year to year as new loans are recorded and repaid. The Company’s five largest loans represented 22% and 23%
of total loans outstanding as of December 31, 2013 and 2012, respectively. No single loan represented more than 10% of the total
loans as of December 31, 2013 or 2012. Loan income, consisting of interest and fees, can fluctuate significantly upon repayment
of large loans. Interest income from the five largest loans accounted for 23%, 22% and 21% of total loan interest and fee income
for the years ended December 31, 2013, 2012 and 2011, respectively.



99







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



Note 10. 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 during the years end December 31, 2013 and 2012:



|Date                         |  | Record |          |  | Payment |  |          | Amount    |  |   | Cash         |  |  | DRIP 
Shares |        |  | DRIP 
Share | 
|---------------------------- |  | ------ | -------- |  | ------- |  | -------- | --------- |  | - | ------------ |  |  | ------------ | ------ |  | ----------- | 
|Declared                     |  | Date   |          |  | Date    |  |          | Per Share |  |   | Distribution |  |  | Issued       |        |  | Value       | 
|Year Ended December 31, 2013 |  |        |          |  |         | 
|11/1/13                      |  |        | 2/17/14  |  |         |  | 3/17/14  |           |  | $ | 0.115        |  |  | $            | —      |  |             | 
|11/1/13                      |  |        | 1/20/14  |  |         |  | 2/14/14  |           |  | $ | 0.115        |  |  | $            | 1,058  |  |             | 
|11/1/13                      |  |        | 12/16/13 |  |         |  | 1/15/14  |           |  | $ | 0.115        |  |  | $            | 1,061  |  |             | 
|8/2/13                       |  |        | 11/19/13 |  |         |  | 12/16/13 |           |  | $ | 0.115        |  |  | $            | 1,045  |  |             | 
|8/2/13                       |  |        | 10/17/13 |  |         |  | 11/15/13 |           |  | $ | 0.115        |  |  | $            | 937    |  |             | 
|8/2/13                       |  |        | 9/18/13  |  |         |  | 10/15/13 |           |  | $ | 0.115        |  |  | $            | 1,051  |  |             | 
|5/3/13                       |  |        | 8/19/13  |  |         |  | 9/16/13  |           |  | $ | 0.115        |  |  | $            | 1,057  |  |             | 
|5/3/13                       |  |        | 7/17/13  |  |         |  | 8/15/13  |           |  | $ | 0.115        |  |  | $            | 1,060  |  |             | 
|5/3/13                       |  |        | 6/20/13  |  |         |  | 7/15/13  |           |  | $ | 0.115        |  |  | $            | 1,070  |  |             | 
|3/8/13                       |  |        | 5/20/13  |  |         |  | 6/17/13  |           |  | $ | 0.115        |  |  | $            | 1,086  |  |             | 
|3/8/13                       |  |        | 4/18/13  |  |         |  | 5/15/13  |           |  | $ | 0.115        |  |  | $            | 1,087  |  |             | 
|3/8/13                       |  |        | 3/20/13  |  |         |  | 4/15/13  |           |  | $ | 0.115        |  |  | $            | 1,046  |  |             | 
|                             |  |        |          |  |         |  |          |           |  | $ | 1.380        |  |  | $            | 11,558 |  |             | 
|Year Ended December 31, 2012 |  |        |          |  |         |  |          |           |  |   |              | 
|11/27/12                     |  |        | 2/21/13  |  |         |  | 3/15/13  |           |  | $ | 0.115        |  |  | $            | 1,050  |  |             | 
|11/27/12                     |  |        | 1/18/13  |  |         |  | 2/15/13  |           |  | $ | 0.115        |  |  | $            | 1,087  |  |             | 
|11/27/12                     |  |        | 12/20/12 |  |         |  | 1/15/13  |           |  | $ | 0.115        |  |  | $            | 1,056  |  |             | 
|11/2/12                      |  |        | 11/16/12 |  |         |  | 11/30/12 |           |  | $ | 0.450        |  |  | $            | 4,243  |  |             | 
|8/7/12                       |  |        | 8/17/12  |  |         |  | 8/31/12  |           |  | $ | 0.450        |  |  | $            | 4,105  |  |             | 
|5/3/12                       |  |        | 5/17/12  |  |         |  | 5/31/12  |           |  | $ | 0.450        |  |  | $            | 3,402  |  |             | 
|3/12/12                      |  |        | 3/23/12  |  |         |  | 3/30/12  |           |  | $ | 0.450        |  |  | $            | 3,378  |  |             | 
|                             |  |        |          |  |         |  |          |           |  | $ | 2.145        |  |  | $            | 18,321 |  |             | 



On March 6, 2014, the Board declared a
monthly dividend of $0.115 per share payable as set forth in the table below.



|               |  |                |  | Dividends |      
|-------------- |  | -------------- |  | --------- | -----
|Record Dates   |  | Payment Date   |  | Declared  |      
|May 20, 2014   |  | June 16, 2014  |  | $         | 0.115
|April 17, 2014 |  | May 15, 2014   |  | $         | 0.115
|March 19, 2014 |  | April 15, 2014 |  | $         | 0.115



100







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



Note 11.  Financial Highlights



The financial highlights
for the Company are as follows:



|                                                     |  | Year Ended December 31, 2013 |           |   | Year Ended December 31, 2012 |   |           | Year Ended December 31, 2011 | 
|---------------------------------------------------- |  | ---------------------------- | --------- | - | ---------------------------- | - | --------- | ---------------------------- | 
|                                                     |  |                              |           |   |                              |   |           |                              | 
|Per share data:                                      |  |                              |           |   |                              |   |           |                              | 
|Net asset value at beginning of period               |  | $                            | 15.15     |   |                              | $ | 17.01     |                              | 
|Net investment income                                |  |                              | 1.38      |   |                              |   | 1.41      |                              | 
|Realized (loss) gain on investments                  |  |                              | (0.78     | ) |                              |   | 0.01      |                              | 
|Unrealized depreciation on investments               |  |                              | (0.23     | ) |                              |   | (0.95     | )                            | 
|Net increase in net assets resulting from operations |  |                              | 0.37      |   |                              |   | 0.47      |                              | 
|Net dilution from issuance of common stock           |  |                              | —         |   |                              |   | (0.28     | )                            | 
|Issuance of common stock and capital contributions   |  |                              | —         |   |                              |   | —         |                              | 
|Offering costs                                       |  |                              | —         |   |                              |   | —         |                              | 
|Dividends declared                                   |  |                              | (1.38     | ) |                              |   | (2.15     | )                            | 
|Other (1)                                            |  |                              | —         |   |                              |   | 0.10      |                              | 
|Net asset value at end of period                     |  | $                            | 14.14     |   |                              | $ | 15.15     |                              | 
|Per share market value, end of period                |  | $                            | 14.21     |   |                              | $ | 14.92     |                              | 
|Total return based on a market value (2)             |  |                              | 4.5       | % |                              |   | 2.5       | %                            | 
|Shares outstanding at end of period                  |  |                              | 9,608,949 |   |                              |   | 9,567,225 |                              | 
|Ratios to average net assets:                        |  |                              |           |   |                              |   |           |                              | 
|Expenses without incentive fees(3)                   |  |                              | 11.8      | % |                              |   | 8.4       | %                            | 
|Incentive fees                                       |  |                              | 2.3       | % |                              |   | 2.1       | %                            | 
|Total expenses(3)                                    |  |                              | 14.1      | % |                              |   | 10.5      | %                            | 
|Net investment income with incentive fees(3)         |  |                              | 9.2       | % |                              |   | 8.7       | %                            | 
|Average net asset value                              |  | $                            | 142,327   |   |                              | $ | 137,741   |                              | 
|Average debt per share                               |  |                              | 12.06     |   |                              |   | 7.42      |                              | 
|Portfolio turnover ratio                             |  |                              | 37.9      | % |                              |   | 74.0      | %                            | 



|
|




| | (1) | 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The total return 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) | During the year ended December 31, 2013, the Advisor
waived $0.1 million of management fees. Had this expense not been waived, the ratio of expenses without incentive fees to average
net assets, the ratio of total expenses to average net assets and the ratio of net investment income with incentive fees to average
net assets would have been 11.9%, 14.3% and 9.1% respectively.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



101







Horizon Technology Finance Corporation
and Subsidiaries



Notes to Consolidated Financial Statements

(In thousands, except share data)



Note 12.  Selected Quarterly Financial Data
(Unaudited)



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



|                                                               |  | December 31, |        |   | September 30, |   |       | June 30, |  |   | March 31, |  
|-------------------------------------------------------------- |  | ------------ | ------ | - | ------------- | - | ----- | -------- |  | - | --------- | -
|                                                               |  | 2012         |        |   | 2012          |   |       | 2012     |  |   | 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     |  



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

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



102







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,
2013, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our
management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures
were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of such possible controls and procedures.



(b) Management’s Report on Internal Control
Over Financial Reporting



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



(c) Changes in Internal Controls Over Financial
Reporting.



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



Item 9B.Other Information



None



PART III



We will file a definitive
Proxy Statement for our 2014 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 2014 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 2014 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal
year.



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



The information required
by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2014 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.



103







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 2014 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 2014 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 69.



(2) Financial
Statement Schedules — None



(3) Exhibits



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



104







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



105







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



|
|




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



106







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 11, 2014



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 |  | March 11, 2014
|Robert D. Pomeroy, Jr.      |  | and Chief Executive Officer        |  |               
|                            |  | (Principal Executive Officer)      |  |               
|                            |  |                                    |  |               
|/s/ Christopher M. Mathieu  |  | Chief Financial Officer and        |  | March 11, 2014
|Christopher M. Mathieu      |  | Treasurer (Principal Financial and |  |               
|                            |  | Accounting Officer)                |  |               
|                            |  |                                    |  |               
|/s/ Gerald A. Michaud       |  | President and Director             |  | March 11, 2014
|Gerald A. Michaud           |  |                                    |  |               
|                            |  |                                    |  |               
|/s/ James J. Bottiglieri    |  | Director                           |  | March 11, 2014
|James J. Bottiglieri        |  |                                    |  |               
|                            |  |                                    |  |               
|/s/ Edmund V. Mahoney       |  | Director                           |  | March 11, 2014
|Edmund V. Mahoney           |  |                                    |  |               
|                            |  |                                    |  |               
|/s/ Elaine A. Sarsynski     |  | Director                           |  | March 11, 2014
|Elaine A. Sarsynski         |  |                                    |  |               
|                            |  |                                    |  |               
|/s/ Christopher B. Woodward |  | Director                           |  | March 11, 2014
|Christopher B. Woodward     |  |                                    |  |               



107