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, 2017

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
        incorporation or organization) | (I.R.S. Employer
        Identification No.)
|312 Farmington Avenue,                                                 |                                             
|Farmington, CT                                                         | 06032                                       
|(Address of principal executive offices)                               | (Zip Code)                                  



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



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              
|                                         |                                          
|6.25% Notes due 2022                     | The New York Stock Exchange              



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

None



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



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



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



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



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



Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging
growth company. See the definitions of “accelerated filer,” “large accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



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



If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ̈



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



The aggregate market value
of common stock held by non-affiliates of the Registrant on June 30, 2017 based on the closing price on that date of $11.33 on
the Nasdaq Global Select Market was $128.7 million. For the purposes of calculating this amount only, all directors and executive
officers of the Registrant have been treated as affiliates. There were 11,522,710 shares of the Registrant’s common stock
outstanding as of March 1, 2018.



Documents Incorporated by
Reference: Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2018 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, 2017



TABLE OF CONTENTS



|         |                                                                                                              | Page
|-------- | ------------------------------------------------------------------------------------------------------------ | ----
|PART I   |                                                                                                             
|Item 1.  | Business                                                                                                     | 3   
|Item 1A. | Risk Factors                                                                                                 | 25  
|Item 1B. | Unresolved Staff Comments                                                                                    | 52  
|Item 2.  | Properties                                                                                                   | 53  
|Item 3.  | Legal Proceedings                                                                                            | 53  
|Item 4.  | Mine Safety Disclosures                                                                                      | 53  
|         |                                                                                                              |     
|PART II  |                                                                                                             
|Item 5.  | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 54  
|Item 6.  | Selected Financial Data                                                                                      | 58  
|Item 7.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                        | 59  
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                                                   | 72  
|Item 8.  | Consolidated Financial Statements and Supplementary Data                                                     | 73  
|Item 9.  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         | 113 
|Item 9A. | Controls and Procedures                                                                                      | 113 
|Item 9B. | Other Information                                                                                            | 113 
|         |                                                                                                              |     
|PART III |                                                                                                             
|Item 10. | Directors, Executive Officers and Corporate Governance                                                       | 114 
|Item 11. | Executive Compensation                                                                                       | 114 
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 114 
|Item 13. | Certain Relationships and Related Transactions, and Director Independence                                    | 114 
|Item 14. | Principal Accounting Fees and Services                                                                       | 114 
|         |                                                                                                              |     
|PART IV  |                                                                                                             
|Item 15. | Exhibits, Financial Statement Schedules                                                                      | 115 
|         | Signatures                                                                                                   | 117 



2







PART I



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



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



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



| | · | “Credit II” refers to Horizon Credit II LLC, a Delaware limited liability company,
which is a special purpose bankruptcy remote entity and our direct subsidiary;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Key” refers to KeyBank National Association and “Key Facility” refers
to the revolving credit facility with Key;
| | - | -----------------------------------------------------------------------------------------------------------------



| | · | “2022 Notes” refers to the $37.4 million aggregate principal amount of our 6.25% unsecured
notes due 2022, which were issued in September and October 2017;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “2019 Notes” refers to the $33.0 million aggregate principal amount of our 7.375% senior
unsecured notes due 2019, which were redeemed in full in October 2017;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | · | “Asset-Backed Notes” refers to the $90.0 million aggregate principal amount of fixed-rate
asset-backed notes that were issued in conjunction with the 2013-1 Securitization, which were paid off in June 2016; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Item 1.Business



General



We are a specialty finance
company that lends to and invests in development-stage companies in the technology, life science, healthcare information and services
and cleantech industries, which we refer to collectively as our “Target Industries.” Our investment objective is to
maximize our investment portfolio’s total return by generating current income from the debt investments we make and capital
appreciation from the warrants we receive when making such debt investments. We are focused on making secured debt investments,
which we refer to as “Venture Loans,” to venture capital backed companies in our Target Industries, which we refer
to as “Venture Lending.” We also selectively provide Venture Loans to publicly traded companies in our Target Industries.
Our debt investments are typically secured by first liens or first liens behind a secured revolving line of credit, or “Senior
Term Loans.” Venture Lending is typically characterized by (1) the making of a secured debt investment after a venture
capital or equity investment in the portfolio company has been made, which investment provides a source of cash to fund the portfolio
company’s debt service obligations under the Venture Loan, (2) the senior priority of the Venture Loan which requires
repayment of the Venture Loan prior to the equity investors realizing a return on their capital, (3) the relatively rapid
amortization of the Venture Loan and (4) the lender’s receipt of warrants or other success fees with the making of the
Venture Loan.



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 a portion of our investments through borrowings. However, as a BDC, we are only
generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing.
The amount of leverage that we employ depends on our assessment of market conditions and other factors at the time of any proposed
borrowing. As a RIC, we generally do not have to pay corporate-level federal income taxes on our investment company taxable income
and our net capital gain that we distribute to our stockholders as long as we meet certain source-of-income, distribution, asset
diversification and other requirements.



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



From the commencement
of operations of our predecessor on March 4, 2008 through December 31, 2017, we funded 158 portfolio companies and invested $975.0 million
in debt investments. As of December 31, 2017, our debt investment portfolio consisted of 33 debt investments with an aggregate
fair value of $203.8 million. As of December 31, 2017, 99.4%, or $202.6 million, of our debt investment portfolio at fair
value consisted of Senior Term Loans. As of December 31, 2017, our net assets were $135.1 million, and all of our debt investments
were secured by all or a portion of the tangible and intangible assets of the applicable portfolio company. The debt investments
in our portfolio are generally not rated by any rating agency. If the individual debt investments in our portfolio were rated,
they would be rated below “investment grade”. Debt investments that are unrated or rated below investment grade are
sometimes referred to as “junk bonds” and have predominantly speculative characteristics with respect to the issuer’s
capacity to pay interest and repay principal.



For the year ended December
31, 2017, our debt investment portfolio had a dollar-weighted yield of 15.1% (excluding any yield from warrants, equity and other
investments). We calculate the yield on dollar-weighted average debt investments for any period as (1) total investment income
during the period divided by (2) the average of the fair value of debt investments outstanding on (a) the last day of the calendar
month immediately preceding the first day of the period and (b) the last day of each calendar month during the period. The dollar-weighted
yield on average debt investments is higher than what investors will realize because it does not reflect our expenses or any sales
load paid by investors.



For the year ended December
31, 2017, our investment portfolio (including any yield from warrants, equity and other investments) had a dollar-weighted yield
of 14.0%. We calculate the yield on dollar-weighted average investments for any period as (1) total investment income during the
period divided by (2) the average of the fair value of all investments outstanding on (a) the last day of the calendar month immediately
preceding the first day of the period and (b) the last day of each calendar month during the period. The dollar-weighted yield
on average investments is higher than what investors will realize because it does not reflect our expenses or any sales load paid
by investors.



As of December 31, 2017,
our debt investments had a dollar-weighted average term of 47 months from inception and a dollar-weighted average remaining
term of 38 months. As of December 31, 2017, substantially all of our debt investments had an original committed principal
amount of between $3 million and $20 million, repayment terms of between 21 and 60 months and bore current pay interest
at annual interest rates of between 9% and 14%.



For the year ended December
31, 2017, our total return based on market value was 17.9%. Total return based on market value is calculated as (x) the sum of
(i) the closing sales price of our common stock on the last day of the period plus (ii) the aggregate amount of distributions paid
per share during the period, less (iii) the closing sales price of our common stock on the first day of the period, divided by
(y) the closing sales price of our common stock on the first day of the period.



In addition to our debt
investments, as of December 31, 2017, we held warrants to purchase stock, predominantly preferred stock, in 72 portfolio companies,
equity positions in six portfolio companies and success fee arrangements in 10 portfolio companies.



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



4







Our common stock began
trading October 29, 2010 and is currently traded on the Nasdaq Global Select Market, or Nasdaq, 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.horizontechfinance.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.



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 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
of our Advisor, the members of our investment team have broad lending backgrounds, with substantial experience at a variety of
commercial finance companies, technology banks and private debt funds, and have developed a broad network of contacts within the
venture capital and private equity community. This network of contacts provides a principal source of investment opportunities.



Our Advisor is led by
five senior managers including Robert D. Pomeroy, Jr., our Chief Executive Officer, Gerald A. Michaud, our President, Daniel
R. Trolio, 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 Investment 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 and public 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 or unsecured debt investments, to participate in the emerging technology
markets because the debt structures we typically utilize provide collateral against the downside risk of loss, provide return of
capital in a much shorter timeframe through current-pay interest and amortization of principal and have a senior position to equity
and unsecured debt in the borrower’s capital structure in the case of insolvency, wind down or bankruptcy. Unlike venture
capital and private equity investments, our investment returns and return of our capital do not require equity investment exits
such as mergers and acquisitions or initial public offerings. Instead, we receive returns on our debt investments primarily through
regularly scheduled payments of principal and interest and, if necessary, liquidation of the collateral supporting the debt investment
upon a default. Only the potential gains from warrants depend upon equity investment exits.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | “Enterprise value” lending.  We and our Advisor take an enterprise
value approach to structuring and underwriting loans. 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 lien position against the enterprise value of each portfolio company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



5







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



| | • | 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 by quarterly reviewing each criteria and, in the event there is an overconcentration,
seeking investment opportunities to reduce such overconcentration. 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. For public companies, our Advisor typically relies on publicly reported quarterly financials.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Use of leverage.  We use leverage to increase returns on equity through our Key
Facility and our 2022 Notes. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Liquidity and capital resources” for additional information about our use of leverage. In addition,
we may issue additional debt securities or preferred stock in one or more series in the future.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Market opportunity



We focus our investments
primarily in four key industries of the emerging technology market: technology, life science, healthcare information and services
and cleantech. The technology sectors we focus on include communications, networking, data storage, software, cloud computing,
semiconductor, internet and media and consumer-related technologies. The life science sectors we focus on include biotechnology,
drug discovery, drug delivery, bioinformatics and medical devices. The healthcare information and services sectors we focus on
include diagnostics, electronic medical record services and software and other healthcare related services and technologies that
improve efficiency and quality of administered healthcare. The cleantech sectors we focus on include alternative energy, power
management, energy efficiency, green building materials and waste recycling. We refer to all of these companies as “technology-related”
companies because the companies are developing or offering goods and services to businesses and consumers which utilize scientific
knowledge, including techniques, skills, methods, devices and processes, to solve problems. We intend, under normal market conditions,
to invest at least 80% of the value of our total assets in such companies.



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



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



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



6







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



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



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



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



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



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



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



Competitive strengths



We believe that we, together
with our Advisor, possess significant competitive strengths, which include the following:



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 Venture Loans with an aggregate original principal amount over $1.4 billion to more than
225 companies since operations commenced in 2004.



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



Highly experienced
and cohesive management team.  Our Advisor’s senior management team of experienced professionals has been together
since our inception. This consistency allows companies, their management teams and their investors to rely on consistent and predictable
service, loan products and terms and underwriting standards.



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



Well-known
brand name.  Our Advisor has originated Venture Loans to more than 225 companies in our Target Industries under
the “Horizon Technology Finance” brand.



Competition



We compete to provide
financing to development-stage companies in our Target Industries with a number of investment funds and other BDCs, as well as
traditional financial services companies such as commercial banks and other financing sources. Some of our competitors are larger
and have greater financial and other resources than we do. We believe we compete effectively with these entities primarily on the
basis of the experience, industry knowledge and contacts of our Advisor’s investment professionals, our Advisor’s responsiveness,
efficient investment analysis and decision-making processes, its creative financing products and its customized investment terms.
We do not intend to compete primarily on the interest rates we offer and believe that some competitors make loans with rates that
are comparable 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 vary 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 committed
partners 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 its 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 market opportunities that capitalize on their
competitive advantages. Competitive advantages may include 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 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. The process includes obtaining and analyzing publicly available
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 primary element
of the due diligence process is interviewing key existing investors of 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 Investment Officer and then
submitted to our Advisor’s investment committee for approval.



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



Loan closing
and funding. Approved investments are documented and closed by our Advisor’s in-house legal and loan administration
staff. Loan documentation is based upon standard templates created by our Advisor and is customized for each transaction to reflect
the specific deal terms. The transaction documents typically include a loan and security agreement, warrant agreement and applicable
perfection documents, including applicable Uniform Commercial Code financing statements and, as applicable, may also include a
landlord agreement, patent and trademark security grants, a subordination agreement, an intercreditor 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 Investment 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 or more
frequent basis. Our Advisor requires all private companies to provide financial statements, typically monthly. For public companies,
our Advisor typically relies on publicly reported quarterly financials. This allows our Advisor to identify any unexpected developments
in the financial performance or condition of our portfolio company.



Our Advisor
has developed a proprietary internal credit rating system to analyze the quality of our debt investments. Using this system, our
Advisor analyzes and then rates the credit risk within the portfolio on a quarterly 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 than existed at the time of its original underwriting. A rating of 2 or 1 represents a deteriorating credit quality
and an increased risk of loss of principal. 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 following table describes
each rating level:



|Rating | 
|------ | 
|4      | 
|3      | 
|2      | 
|1      | 



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 — Debt investment asset quality.”



Managerial assistance



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



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



Employees



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



Investment Management Agreement



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



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



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



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



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



Investment advisory fees



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



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



The Advisor agreed to
waive the base management fee relating to the proceeds raised in a public offering of our common stock that closed on March 24,
2015, or the 2015 Offering, to the extent such fee is not otherwise waived and regardless of the application of the proceeds raised,
until the earlier to occur of (i) March 31, 2016 or (ii) the last day of the second consecutive calendar quarter in which our
net investment income exceeds distributions declared on shares of our common stock for the applicable quarter. As of December
31, 2015, condition (ii) above was met, as our net investment income exceeded distributions declared for the quarters ended September
30, 2015 and December 31, 2015, and our Advisor is not obligated to waive the base management fee with respect to proceeds from
the 2015 Offering for any future quarter.



11







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



The first part, which
is subject to the Incentive Fee Cap and Deferral Mechanism, as defined below, is calculated and payable quarterly in arrears based
on our Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter. For this purpose, “Pre-Incentive
Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees (other than
fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other
fees received from portfolio companies) accrued during the calendar quarter, minus 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 we have not yet received in cash. The incentive fee with respect to the Pre-Incentive
Fee Net Investment Income is 20.00% of the amount, if any, by which the Pre-Incentive Fee Net Investment Income for the immediately
preceding calendar quarter exceeds a hurdle rate of 1.75% (which is 7.00% annualized) of our net assets at the end of the immediately
preceding calendar quarter, subject to a “catch-up” provision measured as of the end of each calendar quarter. Under
this provision, in any calendar quarter, the Advisor receives no incentive fee until the Pre-Incentive Fee Net Investment Income
equals the hurdle rate of 1.75%, but then receives, as a “catch-up,” 100.00% of the Pre-Incentive Fee Net Investment
Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is
less than 2.1875% quarterly (which is 8.75% annualized). The effect of this “catch-up” provision is that, if Pre-Incentive
Fee Net Investment Income exceeds 2.1875% in any calendar quarter, the Advisor will receive 20.00% of the Pre-Incentive Fee Net
Investment Income as if the hurdle rate did not apply.



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



Commencing with the calendar
quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee cap and deferral
mechanism which is determined based upon a look-back period of up to three years and is expensed when incurred. For this purpose,
the look-back period for the incentive fee based on Pre-Incentive Fee Net Investment Income (the “Incentive Fee Look-back
Period”) commenced on July 1, 2014 and increases by one quarter in length at the end of each calendar quarter until June
30, 2017, after which time, the Incentive Fee Look-back Period will include the relevant calendar quarter and the 11 preceding
full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income is subject to a cap (the
“Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such deferred incentive
fees (collectively, the “Incentive Fee Cap and Deferral Mechanism”). The Incentive Fee Cap is equal to (a) 20.00% of
Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive
fees of any kind paid to the Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or
a negative value in any calendar quarter, we will not pay an incentive fee on Pre-Incentive Fee Net Investment Income to the Advisor
in that quarter. To the extent that the payment of incentive fees on Pre-Incentive Fee Net Investment Income is limited by the
Incentive Fee Cap, the payment of such fees will be deferred and paid in subsequent calendar quarters up to three years after their
date of deferment, subject to certain limitations, which are set forth in the Investment Management Agreement. We only pay incentive
fees on Pre-Incentive Fee Net Investment Income to the extent allowed by the Incentive Fee Cap and Deferral Mechanism. “Cumulative
Pre-Incentive Fee Net Return” during any Incentive Fee Look-back Period means the sum of (a) Pre-Incentive Fee Net Investment
Income and the base management fee for each calendar quarter during the Incentive Fee Look-back Period and (b) the sum of cumulative
realized capital gains and losses, cumulative unrealized capital appreciation and cumulative unrealized capital depreciation during
the applicable Incentive Fee Look-back Period.



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



Quarterly incentive fee based on Net Investment
Income



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







12







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



The second part of the
incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management
Agreement, as of the termination date) and equals 20.00% of our realized capital gains, if any, on a cumulative basis from the
date of our election to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized
capital depreciation on a cumulative basis through the end of such year, less all previous amounts paid in respect of the capital
gain incentive fee.



Examples of incentive fee calculation



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



Alternative 1



Assumptions:



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



Hurdle rate(1) = 1.75%



Management fee(2) = 0.50%



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



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



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



Alternative 2



Assumptions:



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



Hurdle rate(1)= 1.75%



Management fee(2) = 0.50%



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



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



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



= 100.00% × (2.10% - 1.75%)



= 0.35%



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



Alternative 3



Assumptions:



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



Hurdle rate(1) = 1.75%



Management fee(2) = 0.50%



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



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



13







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



Incentive fee = 100.00% × “catch-up”
+ (20.00% × (Pre-Incentive Fee Net Investment Income - 2.1875%))



Catch up = 2.1875% - 1.75%



= 0.4375%



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



= 0.4375% + (20.00% × 0.1125%)



= 0.4375% + 0.0225%



= 0.46%



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










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



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



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



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



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



Alternative 1



Assumptions:



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



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



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



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



Alternative 2



Assumptions:



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



14







Hurdle rate(1) = 1.75%



Management fee(2) = 0.50%



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



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



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



=100.00% × (2.10% - 1.75%)



= 0.35%



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



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



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



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










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



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



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



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



Example 3: Capital gains portion of incentive fee



Alternative 1



Assumptions:



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



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



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



Year 4: Investment B sold
for $31 million



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



Year 1: None (No sales
transaction)



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



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



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



15







Alternative 2



Assumptions:



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



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



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



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



Year 5: Investment B sold
for $20 million



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



Year 1: None (no sales
transaction)



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



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



Year 4: None (no sales
transaction)



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



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










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



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



Payment of our expenses



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



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



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



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



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



16







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



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



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



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



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



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



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



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



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



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



| | • | taxes;
| | - | ------



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



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



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



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



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



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



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



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



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



From time to
time, our advisor may pay amounts owed by us to third party providers of goods or services. We subsequently reimburse our
advisor for such amounts paid on our behalf. Generally, our expenses are expensed as incurred in accordance with U.S.
generally accepted accounting principles, or GAAP. To the extent we incur costs that should be capitalized and amortized into
expense we also do so in accordance with GAAP, which may include amortizing such amount on a straight line basis over the
life of the asset or the life of the services or product being performed or provided.



Limitation of liability and indemnification



The Investment Management
Agreement provides that our Advisor and its officers, managers, partners, agents, employees, controlling persons and any other
person or entity affiliated with our Advisor are not liable to us for any act or omission by it in the supervision or management
of our investment activities or for any loss sustained by us except for acts or omissions constituting willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations under the Investment Management Agreement. The Investment Management
Agreement also provides, subject to certain conditions, 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.



17







Board approval of the Investment Management Agreement



Our Board held an in-person
meeting on July 28, 2017 at which it considered and reapproved our Investment Management Agreement for an additional one-year period.
In its consideration of the Investment Management Agreement, our Board focused on information it had received relating to (a) the
nature, quality and extent of the advisory and other services to be provided to us by our Advisor; (b) comparative data with
respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives; (c) our projected expenses
and expense ratio compared to BDCs with similar investment objectives; (d) any existing and potential sources of indirect
income to our Advisor or the Administrator from their relationships with us and the profitability of those relationships; (e) information
about the services to be performed and the personnel performing such services under the Investment Management Agreement; (f) the
organizational capability and financial condition of our Advisor and its affiliates; (g) our Advisor’s practices regarding
the selection and compensation of brokers that may execute our portfolio transactions and the brokers’ provision of brokerage
and research services to our Advisor; and (h) the possibility of obtaining similar services from other third party service
providers or through an internally managed structure.



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



Duration and termination



The Investment Management
Agreement was reapproved by our Board, and by a majority of our independent directors, on July 28, 2017. Unless terminated earlier
as described below, it will continue in effect from year to year thereafter if approved annually by our Board including a majority
of our directors who are not interested persons or by the affirmative vote of the holders of a majority of our outstanding voting
securities and a majority of our directors who are not interested persons. The Investment Management Agreement will automatically
terminate in the event of its assignment. The Investment Management Agreement may be terminated by either party without penalty
by delivering notice of termination upon not more than 60 days’ written notice to the other party. 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.”



Administration Agreement



The Administration Agreement
was considered and reapproved by our Board, and by a majority of our independent directors, on July 28, 2017. Under the Administration
Agreement, the Administrator furnishes us with office facilities and equipment, provides us clerical, bookkeeping and record keeping
services at such facilities and provides us with other administrative services necessary to conduct our day-to-day operations.
We reimburse the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing
its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance
functions and our allocable portion of the costs of compensation and related expenses of our Chief Financial Officer and Chief
Compliance Officer and their respective staffs. The Board reviews the allocation of expenses shared with the Advisor or other clients
of the Advisor, if any, on a periodic basis to confirm that the allocations are reasonable and appropriate in light of the provisions
of the Investment Management Agreement and Administration Agreement and then-current circumstances.



License agreement



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



18







Regulation



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



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



We may also be prohibited
under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors
who are not interested persons and, in some cases, prior approval by the SEC. For example, under the 1940 Act, absent receipt of
exemptive relief from the SEC, we and our affiliates may be precluded from co-investing in transactions for which terms other than
price are negotiated by our affiliates. 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. On November 27, 2017, the SEC
granted us, our Advisor and certain of our affiliates an exemptive relief order permitting us to co-invest with certain affiliated
funds in negotiated investments, subject to the terms and conditions of the order.



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



19







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



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



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



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



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



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



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



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



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



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



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



Managerial assistance to portfolio companies



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



Issuance of additional shares



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



20







Temporary investments



Pending investment in
other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. Government
securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively,
as temporary investments, so that 70% of our assets are qualifying assets. Typically, we invest in highly rated commercial paper,
U.S. Government agency notes, U.S. Treasury bills or in repurchase agreements relating to such securities that are fully
collateralized by cash or securities issued by the U.S. Government or its agencies. A repurchase agreement involves the purchase
by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon
future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There
is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, subject
to certain exceptions, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we generally
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; derivative securities



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



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



Code of ethics



We and our Advisor have
each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Investment Advisers Act
of 1940, as amended, or 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 relevant
code of ethics’ requirements. You may read and copy each 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) 551-8090. In addition,
each code of ethics is attached as Exhibit 14.1 to our Annual Report on Form10-K for the fiscal year ended December 31, 2016 filed
on March 7, 2017 and is available on the SEC’s Internet site at www.sec.gov. You may also obtain copies of the code of ethics,
after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing
the SEC’s Public Reference Section, Washington, D.C. 20549-0102.



Proxy voting policies and procedures



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



Introduction



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



21







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



Proxy policies



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



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



Proxy voting records



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



Sarbanes-Oxley Act of 2002



The Sarbanes-Oxley Act
of 2002, as amended, 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 of Regulation S-K under the Securities Act, 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 under the Securities Act 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 corporate governance regulations



Nasdaq has adopted corporate
governance regulations with which listed companies must comply. 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.



22







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.



Election to be taxed as a RIC



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



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



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



| | • | derive in each tax year at least 90% of our gross income from dividends, 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, or the Qualifying
Income Test; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | diversify our holdings so that at the end of each quarter of the tax 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 represents 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23







Taxation as a RIC



If we qualify as a RIC,
and satisfy the Annual Distribution Requirement, then we will not be subject to entity-level income taxes on the portion of our
investment company taxable income as well as any net capital gain (i.e., realized net long-term capital gains in excess of realized
net short-term capital losses) we distribute as dividends to stockholders. We may retain for investment all or a portion of our
net capital gain. However, if we retain any investment company taxable income or net capital gains, and satisfy the Annual Distribution
Requirement, we will be subject to entity-level taxation at regular corporate rates on any amounts retained. If we fail to qualify
as a RIC for a period greater than two consecutive tax years, to qualify as a RIC in a subsequent tax 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 tax year) that we elect to recognize on requalification or when recognized over the next
five tax years.



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



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



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 generally 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 tax 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 certain corporate stockholders would be eligible
for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated
first as a return of capital to the extent of the stockholder’s tax basis in our common stock, and any remaining distributions
would be treated as a capital gain.



24







Item 1A.Risk Factors



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



Risks related to our business and structure



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



We do not have any employees
and are dependent upon the members of our Advisor’s senior management, 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 the senior members of our Advisor’s management team. If our Advisor were to lose
the services of any of the 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 either
of Mr. Pomeroy, our Chief Executive Officer, or Mr. Michaud, our President, ceases to be actively involved with us or
our Advisor, and is not replaced by an individual satisfactory to Key within 90 days, Key could, absent a waiver or cure, demand
repayment of any outstanding obligations under the Key Facility. In such an event, if we do not have sufficient cash to repay our
outstanding obligations, we may be required to sell investments which, due to their illiquidity, may be difficult to sell on favorable
terms or at all. We may also be unable to make new investments, cover our existing obligations to extend credit or meet other obligations
as they come due, which could adversely impact our results of operations.



Our future success also
depends, in part, on our Advisor’s ability to identify, attract and retain sufficient numbers of highly skilled employees.
If our Advisor is not successful in identifying, attracting and retaining such 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 adviser 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 adviser or (2) a change of control or deemed change of control of the Advisor occurs.
We cannot provide assurance that a new investment management agreement or new investment adviser would provide the same or equivalent
services on the same or on as favorable of terms as the Investment Management Agreement or the Advisor.



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



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



25







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



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



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



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



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



|                                              |  | Assumed Return on Portfolio (Net of Expenses) |       
|--------------------------------------------- |  | --------------------------------------------- | ------
|                                              |  | -10%                                          |       
|Corresponding return to common stockholder(1) |  |                                               | -21.16










| | (1) | Assumes $234 million in total assets, $95 million in outstanding debt, $135 million in net assets, and an average
cost of borrowed funds of 5.44% at December 31, 2017.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Based on our outstanding
indebtedness of $95 million as of December 31, 2017 and the average cost of borrowed funds of 5.44% as of that date, our investment
portfolio would have been required to experience an annual return of at least 2.54% to cover annual interest payments on the outstanding
debt. Actual interest payments may be different.



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



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



26







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



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



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



We may want to obtain
additional debt financing, or need to do so upon maturity of the Key Facility or 2022 Notes, in order to obtain funds which may
be made available for investments. We may borrow under the Key Facility until August 12, 2018. 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 August 12, 2020, unless such date is extended in accordance with its terms. All outstanding amounts
on our 2022 Notes are due and payable on September 15, 2022 unless redeemed prior to that date. If we are unable to increase, renew
or replace the Key Facility or enter into other new debt financings on commercially reasonable terms, our liquidity may be reduced
significantly. In addition, if we are unable to repay amounts outstanding under any such debt financings and are declared in default
or are unable to renew or refinance these debt financings, 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, an economic downturn or an operational problem that
affects third parties or us, and could materially damage our business.



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



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



27







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



As a BDC, we generally
are not able to issue our common stock at a price below the then-current NAV per share without first obtaining the approval of
our stockholders and our independent directors. Stockholder approval to offer our common stock at a price below NAV per share expired
in January 2016, but we may seek such approval again in the future. If our common stock trades at a price below NAV per share and
we do not receive approval from our stockholders and our independent directors to issue common stock at a price below NAV per share,
we cannot raise capital through the issuance of common stock. This may 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.



We are subject to risks associated with a rising 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. Due to several factors, including longer-term inflationary pressure that
may result from the U.S. government’s fiscal policies, the end of the Federal Reserve quantitative easing program and recent
increases in the Federal Funds rate, we expect to experience rising interest rates, rather than falling rates in the future.



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. To the extent our investments have fixed interest rates or have
interest rate floors that are higher than the floor on, or interest rates that “reset” less frequently than, the Key
Facility, increases in interest rates can lead to interest rate compression and have a material adverse effect on our net investment
income. In addition to increasing the cost of borrowed funds, which may materially reduce our net investment income, rising interest
rates may also adversely affect our ability to obtain additional debt financing on terms as favorable as under our current debt
financings, or at all.  See “—If we are unable to obtain additional debt financing, our business could be materially
adversely affected.”



If general interest rates
rise, there is a risk that the portfolio companies in which we hold floating rate securities will be unable to pay escalating interest
amounts, which could result in a default under their loan documents with us. Rising interests rates could also cause portfolio
companies to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their
business and operations and could, over time, lead to increased defaults on our investments in such portfolio companies. 
In addition, increasing payment obligations under floating rate loans may cause borrowers to refinance or otherwise repay our loans
earlier than they otherwise would, requiring us to incur management time and expense to re-deploy such proceeds, including on terms
that may not be as favorable as our existing loans. In addition, rising interest rates may increase pressure on us to provide fixed
rate loans to our portfolio companies, which could adversely affect our net investment income, as increases in our cost of borrowed
funds would not be accompanied by increased interest income from such fixed-rate investments.



We may hedge against interest
rate fluctuations by using hedging instruments such as caps, swaps, futures, options and forward contracts, subject to applicable
legal requirements, including all necessary registrations (or exemptions from registration) with the Commodity Futures Trading
Commission. These activities may limit our ability to benefit from lower interest rates with respect to the hedged portfolio. Adverse
developments resulting from changes in interest rates or hedging transactions or any adverse developments from our use of hedging
instruments could have a material adverse effect on our business, financial condition and results of operations. In addition, we
may be unable to enter into appropriate hedging transactions when desired and any hedging transactions we enter into may not be
effective.



As a rise in the general
level of interest rates can be expected to lead to higher interest rates applicable to our debt investments, an increase in interest
rates would make it easier for us to meet or exceed the hurdle rate applicable to the incentive fee and may result in a substantial
increase in the amount of incentive fees payable to the Advisor with respect to Pre-Incentive Fee Net Investment Income.



Also, an increase in interest
rates on investments available to investors could make investment in our common stock less attractive if we are not able to increase
our distributions, which could materially reduce the value of our common stock.



28







On July 27, 2017, the
head of the United Kingdom Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates
for the calculation of the LIBOR rates after 2021 (the “FCA Announcement”). Furthermore, in the United States, efforts
to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee
of the Federal Reserve Board and the Federal Reserve Bank of New York. On August 24, 2017, the Federal Reserve Board requested
public comment on a proposal by the Federal Reserve Bank of New York, in cooperation with the Office of Financial Research, to
produce three new reference rates intended to serve as alternatives to LIBOR. These alternative rates are based on overnight repurchase
agreement transactions secured by U.S. Treasury Securities. On December 12, 2017, following consideration of public comments, the
Federal Reserve Board concluded that the public would benefit if the Federal Reserve Bank of New York published the three proposed
reference rates as alternatives to LIBOR (the “Federal Reserve Board Notice”). The Federal Reserve Bank of New York
said that the publication of these alternative rates is targeted to commence by mid-2018.



At this time, it is not
possible to predict the effect of the FCA Announcement, the Federal Reserve Board Notice, or other regulatory changes or announcements,
any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom, the United
States or elsewhere. As such, the potential effect of any such event on our net investment income cannot yet be determined.



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



Our investments consist,
and we expect our future investments to consist, primarily of debt investments or securities issued by privately held companies.
As these investments are not publicly traded, their fair value may not be readily determinable. In addition, we are not permitted
to maintain a general reserve for anticipated debt investment losses. Instead, we are required by the 1940 Act to specifically
value each investment and record an unrealized gain or loss for any asset that we believe has increased or decreased in value.
We value these investments on a quarterly basis, or more frequently as circumstances require, in accordance with our valuation
policy and consistent with GAAP. Our Board employs independent third-party valuation firms to assist it 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 firms. 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.



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



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



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



As a BDC, we generally
are not able to issue our common stock at a price below NAV per share without first obtaining the approval of our stockholders
and our independent directors. Our stockholder approval expired in January 2016, but we may seek such approval again in the future.
If our common stock trades at a price below NAV per share and we do not receive approval from our stockholders and our independent
directors to issue common stock at a price below NAV per share, we cannot raise capital through the issuance of equity securities.
This may 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. The stockholder approval 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.



29







Pending legislation may allow us to incur additional leverage.



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



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



To qualify as a RIC under
the Code, we must meet certain source-of-income and asset diversification 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
in order to avoid the imposition of corporate-level income taxes on all of our taxable income, regardless of whether we make any
distributions to our stockholders.



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



The Annual Distribution
Requirement is satisfied if we distribute dividends to our stockholders in each tax year of an amount generally equal to at least
90% of our investment company taxable income, determined without regard to any deductions for dividends paid. If we borrow money,
we may be subject to certain asset coverage 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 be eligible to be subject to taxation as a RIC, assuming we do not qualify for or take advantage of certain remedial provisions,
and, thus, may be subject to corporate-level income taxes.



If we were to fail to
qualify as a RIC for any reason and become subject to a corporate-level income taxes, 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, incur substantial taxes
and interest and make substantial distributions before requalifying as a RIC. See “Item 1. Business—Regulation.”



30







Impact of Recently Enacted Federal Tax Legislation



Significant U.S. federal
tax reform legislation was recently enacted that, among many other changes, permanently reduces the maximum federal corporate income
tax rate, reduces the maximum individual income tax rate (effective for taxable years 2018 through 2025), restricts the deductibility
of business interest expense, changes the rules regarding the use of net operating losses, and under certain circumstances requires
accrual method taxpayers to recognize income for U.S. federal income tax purposes no later than the income is taken into account
as revenue in an applicable financial statement. The impact of this new legislation on us and our portfolio companies is uncertain.
Prospective investors are urged to consult their tax advisors regarding the effects of the new legislation.



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 tax 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 tax year. We do not have a policy limiting our ability to invest in original issue discount instruments, including
payment-in-kind debt investments. Because in certain cases we may recognize taxable income before or without receiving cash representing
such income, we may have difficulty meeting the Annual Distribution Requirement.



Accordingly, we may need
to sell some of our assets at times that we would not consider advantageous, raise additional debt or equity capital or forego
new investment opportunities or otherwise take actions that are disadvantageous to our business (or be unable to take actions that
we believe are necessary or advantageous to our business) in order to satisfy the Annual Distribution Requirement. If we are unable
to obtain cash from other sources to satisfy the Annual Distribution Requirement, we may become subject to a corporate-level income
taxes on all of 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, 2017,
2016 and 2015 was 9.5%, 12.6% and 8.9%, respectively.



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



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



In addition, debt investments
providing for ETPs are subject to the risks associated with debt investments having original issue discount (such as debt instruments
with payment-in-kind interest or, in certain cases, increasing interest rates or issued with warrants). See “—We may
have difficulty paying our required distributions if we recognize taxable income before or without receiving cash.”



31







The borrowing needs of our portfolio
companies are unpredictable, especially during a challenging economic environment. We may not be able to meet our unfunded commitments
to extend credit, which could have a material adverse effect on our reputation in the market and our ability to generate incremental
lending activity and may subject us to lender liability claims.



A commitment to extend
credit is an agreement to lend funds to our portfolio companies as long as there is no violation of any condition established under
the agreement. Because of the credit profile of our portfolio companies, we typically have a substantial amount of total unfunded
credit commitments, which amount is not reflected on our balance sheet. The actual borrowing needs of our portfolio companies may
exceed our expected funding requirements, especially during a challenging economic environment when our portfolio companies may
be more dependent on our credit commitments due to the lack of available credit elsewhere, an increasing cost of credit or the
limited availability of equity financing from venture capital firms or otherwise. In addition, limited partner investors of some
of our portfolio companies may fail to meet their underlying investment commitments due to liquidity or other financing issues,
which may increase our portfolio companies’ borrowing needs. Any failure to meet our unfunded credit commitments in accordance
with the actual borrowing needs of our portfolio companies may have a material adverse effect on our reputation in the market and
our ability to generate incremental lending activity and may subject us to lender liability claims.



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



As a BDC, we are prohibited
from acquiring any assets other than qualifying assets (as defined under the 1940 Act) unless, at the time of and after giving
effect to such acquisition, at least 70% of our total assets are qualifying assets. Subject to certain exceptions for follow-on
investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities
exchange may be treated as a qualifying asset only if such issuer has a market capitalization that is less than $250 million at
the time of such investment and meets the other specified requirements. As of December 31, 2017 and 2016, 100% of our assets were
qualifying assets. 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 at the U.S. local, state and federal level. We are also subject to federal, state and local laws and
are subject to judicial and administrative decisions that affect our operations, including maximum interest rates, fees and other
charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure proceedings and other
trade practices. If these laws, regulations or decisions change, or if we expand our business into additional jurisdictions, we
may have to incur significant expenses in order to comply or we might have to restrict our operations. New legislation may be enacted
or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we or our portfolio
companies are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect. In particular,
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and any amendments thereto
that may be enacted, on us and our portfolio companies is subject to continuing uncertainty. The Dodd-Frank Act, including future
rules implementing its provisions and the interpretation of those rules, along with other legislative and regulatory proposals
directed at the financial services industry or affecting taxation that are proposed or pending in the U.S. Congress, may negatively
impact the operations, cash flows or financial condition of us or our portfolio companies, impose additional costs on us or our
portfolio companies, intensify the regulatory supervision of us or our portfolio companies or otherwise adversely affect our business
or the business of our portfolio companies. President Trump and certain members of Congress have indicated they will seek to amend
or repeal portion of the Dodd-Frank Act, among other federal laws. We cannot predict the ultimate effect on us or our portfolio
companies that changes in the laws and regulations would have as a result of the Dodd-Frank Act, or whether and the extent to which
the Dodd-Frank Act may remain in its current form. In addition, uncertainty regarding legislation and regulations affecting the
financial services industry or taxation could also adversely impact our business or the business of our portfolio companies. If
we do not comply with applicable laws and regulations, we could lose any licenses that we then hold for the conduct of our business
and may be subject to civil fines and criminal penalties.



32







Additionally, changes
to or repeal of the laws and regulations governing our operations related to permitted investments may cause us to alter our investment
strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to our
strategies and plans and may shift our investment focus from the areas of expertise of our Advisor to other types of investments
in which our 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, obligations to these other entities may cause our executive officers
and directors and those of our Advisor to divert their time and attention away from us or otherwise cause them not to dedicate
a significant portion of their time to our businesses which could slow our rate of investment.



In addition, our Advisor
manages other funds, and may manage additional funds in the future, that 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 allocation policy to address and,
if necessary, resolve any conflict of interests. It is also possible that we may not be given the opportunity to participate in
these other investment opportunities.



We pay management and
incentive fees to our Advisor and reimburse our Advisor for certain expenses it incurs. As a result, investors in our common stock
invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in a lower
rate of return than an investor might achieve through direct investments. Also, the incentive fee payable by us to our Advisor
may create an incentive for our Advisor to pursue investments on our behalf that are riskier or more speculative than would be
the case in the absence of such compensation arrangements. In addition, if any of the other funds managed by our Advisor have a
different fee structure than we do, our Advisor may, in certain circumstances, have an incentive to devote more time and resources,
and/or recommend the allocation of investment opportunities, to such fund. For example, to the extent our Advisor’s incentive
compensation is not subject to a total return requirement with respect to another fund, it may have an incentive to devote time
and resources to such fund.



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



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



The incentive fee payable
by us to our Advisor may create an incentive for our Advisor to pursue investments on our behalf that are riskier or more speculative
than would be the case in the absence of such compensation arrangement. The incentive fee payable to our Advisor is calculated
based on a percentage of our return on invested capital. This may encourage our Advisor to use leverage to increase the return
on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would impair
the value of our common stock. In addition, our Advisor receives the incentive fee based, in part, upon net capital gains realized
on our investments. Unlike that portion of the incentive fee based on income, there is no hurdle rate applicable to the portion
of the incentive fee based on net capital gains. As a result, our Advisor may have an incentive 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.



33







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



Our ability to enter into transactions
with our affiliates is restricted, which may limit the scope of investments available to us.



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, of the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is
our affiliate for purposes of the 1940 Act, and we are generally prohibited from buying or selling any security from or to, or
entering into certain “joint” transactions (which could include investments in the same portfolio company) with, such
affiliates, absent the prior approval of our independent directors or, in certain cases, the SEC.



Our Advisor is considered
to be our affiliate under the 1940 Act, as is any person that controls, or is under common control with us or our Advisor. We are
generally prohibited from buying or selling any security from or to, or entering into “joint” transactions with, such
affiliates without prior approval of our independent directors and, in some cases, exemptive relief from the SEC.



We may, however, invest
alongside other clients of our Advisor in certain circumstances where doing so is consistent with applicable law, SEC staff interpretations
and/or exemptive relief issued by the SEC. For example, we may invest alongside such accounts consistent with guidance promulgated
by the staff of the SEC permitting us and such other accounts to purchase interests in a single class of privately placed securities
so long as certain conditions are met, including that our Advisor, acting on our behalf and on behalf of other clients, negotiates
no term other than price. We may also invest alongside our Advisor’s other clients as otherwise permissible under regulatory
guidance and applicable regulations. Such investments will be allocated in accordance with our Advisor’s allocation policy,
and this allocation policy is periodically approved by our Advisor and reviewed by our independent directors. We expect that allocation
determinations will be made similarly for other accounts sponsored or managed by our Advisor. If sufficient securities or loan
amounts are available to satisfy our and each such account’s proposed demand, we expect that the opportunity will be allocated
in accordance with our Advisor’s pre-transaction determination; however, if insufficient securities or loan amounts are available,
the opportunity will generally be allocated pro rata based on each affiliate’s available initial allocation in the asset
class being allocated. We cannot assure you that investment opportunities will be allocated to us fairly or equitably in the short-term
or over time.



On November 27, 2017,
we were granted exemptive relief from the SEC that permits greater flexibility to negotiate the terms of co-investments if our
Board determines in advance that it would be advantageous for us to co-invest with other accounts sponsored or managed by our Advisor
in a manner consistent with our investment objective, positions, policies, strategies and restrictions, as well as regulatory requirements
and other relevant factors. We cannot assure you, however, that we will develop opportunities that comply with such limitations.



In situations where co-investment
with other accounts managed by our Advisor is not permitted or appropriate, our Advisor will need to decide which client will proceed
with the investment. Our Advisor’s allocation policy provides, in such circumstances, for investments to be allocated on
a random or rotational basis to assure that all clients have fair and equitable access to such investment opportunities over time.
Moreover, except in certain circumstances, we will be unable to invest in any issuer in which a fund managed by our Advisor has
previously invested. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates.
These restrictions may limit the scope of investment opportunities that would otherwise be available to us.



34







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
gross assets less cash and cash equivalents and our incentive fees will be based, in part, on unrealized appreciation and depreciation
on our investments.



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



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



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



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



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



35







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



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



Our business plan and growth strategy
depend 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, 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
adviser or administrator or hire internal management with similar expertise and ability to provide the same or equivalent services
on acceptable terms within 60 days, or at all. If we are unable to do so, our operations are likely to be disrupted, our business,
results of operations and financial condition and our ability to pay distributions may be adversely affected and the market price
of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer
if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed
by our Advisor and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration
of new management and their lack of familiarity with our investment objective may result in additional costs and time delays that
may adversely affect our business, results of operations or financial condition.



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



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



Compliance with Section 404 of the
Sarbanes-Oxley Act involves significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act would
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 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 annual re-evaluation, testing and remediation actions or the impact
of the same on our operations, and we cannot assure you that our internal control over financial reporting is or will be effective.
In the event that we are unable to maintain compliance with Section 404 of the Sarbanes-Oxley Act and related rules, we and
the market price of our securities may be adversely affected.



36







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



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



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



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



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



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



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



In addition, these communications
and information systems are subject to potential attacks, including through adverse events that threaten the confidentiality, integrity
or availability of our information resources.  These attacks, which may include cyber incidents, may involve a third party
gaining unauthorized access to our communications or information systems for purposes of misappropriating assets, stealing confidential
information, corrupting data or causing operational disruption.  Any such attack could result in disruption to our business,
misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance
costs, litigation and damage to our business relationships, any of which could have a material adverse effect on our business,
financial condition and results of operations.



Risks related to our investments



Our stockholders are not able to evaluate our future investments.



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



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



We are classified as a
non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with
respect to the proportion of our assets that we may invest in securities of a single issuer, excluding limitations on stake holdings
in investment companies. Beyond our income tax diversification requirements, we do not have fixed guidelines for diversification,
and our investments could be focused on relatively few portfolio 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.
If a significant investment in one or more portfolio companies fails to perform as expected, our financial results could be more
negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more portfolio
companies. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company.



Our portfolio may be focused on a limited
number of industries, which will subject us to a risk of significant loss if there is a downturn in a particular industry.



Our portfolio may be focused
on a limited number of 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.



37







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
each tax year as dividends to stockholders, we will suffer adverse tax consequences, including the possible loss of our ability
to be subject to tax as a RIC.



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.



Our failure to make follow-on investments in our portfolio
companies could impair the value of our portfolio.



Following an initial investment
in a portfolio company, we may have opportunities to make additional investments in that portfolio company as “follow-on”
investments, in seeking to:



| | • | increase or maintain in whole or in part our position as a creditor or equity ownership percentage
in a portfolio company;
| | - | --------------------------------------------------------------------------------------------------------------------------



| | • | exercise warrants, options or convertible securities that were acquired in the original or subsequent
financing; or
| | - | -------------------------------------------------------------------------------------------------------------------



| | • | preserve or enhance the value of our investment.
| | - | ------------------------------------------------



We have discretion to
make follow-on investments, subject to the availability of capital resources. Failure on our part to make follow-on investments
may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result
in a missed opportunity for us to increase our participation in a successful portfolio company. Even if we have sufficient capital
to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our
level of risk, because we prefer other opportunities or because of regulatory or other considerations. Our ability to make follow-on
investments may also be limited by our Advisors’ allocation policy.



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 are susceptible to economic or industry centric slowdowns or recessions and may be unable to repay our debt investments
during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease
during these periods. Adverse economic conditions may also decrease the value of collateral securing some of our debt investments
and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a
material 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.



38







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.



From late 2007 until early
2009, global credit and other financial markets suffered substantial stress and disruption, significantly diminishing overall confidence
in the debt and equity markets. While financial conditions have since recovered, any new period of market disruption may have a
material adverse effect on our business, financial condition, results of operations and cash flows. In addition, unfavorable economic
conditions, including rising interest rates, may also increase our funding costs, limit our access to capital markets or negatively
impact our ability to obtain financing, particularly from the debt markets.



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 debt investments may be an indication of future realized losses, which could reduce our income available for distribution.



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



39







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



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



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



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



The disposition of our debt investments
may result in contingent liabilities.



In connection with the
disposition of a debt investment, we may be required to make representations about the business and financial affairs of the portfolio
company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of
such debt investment to the extent that any such representations turn out to be inaccurate or with respect to potential liabilities.
These arrangements may result in contingent liabilities that ultimately result in funding obligations that we must satisfy through
our return of distributions previously made to us.



40







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



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



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



Even though certain of
our investments are structured as senior debt investments, if one of our portfolio companies were to go bankrupt, depending on
the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company,
a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors
or an out-of-court restructuring might enable other lenders to become effectively senior to our claims. 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 that primarily
includes investments in privately held companies presents certain challenges, including a 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, 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.



Our Advisor may, from time to time, possess
material non-public information regarding our portfolio companies, limiting our investment discretion.



Officers and employees
of our Advisor may serve as directors of, or in a similar capacity with, our portfolio companies, the securities of which are purchased
or sold on our behalf. If we obtain material non-public information with respect to such portfolio companies, or we become subject
to trading restrictions under the internal trading policies of those portfolio companies or as a result of applicable law or regulations,
we could be prohibited for a period of time from purchasing or disposing of the securities of such portfolio companies, and this
prohibition may have an adverse effect on us.



41







We may hold the debt securities of leveraged
companies that may, due to the significant volatility of such companies, experience bankruptcy or similar financial distress.



Leveraged companies may
experience bankruptcy, receivership or similar financial distress. The debt investments of distressed companies may not produce
income, may require us to bear certain expenses or to make additional advances in order to protect our investment and may subject
us to uncertainty as to when, in what manner (e.g., through liquidation, reorganization, receivership or bankruptcy) and for what
value such distressed debt will eventually be satisfied. Proceeds received from such proceedings may not be income that satisfies
the Qualifying Income Test for RICs and may not be in an amount sufficient to repay such expenses or advances. In the event that
a plan of reorganization is adopted or a receivership is established, in exchange for the debt investment we currently hold, we
may receive non-cash proceeds, including equity securities or license or royalty agreements with contingent payments, which may
require significantly more of our management’s time and attention.



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



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



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



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



Some of our portfolio
companies operate in industries that are highly regulated by federal, state and/or local agencies. Changes in existing laws, rules
or regulations, or judicial or administrative interpretations thereof, or uncertainty regarding such changes 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 technology industry are subject to 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 technology industry. Such portfolio companies
face intense competition as their businesses are rapidly evolving and intensely competitive, and are subject to changing technology,
shifting user needs, and frequent introductions of new products and services. The growth of certain technology sectors in which
we focus (such as communications, networking, data storage, software, cloud computing, and internet and media) into a variety of
new fields implicates new regulatory issues and may result in our portfolio companies in such sectors being subject to new regulations.



42







Portfolio companies in
the technology 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. In addition, litigation regarding intellectual property rights is common in the sectors of the technology
industry in which we focus. See “–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.” 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 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.



Such portfolio companies
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. In addition, new laws, regulations or judicial interpretations
of existing laws and regulations might adversely affect a portfolio company in this industry.



The successful and timely
implementation of the business model of life science companies depends on their ability to adapt to changing technologies and introduce
new products. The success of new product offerings will depend, in turn, on many factors, including the ability to properly anticipate
and satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture products in an economic and
timely manner, obtain or maintain advantageous positions with respect to intellectual property, and differentiate products from
those of competitors.



Further, the development
of products (including medical devices or drugs) by life science companies requires significant research and development, clinical
trials and regulatory approvals. The results of product development efforts may be affected by a number of factors, including the
ability to innovate, develop and manufacture new products, complete clinical trials, obtain regulatory approvals and reimbursement
by insurers in the United States (including Medicare and Medicaid) and abroad, or gain and maintain market approval of products.
In addition, patents attained by others can preclude or delay the commercialization of a product. There can be no assurance that
any products now in development will achieve technological feasibility, obtain regulatory approval, or gain market acceptance.
Failure can occur at any point in the development process, including after significant funds have been invested. Products may fail
to reach the market or may have only limited commercial success because of efficacy or safety concerns, failure to achieve positive
clinical outcomes, inability to obtain necessary regulatory approvals, failure to achieve market adoption, limited scope of approved
uses, excessive costs to manufacture, failure to establish or maintain intellectual property rights, infringement by others of
a company’s intellectual property rights, or infringement by a company of intellectual property rights of others.



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 portfolio companies operating in
the healthcare information and services 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 healthcare information and services industry.
Such portfolio companies provide technology to companies that are subject to extensive regulation, including Medicare and Medicaid
payment rules and regulation, the False Claims Act and federal and state laws regarding the collection, use and disclosure of patient
health information and the storage, handling and administration of pharmaceuticals. If any of our portfolio companies or the companies
to which they provide such technology 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 in the healthcare information or services
industry are also subject to the risk that changes in applicable regulations will render their technology obsolete or less desirable
in the marketplace.



43







Portfolio companies in
the healthcare information and services 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 decrease 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.



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,
uncertainty regarding such changes 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 particular, 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.



44







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.



Our portfolio companies may rely upon
licenses for all or part of their intellectual property.



A portfolio company may
license all or part of its intellectual property from another unrelated party. While the portfolio company may continue development
on that licensed intellectual property, it can be difficult to ascertain who has title to the intellectual property. We may also
rely upon the portfolio company’s management team’s representations as to the nature of the licensing agreement. There
are implications in workouts and in bankruptcy where intellectual property is not wholly owned by a portfolio company. Further,
the licensor may have an actual or contingent claim on the intellectual property (for instance, a payment due upon change in control)
that would supersede other claims in that asset in certain situations.



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



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



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



In some cases, we collateralize
our debt investments with a secured collateral position in a portfolio company's assets, which may include a negative pledge or,
to a lesser extent, no security interest on their intellectual property. In the event of a default on a debt investment, the intellectual
property of the portfolio company would most likely be liquidated to provide proceeds to pay the creditors of the portfolio company.
There can be no assurance that our security interest, if any, in the proceeds of the intellectual property will be enforceable
in a court of law or bankruptcy court or that there will not be others with senior or pari passu credit interests.



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.



45







We may invest in foreign portfolio companies
or secure our investments with the assets of our portfolio companies’ foreign subsidiaries.



We may invest in securities
of foreign companies. Additionally, certain debt investments consisting of secured loans to portfolio companies with headquarters
and primary operations located within the United States may be secured by the assets of a portfolio company’s foreign subsidiary.
Investments involving foreign companies may involve greater risks. These risks include: (i) less publicly available information;
(ii) varying levels of governmental regulation and supervision; and (iii) the difficulty of enforcing legal rights in a foreign
jurisdiction and uncertainties as to the status, interpretation and application of laws. Moreover, foreign companies are generally
not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable
to United States companies. Debt investments secured by the assets of a portfolio company’s foreign subsidiary may be subject
to various laws enacted in their home countries for the protection of debtors or creditors, which could adversely affect our ability
to recover amounts owed. These insolvency considerations will differ depending on the country in which each foreign subsidiary
is located and may differ depending on whether the foreign subsidiary is a non-sovereign or a sovereign entity. The economies of
individual non-U.S. countries may also differ from the U.S. economy in such respects as growth of gross domestic product, rate
of inflation, volatility of currency exchange rates, depreciation, capital reinvestment, resources self-sufficiency and balance
of payments position. Accordingly, debt investments secured by the assets of a portfolio company’s foreign subsidiary could
face risks which would not pertain to debt investments solely in U.S. portfolio companies.



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.



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.



Risks related to our securities



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



We intend to make distributions
on a monthly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve
investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions.
Our ability to pay distributions might be adversely affected by 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 ability to be subject to tax as a RIC, 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. Distributions that represent a return of capital (which is the return of your original investment in us, after
subtracting sales load, fees and expenses directly or indirectly paid by you) rather than a distribution from earnings or profits,
reduce your basis in our stock for U.S. federal income tax purposes, which may result in higher tax liability when the shares
are sold, even if they have not increased in value or have lost value.



46







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:



| | • | actual or anticipated changes in our earnings or fluctuations in our operating results;
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| | • | changes in the value of our portfolio of investments;
| | - | -----------------------------------------------------



| | • | 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;
| | - | ------------------



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



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



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



We and our Advisor could be the target
of litigation.



We or our Advisor could
become the target of securities class action litigation or other similar claims if our stock price fluctuates significantly or
for other reasons. The outcome of any such proceedings could materially adversely affect our business, financial condition and/or
operating results and could continue without resolution for long periods of time. Any litigation or other similar claims could
consume substantial amounts of our management’s time and attention, and that time and attention and the devotion of associated
resources could, at times, be disproportionate to the amounts at stake. Litigation and other claims are subject to inherent uncertainties,
and a material adverse impact on our financial statements could occur for the period in which the effect of an unfavorable final
outcome in litigation or other similar claims becomes probable and reasonably estimable. In addition, we could incur expenses associated
with defending ourselves against litigation and other similar claims, and these expenses could be material to our earnings in future
periods.



Shares of closed-end investment companies,
including BDCs, frequently trade at a discount to their NAV, which is separate and distinct from the risk that our NAV per share
may decline.



We cannot predict the
price at which our common stock will trade. Shares of closed-end investment companies, including BDCs, 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.



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.



47







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



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



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



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



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



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



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



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



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



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



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



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.



48







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 an 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 offering will pay a price per share that exceeds the tangible book value per share after
such offering.



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



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



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



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



Stockholders may receive shares of our
common stock as dividends, which could result in adverse tax consequences to them.



In order to satisfy the
Annual Distribution Requirement, we have the ability to declare a large portion of a dividend in shares of our common stock instead
of in cash. As long as a portion of such dividend is paid in cash (which portion may be as low as 20% of such dividend) and certain
requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result,
a stockholder generally would be subject to tax on 100% of the fair market value of the dividend on the date the dividend is received
by the stockholder in the same manner as a cash dividend, even though most of the dividend was paid in shares of our common stock.
We currently do not intend to pay dividends in shares of our common stock.



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 the rate borne by the debt securities.
| | - | -----------------------------------------------------------------------------------



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



49







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.



Sales in the public market of substantial
amounts of our common stock 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.



Our 2022 Notes are unsecured and therefore
are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future.



Our
2022 Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the 2022 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 2022 Notes.



Our 2022 Notes are structurally subordinated
to the indebtedness and other liabilities of our subsidiaries.



Our 2022
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 2022 Notes and the 2022 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 2022 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 2022 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 2022 Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables)
of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise.



In addition,
our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the
2022 Notes.



50







The indenture under which our 2022 Notes
were issued contains limited protection for holders of our 2022 Notes.



The indenture
under which the 2022 Notes were issued offers limited protection to holders of the 2022 Notes. The terms of the indenture and the
2022 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 2022 Notes. In
particular, the terms of the indenture and the 2022 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 2022 Notes, (2)
any indebtedness orother obligations that would be
secured and therefore rank effectively senior in right
of payment to the 2022 Notes to the extent of the values of
the 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 2022 Notes and (4) securities, indebtedness or obligations issued or incurred
by our subsidiariesthat would besenior
to our equity interests in our subsidiaries
and therefore rank structurally senior to the 2022 Notes
with respect to the assets ofour
subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would
cause a violation of Section 18(a)(1)(A) of the 1940 Act
as modified by Section 61(a)(l) of the 1940 Act or any successor provisions,
whether or not we continue to be subject to such provisions of the
1940 Act, (these provisions generally prohibit us from making additional borrowings, including through the issuance of additional
debt or the sale of additional debt securities, unless
our asset coverage, as defined in the 1940 Act, equals at least 200% after such
borrowings);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | pay dividends on, or purchase or redeem or make any payments in respect of capital stock or other
securities ranking junior in right of payment to the 2022 Notes, including subordinated indebtedness, in each case other than dividends,
purchases, redemptions or payments that would cause a violation of Section 18(a)(1)(B) of the 1940 Act 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 2022 Notes in connection with a change of control or any other event.



Furthermore,
the terms of the indenture and the 2022 Notes do not protect holders of the 2022 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 2022 Notes may
have important consequences for holders of the 2022 Notes, including making it more difficult for us to satisfy our obligations
with respect to the 2022 Notes or negatively affecting the trading value of the 2022 Notes.



Certain
of our current debt instruments include more protections for their holders than the indenture and the 2022 Notes. In addition,
other debt we issue or incur in the future could contain more protections for its holders than the indenture and the 2022 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 2022 Notes.



51







An active trading market for our 2022
Notes may not exist, which could limit holders’ ability to sell our 2022 Notes or affect the market price of the 2022 Notes.



The 2022
Notes are listed on the New York Stock Exchange, or NYSE, under the symbol “HTFA”. However, we cannot provide any assurances
that an active trading market for the 2022 Notes will exist in the future or that you will be able to sell your 2022 Notes. Even
if an active trading market does exist, the 2022 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 2022 Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the 2022 Notes
for an indefinite period of time.



The optional redemption
provision may materially adversely affect the return on the 2022 Notes.



The 2022
Notes are redeemable in whole or in part at any time or from time to time on or after September 15, 2019 at our sole option. We
may choose to redeem the 2022 Notes at times when prevailing interest rates are lower than the interest rate paid on the 2022 Notes.
In this circumstance, the holders of the 2022 Notes may not be able to reinvest the redemption proceeds in a comparable security
at an effective interest rate as high as the 2022 Notes being redeemed.



If we default on our obligations to pay
our other indebtedness, we may not be able to make payments on our 2022 Notes.



Any default
under the agreements governing our indebtedness, including a default under the Key Facility 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 2022 Notes and substantially decrease the market value
of the 2022 Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet
required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various
covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under
the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect
to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lender under
the Key Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans
and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating
performance declines, we may in the future need to seek to obtain waivers from the required lender under the Key Facility or other
debt that we may incur in the future to avoid being in default. If we breach our covenants under the Key Facility or other debt
and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders. If this occurs, we would be in default
and our lenders or debt holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation.
If we are unable to repay debt, lenders having secured obligations, including the lender under the Key Facility, could proceed
against the collateral securing the debt. Because the Key Facility has, 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.



FATCA withholding may
apply to payments to certain foreign entities.



Payments
made under the 2022 Notes to a foreign financial institution, or “FFI,” or non-financial foreign entity, or “NFFE”
(including such an institution or entity acting as an intermediary), may be subject to a U.S. withholding tax of 30% under U.S.
Foreign Account Tax Compliance Act provisions of the Code (commonly referred to as “FATCA”). This withholding tax may
apply to payments of interest on the 2022 Notes as well as, after December 31, 2018, to payments made upon maturity, redemption,
or sale of the 2022 Notes, unless the FFI or NFFE complies with certain information reporting, withholding, identification, certification
and related requirements imposed by FATCA. Depending upon the status of a holder and the status of an intermediary through which
any Notes are held, the holder could be subject to this 30% withholding tax in respect of any interest paid on the 2022 Notes as
well as any proceeds from the sale or other disposition of the 2022 Notes. Holders of the 2022 Notes should consult their own tax
advisors regarding FATCA and how it may affect their investment in the 2022 Notes.



Item 1B.Unresolved Staff Comments



None



52







Item 2.Properties



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



Item 3.Legal Proceedings



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



Item 4.Mine Safety Disclosures



Not applicable



53







PART II



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



Price range of common stock and distributions



Our common stock is traded
on Nasdaq, under the symbol “HRZN.” The following table sets forth, for each fiscal quarter since January 1, 2016,
the range of high and low closing sales price of our common stock, the premium or discount of the closing sales price to our NAV
and the distributions declared per share by us.



|                             |  |        |       |  | Closing Sales Price |   |       | Premium/  Discount of
 High Sales Price to |  |   | Premium/  Discount of
 Low Sales Price to |  |  | Distributions Declared Per |    
|---------------------------- |  | ------ | ----- |  | ------------------- | - | ----- | ------------------------------------------ |  | - | ----------------------------------------- |  |  | -------------------------- | ---
|Period                       |  | NAV(1) |       |  | High                |   |       | Low                                        |  |   | NAV(2)                                    |  |  | NAV(2)                     |    
|Year ended December 31, 2017 |  |        |       |  |                     |   |       |                                            |  |   |                                           |  |  |                            |    
|Fourth Quarter               |  | $      | 11.72 |  |                     | $ | 11.50 |                                            |  | $ | 10.55                                     |  |  |                            | (2 
|Third Quarter                |  | $      | 11.81 |  |                     | $ | 11.71 |                                            |  | $ | 10.09                                     |  |  |                            | (1 
|Second Quarter               |  | $      | 11.87 |  |                     | $ | 11.72 |                                            |  | $ | 11.00                                     |  |  |                            | (1 
|First Quarter                |  | $      | 12.11 |  |                     | $ | 11.67 |                                            |  | $ | 10.03                                     |  |  |                            | (4 
|Year ended December 31, 2016 |  |        |       |  |                     |   |       |                                            |  |   |                                           |  |  |                            |    
|Fourth Quarter               |  | $      | 12.09 |  |                     | $ | 13.74 |                                            |  | $ | 9.83                                      |  |  |                            | 14 
|Third Quarter                |  | $      | 12.44 |  |                     | $ | 13.86 |                                            |  | $ | 12.43                                     |  |  |                            | 11 
|Second Quarter               |  | $      | 13.27 |  |                     | $ | 12.20 |                                            |  | $ | 11.23                                     |  |  |                            | (8 
|First Quarter                |  | $      | 13.62 |  |                     | $ | 12.02 |                                            |  | $ | 9.42                                      |  |  |                            | (12










| | (1) | NAV per share 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) | $0.10 of which is payable on March 15, 2018.
| | --- | --------------------------------------------



The last reported price
for our common stock on March 1, 2018 was $10.56 per share, which represented a 10% discount to NAV per share. As of March 1,
2018 we had 12 stockholders of record, which did not include stockholders for whom shares are held in nominee or “street”
name.



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



Sales of unregistered securities



We did not engage in any
sales of unregistered equity securities during the years ended December 31, 2017, 2016 and 2015.



54







Issuer Purchases of Equity Securities



On April 27, 2017, our
Board extended a previously authorized stock repurchase plan which allows us to repurchase up to $5.0 million of our outstanding
common stock. Unless extended by our Board, the repurchase program will expire on the earlier of June 30, 2018 and the repurchase
of $5.0 million of common stock. During the quarter ended December 31, 2017, we did not purchase any common stock. During the year
ended December 31, 2017, we repurchased 5,923 shares of our common stock at an average price of $9.97 on the open market at a total
cost of $0.1 million. During the year ended December 31, 2016, we repurchased 48,160 shares of our common stock at an average price
of $10.66 on the open market for a total cost of $0.5 million. During the year ended December 31, 2015, we repurchased 113,382
shares of our common stock at an average price of $11.53 on the open market for a total cost of $1.3 million. From the inception
of the stock repurchase program through December 31, 2017, we repurchased 167,465 shares of our common stock at an average price
of $11.22 on the open market at a total cost of $1.9 million.



Any shares repurchased
by us may have the effect of maintaining the market price of our common stock or retarding a decline in the market price of the
common stock, and, as a result, the price of our common stock may be higher than the price that otherwise might exist in the open
market. In addition, as any shares repurchased pursuant to the stock repurchase plan will be purchased at a price below the net
asset value per share as reported in our most recent financial statements, share repurchases may have the effect of increasing
our net asset value per share.



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 considered
a return of capital to our common stockholders for U.S. federal income tax purposes. Thus, the source of distribution to our stockholders
may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure
accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary income
or gains.



In order to qualify to
be subject to tax as a RIC, we must meet certain source-of-income, asset diversification and annual distribution requirements.
Generally, in order to qualify as a RIC, we must derive at least 90% of our gross income during each tax year from dividends, interest,
payments with respect to certain securities, loans, gains from the sale or other disposition of stock, securities or foreign currencies,
or other income derived with respect to our business of investing in stock or other securities. We must also meet certain asset
diversification requirements at the end of each quarter of each tax year. Failure to meet these diversification requirements on
the last day of a quarter may result in us having to dispose of certain investments quickly in order to prevent the loss of RIC
status. Any such dispositions could be made at disadvantageous prices or times, and may cause us to incur substantial losses.



In addition, in order
to be eligible for the special tax treatment accorded to RICs and to avoid the imposition of corporate level tax on the income
and gains we distribute to our stockholders, each tax year we are required under the Code to distribute as dividends of an amount
generally at least 90% of our investment company taxable income, determined without regard to any deduction for dividends paid
to our stockholders. We refer to such amount as the Annual Distribution Requirement in this annual report on Form 10-K. Additionally,
we must distribute, in respect of each calendar year, dividends of an amount generally at least equal to the sum of 98% of our
calendar year net ordinary income (taking into account certain deferrals and elections); 98.2% of our capital gain net income (adjusted
for certain ordinary losses) for the one year period ending on October 31 of such calendar year; and any net ordinary income or
capital gain net income for preceding years that was not distributed during such years and on which we previously did not incur
any U.S. federal income tax in order to avoid the imposition of a 4% U.S. federal excise tax. If we fail to qualify as a RIC for
any reason and become subject to corporate income tax, the resulting corporate income taxes could substantially reduce our net
assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material
adverse effect on us and our stockholders. In addition, we could be required to recognize unrealized gains, incur substantial taxes
and interest and make substantial distributions in order to re-qualify as a RIC. We cannot assure stockholders that they will receive
any distributions.



55







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% U.S. federal excise tax on such undistributed income. Distributions of any such carryover taxable
income must be made through a distribution declared as of the earlier of the filing date of the corporate income tax return related
to the tax year in which such taxable income was generated or the 15th day of the ninth month following the end of such
tax year, in order to count towards the satisfaction of the Annual Distribution Requirement for the tax year in which such taxable
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 stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See “Item 1.
Business — Regulation — Taxation as a RIC.”



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



The following table reflects
the monthly cash distributions, including dividends and returns of capital per share that our Board has declared since January
1, 2016, including shares issued under our DRIP, on our common stock:



|Record Dates                 |  | Payment Date       |  | Distributions Declared |      
|---------------------------- |  | ------------------ |  | ---------------------- | -----
|Year ended December 31, 2017 |  |                    |  |                        |      
|February 21, 2018            |  | March 15, 2018     |  | $                      | 0.10 
|January 22, 2018             |  | February 15, 2018  |  |                        | 0.10 
|December 20, 2017            |  | January 17, 2018   |  |                        | 0.10 
|November 20, 2017            |  | December 15, 2017  |  |                        | 0.10 
|October 19, 2017             |  | November 15, 2017  |  |                        | 0.10 
|September 20, 2017           |  | October 16, 2017   |  |                        | 0.10 
|August 18, 2017              |  | September 15, 2017 |  |                        | 0.10 
|July 20, 2017                |  | August 15, 2017    |  |                        | 0.10 
|June 20, 2017                |  | July 14, 2017      |  |                        | 0.10 
|May 19, 2017                 |  | June 15, 2017      |  |                        | 0.10 
|April 21, 2017               |  | May 16, 2017       |  |                        | 0.10 
|March 20, 2017               |  | April 18, 2017     |  |                        | 0.10 
|Total                        |  |                    |  | $                      | 1.20 
|                             |  |                    |  |                        |      
|Year ended December 31, 2016 |  |                    |  |                        |      
|February 22, 2017            |  | March 15, 2017     |  | $                      | 0.10 
|January 19, 2017             |  | February 15, 2017  |  |                        | 0.10 
|December 20, 2016            |  | January 13, 2017   |  |                        | 0.10 
|November 18, 2016            |  | December 15, 2016  |  |                        | 0.115
|October 20, 2016             |  | November 15, 2016  |  |                        | 0.115
|September 20, 2016           |  | October 17, 2016   |  |                        | 0.115
|August 19, 2016              |  | September 15, 2016 |  |                        | 0.115
|July 20, 2016                |  | August 15, 2016    |  |                        | 0.115
|June 20, 2016                |  | July 15, 2016      |  |                        | 0.115
|May 19, 2016                 |  | June 15, 2016      |  |                        | 0.115
|April 20, 2016               |  | May 16, 2016       |  |                        | 0.115
|March 18, 2016               |  | April 15, 2016     |  |                        | 0.115
|Total                        |  |                    |  | $                      | 1.335



On March 1, 2018, our Board declared distributions
as set forth in the following table:



|Ex-Dividend Date |  | Record Date    |  | Payment Date   |  | Distributions Declared |     
|---------------- |  | -------------- |  | -------------- |  | ---------------------- | ----
|May 16, 2018     |  | May 17, 2018   |  | June 15, 2018  |  | $                      | 0.10
|April 18, 2018   |  | April 19, 2018 |  | May 15, 2018   |  | $                      | 0.10
|March 16, 2018   |  | March 19, 2018 |  | April 17, 2018 |  | $                      | 0.10



56







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 Wells Fargo BDC Index,
for the period from December 30, 2012 through December 31, 2017. The graph assumes that, on December 31, 2012, a person invested
$100 in each of our common stock, the S&P 500 Index and the Wells Fargo BDC Index. The graph measures total stockholder return,
which takes into account both changes in stock price and distributions. It assumes that distributions paid are invested in like
securities. The graph and other information furnished under this Part II Item 5 of Form 10-K shall not be deemed
to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or
to the liabilities of Section 18 of the Exchange Act. The stock price performance included in this graph is not necessarily
indicative of future stock price performance.







57







Item 6.Selected Financial Data





The following selected
consolidated financial data of the Company as of December 31, 2017, 2016, 2015, 2014 and 2013, and for the years ended December
31, 2017, 2016, 2015, 2014 and 2013 are derived from the consolidated financial statements that have been audited by RSM US LLP,
an independent registered public accounting firm. 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.”



|                                                                            |  | As of and for the years ended December 31, |        
|--------------------------------------------------------------------------- |  | ------------------------------------------ | -------
|(Dollars in thousands, except per share data and portfolio
 company counts) |  | 2017                                       |        
|Statement of Operations Data:                                               |  |                                            |        
|Total investment income                                                     |  | $                                          | 25,777 
|Base management fee                                                         |  |                                            | 3,786  
|Performance based incentive fee                                             |  |                                            | 1,714  
|All other expenses                                                          |  |                                            | 8,034  
|Base management and performance based incentive fees waived                 |  |                                            | (79    
|Net investment income before excise tax                                     |  |                                            | 12,322 
|Provision (credit) for excise tax                                           |  |                                            | 25     
|Net investment income                                                       |  |                                            | 12,297 
|Net realized loss on investments                                            |  |                                            | (21,191
|Net unrealized appreciation (depreciation) on investments                   |  |                                            | 18,485 
|Net increase (decrease) in net assets resulting from operations             |  | $                                          | 9,591  
|Dollar amount of distributions declared                                     |  | $                                          | 13,823 
|Per Share Data:                                                             |  |                                            |        
|Net asset value                                                             |  | $                                          | 11.72  
|Net investment income                                                       |  |                                            | 1.07   
|Net realized loss on investments                                            |  |                                            | (1.84  
|Net change in unrealized appreciation (depreciation) on investments         |  |                                            | 1.60   
|Net increase (decrease) in net assets resulting from operations             |  |                                            | 0.83   
|Per share distributions declared                                            |  |                                            | 1.20   
|Statement of Assets and Liabilities Data:                                   |  |                                            |        
|Investments, at fair value                                                  |  | $                                          | 222,099
|Other assets                                                                |  |                                            | 12,047 
|Total assets                                                                |  |                                            | 234,146
|Borrowings                                                                  |  |                                            | 94,075 
|Total liabilities                                                           |  |                                            | 99,071 
|Total net assets                                                            |  | $                                          | 135,075
|Other data:                                                                 |  |                                            |        
|Weighted yield on debt investments at fair value                            |  |                                            | 15.1   
|Weighted yield on all portfolio investments at fair value                   |  |                                            | 14.0   
|Number of portfolio companies at period end:                                |  |                                            |        
|Debt investments                                                            |  |                                            | 33     
|Warrants investments                                                        |  |                                            | 72     
|Equity investments                                                          |  |                                            | 6      
|Other investments                                                           |  |                                            | 4      



58







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



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



Forward-looking statements



This annual report on
Form 10-K, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains
statements that constitute forward-looking statements, which relate to future events or our future performance or financial condition.
These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections
about our industry, our beliefs and our assumptions. The forward-looking statements contained in this annual report on Form 10-K
involve risks and uncertainties, including statements as to:



| | • | our future operating results, including the performance of our existing debt investments, warrants
and other investments;
| | - | -------------------------------------------------------------------------------------------------------------------------

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

| | • | our ability to qualify and maintain qualification as a RIC and as a BDC;
| | - | ------------------------------------------------------------------------

| | • | the adequacy of our cash resources and working capital;
| | - | -------------------------------------------------------

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

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

| | • | the ability of our portfolio companies to achieve their objective;
| | - | ------------------------------------------------------------------

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

| | • | our contractual arrangements and relationships with third parties;
| | - | ------------------------------------------------------------------

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

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

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



We use words such as “anticipates,”
“believes,” “expects,” “intends,” “seeks” and similar expressions to identify forward-looking
statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially
from those projected in the forward-looking statements for any reason, including the factors in “Item 1A – Risk Factors”
and elsewhere in our annual report on Form 10-K.



We have based the forward-looking
statements included in this report on information available to us on the date of this report, and we assume no obligation to update
any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in
this annual report on Form 10-K, whether as a result of new information, future events or otherwise, you are advised to consult
any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including
quarterly 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.



59







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 maximize
our investment portfolio’s total return by generating current income from the debt investments we make and capital appreciation
from the warrants we receive when making such debt investments. We are focused on making Venture Loans to venture capital backed
companies in our Target Industries, which we refer to as “Venture Lending.” We also selectively provide Venture Loans
to publicly traded companies in our Target Industries. Our debt investments are typically secured by first liens or first liens
behind a secured revolving line of credit, or Senior Term Loans. As of December 31, 2017, 99.4%, or $202.6 million, of our debt
investment portfolio at fair value consisted of Senior Term Loans. Venture Lending is typically characterized by (1) the making
of a secured debt investment after a venture capital or equity investment in the portfolio company has been made, which investment
provides a source of cash to fund the portfolio company’s debt service obligations under the Venture Loan, (2) the senior
priority of the Venture Loan which requires repayment of the Venture Loan prior to the equity investors realizing a return on their
capital, (3) the relatively rapid amortization of the Venture Loan and (4) the lender’s receipt of warrants or other success
fees with the making of the Venture Loan.



We are an externally managed,
closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. In addition,
for U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. As a BDC, we are required
to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance our
investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage,
as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on our assessment
of market conditions and other factors at the time of any proposed borrowing. As a RIC, we generally are not subject to corporate-level
income taxes on our investment company taxable income, determined without regard to any deductions for dividends paid, and our
net capital gain that we distribute as dividends for U.S. federal income tax purposes to our stockholders as long as we meet certain
source-of-income, distribution, asset diversification and other requirements.



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



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



Portfolio composition and investment activity



The following table shows
our portfolio by type of investment as of December 31, 2017 and 2016:



|                  |  | December 31, 2017      |  | December 31, 2016
|----------------- |  | ---------------------- |  | -----------------
|                  |  | Number of Investments  |  | Fair Value       
|                  |  | (Dollars in thousands) | 
|Debt investments  |  | 33                     |  | $                
|Warrants          |  | 72                     |  |                  
|Other investments |  | 4                      |  |                  
|Equity            |  | 6                      |  |                  
|Total             |  |                        |  | $                



60







The following table shows
total portfolio investment activity as of and for the years ended December 31, 2017 and 2016:





|                                               |  | December 31,   |        
|---------------------------------------------- |  | -------------- | -------
|                                               |  | 2017           |        
|                                               |  | (In thousands) |        
|Beginning portfolio                            |  | $              | 194,003
|New debt investments                           |  |                | 139,256
|Less refinanced debt investments               |  |                | (3,700 
|Net new debt investments                       |  |                | 135,556
|Principal payments received on investments     |  |                | (30,477
|Early pay-offs                                 |  |                | (72,613
|Accretion of debt investment fees              |  |                | 1,881  
|New debt investment fees                       |  |                | (1,705 
|New equity                                     |  |                | —      
|Proceeds from sale of investments              |  |                | (1,840 
|Net realized loss on investments               |  |                | (21,191
|Net appreciation (depreciation) on investments |  |                | 18,485 
|Ending portfolio                               |  | $              | 222,099



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



The following table shows
our debt investments by industry sector as of December 31, 2017 and 2016:



|                                    |  | December 31, 2017              |         |  | December 31, 2016             | 
|----------------------------------- |  | ------------------------------ | ------- |  | ----------------------------- | 
|                                    |  | Debt Investments at Fair Value |         |  | Percentage of Total Portfolio | 
|                                    |  |                                |         |  | (Dollars in thousands)        | 
|Life Science                        |  |                                |         |  |                               | 
|Biotechnology                       |  | $                              | 15,015  |  |                               | 
|Drug Delivery                       |  |                                | 6,830   |  |                               | 
|Medical Device                      |  |                                | 36,173  |  |                               | 
|Technology                          |  |                                |         |  |                               | 
|Communications                      |  |                                | 19,549  |  |                               | 
|Consumer-Related                    |  |                                | 10,918  |  |                               | 
|Internet and Media                  |  |                                | 38,899  |  |                               | 
|Materials                           |  |                                | 9,324   |  |                               | 
|Networking                          |  |                                | —       |  |                               | 
|Power Management                    |  |                                | 1,234   |  |                               | 
|Semiconductors                      |  |                                | 3,345   |  |                               | 
|Software                            |  |                                | 53,994  |  |                               | 
|Cleantech                           |  |                                |         |  |                               | 
|Energy Efficiency                   |  |                                | —       |  |                               | 
|Waste Recycling                     |  |                                | —       |  |                               | 
|Healthcare Information and Services |  |                                |         |  |                               | 
|Diagnostics                         |  |                                | —       |  |                               | 
|Other                               |  |                                | —       |  |                               | 
|Software                            |  |                                | 8,512   |  |                               | 
|Total                               |  | $                              | 203,793 |  |                               | 



61







The largest debt investments
in our portfolio may vary from year to year as new debt investments are originated and existing debt investments are repaid. Our
five largest debt investments represented 29% and 24% of total debt investments outstanding as of December 31, 2017 and 2016, respectively.
No single debt investment represented more than 10% of our total debt investments as of December 31, 2017 or 2016.



Debt investment asset quality



We use an internal credit
rating system which rates each debt investment on a scale of 4 to 1, with 4 being the highest credit quality rating and 3 being
the rating for a standard level of risk. A rating of 2 represents an increased level of risk and, while no loss is currently anticipated
for a 2-rated debt investment, there is potential for future loss of principal. A rating of 1 represents a deteriorating credit
quality and a high degree of risk of loss of principal. Our internal credit rating system is not a national credit rating system.
See “Item 1 – Business” for a more detailed description of the internal credit rating system. As of December
31, 2017 and 2016, our debt investments had a weighted average credit rating of 3.0. The following table shows the classification
of our debt investment portfolio by credit rating as of December 31, 2017 and December 31, 2016:



|              |  | December 31, 2017      |  | December 31, 2016              
|------------- |  | ---------------------- |  | -------------------------------
|              |  | Number of Investments  |  | Debt Investments  at Fair Value
|              |  | (Dollars in thousands) | 
|Credit Rating |  |                        |  |                                
|4             |  | 4                      |  | $                              
|3             |  | 25                     |  |                                
|2             |  | 3                      |  |                                
|1             |  | 1                      |  |                                
|Total         |  | 33                     |  | $                              



As of December 31, 2017,
there was one debt investment with an internal credit rating of 1, with a cost of $3.0 million and a fair value of $2.9 million.
As of December 31, 2016, there were four debt investments with an internal credit rating of 1, with a cost of $26.2 million and
a fair value of $11.5 million.



Consolidated results
of operations



The consolidated results
of operations described below may not be indicative of the results we report in future periods.



The following table shows
consolidated results of operations for the years ended December 31, 2017, 2016 and 2015:



|                                                                |  | 2017           |         |   | 2016 |   |         | 2015 | 
|--------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- | 
|                                                                |  | (In thousands) |        
|Total investment income                                         |  | $              | 25,777  |   |      | $ | 32,984  |      | 
|Total expenses                                                  |  |                | 13,534  |   |      |   | 15,972  |      | 
|Management and performance based incentive fees waived          |  |                | (79     | ) |      |   | —       |      | 
|Net expenses                                                    |  |                | 13,455  |   |      |   | 15,972  |      | 
|Net investment income before excise tax                         |  |                | 12,322  |   |      |   | 17,012  |      | 
|Provision (credit) for excise tax                               |  |                | 25      |   |      |   | (87     | )    | 
|Net investment income                                           |  |                | 12,297  |   |      |   | 17,099  |      | 
|Net realized loss on investments                                |  |                | (21,191 | ) |      |   | (7,776  | )    | 
|Net unrealized appreciation (depreciation) on investments       |  |                | 18,485  |   |      |   | (14,236 | )    | 
|Net increase (decrease) in net assets resulting from operations |  | $              | 9,591   |   |      | $ | (4,913  | )    | 
|Average debt investments, at fair value                         |  | $              | 170,685 |   |      | $ | 221,257 |      | 
|Average borrowings outstanding                                  |  | $              | 75,960  |   |      | $ | 102,875 |      | 



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



62







Investment income



Total investment income
decreased by $7.2 million, or 21.8%, to $25.8 million for the year ended December 31, 2017 as compared to the year ended December 31,
2016. For the year ended December 31, 2017, total investment income consisted primarily of $23.8 million in interest
income from investments, which included $5.8 million in income from the accretion of origination fees and ETPs and $2.0 million
in fee income. Interest income on investments decreased by $7.6 million, or 24.3%, to $23.8 million for the year ended December 31,
2017 as compared to the year ended December 31, 2016. Interest income on investments decreased primarily due to a decrease
of $50.6 million, or 22.9%, in the average size of our investment portfolio for the year ended December 31, 2017 as compared to
the year ended December 31, 2016. Fee income, which includes success fee and prepayment fee income on debt investments, increased
by $0.4 million, or 26.9%, primarily due to fees earned on higher principal prepayments received during the year ended December
31, 2017 compared to the year ended December 31, 2016.



Total investment income
increased by $1.9 million, or 6.0%, to $33.0 million for the year ended December 31, 2016 as compared to the year ended December 31,
2015. For the year ended December 31, 2016, total investment income consisted primarily of $31.4 million in interest
income from investments, which included $8.3 million in income from the accretion of origination fees and ETPs and $1.6 million
in fee income. Interest income on investments increased by $2.7 million, or 9.6%, to $31.4 million for the year ended December 31,
2016 as compared to the year ended December 31, 2015. Interest income on investments increased primarily due to the larger
amount of ETPs earned during the year ended December 31, 2016 compared to the year ended December 31, 2015. Fee income, which includes
success fee and prepayment fee income on debt investments, decreased by $0.9 million, or 35.5%, primarily due to a lower average
prepayment fee rate earned during the year ended December 31, 2016 compared to the year ended December 31, 2015, along with a lower
amount of success fees earned during the year ended December 31, 2016 compared to the year ended December 31, 2015.



For the years ended December
31, 2017, 2016 and 2015, our dollar-weighted yield on average debt investments (excluding any yield from warrants, equity and other
investments) was 15.1%, 14.9% and 14.2%, respectively. We calculate the yield on dollar-weighted average debt investments for any
period as (1) total investment income during the period divided by (2) the average of the fair value of debt investments outstanding
on (a) the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar
month during the period. The dollar-weighted yield on average debt investments is higher than what investors will realize because
it does not reflect our expenses or any sales load paid by investors.



For the years ended December
31, 2017, 2016 and 2015, our investment portfolio (including any yield from warrants, equity and other investments) had an overall
total return of 14.0%, 14.4% and 13.7%, respectively. We calculate the yield on dollar-weighted average investments for any period
as (1) total investment income during the period divided by (2) the average of the fair value of investments outstanding on (a)
the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar month
during the period. The dollar-weighted yield on average investments is higher than what investors will realize because it does
not reflect our expenses or any sales load paid by investors.



Investment income, consisting
of interest income and fees on debt investments, can fluctuate significantly upon repayment of large debt investments. Interest
income from the five largest debt investments in the aggregate accounted for 14%, 17% and 14% of investment income for the years
ended December 31, 2017, 2016 and 2015, respectively.



Expenses



Total net expenses decreased
by $2.5 million, or 15.8%, to $13.5 million for the year ended December 31, 2017 as compared to the year ended December 31,
2016. Total net expenses decreased by $1.1 million, or 6.7%, to $16.0 million for the year ended December 31, 2016
as compared to the year ended December 31, 2015. Total expenses for each period consisted of interest expense, base management
fee, incentive and administrative fees, professional fees and general and administrative expenses.



63







Interest expense decreased
by $0.7 million, or 12.1%, to $5.2 million for the year ended December 31, 2017 as compared to the year ended December 31,
2016. Interest expense, which includes the amortization of debt issuance costs, decreased primarily due to a decrease in average
borrowings of $26.9 million, or 26.2%, which was partially offset by the acceleration of $0.2 million of unamortized debt issuance
costs related to the redemption of the 2019 Notes and an increase in our effective cost of debt for the year ended December 31,
2017 as compared to the year ended December 31, 2016. Interest expense increased by $0.1 million, or 2.1%, to $5.9 million
for the year ended December 31, 2016 as compared to the year ended December 31, 2015. Interest expense, which includes
the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $14.9 million, or 16.9%,
which was partially offset by a decrease in our effective cost of debt for the year ended December 31, 2016 as compared to the
year ended December 31, 2015.



Base management fee expense
decreased by $0.9 million, or 19.9%, to $3.8 million for the year ended December 31, 2017 as compared to the year ended December 31,
2016. Base management fee expense decreased primarily due to a decrease of $50.6 million, or 22.9%, in the average size of our
investment portfolio for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Base management
fee expense increased by $0.3 million, or 7.4%, to $4.7 million for the year ended December 31, 2016 as compared to the
year ended December 31, 2015, after giving effect to waivers of $0.3 million in base management fees for the year ended December
31, 2015. Base management fee increased for the year ended December 31, 2016 compared to December 31, 2015 primarily due to the
waiver of base management fees of $0.3 million in 2015 in connection with the 2015 Offering.



As noted above, our Advisor
agreed to waive its base management fee relating to the proceeds raised in the 2015 Offering, to the extent such fee was not otherwise
waived and regardless of the application of the proceeds raised, until the earlier to occur of (i) March 31, 2016 or (ii) the last
day of the second consecutive calendar quarter in which our net investment income exceeded distributions declared on shares of
our common stock for the applicable quarter. During the year ended December 31, 2015, our Advisor waived $0.3 million of base management
fees. As of December 31, 2015, condition (ii) above had been met, as our net investment income exceeded distributions declared
for the quarters ended September 30, 2015 and December 31, 2015.



Performance based incentive
fee expense, net of waivers, decreased by $0.5 million, or 23.1%, to $1.6 million for the year ended December 31, 2017 as
compared to the year ended December 31, 2016. Performance based incentive fee expense decreased due to a decrease of $5.3
million, or 27.5%, to $13.9 million in Pre-Incentive Fee Net Investment Income for the year ended December 31, 2017 as compared
to the year ended December 31, 2016. The Incentive Fee Cap and Deferral Mechanism resulted in $1.1 million of reduced incentive
fee expense and thus increased net investment income for the year ended December 31, 2017. The incentive fee on Pre-Incentive
Fee Net Investment Income was subject to the Incentive Fee Cap and Deferral Mechanism during the year ended December 31, 2017
due to the cumulative incentive fees paid to the Advisor exceeding the Cumulative Pre-Incentive Fee Net Return during the Incentive
Fee Look-Back Period. (See Item 1 above, “Investment Management Agreement.”) Performance based incentive fee expense
decreased by $1.4 million, or 39.3%, to $2.1 million for the year ended December 31, 2016 as compared to the year
ended December 31, 2015. Performance based incentive fee expense decreased because the incentive fee expense for the three
months ended September 30, 2016 and December 31, 2016 was limited by the incentive fee cap and deferral mechanism under our Investment
Management Agreement. This resulted in $1.7 million of reduced expense and additional net investment income for the year ended
December 31, 2016. The incentive fee on pre-incentive fee net investment income was subject to the incentive fee cap and deferral
mechanism due to net realized and unrealized losses in the portfolio during the year ended December 31, 2016 totaling $22.0 million.



Administrative fee expense
decreased by $0.2 million, or 19.6%, to $0.7 million for the year ended December 31, 2017 as compared to the year
ended December 31, 2016. Administrative fee expense decreased primarily due to a decrease in our allocated costs of compensation
incurred by the Advisor on our behalf for the year ended December 31, 2017 as compared to the year ended December 31,
2016. Administrative fee expense decreased by $0.3 million, or 22.7%, to $0.9 million for the year ended December 31,
2016 as compared to the year ended December 31, 2015. Administrative fee expense decreased primarily due to a decrease in our allocated
costs of compensation incurred by the Advisor on our behalf for the year ended December 31, 2016 as compared to the year ended
December 31, 2015.



In 2017 and 2016, we elected
to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such
income. For the years ended December 31, 2017 and 2016, we elected to carry forward taxable income in excess of current year distributions
of $1.0 million and $1.8 million, respectively. At December 31, 2017 and 2016, excise tax payable of $0.03 million and $0.1 million,
respectively, was recorded.



64







Professional fees and
general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses were $2.2 million,
$2.3 million and $2.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.



Net realized gains and losses and net unrealized
appreciation and depreciation



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



During the year ended
December 31, 2017, we realized net losses totaling $21.2 million primarily due to the resolution of four debt investments
partially offset by realized gains on the sale of equity received upon the exercise of warrants. One debt investment was settled,
which resulted in a realized loss of $5.8 million and unrealized appreciation of $5.8 million. One debt investment was settled
for net cash proceeds of $1.3 million, which resulted in a realized loss of $3.0 million and unrealized appreciation of $2.8 million.
Two debt investments were settled for a royalty and sale agreements collectively fair valued at $7.5 million, which resulted in
a realized loss of $12.4 million and unrealized appreciation of $11.8 million. During the year ended December 31, 2016, we realized
net losses totaling $7.8 million primarily due to the resolution of three debt investments. One debt investment was settled for
net cash proceeds of $3.6 million, which resulted in a realized loss of $4.5 million and unrealized appreciation of $4.6 million.
One debt investment was settled for net cash proceeds of $0.2 million and a royalty and sale agreement fair valued at $0.4 million,
which resulted in a realized loss of $2.2 million and unrealized appreciation of $2.2 million. One debt investment was settled
for cash proceeds which resulted in a realized loss of $0.9 million and unrealized appreciation of $0.7 million. During the year
ended December 31, 2015, we realized net losses totaling $1.7 million primarily due to the resolution of one debt investment partially
offset by realized gains on the sale of equity received upon the exercise of warrants. The debt investment was settled for a net
cash payment of $4.9 million, which resulted in a realized loss of $1.8 million and unrealized appreciation of $1.8 million.



During the year ended
December 31, 2017, net unrealized appreciation on investments totaled $18.5 million which was primarily due to the reversal
of previously recorded unrealized depreciation on four debt investments that were settled during the period. During the year ended
December 31, 2016, net unrealized depreciation on investments totaled $14.2 million which was primarily due to the unrealized depreciation
on three debt investments offset by the reversal of previously recorded unrealized depreciation on one debt investment. During
the year ended December 31, 2015, net unrealized depreciation on investments totaled $0.5 million which was primarily due to the
unrealized depreciation on one debt investment offset by the reversal of previously recorded unrealized depreciation on one debt
investment that was settled during the period, described above.



Liquidity and capital resources



As of December 31, 2017
and 2016, we had cash of $6.6 million and $37.1 million, respectively. Cash is available to fund new investments, reduce
borrowings, pay expenses, repurchase common stock and pay distributions. Our primary sources of capital have been from our public
and private equity offerings, use of our revolving credit facilities, issuance of our 2019 Notes and issuance of our 2022 Notes.



On April 27, 2017, our
Board extended a previously authorized stock repurchase program which allows us to repurchase up to $5.0 million of our common
stock at prices below our net asset value per share as reported in our most recent consolidated financial statements. Under the
repurchase program, we may, but are not obligated to, repurchase shares of our outstanding common stock in the open market or in
privately negotiated transactions from time to time. Any repurchases by us will comply with the requirements of Rule 10b-18 under
the Exchange Act and any applicable requirements of the 1940 Act. Unless extended by our Board, the repurchase program will terminate
on the earlier of June 30, 2018 or the repurchase of $5.0 million of our common stock. During the year ended December 31, 2017,
we repurchased 5,923 shares of our common stock at an average price of $9.97 on the open market at a total cost of $0.1 million.
During the year ended December 31, 2016, we repurchased 48,160 shares of our common stock at an average price of $10.66 on the
open market for a total cost of $0.5 million. During the year ended December 31, 2015, we repurchased 113,382 shares of our common
stock at an average price of $11.53 on the open market for a total cost of $1.3 million. From the inception of the stock repurchase
program through December 31, 2017, we repurchased 167,465 shares of our common stock at an average price of $11.22 on the open
market at a total cost of $1.9 million.



65







At December 31, 2017 and
2016, the outstanding principal balance under the Key Facility was $58.0 million and $63.0 million, respectively. As of December
31, 2017 and 2016, we had borrowing capacity under the Key Facility of $37.0 million and $32.0 million, respectively. At December
31, 2017 and 2016, $23.6 million and $4.6 million, respectively, was available, subject to existing terms and advance rates.



Our operating activities
used cash of $14.8 million for the year ended December 31, 2017, and our financing activities used cash of $15.7 million
for the same period. Our operating activities used cash primarily for investments made in portfolio companies, partially offset
by principal payments received on our debt investments. Our financing activities used cash primarily to redeem the 2019 Notes,
pay down the Key Facility and pay distributions to our stockholders, partially offset by the issuance of the 2022 Notes.



Our operating activities
provided cash of $52.3 million for the year ended December 31, 2016, and our financing activities used cash of $35.9 million
for the same period. Our operating activities provided cash primarily from principal payments received on our debt investments,
partially offset by investments made in portfolio companies. Our financing activities used cash primarily to pay off our Asset-Backed
Notes and pay distributions to our stockholders.



Our operating activities
used cash of $31.3 million for the year ended December 31, 2015, and our financing activities provided cash of $43.7 million
for the same period. Our operating activities used cash primarily for investments made in portfolio companies, partially offset
by principal payments received on our debt investments. Our financing activities provided cash primarily from the 2015 Offering
and advances on our Key Facility of $58.0 million, which was partially offset by cash used to pay down our Asset-Backed Notes,
pay distributions to our stockholders and repurchase common stock under the stock repurchase program.



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



In order to remain subject
to taxation as a RIC, we intend to distribute to our stockholders all or substantially all of our investment company taxable income.
In addition, as a BDC, we are required to maintain asset coverage of at least 200%. This requirement limits the amount that we
may borrow.



We believe that our current
cash, cash generated from operations, and funds available from our Key Facility will be sufficient to meet our working capital
and capital expenditure commitments for at least the next 12 months.



Current borrowings



The following table shows
our borrowings as of December 31, 2017 and 2016:



|                                                                |  | December 31, 2017 |         |  | December 31, 2016   |  
|--------------------------------------------------------------- |  | ----------------- | ------- |  | ------------------- | -
|                                                                |  | Total Commitment  |         |  | Balance Outstanding |  
|                                                                |  |                   |         |  |                     |  
|Key Facility                                                    |  | $                 | 95,000  |  |                     | $
|2022 Notes                                                      |  |                   | 37,375  |  |                     |  
|2019 Notes                                                      |  |                   | —       |  |                     |  
|Total before debt issuance costs                                |  |                   | 132,375 |  |                     |  
|Unamortized debt issuance costs attributable to term borrowings |  |                   | —       |  |                     |  
|Total borrowings outstanding, net                               |  | $                 | 132,375 |  |                     | $



We entered into the Key
Facility effective November 4, 2013. 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 LIBOR rate was 1.56% and 0.77% as of December 31, 2017
and 2016, respectively. The interest rate in effect was 4.61% and 4.00%, respectively, as of December 31, 2017 and 2016. The Key
Facility requires the payment of an unused line fee in an amount equal to 0.50% of any unborrowed amount available under the facility
annually.



66







The Key Facility has an
accordion feature which allows for an increase in the total loan commitment to $150 million. The Key Facility is collateralized
by debt investments held by Credit II and permits an advance rate of up to fifty percent (50%) of eligible debt investments held
by Credit II. The Key Facility contains covenants that, among other things, require us to maintain a minimum net worth, to restrict
the debt investments securing the Key Facility to certain criteria for qualified debt investments and to comply with portfolio
company concentration limits as defined in the related loan agreement. We may request advances under the Key Facility through
August 12, 2018, or the Revolving Period. After the Revolving Period, we may not request new advances, and we must repay the outstanding
advances under the Key Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with
the terms and conditions of the Key Facility, particularly the condition that the principal balance of the Key Facility not exceed
fifty percent (50%) of the aggregate principal balance of our eligible debt investments to our portfolio companies. All outstanding
advances under the Key Facility are due and payable on August 12, 2020.



On March 23, 2012, we
issued and sold an aggregate principal amount of $30.0 million 2019 Notes, and on April 18, 2012, pursuant to the underwriters’
30-day option to purchase additional notes, we sold an additional $3.0 million of the 2019 Notes. The 2019 Notes had a stated maturity
of March 15, 2019 and were redeemable in whole or in part at our option at any time or from time to time at a redemption price
of $25 per security plus accrued and unpaid interest. The 2019 Notes bore 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 were our direct, unsecured obligations and (1)
ranked equally in right of payment with our future unsecured indebtedness; (2) were senior in right of payment to any of our future
indebtedness that expressly provided it was subordinated to the 2019 Notes; (3) were effectively subordinated to all of our existing
and future secured indebtedness (including indebtedness that was initially unsecured to which we subsequently granted security),
to the extent of the value of the assets securing such indebtedness and (4) were structurally subordinated to all existing and
future indebtedness and other obligations of any of our subsidiaries. On October 30, 2017, or the Redemption Date, we redeemed
all of the issued and outstanding 2019 Notes in an aggregate principal amount of $33.0 million and paid accrued interest of $0.3
million. The 2019 Notes were delisted effective on the Redemption Date.



On September 29, 2017,
we issued and sold an aggregate principal amount of $32.5 million 2022 Notes, and on October 11, 2017, pursuant to the underwriters’
30-day option to purchase additional notes, we sold an additional $4.9 million of the 2022 Notes. The 2022 Notes have a stated
maturity of September 15, 2022 and may be redeemed in whole or in part at our option at any time or from time to time on or after
September 15, 2019 at a redemption price of $25 per security plus accrued and unpaid interest. The 2022 Notes bear interest at
a rate of 6.25% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2022 Notes are
our direct, unsecured obligations and (1) rank equally in right of payment with our current and future unsecured indebtedness;
(2) are senior in right of payment to any of our future indebtedness that expressly provides it is subordinated to the 2022 Notes;
(3) are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially
unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness and (4)
are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. As
of December, 31, 2017, we were in material compliance with the terms of the 2022 Notes.The 2022 Notes are listed on the
New York Stock Exchange under the symbol “HTFA”.



On June 28, 2013, we completed
the 2013-1 Securitization. In connection with the 2013-1 Securitization, 2013-1 Trust, a wholly owned subsidiary of ours, issued
$90.0 million in the Asset-Backed Notes, which were rated A1(sf) by Moody’s Investors Service, Inc. The Asset-Backed Notes
were issued by 2013-1 Trust and were backed by a pool of loans made to certain portfolio companies of ours and secured by certain
assets of such portfolio companies. The Asset-Backed Notes were secured obligations of 2013-1 Trust and non-recourse to us. In
connection with the issuance and sale of the Asset-Backed Notes, we made customary representations, warranties and covenants. The
Asset-Backed Notes bore interest at a fixed rate of 3.00% per annum and had a stated maturity of May 15, 2018. As of December 31,
2016, the Asset-Backed Notes were repaid in full.



Other assets



As of December 31, 2017
and 2016, other assets were $1.5 million and $2.1 million, respectively, which is primarily comprised of debt issuance
costs and prepaid expenses.



67







Contractual obligations and off-balance sheet arrangements



The following table shows
our significant contractual payment obligations and off-balance sheet arrangements as of December 31, 2017:



|                     |  | Payments due by period |        
|-------------------- |  | ---------------------- | -------
|                     |  | Total                  |        
|                     |  | (In thousands)         |        
|Borrowings           |  | $                      | 95,375 
|Unfunded commitments |  |                        | 33,250 
|Total                |  | $                      | 128,625



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, 2017, we
had unfunded commitments of $33.3 million. These commitments are subject to the same underwriting and ongoing portfolio maintenance
requirements as are the financial instruments that we hold on our balance sheet. In addition, these commitments are often subject
to financial or non-financial milestones and other conditions to borrowing that must be achieved before the commitment can be drawn.
Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future
cash requirements. We regularly monitor our unfunded commitments and anticipated refinancings, maturities and capital raising,
to ensure that we have sufficient liquidity to fund such unfunded commitments. As of December 31, 2017, we reasonably believed
that our assets would provide adequate financial resources to satisfy all of our unfunded commitments.



In addition to the Key
Facility, we have certain commitments pursuant to our Investment Management Agreement entered into with our Advisor. We have agreed
to pay a fee for investment advisory and management services consisting of two components (1) a base management fee equal
to a percentage of the value of our gross assets less cash or cash equivalents, and (2) a two-part incentive fee. We have
also entered into a contract with our Advisor to serve as our administrator. Payments under the Administration Agreement are equal
to an amount based upon our allocable portion of our Advisor’s overhead in performing its obligations under the agreement,
including rent, fees and other expenses inclusive of our allocable portion of the compensation of our Chief Financial Officer and
Chief Compliance Officer and their respective staffs. See Note 3 to our consolidated financial statements for additional information
regarding our Investment Management Agreement and our Administration Agreement.



Distributions



In order to qualify and
be subject to tax as a RIC, we must meet certain source-of-income, asset diversification and annual distribution requirements.
Generally, in order to qualify as a RIC, we must derive at least 90% of our gross income for each tax year from dividends, interest,
payments with respect to certain securities, loans, gains from the sale or other disposition of stock, securities or foreign currencies,
or other income derived with respect to its business of investing in stock or other securities. We must also meet certain asset
diversification requirements at the end of each quarter of each tax year. Failure to meet these diversification requirements on
the last day of a quarter may result in us having to dispose of certain investments quickly in order to prevent the loss of RIC
status. Any such dispositions could be made at disadvantageous prices or times, and may cause us to incur substantial losses.



In addition, in order
to be subject to tax as a RIC and to avoid the imposition of corporate-level tax on the income and gains we distribute to our stockholders
in respect of any tax year, we are required under the Code to distribute as dividends to our stockholders out of assets legally
available for distribution each tax year an amount generally at least equal to 90% of the sum of our net ordinary income and net
short-term capital gains in excess of net long-term capital losses, if any. Additionally, in order to avoid the imposition of a
U.S. federal excise tax, we are required to distribute, in respect of each calendar year, dividends to our stockholders of an amount
at least equal to the sum of 98% of our calendar year net ordinary income (taking into account certain deferrals and elections);
98.2% of our capital gain net income (adjusted for certain ordinary losses) for the one year period ending on October 31 of such
calendar year; and any net ordinary income and capital gain net income for preceding calendar years that were not distributed during
such calendar years and on which we previously did not incur any U.S. federal income tax. If we fail to qualify as a RIC for any
reason and become subject to corporate tax, the resulting corporate taxes could substantially reduce our net assets, the amount
of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on
us and our stockholders. In addition, we could be required to recognize unrealized gains, incur substantial taxes and interest
and make substantial distributions in order to re-qualify as a RIC. We cannot assure stockholders that they will receive any distributions.



68







To the extent our taxable
earnings in a tax year fall below the total amount of our distributions made to stockholders in respect of such tax 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 review any written disclosure accompanying a distribution payment carefully and should not assume that
the source of any distribution is our ordinary income or gains.



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



Related party transactions



We have entered into the
Investment Management Agreement with the Advisor. The Advisor is registered as an investment adviser under the Investment Advisers
Act of 1940, as amended. Our investment activities are managed by the Advisor and supervised by the Board, the majority of whom
are independent directors. Under the Investment Management Agreement, we have agreed to pay the Advisor a base management fee as
well as an incentive fee. During the years ended December 31, 2017, 2016 and 2015, we paid the Advisor $5.4 million, $6.9 million
and $7.9 million, respectively, pursuant to the Investment Management Agreement.



Our Advisor is 60% owned
by HTF Holdings LLC, which is 100% owned by Horizon Technology Finance, LLC. By virtue of their ownership interest in Horizon Technology
Finance, LLC, our Chief Executive Officer, Robert D. Pomeroy, Jr. and our President, Gerald A. Michaud, may be deemed to control
our Advisor.



We have also entered into
the Administration Agreement with the Advisor. Under the Administration Agreement, 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, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Financial Officer
and Chief Compliance Officer and their respective staffs. In addition, pursuant to the terms of the Administration Agreement the
Advisor provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. During
the years ended December 31, 2017, 2016 and 2015, we paid the Advisor $0.7 million, $0.9 million and $1.1 million, respectively,
pursuant to the Administration Agreement.



The predecessor of the
Advisor has granted the Company a non-exclusive, royalty-free license to use the name “Horizon Technology Finance.”



We believe that we derive
substantial benefits from our relationship with our Advisor. Our Advisor may manage other investment vehicles, or Advisor Funds,
with the same investment strategy as us. The Advisor may provide us an opportunity to co-invest with the Advisor Funds. Under the
1940 Act, absent receipt of exemptive relief from the SEC, we and our affiliates are precluded from co-investing in negotiated
investments. On November 27, 2017, we were granted exemptive relief from the SEC which permits us to co-invest with Advisor Funds,
subject to certain conditions.



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.



69







We have identified the
following items as critical accounting policies.



Valuation of investments



Investments are recorded
at fair value. Our Board determines the fair value of our portfolio investments. We apply fair value to substantially all of our
investments in accordance with Topic 820, Fair Value Measurement, of the Financial Accounting Standards Board’s, or
FASB’s, Accounting Standards Codification as amended, or ASC, which establishes a framework used to measure fair value and
requires disclosures for fair value measurements. We have categorized our investments carried at fair value, based on the priority
of the valuation technique, into a three-level fair value hierarchy. Fair value is a market-based measure considered from the perspective
of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions
are not readily available, our own assumptions are set to reflect those that management believes market participants would use
in pricing the financial instrument at the measurement date.



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



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



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



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



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



Income recognition



Interest on debt investments
is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined
using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes
90 days or more past due, or if we otherwise do not expect to receive interest and principal repayments, the debt investment
is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual
debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment
at the time the debt investment is placed on non-accrual status. For the year ended December 31, 2017, we recognized as interest
income interest payments of $0.1 million received from one portfolio company whose debt investment was on non-accrual status. For
the year ended December 31, 2016, we did not recognize interest income from debt investments on non-accrual status. For the year
ended December 31, 2015, we recognized as interest income interest payments of $0.2 million received from one portfolio company
whose debt investment was on non-accrual status.



70







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



Certain debt investment
agreements also require the borrower to make an ETP that is accrued into income over the life of the debt investment to the extent
such amounts are expected to be collected. We will generally cease accruing the income if there is insufficient value to support
the accrual or if we do not expect the borrower to be able to pay all principal and interest due.



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



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



Income taxes



We have elected to be
treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs.
In order to qualify as a RIC and to avoid the imposition of corporate-level U.S. federal income tax on the amounts we distribute
to our stockholders, among other things, we are required to meet certain source of income and asset diversification requirements,
and we must timely distribute dividends to our stockholders out of assets legally available for distribution each tax year of an
amount generally at least equal to 90% of our investment company taxable income, as defined by the Code and determined without
regard to any deduction for dividends paid. We, among other things, have made and intend to continue to make the requisite distributions
to our stockholders, which will generally relieve us from incurring any material liability for U.S. federal income taxes.



Depending on the level
of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into
the next tax year and incur a 4% excise tax on such income, as required. To the extent that we determine that our estimated current
year annual taxable income will be in excess of estimated current year distributions, we will accrue excise tax, if any, on estimated
excess taxable income as taxable income is earned.



We evaluate tax positions
taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not”
to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes, as modified by ASC Topic
946, Financial Services – Investment Companies. 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, 2017 and 2016.



Recently issued accounting pronouncement



In April 2014, the FASB
issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which amends existing
revenue recognition guidance to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim
periods beginning on or after December 15, 2017. We have evaluated ASU 2014-09 and determined it will not have a material impact
on our consolidated financial statements and disclosures.



71







Item 7A.Quantitative and Qualitative Disclosures
About Market Risk



We are subject to financial
market risks, including changes in interest rates. During the periods covered by our financial statements, the interest rates on
the debt investments within our portfolio were primarily at floating rates. We expect that our debt investments in the future will
primarily have floating interest rates. As of December 31, 2017 and 2016, 99% and 96%, respectively, of the outstanding principal
amount of our debt investments bore interest at floating rates. The initial commitments to lend to our portfolio companies are
usually based on a floating LIBOR index.



Based on our December
31, 2017 consolidated statement of assets and liabilities (without adjustment for potential changes in the credit market, credit
quality, size and composition of assets on the consolidated statement of assets and liabilities or other business developments
that could affect net income), the following table shows the annual impact on the change in net assets resulting from operations
of changes in interest rates, which assumes no changes in our investments and borrowings:



|                       |  | Interest Income |        |   | Interest Expense |   |       | Change in 
Net Assets(1) | 
|---------------------- |  | --------------- | ------ | - | ---------------- | - | ----- | ------------------------ | 
|Change in basis points |  | (In thousands)  |       
|Up 300 basis points    |  | $               | 6,012  |   |                  | $ | 1,764 |                          | 
|Up 200 basis points    |  | $               | 4,036  |   |                  | $ | 1,176 |                          | 
|Up 100 basis points    |  | $               | 2,051  |   |                  | $ | 588   |                          | 
|Down 300 basis points  |  | $               | (1,107 | ) |                  | $ | (359  | )                        | 
|Down 200 basis points  |  | $               | (1,107 | ) |                  | $ | (359  | )                        | 
|Down 100 basis points  |  | $               | (1,012 | ) |                  | $ | (359  | )                        | 



| | (1) | Excludes the impact of incentive fees based on pre-incentive
fee net investment income.
| | --- | ---------------------------------------------------------------------------------------



While our 2022 Notes bear
interest at a fixed rate, our Key Facility has a floating interest rate provision, subject to a floor of 0.75% per annum, based
on a LIBOR index which resets monthly, and any other credit facilities into which we enter in the future may have floating interest
rate provisions. We have used hedging instruments in the past to protect us against interest rate fluctuations, and we may use
them in the future. Such instruments may include caps, swaps, futures, options and forward contracts. While hedging activities
may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower
interest rates with respect to the investments in our portfolio with fixed interest rates.



Because we currently fund,
and expect to 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 could increase, which would reduce our net investment income.



72







Item 8.  Consolidated
Financial Statements and Supplementary Data



Index to Consolidated Financial Statements



|                                                                                                      | Page
|----------------------------------------------------------------------------------------------------- | ----
|Management’s Report on Internal Control over Financial Reporting                                      | 74  
|Report of Independent Registered Public Accounting Firm                                               | 75  
|Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting  | 76  
|Consolidated Statements of Assets and Liabilities as of December 31, 2017 and 2016                    | 77  
|Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015            | 78  
|Consolidated Statements of Changes in Net Assets for the Years Ended December 31, 2017, 2016 and 2015 | 79  
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015            | 80  
|Consolidated Schedules of Investments as of December 31, 2017 and 2016                                | 81  
|Notes to the Consolidated Financial Statements                                                        | 92  



73







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, 2017. 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 2013. Based on the assessment, management believes that, as of December 31, 2017, 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, 2017, which appears in this annual report on Form
10-K.



74







Report of Independent Registered Public Accounting
Firm



To the Stockholders and the Board of Directors

Horizon Technology Finance Corporation



Opinion on the Financial Statements

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, 2017 and 2016, 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, 2017, and the related notes to the consolidated
financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally
accepted in the United States of America.



We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 6, 2018, expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.



Basis for Opinion

These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.



We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation
of investments owned as of December 31, 2017 and 2016, by correspondence with the custodian or borrower or by other appropriate
auditing procedures where replies from the custodian or borrowers were not received. We believe that our audits provide a reasonable
basis for our opinion.



|/s/ RSM US LLP | 
|-------------- | 



We have served as the Company's auditor since 2008.



New York, New York

March 6, 2018



75







Report of
Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting



To the Stockholders and the Board of Directors

Horizon Technology Finance Corporation



Opinion on the Internal Control Over Financial Reporting

We have audited Horizon Technology Finance
Corporation and Subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013.



We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of assets and liabilities
of the Company, including the consolidated schedules of investments, as of December 31, 2017 and 2016, 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, 2017,
and our report dated March 6, 2018 expressed an unqualified opinion.



Basis for Opinion

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 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 are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audit in accordance with the
standards of the PCAOB. 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.



Definition and Limitations of Internal Control
Over Financial Reporting

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 (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.



|/s/ RSM US LLP     | 
|------------------ | 
|New York, New York | 
|March 6, 2018      | 



76







Horizon Technology Finance Corporation and
Subsidiaries



Consolidated Statements of Assets and Liabilities

(In thousands, except share and per share
data)



|                                                                                                                                                                                                                 |  | December 31, |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                                                                                                                                                 |  | 2017         |        
|                                                                                                                                                                                                                 |  |              |        
|Assets                                                                                                                                                                                                           |  |              |        
|Non-affiliate investments at fair value (cost of $219,303 and $211,627, respectively) (Note 4)                                                                                                                   |  | $            | 218,600
|Affiliate investments at fair value (cost of $3,774)(Note 5)                                                                                                                                                     |  |              | 3,499  
|Total investments at fair value (cost of $223,077 and $211,627, respectively)                                                                                                                                    |  |              | 222,099
|Cash                                                                                                                                                                                                             |  |              | 6,594  
|Interest receivable                                                                                                                                                                                              |  |              | 3,986  
|Other assets                                                                                                                                                                                                     |  |              | 1,467  
|Total assets                                                                                                                                                                                                     |  | $            | 234,146
|                                                                                                                                                                                                                 |  |              |        
|Liabilities                                                                                                                                                                                                      |  |              |        
|Borrowings (Note 7)                                                                                                                                                                                              |  | $            | 94,075 
|Distributions payable                                                                                                                                                                                            |  |              | 3,456  
|Base management fee payable (Note 3)                                                                                                                                                                             |  |              | 379    
|Incentive fee payable (Note 3)                                                                                                                                                                                   |  |              | 541    
|Other accrued expenses                                                                                                                                                                                           |  |              | 620    
|Total liabilities                                                                                                                                                                                                |  |              | 99,071 
|                                                                                                                                                                                                                 |  |              |        
|Commitments and Contingencies (Note 8 and 9)                                                                                                                                                                     |  |              |        
|                                                                                                                                                                                                                 |  |              |        
|Net assets                                                                                                                                                                                                       |  |              |        
|Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of December 31, 2017 and 2016                                                                    |  |              | —      
|Common stock, par value $0.001 per share, 100,000,000 shares authorized, 11,687,871 and 11,671,966 shares issued and 11,520,406 and 11,510,424 shares outstanding as of December 31, 2017 and 2016, respectively |  |              | 12     
|Paid-in capital in excess of par                                                                                                                                                                                 |  |              | 179,641
|Distributions in excess of net investment income                                                                                                                                                                 |  |              | (1,898 
|Net unrealized depreciation on investments                                                                                                                                                                       |  |              | (978   
|Net realized loss on investments                                                                                                                                                                                 |  |              | (41,702
|Total net assets                                                                                                                                                                                                 |  |              | 135,075
|Total liabilities and net assets                                                                                                                                                                                 |  | $            | 234,146
|Net asset value per common share                                                                                                                                                                                 |  | $            | 11.72  



See Notes to Consolidated Financial Statements



77







Horizon Technology Finance Corporation and
Subsidiaries



Consolidated Statements of Operations

(In thousands, except share and per share
data)



|                                                                        |  | Year Ended December 31, |           
|----------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                        |  | 2017                    |           
|Investment income                                                       |  |                         |           
|Interest income on non-affiliate investments                            |  | $                       | 23,538    
|Interest income on affiliate investments                                |  |                         | 225       
|Total interest income on investments                                    |  |                         | 23,763    
|Fee income                                                              |  |                         |           
|Prepayment fee income on non-affiliate investments                      |  |                         | 1,432     
|Fee income on non-affiliate investments                                 |  |                         | 567       
|Fee income on affiliate investments                                     |  |                         | 15        
|Total investment income                                                 |  |                         | 25,777    
|Expenses                                                                |  |                         |           
|Interest expense                                                        |  |                         | 5,167     
|Base management fee (Note 3)                                            |  |                         | 3,786     
|Performance based incentive fee (Note 3)                                |  |                         | 1,714     
|Administrative fee (Note 3)                                             |  |                         | 699       
|Professional fees                                                       |  |                         | 1,365     
|General and administrative                                              |  |                         | 803       
|Total expenses                                                          |  |                         | 13,534    
|Management and performance based incentive fees waived (Note 3)         |  |                         | (79       
|Net expenses                                                            |  |                         | 13,455    
|Net investment income before excise tax                                 |  |                         | 12,322    
|Provision (credit) for excise tax (Note 8)                              |  |                         | 25        
|Net investment income                                                   |  |                         | 12,297    
|Net realized and unrealized loss on investments                         |  |                         |           
|Net realized loss on non-affiliate investments                          |  |                         | (21,191   
|Net realized loss on investments                                        |  |                         | (21,191   
|Net unrealized appreciation (depreciation) on non-affiliate investments |  |                         | 18,506    
|Net unrealized depreciation on affiliate investments                    |  |                         | (21       
|Net unrealized appreciation (depreciation) on investments               |  |                         | 18,485    
|Net realized and unrealized loss on investments                         |  |                         | (2,706    
|Net increase (decrease) in net assets resulting from operations         |  | $                       | 9,591     
|Net investment income per common share                                  |  | $                       | 1.07      
|Net increase (decrease) in net assets per common share                  |  | $                       | 0.83      
|Distributions declared per share                                        |  | $                       | 1.20      
|Weighted average shares outstanding                                     |  |                         | 11,516,846



See Notes to Consolidated Financial Statements



78







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 |   |    | AccumulatedUndistributed(Distributions inExcess of) NetInvestment |  |   | Net Unrealized
    Depreciation on |   |  | Net Realized
    Loss on |         |   | Total Net   |  
|--------------------------------------------------------------------------- |  | ------------ | ---------- | - | -------------------------------- | - | -- | ----------------------------------------------------------------- |  | - | ---------------------------------- | - |  | ------------------------ | ------- | - | ----------- | -
|                                                                            |  | Shares       |            |   | Amount                           |   |    | Par                                                               |  |   | Income                             |   |  | Investments              |         |   | Investments |  
|Balance at December 31, 2014                                                |  |              | 9,628,124  |   |                                  | $ | 10 |                                                                   |  | $ | 155,240                            |   |  | $                        | (1,102  | ) |             | $
|Issuance of common stock,
    net of offering costs                         |  |              | 2,000,000  |   |                                  |   | 2  |                                                                   |  |   | 26,504                             |   |  |                          | —       |   |             |  
|Net increase in net
    assets resulting from operations, net of excise tax |  |              | —          |   |                                  |   | —  |                                                                   |  |   | —                                  |   |  |                          | 13,996  |   |             |  
|Issuance of common stock
    under dividend reinvestment plan               |  |              | 20,470     |   |                                  |   | —  |                                                                   |  |   | 247                                |   |  |                          | —       |   |             |  
|Repurchase of common
    stock                                              |  |              | (113,382   | ) |                                  |   | —  |                                                                   |  |   | (1,313                             | ) |  |                          | —       |   |             |  
|Distributions declared                                                      |  |              | —          |   |                                  |   | —  |                                                                   |  |   | —                                  |   |  |                          | (15,793 | ) |             |  
|Reclassification
    of permanent tax differences (Note 2)                  |  |              | —          |   |                                  |   | —  |                                                                   |  |   | (971                               | ) |  |                          | 893     |   |             |  
|Balance at December 31, 2015                                                |  |              | 11,535,212 |   |                                  |   | 12 |                                                                   |  |   | 179,707                            |   |  |                          | (2,006  | ) |             |  
|Net decrease in net
    assets resulting from operations, net of excise tax |  |              | —          |   |                                  |   | —  |                                                                   |  |   | —                                  |   |  |                          | 17,099  |   |             |  
|Issuance of common stock
    under dividend reinvestment plan               |  |              | 23,372     |   |                                  |   | —  |                                                                   |  |   | 273                                |   |  |                          | —       |   |             |  
|Repurchase of common stock                                                  |  |              | (48,160    | ) |                                  |   | —  |                                                                   |  |   | (516                               | ) |  |                          | —       |   |             |  
|Distributions declared                                                      |  |              | —          |   |                                  |   | —  |                                                                   |  |   | —                                  |   |  |                          | (15,403 | ) |             |  
|Reclassification of permanent tax differences
    (Note 2)                  |  |              | —          |   |                                  |   | —  |                                                                   |  |   | 87                                 |   |  |                          | (87     | ) |             |  
|Balance at December 31, 2016                                                |  |              | 11,510,424 |   |                                  |   | 12 |                                                                   |  |   | 179,551                            |   |  |                          | (397    | ) |             |  
|Net increase in net assets resulting from operations, net of excise
    tax |  |              | —          |   |                                  |   | —  |                                                                   |  |   | —                                  |   |  |                          | 12,297  |   |             |  
|Issuance of common stock under dividend reinvestment plan                   |  |              | 15,905     |   |                                  |   | —  |                                                                   |  |   | 174                                |   |  |                          | —       |   |             |  
|Repurchase of common stock                                                  |  |              | (5,923     | ) |                                  |   | —  |                                                                   |  |   | (59                                | ) |  |                          | —       |   |             |  
|Distributions declared                                                      |  |              | —          |   |                                  |   | —  |                                                                   |  |   | —                                  |   |  |                          | (13,823 | ) |             |  
|Reclassification of permanent tax differences
    (Note 2)                  |  |              | —          |   |                                  |   | —  |                                                                   |  |   | (25                                | ) |  |                          | 25      |   |             |  
|Balance at December 31, 2017                                                |  |              | 11,520,406 |   |                                  | $ | 12 |                                                                   |  | $ | 179,641                            |   |  | $                        | (1,898  | ) |             | $



See Notes to Consolidated Financial Statements





79











Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Statements of Cash Flow

(In thousands)



|                                                                                                                                                 |  | Year Ended December 31, |         
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | --------
|                                                                                                                                                 |  | 2017                    |         
|Cash flows from operating activities:                                                                                                            |  |                         |         
|Net increase (decrease) in net assets resulting from operations                                                                                  |  | $                       | 9,591   
|Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash (used in) provided by operating activities: |  |                         |         
|Amortization of debt issuance costs                                                                                                              |  |                         | 795     
|Net realized loss on investments                                                                                                                 |  |                         | 21,191  
|Net unrealized (appreciation) depreciation on investments                                                                                        |  |                         | (18,485 
|Purchase of investments                                                                                                                          |  |                         | (135,556
|Principal payments received on investments                                                                                                       |  |                         | 103,790 
|Proceeds from sale of investments                                                                                                                |  |                         | 1,840   
|Changes in assets and liabilities:                                                                                                               |  |                         |         
|Net decrease (increase) in investments in money market funds                                                                                     |  |                         | —       
|Net decrease in restricted investments in money market funds                                                                                     |  |                         | —       
|(Increase) decrease in interest receivable                                                                                                       |  |                         | (87     
|Decrease (increase) in end-of-term payments                                                                                                      |  |                         | 1,437   
|Decrease in unearned income                                                                                                                      |  |                         | (176    
|Decrease in other assets                                                                                                                         |  |                         | 289     
|Decrease in other accrued expenses                                                                                                               |  |                         | (53     
|Increase (decrease) in base management fee payable                                                                                               |  |                         | 42      
|Increase (decrease) in incentive fee payable                                                                                                     |  |                         | 541     
|Net cash (used in) provided by operating activities                                                                                              |  |                         | (14,841 
|Cash flows from financing activities:                                                                                                            |  |                         |         
|Proceeds from issuance of 2022 Notes                                                                                                             |  |                         | 37,375  
|Repayment of 2019 Notes                                                                                                                          |  |                         | (33,000 
|Proceeds from issuance of common stock, net of offering costs                                                                                    |  |                         | —       
|Repayment of Asset-Backed Notes                                                                                                                  |  |                         | —       
|Advances on credit facility                                                                                                                      |  |                         | 92,000  
|Repayment of credit facility                                                                                                                     |  |                         | (97,000 
|Distributions paid                                                                                                                               |  |                         | (13,646 
|Repurchase of common stock                                                                                                                       |  |                         | (59     
|Debt issuance costs                                                                                                                              |  |                         | (1,370  
|Net cash (used in) provided by financing activities                                                                                              |  |                         | (15,700 
|Net (decrease) increase in cash                                                                                                                  |  |                         | (30,541 
|Cash:                                                                                                                                            |  |                         |         
|Beginning of period                                                                                                                              |  |                         | 37,135  
|End of period                                                                                                                                    |  | $                       | 6,594   
|Supplemental disclosure of cash flow information:                                                                                                |  |                         |         
|Cash paid for interest                                                                                                                           |  | $                       | 4,397   
|Supplemental non-cash investing and financing activities:                                                                                        |  |                         |         
|Warrant investments received and recorded as unearned income                                                                                     |  | $                       | 2,463   
|Distributions payable                                                                                                                            |  | $                       | 3,456   
|End of term payments receivable                                                                                                                  |  | $                       | 2,936   



See Notes to Consolidated Financial Statements



80







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2017

(In thousands)



|                                                          |  |                               |  |                                                                                   |  | Principal |       |  | Cost of             |   |        | Fair           | 
|--------------------------------------------------------- |  | ----------------------------- |  | --------------------------------------------------------------------------------- |  | --------- | ----- |  | ------------------- | - | ------ | -------------- | 
|Portfolio Company (1)(3)                                  |  | Sector                        |  | Type of Investment (4)(7)(9)(10)                                                  |  | Amount    |       |  | Investments
    (6) |   |        | Value
    (14) | 
|Non-Affiliate Investments — 161.8% (8)                    |  |                               |  |                                                                                   |  |           |       |  |                     |   |        |                | 
|Non-Affiliate Debt Investments — 148.4% (8)               |  |                               |  |                                                                                   |  |           |       |  |                     |   |        |                | 
|Non-Affiliate Debt Investments — Life Science — 43.0% (8) |  |                               |  |                                                                                   |  |           |       |  |                     |   |        |               
|Palatin Technologies, Inc. (2)(5)                         |  | Biotechnology                 |  | Term Loan (9.87% cash (Libor + 8.50%; Floor 9.00%),
    5.00% ETP, Due 1/1/19)    |  | $         | 2,000 |  |                     | $ | 1,980  |                | 
|                                                          |  |                               |  | Term Loan (9.87% cash (Libor + 8.50%; Floor 9.00%), 5.00% ETP, Due 8/1/19)        |  |           | 3,167 |  |                     |   | 3,139  |                | 
|vTv Therapeutics Inc. (2)(5)                              |  | Biotechnology                 |  | Term Loan (11.37% cash (Libor + 10.00%; Floor 10.50%), 6.00% ETP, Due 5/1/20)     |  |           | 6,250 |  |                     |   | 6,196  |                | 
|                                                          |  |                               |  | Term Loan (11.37% cash (Libor + 10.00%; Floor 10.50%), 6.00% ETP, Due 10/1/20)    |  |           | 3,750 |  |                     |   | 3,700  |                | 
|Titan Pharmaceuticals, Inc. (2)(5)                        |  | Drug Delivery                 |  | Term Loan (9.77% cash (Libor + 8.40%; Floor 9.50%), 5.00% ETP, Due 6/1/21)        |  |           | 3,500 |  |                     |   | 3,400  |                | 
|                                                          |  |                               |  | Term Loan (9.77% cash (Libor + 8.40%; Floor 9.50%), 5.00% ETP, Due 6/1/21)        |  |           | 3,500 |  |                     |   | 3,430  |                | 
|Aerin Medical, Inc. (2)                                   |  | Medical Device                |  | Term Loan (8.85% cash (Libor + 7.45%; Floor 8.75%), 4.00% ETP, Due 1/1/22)        |  |           | 4,000 |  |                     |   | 3,876  |                | 
|                                                          |  |                               |  | Term Loan (8.85% cash (Libor + 7.45%; Floor 8.75%), 4.00% ETP, Due 1/1/22)        |  |           | 3,000 |  |                     |   | 2,954  |                | 
|                                                          |  |                               |  | Term Loan (8.85% cash (Libor + 7.45%; Floor 8.75%), 4.00% ETP, Due 1/1/22)        |  |           | 3,000 |  |                     |   | 2,954  |                | 
|Conventus Orthopaedics, Inc. (2)                          |  | Medical Device                |  | Term Loan (9.49% cash (Libor + 8.00%; Floor 9.25%), 6.00% ETP, Due 6/1/21)        |  |           | 4,000 |  |                     |   | 3,928  |                | 
|                                                          |  |                               |  | Term Loan (9.49% cash (Libor + 8.00%; Floor 9.25%), 6.00% ETP, Due 6/1/21)        |  |           | 4,000 |  |                     |   | 3,928  |                | 
|                                                          |  |                               |  | Term Loan (9.49% cash (Libor + 8.00%; Floor 9.25%), 6.00% ETP, Due 6/1/21)        |  |           | 4,000 |  |                     |   | 3,928  |                | 
|Lantos Technologies, Inc. (2)                             |  | Medical Device                |  | Term Loan (11.87% PIK (Libor + 10.50%; Floor 11.50%), 8.91% ETP, Due 5/1/19) (13) |  |           | 2,479 |  |                     |   | 2,466  |                | 
|Mederi Therapeutics, Inc. (2)                             |  | Medical Device                |  | Term Loan (13.01% cash (Libor + 11.82%; Floor 12.00%), 6.00% ETP, Due 12/1/17)    |  |           | 173   |  |                     |   | 173    |                | 
|                                                          |  |                               |  | Term Loan (13.01% cash (Libor + 11.82%; Floor 12.00%), 6.00% ETP, Due 12/1/17)    |  |           | 173   |  |                     |   | 173    |                | 
|NinePoint Medical, Inc. (2)                               |  | Medical Device                |  | Term Loan (10.12% cash (Libor + 8.75%; Floor 9.25%), 4.50% ETP, Due 3/1/19)       |  |           | 2,667 |  |                     |   | 2,645  |                | 
|                                                          |  |                               |  | Term Loan (10.12% cash (Libor + 8.75%; Floor 9.25%), 4.50% ETP, Due 3/1/19)       |  |           | 1,333 |  |                     |   | 1,320  |                | 
|VERO Biotech LLC (2)                                      |  | Medical Device                |  | Term Loan (9.33% cash (Libor + 8.00%; Floor 9.25%), 5.00% ETP, Due 1/1/22)        |  |           | 4,000 |  |                     |   | 3,914  |                | 
|                                                          |  |                               |  | Term Loan (9.33% cash (Libor + 8.00%; Floor 9.25%), 5.00% ETP, Due 1/1/22)        |  |           | 4,000 |  |                     |   | 3,934  |                | 
|Total Non-Affiliate Debt Investments —
    Life Science   |  |                               |  |                                                                                   |  |           |       |  |                     |   | 58,038 |                | 
|Non-Affiliate Debt Investments — Technology — 99.1% (8)   |  |                               |  |                                                                                   |  |           |       |  |                     |   |        |               
|Intelepeer Holdings, Inc.                                 |  | Communications                |  | Term Loan (11.39% cash (Libor + 9.95%; Floor 11.25%), 2.50% ETP, Due 7/1/21)      |  |           | 4,000 |  |                     |   | 3,888  |                | 
|                                                          |  |                               |  | Term Loan (11.39% cash (Libor + 9.95%; Floor 11.25%), 2.50% ETP, Due 7/1/21)      |  |           | 4,000 |  |                     |   | 3,927  |                | 
|                                                          |  |                               |  | Term Loan (11.39% cash (Libor + 9.95%; Floor 11.25%), 2.50% ETP, Due 7/1/21)      |  |           | 4,000 |  |                     |   | 3,927  |                | 
|PebblePost, Inc. (2)                                      |  | Communications                |  | Term Loan (10.63% cash (Libor + 9.26%; Floor 10.25%), 4.00% ETP, Due 7/1/21)      |  |           | 4,000 |  |                     |   | 3,874  |                | 
|                                                          |  |                               |  | Term Loan (10.63% cash (Libor + 9.26%; Floor 10.25%), 4.00% ETP, Due 7/1/21)      |  |           | 4,000 |  |                     |   | 3,933  |                | 
|Le Tote, Inc. (2)                                         |  | Consumer-related Technologies |  | Term Loan (11.02% cash (Libor + 9.65%; Floor 10.15%), 5.00% ETP, Due 3/1/20)      |  |           | 4,000 |  |                     |   | 3,960  |                | 
|                                                          |  |                               |  | Term Loan (11.02% cash (Libor + 9.65%; Floor 10.15%), 5.00% ETP, Due 3/1/20)      |  |           | 3,000 |  |                     |   | 2,969  |                | 
|SavingStar, Inc. (2)                                      |  | Consumer-related Technologies |  | Term Loan (11.77% cash (Libor + 10.40%; Floor 10.90%), 4.25% ETP, Due 6/1/20)     |  |           | 2,167 |  |                     |   | 2,140  |                | 
|                                                          |  |                               |  | Term Loan (11.77% cash (Libor + 10.40%; Floor 10.90%), 3.80% ETP, Due 11/1/20)    |  |           | 1,911 |  |                     |   | 1,849  |                | 



See Notes to Consolidated Financial Statements



81







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2017

(In thousands)



|                                    |  |                    |  |                                                                                               |  | Principal |       |  | Cost of             |  |       | Fair           | 
|----------------------------------- |  | ------------------ |  | --------------------------------------------------------------------------------------------- |  | --------- | ----- |  | ------------------- |  | ----- | -------------- | 
|Portfolio Company (1)(3)            |  | Sector             |  | Type of Investment (4)(7)(9)(10)                                                              |  | Amount    |       |  | Investments
    (6) |  |       | Value
    (14) | 
|IgnitionOne, Inc. (2)               |  | Internet and Media |  | Term Loan (11.60% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)                 |  |           | 3,000 |  |                     |  | 2,832 |                | 
|                                    |  |                    |  | Term Loan (11.60% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)                 |  |           | 3,000 |  |                     |  | 2,832 |                | 
|                                    |  |                    |  | Term Loan (11.60% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)                 |  |           | 3,000 |  |                     |  | 2,832 |                | 
|                                    |  |                    |  | Term Loan (11.60% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)                 |  |           | 3,000 |  |                     |  | 2,832 |                | 
|Jump Ramp Games, Inc. (2)           |  | Internet and Media |  | Term Loan (11.10% cash (Libor + 9.73%), 3.00% ETP, Due
    4/1/21)                            |  |           | 4,000 |  |                     |  | 3,942 |                | 
|Kixeye, Inc. (2)                    |  | Internet and Media |  | Term Loan (10.97% cash (Libor + 9.60%; Floor 10.75%), 2.00% ETP, Due 9/1/21)                  |  |           | 3,000 |  |                     |  | 2,900 |                | 
|                                    |  |                    |  | Term Loan (10.97% cash (Libor + 9.60%; Floor 10.75%), 2.00% ETP, Due 9/1/21)                  |  |           | 3,000 |  |                     |  | 2,945 |                | 
|MediaBrix, Inc. (2)                 |  | Internet and Media |  | Term Loan (12.37% cash (Libor + 11.00%; Floor 11.50%), 3.00% ETP, Due 1/1/20)                 |  |           | 4,000 |  |                     |  | 3,977 |                | 
|Rocket Lawyer Incorporated (2)      |  | Internet and Media |  | Term Loan (10.77% cash (Libor + 9.40%; Floor 10.50%), 3.00% ETP, Due 7/1/21)                  |  |           | 4,000 |  |                     |  | 3,933 |                | 
|                                    |  |                    |  | Term Loan (10.77% cash (Libor + 9.40%; Floor 10.50%), 3.00% ETP, Due 7/1/21)                  |  |           | 4,000 |  |                     |  | 3,933 |                | 
|                                    |  |                    |  | Term Loan (10.77% cash (Libor + 9.40%; Floor 10.50%), 3.00% ETP, Due 11/1/21)                 |  |           | 2,000 |  |                     |  | 1,963 |                | 
|Zinio Holdings, LLC (2)             |  | Internet and Media |  | Term Loan (12.62% cash (Libor + 11.25%; Floor 11.75%), 6.00% ETP, Due 2/1/20)                 |  |           | 4,000 |  |                     |  | 3,978 |                | 
|The NanoSteel Company, Inc. (2)     |  | Materials          |  | Term Loan (10.87% cash (Libor + 9.50%; Floor 10.00%), 7.20% ETP, Due 1/1/20)                  |  |           | 4,653 |  |                     |  | 4,578 |                | 
|                                    |  |                    |  | Term Loan (10.87% cash (Libor + 9.50%; Floor 10.00%), 6.45% ETP, Due 1/1/20)                  |  |           | 2,327 |  |                     |  | 2,289 |                | 
|                                    |  |                    |  | Term Loan (10.87% cash (Libor + 9.50%; Floor 10.00%), 5.85% ETP, Due 3/1/20)                  |  |           | 2,500 |  |                     |  | 2,457 |                | 
|Powerhouse Dynamics, Inc. (2)       |  | Power Management   |  | Term Loan (12.07% cash (Libor + 10.70%; Floor 11.20%), 3.00% ETP, Due 3/1/19)                 |  |           | 1,250 |  |                     |  | 1,234 |                | 
|Luxtera, Inc.                       |  | Semiconductors     |  | Term Loan (11.25% cash (Prime + 6.75%), Due 3/28/20)                                          |  |           | 2,000 |  |                     |  | 1,902 |                | 
|                                    |  |                    |  | Term Loan (11.25% cash (Prime + 6.75%), Due 3/28/20)                                          |  |           | 1,500 |  |                     |  | 1,443 |                | 
|Bridge2 Solutions, LLC. (2)         |  | Software           |  | Term Loan (10.62% cash (Libor + 9.25%; Floor 10.50%), 2.00% ETP, Due 11/1/21)                 |  |           | 5,000 |  |                     |  | 4,777 |                | 
|                                    |  |                    |  | Term Loan (10.62% cash (Libor + 9.25%; Floor 10.50%), 2.00% ETP, Due 11/1/21)                 |  |           | 5,000 |  |                     |  | 4,777 |                | 
|Digital Signal Corporation (11)(12) |  | Software           |  | Term Loan (11.62% cash (Libor + 10.25%; Floor 10.43%), 5.00% ETP, Due 7/1/19)                 |  |           | 1,290 |  |                     |  | 1,256 |                | 
|                                    |  |                    |  | Term Loan (11.62% cash (Libor + 10.25%; Floor 10.43%), 5.00% ETP, Due 7/1/19)                 |  |           | 1,290 |  |                     |  | 1,256 |                | 
|                                    |  |                    |  | Term Loan (10.00% cash, Due 12/31/17)                                                         |  |           | 501   |  |                     |  | 501   |                | 
|Education Elements, Inc. (2)        |  | Software           |  | Term Loan (11.37% cash (Libor + 10.00%; Floor 10.50%), 4.00% ETP, Due 1/1/19)                 |  |           | 800   |  |                     |  | 789   |                | 
|                                    |  |                    |  | Term Loan (11.37% cash (Libor + 10.00%; Floor 10.50%), 4.00% ETP, Due 8/1/19)                 |  |           | 950   |  |                     |  | 937   |                | 
|Metricly, Inc.                      |  | Software           |  | Term Loan (13.62% cash (Libor + 12.25%; Floor 12.50%), 3.33% ETP, Due 9/1/18)                 |  |           | 184   |  |                     |  | 184   |                | 
|ShopKeep.com, Inc. (2)              |  | Software           |  | Term Loan (11.32% cash (Libor + 9.95%; Floor 10.45%), 4.08% ETP, Due 10/1/20)                 |  |           | 6,000 |  |                     |  | 5,897 |                | 
|                                    |  |                    |  | Term Loan (11.32% cash (Libor + 9.95%; Floor 10.45%), 3.55% ETP, Due 2/1/21)                  |  |           | 4,000 |  |                     |  | 3,924 |                | 
|SIGNiX, Inc.                        |  | Software           |  | Term Loan (12.37% cash (Libor + 11.00%; Floor 11.50%), 5.33% ETP, Due 2/1/20)                 |  |           | 2,180 |  |                     |  | 2,073 |                | 
|SilkRoad Technology, Inc. (2)       |  | Software           |  | Term Loan (11.72% cash (Libor + 10.35%; Floor 10.85%; Ceiling 12.85%), 5.00% ETP, Due 6/1/20) |  |           | 7,000 |  |                     |  | 6,904 |                | 
|Weblinc Corporation (2)             |  | Software           |  | Term Loan (11.62% cash (Libor + 10.25%; Floor 11.25%), 3.00% ETP, Due 3/1/21)                 |  |           | 3,000 |  |                     |  | 2,913 |                | 





See Notes to Consolidated Financial Statements





82







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2017

(In thousands)





|                                                                                |  |                               |  |                                                                               |  | Principal |         |  | Cost of             |  |         | Fair           | 
|------------------------------------------------------------------------------- |  | ----------------------------- |  | ----------------------------------------------------------------------------- |  | --------- | ------- |  | ------------------- |  | ------- | -------------- | 
|Portfolio Company (1)(3)                                                        |  | Sector                        |  | Type of Investment (4)(7)(9)(10)                                              |  | Amount    |         |  | Investments
    (6) |  |         | Value
    (14) | 
|xAd, Inc. (2)                                                                   |  | Software                      |  | Term Loan (10.07% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21) |  |           | 5,000   |  |                     |  | 4,895   |                | 
|                                                                                |  |                               |  | Term Loan (10.07% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21) |  |           | 5,000   |  |                     |  | 4,895   |                | 
|                                                                                |  |                               |  | Term Loan (10.07% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21) |  |           | 3,000   |  |                     |  | 2,937   |                | 
|                                                                                |  |                               |  | Term Loan (10.07% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21) |  |           | 2,000   |  |                     |  | 1,958   |                | 
|Total Non-Affiliate Debt Investments —
    Technology                           |  |                               |  |                                                                               |  |           |         |  |                     |  | 134,142 |                | 
|Non-Affiliate Debt Investments — Healthcare information and services — 6.3% (8) |  |                               |  |                                                                               |  |           |         |  |                     |  |         |               
|HealthEdge Software, Inc. (2)                                                   |  | Software                      |  | Term Loan (9.62% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 7/1/22)    |  |           | 5,000   |  |                     |  | 4,819   |                | 
|                                                                                |  |                               |  | Term Loan (9.68% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 1/1/23)    |  |           | 3,750   |  |                     |  | 3,693   |                | 
|Total Non-Affiliate Debt Investments —
    Healthcare information and services  |  |                               |  |                                                                               |  |           |         |  |                     |  | 8,512   |                | 
|Total Non- Affiliate Debt Investments                                           |  |                               |  |                                                                               |  |           | 200,692 |  |                     |  | 200,419 |               
|                                                                                |  |                               |  |                                                                               |  |           |         |  |                     |  |         |                | 
|Non-Affiliate Warrant Investments — 6.7% (8)                                    |  |                               |  |                                                                               |  |           |         |  |                     |  |         |               
|Non-Affiliate Warrants — Life Science — 1.6% (8)                                |  |                               |  |                                                                               |  |           |         |  |                     |  |         |               
|ACT Biotech Corporation                                                         |  | Biotechnology                 |  | 604,038 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 60      |                | 
|Alpine Immune Sciences, Inc. (5)                                                |  | Biotechnology                 |  | 4,634 Common Stock Warrants                                                   |  |           |         |  |                     |  | 122     |                | 
|Argos Therapeutics, Inc. (2)(5)                                                 |  | Biotechnology                 |  | 73,112 Common Stock Warrants                                                  |  |           |         |  |                     |  | 33      |                | 
|Celsion Corporation (5)                                                         |  | Biotechnology                 |  | 408 Common Stock Warrants                                                     |  |           |         |  |                     |  | 15      |                | 
|Rocket Pharmaceuticals Corporation (5)                                          |  | Biotechnology                 |  | 7,051 Common Stock Warrants                                                   |  |           |         |  |                     |  | 17      |                | 
|Palatin Technologies, Inc. (2)(5)                                               |  | Biotechnology                 |  | 608,058 Common Stock Warrants                                                 |  |           |         |  |                     |  | 51      |                | 
|Revance Therapeutics, Inc. (5)                                                  |  | Biotechnology                 |  | 34,113 Common Stock Warrants                                                  |  |           |         |  |                     |  | 68      |                | 
|Sample6, Inc. (2)                                                               |  | Biotechnology                 |  | 661,956 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 53      |                | 
|Strongbridge U.S. Inc. (5)                                                      |  | Biotechnology                 |  | 160,714 Common Stock Warrants                                                 |  |           |         |  |                     |  | 72      |                | 
|Sunesis Pharmaceuticals, Inc. (5)                                               |  | Biotechnology                 |  | 2,050 Common Stock Warrants                                                   |  |           |         |  |                     |  | 5       |                | 
|vTv Therapeutics Inc. (2)(5)                                                    |  | Biotechnology                 |  | 95,293 Common Stock Warrants                                                  |  |           |         |  |                     |  | 44      |                | 
|Titan Pharmaceuticals, Inc. (2)(5)                                              |  | Drug Delivery                 |  | 280,612 Common Stock Warrants                                                 |  |           |         |  |                     |  | 88      |                | 
|AccuVein Inc. (2)                                                               |  | Medical Device                |  | 75,769 Preferred Stock Warrants                                               |  |           |         |  |                     |  | 24      |                | 
|Aerin Medical, Inc. (2)                                                         |  | Medical Device                |  | 1,818,182 Preferred Stock Warrants                                            |  |           |         |  |                     |  | 66      |                | 
|Conventus Orthopaedics, Inc. (2)                                                |  | Medical Device                |  | 720,000 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 95      |                | 
|IntegenX, Inc. (2)                                                              |  | Medical Device                |  | 170,646 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 35      |                | 
|Lantos Technologies, Inc. (2)                                                   |  | Medical Device                |  | 471,979 Common Stock Warrants                                                 |  |           |         |  |                     |  | 39      |                | 
|Mederi Therapeutics, Inc. (2)                                                   |  | Medical Device                |  | 248,736 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 26      |                | 
|Mitralign, Inc. (2)                                                             |  | Medical Device                |  | 64,190 Common Stock Warrants                                                  |  |           |         |  |                     |  | 52      |                | 
|NinePoint Medical, Inc. (2)                                                     |  | Medical Device                |  | 29,102 Preferred Stock Warrants                                               |  |           |         |  |                     |  | 33      |                | 
|OraMetrix, Inc. (2)                                                             |  | Medical Device                |  | 812,348 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 78      |                | 
|ReShape Lifesciences Inc. (5)                                                   |  | Medical Device                |  | 134 Common Stock Warrants                                                     |  |           |         |  |                     |  | 347     |                | 
|Tryton Medical, Inc. (2)                                                        |  | Medical Device                |  | 122,362 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 15      |                | 
|VERO Biotech LLC (2)                                                            |  | Medical Device                |  | 800,000 Common Stock Warrants                                                 |  |           |         |  |                     |  | 53      |                | 
|ViOptix, Inc.                                                                   |  | Medical Device                |  | 375,763 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 13      |                | 
|Total Non-Affiliate Warrants — Life Science                                     |  |                               |  |                                                                               |  |           | 1,504   |  |                     |  | 2,175   |               
|Non-Affiliate Warrants — Technology — 4.6% (8)                                  |  |                               |  |                                                                               |  |           |         |  |                     |  |         |               
|Ekahau, Inc. (2)                                                                |  | Communications                |  | 978,261 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 32      |                | 
|Intelepeer Holdings, Inc.                                                       |  | Communications                |  | 2,256,549 Preferred Stock Warrants                                            |  |           |         |  |                     |  | 149     |                | 
|PebblePost, Inc. (2)                                                            |  | Communications                |  | 598,850 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 92      |                | 
|Additech, Inc. (2)                                                              |  | Consumer-related Technologies |  | 150,000 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 33      |                | 
|Gwynnie Bee, Inc. (2)                                                           |  | Consumer-related Technologies |  | 268,591 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 68      |                | 
|Le Tote, Inc. (2)                                                               |  | Consumer-related Technologies |  | 202,974 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 63      |                | 
|Rhapsody International Inc. (2)                                                 |  | Consumer-related Technologies |  | 852,273 Common Stock Warrants                                                 |  |           |         |  |                     |  | 164     |                | 
|SavingStar, Inc. (2)                                                            |  | Consumer-related Technologies |  | 850,439 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 104     |                | 
|IgnitionOne, Inc. (2)                                                           |  | Internet and Media            |  | 262,910 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 672     |                | 
|Jump Ramp Games, Inc. (2)                                                       |  | Internet and Media            |  | 159,766 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 31      |                | 
|Kixeye, Inc. (2)                                                                |  | Internet and Media            |  | 791,251 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 75      |                | 
|Rocket Lawyer Incorporated (2)                                                  |  | Internet and Media            |  | 261,721 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 91      |                | 
|The NanoSteel Company, Inc. (2)                                                 |  | Materials                     |  | 379,360 Preferred Stock Warrants                                              |  |           |         |  |                     |  | 187     |                | 
|Nanocomp Technologies, Inc. (2)                                                 |  | Networking                    |  | 1,440,489 Preferred Stock Warrants                                            |  |           |         |  |                     |  | 67      |                | 





See Notes to Consolidated Financial Statements



83







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2017

(In thousands)



|                                                                        |  |                               |  |                                                                                 |  | Principal |         |  | Cost of             |   |         | Fair           | 
|----------------------------------------------------------------------- |  | ----------------------------- |  | ------------------------------------------------------------------------------- |  | --------- | ------- |  | ------------------- | - | ------- | -------------- | 
|Portfolio Company (1)(3)                                                |  | Sector                        |  | Type of Investment (4)(7)(9)(10)                                                |  | Amount    |         |  | Investments
    (6) |   |         | Value
    (14) | 
|Powerhouse Dynamics, Inc. (2)                                           |  | Power Management              |  | 290,698 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 28      |                | 
|Avalanche Technology, Inc. (2)                                          |  | Semiconductors                |  | 202,602 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 101     |                | 
|eASIC Corporation (2)                                                   |  | Semiconductors                |  | 40,445 Preferred Stock Warrants                                                 |  |           |         |  |                     |   | 25      |                | 
|Kaminario, Inc.                                                         |  | Semiconductors                |  | 1,087,203 Preferred Stock Warrants                                              |  |           |         |  |                     |   | 59      |                | 
|Luxtera, Inc.(2)                                                        |  | Semiconductors                |  | 3,546,553 Preferred Stock Warrants                                              |  |           |         |  |                     |   | 213     |                | 
|Soraa, Inc. (2)                                                         |  | Semiconductors                |  | 203,616 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 80      |                | 
|Bolt Solutions Inc. (2)                                                 |  | Software                      |  | 202,892 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 113     |                | 
|Bridge2 Solutions, Inc. (2)                                             |  | Software                      |  | 125,458 Common Stock Warrants                                                   |  |           |         |  |                     |   | 433     |                | 
|Clarabridge, Inc.                                                       |  | Software                      |  | 53,486 Preferred Stock Warrants                                                 |  |           |         |  |                     |   | 14      |                | 
|Digital Signal Corporation                                              |  | Software                      |  | 125,116 Common Stock Warrants                                                   |  |           |         |  |                     |   | 32      |                | 
|Education Elements, Inc. (2)                                            |  | Software                      |  | 238,121 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 28      |                | 
|Lotame Solutions, Inc. (2)                                              |  | Software                      |  | 288,115 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 22      |                | 
|Metricly, Inc.                                                          |  | Software                      |  | 41,569 Common Stock Warrants                                                    |  |           |         |  |                     |   | 48      |                | 
|Riv Data Corp. (2)                                                      |  | Software                      |  | 321,428 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 12      |                | 
|ShopKeep.com, Inc. (2)                                                  |  | Software                      |  | 193,962 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 118     |                | 
|SIGNiX, Inc.                                                            |  | Software                      |  | 133,560 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 225     |                | 
|Skyword, Inc.                                                           |  | Software                      |  | 301,056 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 48      |                | 
|SpringCM, Inc. (2)                                                      |  | Software                      |  | 2,385,686 Preferred Stock Warrants                                              |  |           |         |  |                     |   | 55      |                | 
|Sys-Tech Solutions, Inc.                                                |  | Software                      |  | 375,000 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 242     |                | 
|Visage Mobile, Inc.                                                     |  | Software                      |  | 1,692,047 Preferred Stock Warrants                                              |  |           |         |  |                     |   | 19      |                | 
|Weblinc Corporation (2)                                                 |  | Software                      |  | 195,122 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 42      |                | 
|xAd, Inc. (2)                                                           |  | Software                      |  | 4,343,350 Preferred Stock Warrants                                              |  |           |         |  |                     |   | 177     |                | 
|Total Non-Affiliate Warrants — Technology                               |  |                               |  |                                                                                 |  |           |         |  |                     |   | 3,962   |                | 
|Non-Affiliate Warrants — Cleantech — 0.1% (8)                           |  |                               |  |                                                                                 |  |           |         |  |                     |   |         |               
|Renmatix, Inc.                                                          |  | Alternative Energy            |  | 53,022 Preferred Stock Warrants                                                 |  |           |         |  |                     |   | 68      |                | 
|Tigo Energy, Inc. (2)                                                   |  | Energy Efficiency             |  | 804,604 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 100     |                | 
|Total Non-Affiliate Warrants — Cleantech                                |  |                               |  |                                                                                 |  |           |         |  |                     |   | 168     |                | 
|Non-Affiliate Warrants — Healthcare information and services — 0.4% (8) |  |                               |  |                                                                                 |  |           |         |  |                     |   |         |               
|LifePrint Group, Inc. (2)                                               |  | Diagnostics                   |  | 49,000 Preferred Stock Warrants                                                 |  |           |         |  |                     |   | 29      |                | 
|ProterixBio, Inc. (2)                                                   |  | Diagnostics                   |  | 3,156 Common Stock Warrants                                                     |  |           |         |  |                     |   | 54      |                | 
|Singulex, Inc.                                                          |  | Other Healthcare              |  | 294,231 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 44      |                | 
|Verity Solutions Group, Inc.                                            |  | Other Healthcare              |  | 300,360 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 100     |                | 
|Watermark Medical, Inc. (2)                                             |  | Other Healthcare              |  | 27,373 Preferred Stock Warrants                                                 |  |           |         |  |                     |   | 74      |                | 
|HealthEdge Software, Inc. (2)                                           |  | Software                      |  | 110,644 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 46      |                | 
|Medsphere Systems Corporation (2)                                       |  | Software                      |  | 7,097,792 Preferred Stock Warrants                                              |  |           |         |  |                     |   | 60      |                | 
|Recondo Technology, Inc. (2)                                            |  | Software                      |  | 556,796 Preferred Stock Warrants                                                |  |           |         |  |                     |   | 95      |                | 
|Total Non-Affiliate Warrants — Healthcare
    information and services  |  |                               |  |                                                                                 |  |           |         |  |                     |   | 502     |                | 
|Total Non-Affiliate Warrants                                            |  |                               |  |                                                                                 |  |           | 6,136   |  |                     |   | 9,090   |               
|                                                                        |  |                               |  |                                                                                 |  |           |         |  |                     |   |         |                | 
|Non-Affiliate Other Investments — 5.7% (8)                              |  |                               |  |                                                                                 |  |           |         |  |                     |   |         |               
|Espero Pharmaceuticals, Inc.                                            |  | Biotechnology                 |  | Royalty Agreement                                                               |  |           |         |  |                     |   | 5,300   |                | 
|ZetrOZ, Inc.                                                            |  | Medical Device                |  | Royalty Agreement                                                               |  |           |         |  |                     |   | 305     |                | 
|Vette Technology, LLC                                                   |  | Data Storage                  |  | Royalty Agreement Due 4/18/2019                                                 |  |           |         |  |                     |   | 4,226   |                | 
|Triple Double Holdings, LLC                                             |  | Software                      |  | License Agreement                                                               |  |           |         |  |                     |   | 2,200   |                | 
|Total Non-Affiliate Other Investments                                   |  |                               |  |                                                                                 |  |           | 12,031  |  |                     |   | 7,700   |               
|                                                                        |  |                               |  |                                                                                 |  |           |         |  |                     |   |         |                | 
|Non-Affiliate Equity — 1.0% (8)                                         |  |                               |  |                                                                                 |  |           |         |  |                     |   |         |                | 
|Insmed Incorporated (5)                                                 |  | Biotechnology                 |  | 33,208 Common Stock                                                             |  |           |         |  |                     |   | 238     |                | 
|Revance Therapeutics, Inc.(5)                                           |  | Biotechnology                 |  | 5,125 Common Stock                                                              |  |           |         |  |                     |   | 73      |                | 
|Sunesis Pharmaceuticals, Inc. (5)                                       |  | Biotechnology                 |  | 13,082 Common Stock                                                             |  |           |         |  |                     |   | 83      |                | 
|SnagAJob.com, Inc.                                                      |  | Consumer-related Technologies |  | 82,974 Common Stock                                                             |  |           |         |  |                     |   | 9       |                | 
|TruSignal, Inc.                                                         |  | Software                      |  | 32,637 Common Stock                                                             |  |           |         |  |                     |   | 41      |                | 
|Total Non-Affiliate Equity                                              |  |                               |  |                                                                                 |  |           |         |  |                     |   | 444     |                | 
|Total Non-Affiliate Portfolio Investment Assets                         |  |                               |  |                                                                                 |  | $         | 219,303 |  |                     | $ | 218,600 |               
|                                                                        |  |                               |  |                                                                                 |  |           |         |  |                     |   |         |                | 
|Affiliate Investments — 2.6% (8)                                        |  |                               |  |                                                                                 |  |           |         |  |                     |   |         |               
|Affiliate Debt Investments — Technology — 2.5% (8)                      |  |                               |  |                                                                                 |  |           |         |  |                     |   |         |               
|Decisyon, Inc.                                                          |  | Software                      |  | Term Loan (13.678% cash (Libor + 12.308%; Floor 12.50%), 8.00% ETP, Due 1/1/20) |  | $         | 1,523   |  |                     | $ | 1,522   |                | 
|                                                                        |  |                               |  | Term Loan (13.678% cash (Libor + 12.308%; Floor 12.50%), 8.00% ETP, Due 1/1/20) |  |           | 833     |  |                     |   | 771     |                | 
|                                                                        |  |                               |  | Term Loan (12.02% PIK , Due 4/15/19) (13)                                       |  |           | 250     |  |                     |   | 250     |                | 
|                                                                        |  |                               |  | Term Loan (12.03% PIK , Due 4/15/19) (13)                                       |  |           | 250     |  |                     |   | 250     |                | 
|                                                                        |  |                               |  | Term Loan (12.24% PIK , Due 4/15/19) (13)                                       |  |           | 750     |  |                     |   | 750     |                | 
|Total Affiliate Debt Investments —
    Technology                       |  |                               |  |                                                                                 |  |           |         |  |                     |   | 3,543   |                | 



See Notes to Consolidated Financial Statements





84







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2017

(In thousands)



|                                              |  |          |  |                                  |  | Principal |         |  | Cost of             |   |         | Fair           | 
|--------------------------------------------- |  | -------- |  | -------------------------------- |  | --------- | ------- |  | ------------------- | - | ------- | -------------- | 
|Portfolio Company (1)(3)                      |  | Sector   |  | Type of Investment (4)(7)(9)(10) |  | Amount    |         |  | Investments
    (6) |   |         | Value
    (14) | 
|Affiliate Warrants — Technology — 0.0% (8)    |  |          |  |                                  |  |           |         |  |                     |   |         |               
|Decisyon, Inc.                                |  | Software |  | 82,967 Common Stock Warrants     |  |           |         |  |                     |   | 46      |                | 
|Total Affiliate Warrants — Technology         |  |          |  |                                  |  |           | 46      |  |                     |   | —       |               
|                                              |  |          |  |                                  |  |           |         |  |                     |   |         |                | 
|Affiliate Equity — Technology — 0.1% (8)      |  |          |  |                                  |  |           |         |  |                     |   |         |               
|Decisyon, Inc.                                |  | Software |  | 45,365,936 Common Stock          |  |           |         |  |                     |   | 185     |                | 
|Total Affiliate Equity                        |  |          |  |                                  |  |           | 185     |  |                     |   | 125     |               
|Total Affiliate Portfolio Investment Assets   |  |          |  |                                  |  | $         | 3,774   |  |                     | $ | 3,499   |               
|Total Portfolio Investment Assets — 164.4%(8) |  |          |  |                                  |  | $         | 223,077 |  |                     | $ | 222,099 |               

_____________________________

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)  |  | All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(2)  |  | Has been pledged as collateral under the Key Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(3)  |  | All non-affiliate investments are investments in which the Company owns less than 5% ownership of the voting securities of the portfolio company.  All affiliate investments are investments in which the Company owns 5% or more of the voting securities of the portfolio company.                                                                                                                                                                                                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(4)  |  | All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include end-of-term payments (“ETPs”) and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt investments are at fixed rates for the term of the debt investment, unless otherwise indicated. All debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2017 is provided.
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(5)  |  | Portfolio company is a public company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(6)  |  | For debt investments, represents principal balance less unearned income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(7)  |  | Warrants, Equity and Other Investments are non-income producing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(8)  |  | Value as a percent of net assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(9)  |  | The Company did not have any non-qualifying assets under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”), as of December 31, 2017. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.                                                                                                                                                                                                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(10) |  | ETPs are contractual fixed-interest payments
        due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are a fixed percentage of
        the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt
        investment on each ETP and will be recognized as non-cash income until it is actually paid. Therefore, a portion of the incentive
        fee the Company may pay its Advisor will be based on income that the Company has not yet received in cash.                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(11) |  | Debt investment is on non-accrual status as of December 31, 2017.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(12) |  | Digital Signal Corporation, a Delaware
        corporation (“DSC”), made an assignment for the benefit of its creditors whereby DSC assigned all of its assets to
        DSC (assignment for the benefit of creditors), LLC (“DSC ABC”), a Delaware limited liability company, established under
        Delaware law to effectuate the Assignment for the Benefit of Creditors of DSC.                                                                                                                                                                                                                                                                
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(13) |  | Debt investment has a payment-in-kind (“PIK”) feature.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(14) |  | Except for common stock in publicly traded companies, the fair value of the investment was valued using significant unobservable inputs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



See Notes to Consolidated Financial Statements



85







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2016

(In thousands)





|                                            |  |                               |  |                                                                                                |  | Principal |       |  | Cost of             |   |        | Fair           | 
|------------------------------------------- |  | ----------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------- | ----- |  | ------------------- | - | ------ | -------------- | 
|Portfolio Company (1)                       |  | Sector                        |  | Type of Investment (3)(4)(7)(9)(10)                                                            |  | Amount    |       |  | Investments
    (6) |   |        | Value
    (14) | 
|Debt Investments — 133.8% (8)               |  |                               |  |                                                                                                |  |           |       |  |                    
|Debt Investments — Life Science — 38.5% (8) |  |                               |  |                                                                                                |  |           |       |  |                     |   |        |               
|Argos Therapeutics, Inc. (2)(5)             |  | Biotechnology                 |  | Term Loan (9.38% cash (Libor + 8.75%; Floor 9.25%; Ceiling 10.75%), 5.00% ETP, Due 10/1/18)    |  | $         | 4,375 |  |                     | $ | 4,339  |                | 
|                                            |  |                               |  | Term Loan (9.38% cash (Libor + 8.75%; Floor 9.25%; Ceiling 10.75%), 5.00% ETP, Due 3/1/19)     |  |           | 5,000 |  |                     |   | 4,969  |                | 
|New Haven Pharmaceuticals, Inc. (11)        |  | Biotechnology                 |  | Term Loan (11.63% cash (Libor + 11.00%; Floor 11.50%), 11.42% ETP, Due 3/1/19)                 |  |           | 1,282 |  |                     |   | 1,274  |                | 
|                                            |  |                               |  | Term Loan (11.63% cash (Libor + 11.00%; Floor 11.50%), 11.42% ETP, Due 3/1/19)                 |  |           | 427   |  |                     |   | 424    |                | 
|                                            |  |                               |  | Term Loan (10.63% cash (Libor + 10.00%; Floor 10.50%), 6.10% ETP, Due 3/1/19)                  |  |           | 1,973 |  |                     |   | 1,960  |                | 
|                                            |  |                               |  | Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%), 4.00% ETP, Due 4/1/19)                   |  |           | 6,185 |  |                     |   | 6,118  |                | 
|                                            |  |                               |  | Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%), Due 1/31/17)                             |  |           | 593   |  |                     |   | 593    |                | 
|Palatin Technologies, Inc. (2)(5)           |  | Biotechnology                 |  | Term Loan (9.13% cash (Libor + 8.50%; Floor 9.00%), 5.00% ETP, Due 1/1/19)                     |  |           | 4,000 |  |                     |   | 3,960  |                | 
|                                            |  |                               |  | Term Loan (9.13% cash (Libor + 8.50%; Floor 9.00%), 5.00% ETP, Due 8/1/19)                     |  |           | 5,000 |  |                     |   | 4,955  |                | 
|Sample6, Inc. (2)                           |  | Biotechnology                 |  | Term Loan (9.63% cash (Libor + 9.00%; Floor 9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)     |  |           | 972   |  |                     |   | 969    |                | 
|                                            |  |                               |  | Term Loan (9.63% cash (Libor + 9.00%; Floor 9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)     |  |           | 591   |  |                     |   | 588    |                | 
|                                            |  |                               |  | Term Loan (9.63% cash (Libor + 9.00%; Floor 9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)     |  |           | 2,083 |  |                     |   | 2,073  |                | 
|Strongbridge U.S. Inc. (5)                  |  | Biotechnology                 |  | Term Loan (8.84% cash (Libor + 10.00%; Floor 10.50%), 8.00% ETP, Due 12/1/20)                  |  |           | 7,500 |  |                     |   | 7,353  |                | 
|vTv Therapeutics Inc. (2)(5)                |  | Biotechnology                 |  | Term Loan (10.63% cash (Libor + 8.22%; Floor 8.75%), 6.00% ETP, Due 5/1/20)                    |  |           | 6,250 |  |                     |   | 6,106  |                | 
|Lantos Technologies, Inc. (2)               |  | Medical Device                |  | Term Loan (11.50% cash (Libor + 10.50%; Floor 11.50%), 5.00% ETP, Due 2/1/18)                  |  |           | 2,479 |  |                     |   | 2,455  |                | 
|Mederi Therapeutics, Inc. (2)               |  | Medical Device                |  | Term Loan (12.27% cash (Libor + 11.82%; Floor 12.00%), 4.00% ETP, Due 7/1/17)                  |  |           | 1,352 |  |                     |   | 1,344  |                | 
|                                            |  |                               |  | Term Loan (12.27% cash (Libor + 11.82%; Floor 12.00%), 4.00% ETP, Due 7/1/17)                  |  |           | 1,352 |  |                     |   | 1,344  |                | 
|NinePoint Medical, Inc. (2)                 |  | Medical Device                |  | Term Loan (9.38% cash (Libor + 8.75%; Floor 9.25%), 4.50% ETP, Due 3/1/19)                     |  |           | 4,500 |  |                     |   | 4,461  |                | 
|                                            |  |                               |  | Term Loan (9.38% cash (Libor + 8.75%; Floor 9.25%), 4.50% ETP, Due 3/1/19)                     |  |           | 2,250 |  |                     |   | 2,225  |                | 
|Tryton Medical, Inc. (2)                    |  | Medical Device                |  | Term Loan (10.66% cash (Prime + 7.16%), 2.50% ETP, Due 3/1/17)                                 |  |           | 1,313 |  |                     |   | 1,309  |                | 
|Total Debt Investments — Life Science       |  |                               |  |                                                                                                |  |           |       |  |                     |   | 58,819 |                | 
|Debt Investments — Technology — 75.4% (8)   |  |                               |  |                                                                                                |  |           |       |  |                     |   |        |               
|Ekahau, Inc. (2)                            |  | Communications                |  | Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)                                                 |  |           | 57    |  |                     |   | 57     |                | 
|                                            |  |                               |  | Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)                                                 |  |           | 19    |  |                     |   | 19     |                | 
|Gwynnie Bee, Inc. (2)                       |  | Consumer-related Technologies |  | Term Loan (11.13% cash (Libor + 10.50%; Floor 11.00%; Ceiling 12.50%), 2.00% ETP, Due 11/1/17) |  |           | 667   |  |                     |   | 657    |                | 
|                                            |  |                               |  | Term Loan (11.13% cash (Libor + 10.50%; Floor 11.00%; Ceiling 12.50%), 2.00% ETP, Due 2/1/18)  |  |           | 433   |  |                     |   | 424    |                | 
|                                            |  |                               |  | Term Loan (11.13% cash (Libor + 10.50%; Floor 11.00%; Ceiling 12.50%), 2.00% ETP, Due 4/1/18)  |  |           | 500   |  |                     |   | 492    |                | 
|Le Tote, Inc. (2)                           |  | Consumer-related Technologies |  | Term Loan (10.28% cash (Libor + 9.65%; Floor 10.15%), 5.00% ETP, Due 3/1/20)                   |  |           | 4,000 |  |                     |   | 3,942  |                | 
|                                            |  |                               |  | Term Loan (10.28% cash (Libor + 9.65%; Floor 10.15%), 5.00% ETP, Due 3/1/20)                   |  |           | 3,000 |  |                     |   | 2,955  |                | 
|Rhapsody International, Inc. (2)            |  | Consumer-related Technologies |  | Term Loan (11.13% cash (Libor + 10.50%; Floor 11.00%), 3.00% ETP, Due 10/1/19)                 |  |           | 7,500 |  |                     |   | 7,336  |                | 
|SavingStar, Inc. (2)                        |  | Consumer-related Technologies |  | Term Loan (11.03% cash (Libor + 10.40%; Floor 10.90%), 3.00% ETP, Due 6/1/19)                  |  |           | 2,900 |  |                     |   | 2,860  |                | 
|                                            |  |                               |  | Term Loan (11.03% cash (Libor + 10.40%; Floor 10.90%), 3.00% ETP, Due 3/1/20)                  |  |           | 2,000 |  |                     |   | 1,965  |                | 



See Notes to Consolidated Financial Statements



86







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2016

(In thousands)



|                                    |  |                    |  |                                                                                               |  | Principal |       |  | Cost of             |  |       | Fair           | 
|----------------------------------- |  | ------------------ |  | --------------------------------------------------------------------------------------------- |  | --------- | ----- |  | ------------------- |  | ----- | -------------- | 
|Portfolio Company (1)               |  | Sector             |  | Type of Investment (3)(4)(7)(9)(10)                                                           |  | Amount    |       |  | Investments
    (6) |  |       | Value
    (14) | 
|MediaBrix, Inc. (2)                 |  | Internet and Media |  | Term Loan (11.63% cash (Libor + 11.00%; Floor 11.50%), 3.00% ETP, Due 1/1/20)                 |  |           | 4,000 |  |                     |  | 3,966 |                | 
|Zinio Holdings, LLC (2)             |  | Internet and Media |  | Term Loan (11.88% cash (Libor + 11.25%; Floor 11.75%), 4.00% ETP, Due 2/1/20)                 |  |           | 4,000 |  |                     |  | 3,967 |                | 
|The NanoSteel Company, Inc. (2)     |  | Materials          |  | Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%), 5.00% ETP, Due 7/1/19)                  |  |           | 5,000 |  |                     |  | 4,940 |                | 
|                                    |  |                    |  | Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%), 5.00% ETP, Due 7/1/19)                  |  |           | 2,500 |  |                     |  | 2,470 |                | 
|                                    |  |                    |  | Term Loan (10.13% cash (Libor + 9.50%; Floor 10.00%), 5.00% ETP, Due 1/1/20)                  |  |           | 2,500 |  |                     |  | 2,464 |                | 
|Nanocomp Technologies, Inc. (2)     |  | Networking         |  | Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)                                               |  |           | 369   |  |                     |  | 367   |                | 
|                                    |  |                    |  | Term Loan (11.63% cash (Libor + 11.00%; Floor 11.50%), 3.00% ETP,
    Due 4/1/20)             |  |           | 3,000 |  |                     |  | 2,939 |                | 
|Powerhouse Dynamics, Inc. (2)       |  | Power Management   |  | Term Loan (11.33% cash (Libor + 10.70%; Floor 11.20%), 3.00% ETP, Due 3/1/19)                 |  |           | 2,250 |  |                     |  | 2,220 |                | 
|Avalanche Technology, Inc. (2)      |  | Semiconductors     |  | Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%; Ceiling 11.75%), 2.40% ETP, Due 4/1/17)  |  |           | 417   |  |                     |  | 416   |                | 
|                                    |  |                    |  | Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%; Ceiling 11.75%), 2.40% ETP, Due 10/1/18) |  |           | 1,335 |  |                     |  | 1,331 |                | 
|                                    |  |                    |  | Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%; Ceiling 11.75%), 2.00% ETP, Due 2/1/19)  |  |           | 1,548 |  |                     |  | 1,517 |                | 
|Luxtera, Inc. (2)                   |  | Semiconductors     |  | Term Loan (10.38% cash (Libor + 9.75%; Floor 10.25%; Ceiling 12.25%), 13.00% ETP, Due 7/1/17) |  |           | 614   |  |                     |  | 607   |                | 
|                                    |  |                    |  | Term Loan (10.38% cash (Libor + 9.75%; Floor 10.25%; Ceiling 12.25%), 13.00% ETP, Due 7/1/17) |  |           | 343   |  |                     |  | 341   |                | 
|                                    |  |                    |  | Term Loan (9.13% cash (Libor + 8.50%; Floor 9.00%), 4.50% ETP, Due 12/1/18)                   |  |           | 667   |  |                     |  | 663   |                | 
|                                    |  |                    |  | Term Loan (9.13% cash (Libor + 8.50%; Floor 9.00%), 4.50% ETP, Due 12/1/18)                   |  |           | 667   |  |                     |  | 663   |                | 
|                                    |  |                    |  | Term Loan (9.63% cash (Libor + 9.00%; Floor 9.50%), 4.50% ETP, Due 11/1/19)                   |  |           | 2,000 |  |                     |  | 1,990 |                | 
|Xtera Communications, Inc. (5)(11)  |  | Semiconductors     |  | Term Loan (12.50% cash, 22.92% ETP, Due 11/1/16)                                              |  |           | 3,056 |  |                     |  | 3,047 |                | 
|                                    |  |                    |  | Term Loan (12.50% cash, 22.92% ETP, Due 11/1/16)                                              |  |           | 936   |  |                     |  | 933   |                | 
|Bridge2 Solutions, Inc.             |  | Software           |  | Term Loan (11.63% cash (Libor + 11.00%; Floor 11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19) |  |           | 4,000 |  |                     |  | 3,976 |                | 
|                                    |  |                    |  | Term Loan (11.63% cash (Libor + 11.00%; Floor 11.50%; Ceiling 14.50%), 2.00% ETP, Due 1/1/20) |  |           | 1,000 |  |                     |  | 996   |                | 
|ControlScan, Inc. (2)               |  | Software           |  | Term Loan (10.88% cash (Libor + 10.25%), 3.00% ETP, Due 7/1/20)                               |  |           | 4,500 |  |                     |  | 4,413 |                | 
|Decisyon, Inc.                      |  | Software           |  | Term Loan (12.94% cash (Libor + 12.308%; Floor 12.50%), 6.50% ETP, Due 6/1/18)                |  |           | 1,523 |  |                     |  | 1,521 |                | 
|                                    |  |                    |  | Term Loan (12.94% cash (Libor + 12.308%; Floor 12.50%), 6.50% ETP, Due 6/1/18)                |  |           | 833   |  |                     |  | 715   |                | 
|Digital Signal Corporation (11)(13) |  | Software           |  | Term Loan (10.88% cash (Libor + 10.25%; Floor 10.43%), 5.00% ETP, Due 7/1/19)                 |  |           | 1,280 |  |                     |  | 1,246 |                | 
|                                    |  |                    |  | Term Loan (10.88% cash (Libor + 10.25%; Floor 10.43%), 5.00% ETP, Due 7/1/19)                 |  |           | 1,280 |  |                     |  | 1,246 |                | 
|                                    |  |                    |  | Term Loan (10.00% cash, Due 6/30/17)                                                          |  |           | 194   |  |                     |  | 194   |                | 
|Education Elements, Inc. (2)        |  | Software           |  | Term Loan (10.63% cash (Libor + 10.00%; Floor 10.50%), 4.00% ETP, Due 1/1/19)                 |  |           | 1,600 |  |                     |  | 1,578 |                | 
|                                    |  |                    |  | Term Loan (10.63% cash (Libor + 10.00%; Floor 10.50%), 4.00% ETP, Due 8/1/19)                 |  |           | 1,500 |  |                     |  | 1,479 |                | 
|Netuitive, Inc.                     |  | Software           |  | Term Loan (12.88% cash (Libor + 12.25%; Floor 12.50%), 3.33% ETP, Due 9/1/17)                 |  |           | 461   |  |                     |  | 460   |                | 
|ScoreBig, Inc. (2)(11)(12)          |  | Software           |  | Term Loan (10.63% cash (Libor + 10.00%; Floor 10.50%), 4.00% ETP, Due 4/1/19)                 |  |           | 3,403 |  |                     |  | 3,332 |                | 
|                                    |  |                    |  | Term Loan (10.63% cash (Libor + 10.00%; Floor 10.50%), 4.00% ETP, Due 4/1/19)                 |  |           | 3,403 |  |                     |  | 3,360 |                | 
|                                    |  |                    |  | Term Loan (10.63% cash (Libor + 10.00%; Floor 10.50%), 4.00% ETP, Due 3/1/20)                 |  |           | 2,000 |  |                     |  | 1,950 |                | 
|                                    |  |                    |  | Term Loan (10.63% cash (Libor + 10.00%; Floor 10.50%), 4.00% ETP, Due 10/31/16)               |  |           | 203   |  |                     |  | 203   |                | 
|                                    |  |                    |  | Term Loan (10.63% cash (Libor + 10.00%; Floor 10.50%), 4.00% ETP, Due 11/11/19)               |  |           | 324   |  |                     |  | 324   |                | 



See Notes to Consolidated Financial Statements



87











Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2016

(In thousands)



|                                                                   |  |                   |  |                                                                                                    |  | Principal |       |  | Cost of             |  |         | Fair           | 
|------------------------------------------------------------------ |  | ----------------- |  | -------------------------------------------------------------------------------------------------- |  | --------- | ----- |  | ------------------- |  | ------- | -------------- | 
|Portfolio Company (1)                                              |  | Sector            |  | Type of Investment (3)(4)(7)(9)(10)                                                                |  | Amount    |       |  | Investments
    (6) |  |         | Value
    (14) | 
|ShopKeep.com, Inc. (2)                                             |  | Software          |  | Term Loan (10.47% cash (Libor + 9.95%; Floor
    10.45%), 3.00% ETP, Due 4/1/20)                   |  |           | 6,000 |  |                     |  | 5,811   |                | 
|SIGNiX, Inc.                                                       |  | Software          |  | Term Loan (11.63% cash (Libor + 11.00%; Floor
    11.50%), Due 10/1/18)                            |  |           | 2,250 |  |                     |  | 2,124   |                | 
|SilkRoad Technology, Inc. (2)                                      |  | Software          |  | Term Loan (10.98% cash (Libor + 10.35%; Floor
    10.85%; Ceiling 12.85%), 3.00% ETP, Due 6/1/19)  |  |           | 7,500 |  |                     |  | 7,455   |                | 
|Skyword, Inc.                                                      |  | Software          |  | Term Loan (11.58% cash (Libor + 10.95%; Floor
    11.45%), 3.00% ETP, Due 8/1/19)                  |  |           | 4,000 |  |                     |  | 3,944   |                | 
|Social Intelligence Corp. (2)                                      |  | Software          |  | Term Loan (11.13% cash (Libor + 10.50%; Floor
    11.00%; Ceiling 13.00%), 3.50% ETP, Due 12/1/17) |  |           | 323   |  |                     |  | 316     |                | 
|Sys-Tech Solutions, Inc. (2)                                       |  | Software          |  | Term Loan (11.78% cash (Libor + 11.15%; Floor
    11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)  |  |           | 3,000 |  |                     |  | 2,983   |                | 
|                                                                   |  |                   |  | Term Loan (11.78% cash (Libor + 11.15%; Floor
    11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)  |  |           | 2,833 |  |                     |  | 2,814   |                | 
|VBrick Systems, Inc. (2)                                           |  | Software          |  | Term Loan (11.63% cash (Libor + 11.00%; Floor
    11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)  |  |           | 700   |  |                     |  | 696     |                | 
|Vidsys, Inc. (2)                                                   |  | Software          |  | Term Loan (13.00% cash, 12.58% ETP, Due 12/1/17)                                                   |  |           | 2,610 |  |                     |  | 2,610   |                | 
|xTech Holdings, Inc. (2)                                           |  | Software          |  | Term Loan (11.13% cash (Libor + 10.50%; Floor
    11.00%), 3.00% ETP, Due 4/1/19)                  |  |           | 1,500 |  |                     |  | 1,479   |                | 
|                                                                   |  |                   |  | Term Loan (11.13% cash
    (Libor + 10.50%; Floor 11.00%), 3.00% ETP, Due 3/1/20)                  |  |           | 2,000 |  |                     |  | 1,970   |                | 
|Total Debt Investments —
    Technology                            |  |                   |  |                                                                                                    |  |           |       |  |                     |  | 114,743 |                | 
|Debt Investments — Cleantech — 5.7% (8)                            |  |                   |  |                                                                                                    |  |           |       |  |                     |  |        
|Rypos, Inc. (2)                                                    |  | Energy Efficiency |  | Term Loan (11.93% cash (Libor + 11.55%; Floor
    11.80%), 4.25% ETP, Due 6/1/17)                  |  |           | 1,260 |  |                     |  | 1,252   |                | 
|                                                                   |  |                   |  | Term Loan (11.93% cash (Libor + 11.55%; Floor
    11.80%), 4.25% ETP, Due 1/1/18)                  |  |           | 697   |  |                     |  | 690     |                | 
|Lehigh Technologies, Inc. (2)                                      |  | Waste Recycling   |  | Term Loan (10.35% cash (Libor + 9.72%), 6.75%
    ETP, Due 8/1/19)                                 |  |           | 3,000 |  |                     |  | 2,982   |                | 
|                                                                   |  |                   |  | Term Loan (10.35% cash
    (Libor + 9.72%), 6.75% ETP, Due 8/1/19)                                 |  |           | 3,000 |  |                     |  | 2,982   |                | 
|Total Debt Investments —
    Cleantech                             |  |                   |  |                                                                                                    |  |           |       |  |                     |  | 7,906   |                | 
|Debt Investments — Healthcare information and services — 14.2% (8) |  |                   |  |                                                                                                    |  |           |       |  |                     |  |        
|Interleukin Genetics, Inc. (2)(5)                                  |  | Diagnostics       |  | Term Loan (11.13% cash (Libor + 10.50%; Floor
    11.00%), 6.50% ETP, Due 10/1/18)                 |  |           | 4,225 |  |                     |  | 4,081   |                | 
|Watermark Medical, Inc. (2)                                        |  | Other Healthcare  |  | Term Loan (10.13% cash (Libor + 9.50%; Floor
    10.00%; Ceiling 11.00%); 4.00% ETP, Due 4/1/18)   |  |           | 2,333 |  |                     |  | 2,330   |                | 
|                                                                   |  |                   |  | Term Loan (10.13% cash (Libor + 9.50%; Floor
    10.00%; Ceiling 11.00%); 4.00% ETP, Due 4/1/18)   |  |           | 2,333 |  |                     |  | 2,330   |                | 
|                                                                   |  |                   |  | Term Loan (10.13% cash (Libor + 9.50%; Floor
    10.00%; Ceiling 11.00%); 4.00% ETP, Due 4/1/18)   |  |           | 1,111 |  |                     |  | 1,110   |                | 
|MedAvante, Inc. (2)                                                |  | Software          |  | Term Loan (9.88% cash (Libor + 9.25%; Floor
    9.75%), 4.00% ETP, Due 1/1/19)                     |  |           | 3,000 |  |                     |  | 2,972   |                | 
|                                                                   |  |                   |  | Term Loan (9.88% cash (Libor + 9.25%; Floor
    9.75%), 4.00% ETP, Due 1/1/19)                     |  |           | 3,000 |  |                     |  | 2,972   |                | 
|                                                                   |  |                   |  | Term Loan (9.88% cash
    (Libor + 9.25%; Floor 9.75%), 4.00% ETP, Due 7/1/19)                     |  |           | 4,000 |  |                     |  | 3,953   |                | 
|Total Debt Investments —
    Healthcare information and services   |  |                   |  |                                                                                                    |  |           |       |  |                     |  | 19,748  |                | 
|Total
    Debt Investments                                         |  |                   |  |                                                                                                    |  |           |       |  |                     |  | 201,216 |                | 



See Notes to Consolidated Financial Statements



88







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2016

(In thousands)



|                                       |  |                               |  |                                     |  |  |  |  | Cost of             |  |       | Fair  | 
|-------------------------------------- |  | ----------------------------- |  | ----------------------------------- |  |  |  |  | ------------------- |  | ----- | ----- | 
|Portfolio Company (1)                  |  | Sector                        |  | Type of Investment (3)(4)(7)(9)(10) |  |  |  |  | Investments
    (6) |  |       | Value | 
|Warrant Investments — 4.6% (8)         |  |                               |  |                                     |  |  |  |  |                     |  |      
|Warrants — Life Science — 0.5% (8)     |  |                               |  |                                     |  |  |  |  |                     |  |      
|ACT Biotech Corporation                |  | Biotechnology                 |  | 1,521,820 Preferred Stock Warrants  |  |  |  |  |                     |  | 83    |       | 
|Argos Therapeutics, Inc. (2)(5)        |  | Biotechnology                 |  | 33,112 Common Stock Warrants        |  |  |  |  |                     |  | 33    |       | 
|Celsion Corporation (5)                |  | Biotechnology                 |  | 5,708 Common Stock Warrants         |  |  |  |  |                     |  | 15    |       | 
|Inotek Pharmaceuticals Corporation (5) |  | Biotechnology                 |  | 28,204 Common Stock Warrants        |  |  |  |  |                     |  | 17    |       | 
|New Haven Pharmaceuticals, Inc.        |  | Biotechnology                 |  | 103,982 Preferred Stock Warrants    |  |  |  |  |                     |  | 88    |       | 
|Nivalis Therapeutics, Inc. (5)         |  | Biotechnology                 |  | 18,534 Common Stock Warrants        |  |  |  |  |                     |  | 122   |       | 
|Ocera Therapeutics, Inc. (2)(5)        |  | Biotechnology                 |  | 6,491 Common Stock Warrants         |  |  |  |  |                     |  | 6     |       | 
|Palatin Technologies, Inc. (2)(5)      |  | Biotechnology                 |  | 608,058 Common Stock Warrants       |  |  |  |  |                     |  | 51    |       | 
|Revance Therapeutics, Inc. (5)         |  | Biotechnology                 |  | 34,377 Common Stock Warrants        |  |  |  |  |                     |  | 68    |       | 
|Sample6, Inc. (2)                      |  | Biotechnology                 |  | 494,988 Preferred Stock Warrants    |  |  |  |  |                     |  | 45    |       | 
|Strongbridge U.S. Inc. (5)             |  | Biotechnology                 |  | 160,714 Common Stock Warrants       |  |  |  |  |                     |  | 72    |       | 
|vTv Therapeutics Inc. (2)(5)           |  | Biotechnology                 |  | 76,290 Common Stock Warrants        |  |  |  |  |                     |  | 23    |       | 
|Sunesis Pharmaceuticals, Inc. (5)      |  | Biotechnology                 |  | 2,050 Common Stock Warrants         |  |  |  |  |                     |  | 5     |       | 
|AccuVein Inc. (2)                      |  | Medical Device                |  | 75,769 Preferred Stock Warrants     |  |  |  |  |                     |  | 24    |       | 
|EnteroMedics, Inc. (5)                 |  | Medical Device                |  | 134 Common Stock Warrants           |  |  |  |  |                     |  | 347   |       | 
|IntegenX, Inc. (2)                     |  | Medical Device                |  | 170,646 Preferred Stock Warrants    |  |  |  |  |                     |  | 35    |       | 
|Lantos Technologies, Inc. (2)          |  | Medical Device                |  | 66,665,256 Preferred Stock Warrants |  |  |  |  |                     |  | 38    |       | 
|Mederi Therapeutics, Inc. (2)          |  | Medical Device                |  | 248,736 Preferred Stock Warrants    |  |  |  |  |                     |  | 26    |       | 
|Mitralign, Inc. (2)                    |  | Medical Device                |  | 641,909 Preferred Stock Warrants    |  |  |  |  |                     |  | 52    |       | 
|NinePoint Medical, Inc. (2)            |  | Medical Device                |  | 566,038 Preferred Stock Warrants    |  |  |  |  |                     |  | 33    |       | 
|OraMetrix, Inc. (2)                    |  | Medical Device                |  | 812,348 Preferred Stock Warrants    |  |  |  |  |                     |  | 78    |       | 
|Tryton Medical, Inc. (2)               |  | Medical Device                |  | 122,362 Preferred Stock Warrants    |  |  |  |  |                     |  | 15    |       | 
|ViOptix, Inc.                          |  | Medical Device                |  | 375,763 Preferred Stock Warrants    |  |  |  |  |                     |  | 13    |       | 
|Total Warrants — Life Science          |  |                               |  |                                     |  |  |  |  |                     |  | 1,289 |       | 
|Warrants — Technology — 3.3% (8)       |  |                               |  |                                     |  |  |  |  |                     |  |      
|Ekahau, Inc. (2)                       |  | Communications                |  | 978,261 Preferred Stock Warrants    |  |  |  |  |                     |  | 32    |       | 
|Additech, Inc. (2)                     |  | Consumer-related Technologies |  | 150,000 Preferred Stock Warrants    |  |  |  |  |                     |  | 33    |       | 
|Gwynnie Bee, Inc. (2)                  |  | Consumer-related Technologies |  | 268,591 Preferred Stock Warrants    |  |  |  |  |                     |  | 68    |       | 
|If(we), Inc.                           |  | Consumer-related Technologies |  | 190,868 Preferred Stock Warrants    |  |  |  |  |                     |  | 27    |       | 
|Le Tote, Inc. (2)                      |  | Consumer-related Technologies |  | 202,974 Preferred Stock Warrants    |  |  |  |  |                     |  | 63    |       | 
|Rhapsody International Inc. (2)        |  | Consumer-related Technologies |  | 852,273 Common Stock Warrants       |  |  |  |  |                     |  | 164   |       | 
|SavingStar, Inc. (2)                   |  | Consumer-related Technologies |  | 98,860 Preferred Stock Warrants     |  |  |  |  |                     |  | 60    |       | 
|XIOtech, Inc.                          |  | Data Storage                  |  | 2,217,979 Preferred Stock Warrants  |  |  |  |  |                     |  | 22    |       | 
|The NanoSteel Company, Inc. (2)        |  | Materials                     |  | 299,211 Preferred Stock Warrants    |  |  |  |  |                     |  | 92    |       | 
|IntelePeer, Inc.                       |  | Networking                    |  | 141,549 Common Stock Warrants       |  |  |  |  |                     |  | 39    |       | 
|Nanocomp Technologies, Inc. (2)        |  | Networking                    |  | 707,387 Preferred Stock Warrants    |  |  |  |  |                     |  | 67    |       | 
|Aquion Energy, Inc.                    |  | Power Management              |  | 115,051 Preferred Stock Warrants    |  |  |  |  |                     |  | 7     |       | 
|Powerhouse Dynamics, Inc. (2)          |  | Power Management              |  | 290,698 Preferred Stock Warrants    |  |  |  |  |                     |  | 28    |       | 
|Avalanche Technology, Inc. (2)         |  | Semiconductors                |  | 202,602 Preferred Stock Warrants    |  |  |  |  |                     |  | 101   |       | 
|eASIC Corporation (2)                  |  | Semiconductors                |  | 40,445 Preferred Stock Warrants     |  |  |  |  |                     |  | 25    |       | 
|InVisage Technologies, Inc. (2)        |  | Semiconductors                |  | 395,009 Preferred Stock Warrants    |  |  |  |  |                     |  | 48    |       | 
|Kaminario, Inc.                        |  | Semiconductors                |  | 1,087,203 Preferred Stock Warrants  |  |  |  |  |                     |  | 59    |       | 
|Luxtera, Inc.(2)                       |  | Semiconductors                |  | 2,508,671 Preferred Stock Warrants  |  |  |  |  |                     |  | 49    |       | 
|Soraa, Inc. (2)                        |  | Semiconductors                |  | 203,616 Preferred Stock Warrants    |  |  |  |  |                     |  | 80    |       | 
|Xtera Communications, Inc. (5)         |  | Semiconductors                |  | 37,831 Common Stock Warrants        |  |  |  |  |                     |  | 206   |       | 
|Bolt Solutions Inc. (2)                |  | Software                      |  | 202,892 Preferred Stock Warrants    |  |  |  |  |                     |  | 113   |       | 
|Bridge2 Solutions, Inc.                |  | Software                      |  | 75,458 Common Stock Warrants        |  |  |  |  |                     |  | 18    |       | 
|Clarabridge, Inc.                      |  | Software                      |  | 53,486 Preferred Stock Warrants     |  |  |  |  |                     |  | 14    |       | 
|ControlScan, Inc. (2)                  |  | Software                      |  | 2,295,918 Preferred Stock Warrants  |  |  |  |  |                     |  | 19    |       | 
|Decisyon, Inc.                         |  | Software                      |  | 82,967 Common Stock Warrants        |  |  |  |  |                     |  | 46    |       | 
|Digital Signal Corporation             |  | Software                      |  | 125,116 Common Stock Warrants       |  |  |  |  |                     |  | 32    |       | 
|Education Elements, Inc. (2)           |  | Software                      |  | 238,122 Preferred Stock Warrants    |  |  |  |  |                     |  | 28    |       | 
|Lotame Solutions, Inc. (2)             |  | Software                      |  | 288,115 Preferred Stock Warrants    |  |  |  |  |                     |  | 22    |       | 
|Netuitive, Inc.                        |  | Software                      |  | 41,569 Common Stock Warrants        |  |  |  |  |                     |  | 48    |       | 
|Riv Data Corp. (2)                     |  | Software                      |  | 237,361 Preferred Stock Warrants    |  |  |  |  |                     |  | 12    |       | 
|ScoreBig, Inc. (2)                     |  | Software                      |  | 879,014 Preferred Stock Warrants    |  |  |  |  |                     |  | 88    |       | 
|ShopKeep.com, Inc. (2)                 |  | Software                      |  | 165,779 Preferred Stock Warrants    |  |  |  |  |                     |  | 98    |       | 
|SIGNiX, Inc.                           |  | Software                      |  | 89,767 Preferred Stock Warrants     |  |  |  |  |                     |  | 168   |       | 



See Notes to Consolidated Financial Statements



89







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2016

(In thousands)



|                                                          |  |                               |  |                                     |   |         |  |  | Cost of             |         |       | Fair  | 
|--------------------------------------------------------- |  | ----------------------------- |  | ----------------------------------- | - | ------- |  |  | ------------------- | ------- | ----- | ----- | 
|Portfolio Company (1)                                     |  | Sector                        |  | Type of Investment (3)(4)(7)(9)(10) |   |         |  |  | Investments
    (6) |         |       | Value | 
|Skyword, Inc.                                             |  | Software                      |  | 301,056 Preferred Stock Warrants    |   |         |  |  |                     |         | 48    |       | 
|SpringCM, Inc. (2)                                        |  | Software                      |  | 2,385,686 Preferred Stock Warrants  |   |         |  |  |                     |         | 55    |       | 
|Sys-Tech Solutions, Inc.                                  |  | Software                      |  | 375,000 Preferred Stock Warrants    |   |         |  |  |                     |         | 242   |       | 
|Vidsys, Inc.                                              |  | Software                      |  | 85,399 Preferred Stock Warrants     |   |         |  |  |                     |         | 23    |       | 
|Visage Mobile, Inc.                                       |  | Software                      |  | 1,692,047 Preferred Stock Warrants  |   |         |  |  |                     |         | 19    |       | 
|xTech Holdings, Inc. (2)                                  |  | Software                      |  | 158,730 Preferred Stock Warrants    |   |         |  |  |                     |         | 43    |       | 
|Total Warrants — Technology                               |  |                               |  |                                     |   |         |  |  |                     |         | 2,406 |       | 
|Warrants — Cleantech — 0.1% (8)                           |  |                               |  |                                     |   |         |  |  |                     |         |      
|Renmatix, Inc.                                            |  | Alternative Energy            |  | 53,022 Preferred Stock Warrants     |   |         |  |  |                     |         | 68    |       | 
|Semprius, Inc.                                            |  | Alternative Energy            |  | 519,981 Preferred Stock Warrants    |   |         |  |  |                     |         | 25    |       | 
|Rypos, Inc. (2)                                           |  | Energy Efficiency             |  | 5,627 Preferred Stock Warrants      |   |         |  |  |                     |         | 44    |       | 
|Tigo Energy, Inc. (2)                                     |  | Energy Efficiency             |  | 804,604 Preferred Stock Warrants    |   |         |  |  |                     |         | 100   |       | 
|Lehigh Technologies, Inc. (2)                             |  | Waste Recycling               |  | 272,727 Preferred Stock Warrants    |   |         |  |  |                     |         | 33    |       | 
|Total Warrants — Cleantech                                |  |                               |  |                                     |   |         |  |  |                     |         | 270   |       | 
|Warrants — Healthcare information and services — 0.7% (8) |  |                               |  |                                     |   |         |  |  |                     |         |      
|Accumetrics, Inc.                                         |  | Diagnostics                   |  | 100,928 Preferred Stock Warrants    |   |         |  |  |                     |         | 107   |       | 
|Candescent Health, Inc. (2)                               |  | Diagnostics                   |  | 519,991 Preferred Stock Warrants    |   |         |  |  |                     |         | 378   |       | 
|Interleukin Genetics, Inc. (2)(5)                         |  | Diagnostics                   |  | 7,662,100 Common Stock Warrants     |   |         |  |  |                     |         | 168   |       | 
|LifePrint Group, Inc. (2)                                 |  | Diagnostics                   |  | 49,000 Preferred Stock Warrants     |   |         |  |  |                     |         | 29    |       | 
|ProterixBio, Inc. (2)                                     |  | Diagnostics                   |  | 3,156 Common Stock Warrants         |   |         |  |  |                     |         | 54    |       | 
|Singulex, Inc.                                            |  | Other Healthcare              |  | 294,231 Preferred Stock Warrants    |   |         |  |  |                     |         | 44    |       | 
|Verity Solutions Group, Inc.                              |  | Other Healthcare              |  | 300,360 Preferred Stock Warrants    |   |         |  |  |                     |         | 100   |       | 
|Watermark Medical, Inc. (2)                               |  | Other Healthcare              |  | 27,373 Preferred Stock Warrants     |   |         |  |  |                     |         | 74    |       | 
|MedAvante, Inc. (2)                                       |  | Software                      |  | 114,285 Preferred Stock Warrants    |   |         |  |  |                     |         | 66    |       | 
|Medsphere Systems Corporation (2)                         |  | Software                      |  | 7,097,791 Preferred Stock Warrants  |   |         |  |  |                     |         | 60    |       | 
|Recondo Technology, Inc. (2)                              |  | Software                      |  | 556,796 Preferred Stock Warrants    |   |         |  |  |                     |         | 95    |       | 
|Total Warrants — Healthcare information
    and services  |  |                               |  |                                     |   |         |  |  |                     |         | 1,175 |       | 
|Total Warrants                                            |  |                               |  |                                     |   |         |  |  |                     |         | 5,140 |       | 
|                                                          |  |                               |  |                                     |   |         |  |  |                     |         |       |       | 
|Other Investments — 0.4% (8)                              |  |                               |  |                                     |   |         |  |  |                     |         |      
|ZetrOZ, Inc.                                              |  | Medical Device                |  | Royalty Agreement                   |   |         |  |  |                     |         | 365   |       | 
|Vette Technology, LLC                                     |  | Data Storage                  |  | Royalty Agreement Due 4/18/2019     |   |         |  |  |                     |         | 4,318 |       | 
|Total Other Investments                                   |  |                               |  |                                     |   |         |  |  |                     |         | 4,683 |       | 
|Equity — 0.6% (8)                                         |  |                               |  |                                     |   |         |  |  |                     |         |       |       | 
|Insmed Incorporated (5)                                   |  | Biotechnology                 |  | 33,208 Common Stock                 |   |         |  |  |                     |         | 238   |       | 
|Revance Therapeutics, Inc.(5)                             |  | Biotechnology                 |  | 4,861 Common Stock                  |   |         |  |  |                     |         | 73    |       | 
|Sunesis Pharmaceuticals, Inc. (5)                         |  | Biotechnology                 |  | 78,493 Common Stock                 |   |         |  |  |                     |         | 83    |       | 
|SnagAJob.com, Inc.                                        |  | Consumer-related Technologies |  | 82,974 Common Stock                 |   |         |  |  |                     |         | 9     |       | 
|Decisyon, Inc.                                            |  | Software                      |  | 4,200,934 Common Stock              |   |         |  |  |                     |         | 185   |       | 
|Total Equity                                              |  |                               |  |                                     |   |         |  |  |                     |         | 588   |       | 
|Total Portfolio Investment Assets — 139.4% (8)            |  |                               |  |                                     | $ | 211,627 |  |  | $                   | 194,003 |      








| | (1) | All investments of the Company are in entities which are organized under the laws of the United
States and have a principal place of business in the United States.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Has been pledged as collateral under the Key Facility.
| | --- | ------------------------------------------------------



| | (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
ETPs and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt
investments are at fixed rates for the term of the debt investment, unless otherwise indicated. Debt investments based on LIBOR
are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2016 is provided.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | (7) | Warrants, Equity and Other Investments are non-income producing.
| | --- | ----------------------------------------------------------------



See Notes to Consolidated Financial Statements



90







Horizon Technology Finance Corporation
and Subsidiaries



Consolidated Schedule of Investments

December 31, 2016

(In thousands)



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



| | (9) | The Company did not have any non-qualifying assets under Section 55(a) of the 1940 Act, as of December
31, 2016. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made,
qualifying assets represent at least 70% of the Company’s total assets.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (10) | ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable
debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments
unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash
income until it is actually paid. Therefore, a portion of the incentive fee the Company may pay its Advisor will be based on income
that the Company has not yet received in cash.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (11) | Debt investment is on non-accrual status as of December 31, 2016.
| | ---- | -----------------------------------------------------------------



| | (12) | ScoreBig, Inc., a Delaware corporation (“ScoreBig”), made an assignment for the benefit
of its creditors whereby ScoreBig assigned all of its assets to SB (assignment for the benefit of creditors), LLC, a California
limited liability company (“SBABC”), established under California law to effectuate the Assignment for the Benefit
of Creditors of ScoreBig. SBABC subsequently entered into a License Agreement with a third party (“Licensee”), whereby
SBABC granted a license of certain of SBABC’s intellectual property and general intangibles to Licensee in exchange for certain
royalty payments on the future net profits, if any, of Licensee. SBABC, in consideration for the Company’s consent to the
License Agreement, agreed to pay all payments due under the License Agreement, if any, to the Company until the payment in full
in cash of the Company’s debt investments in ScoreBig.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (13) | DSC, made an assignment for the benefit of its creditors whereby DSC assigned all of its assets
to DSC (assignment for the benefit of creditors), LLC, a Delaware limited liability company, established under Delaware law to
effectuate the Assignment for the Benefit of Creditors of DSC.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (14) | Except for common stock in publicly traded companies, the fair value of the investment was valued
using significant unobservable inputs.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------



See Notes to Consolidated Financial Statements



91









Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Note 1.  Organization



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



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



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



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 the 2013-1 LLC, the “2013-1 Entities”) as a Delaware trust on
June 18, 2013. The 2013-1 Entities were special purpose bankruptcy remote entities and were separate legal entities from the Company.
The Company formed the 2013-1 Entities for purposes of securitizing $189.3 million of secured loans (the “2013-1 Securitization”)
and issuing fixed-rate asset-backed notes in an aggregate principal amount of $90.0 million (the “Asset-Backed Notes”).
The 2013-1 Entities were dissolved as of December 31, 2016.



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



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



On March 24, 2015, the
Company completed a public offering of 2,000,000 shares of its common stock at a public offering price of $13.95 per share, for
total net proceeds to the Company of $26.5 million, after deducting underwriting commission and discounts and other offering expenses
(the “2015 Offering”).



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 Articles 6 and 10 of Regulation S-X (“Regulation
S-X”) under the Securities Act of 1933, as amended (the “Securities Act”). In the opinion of management, the
consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of
financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated.



92







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Principles of consolidation



As required under GAAP
and Regulation S-X, the Company will generally consolidate its investment in a company that is an investment company subsidiary
or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated
the results of the Company’s wholly-owned 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 6. Fair value is a
market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an
entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are
set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement
date.



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



See Note 6 for
additional information regarding fair value.



Segments



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



Investments



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



Interest on debt investments
is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined
using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes
90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the debt
investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received
on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s
judgment at the time the debt investment is placed on non-accrual status. As of December 31, 2017, there was one investment on
non-accrual status with a cost of $3.0 million and a fair value of $2.9 million. As of December 31, 2016, there were four investments
on non-accrual status with a cost of $26.2 million and a fair value of $11.5 million. For the year ended December 31, 2017, the
Company recognized, as interest income, payments of $0.1 million received from one portfolio company whose debt investment was
on non-accrual status. For the year ended December 31, 2016, the Company did not recognize interest income from debt investments
on non-accrual status. For the year ended December 31, 2015, the Company recognized, as interest income, payments of $0.2 million
received from one portfolio company whose debt investment was on non-accrual status.



93







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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



Certain debt investment
agreements also require the borrower to make an ETP, that is accrued into interest receivable and taken into income over the life
of the debt investment to the extent such amounts are expected to be collected. The Company will generally cease accruing the income
if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay the ETP when
due. The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash
for the years ended December 31, 2017, 2016 and 2015 was 6.0%, 10.8% and 7.1%, respectively.



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



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



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.
The unamortized balance of debt issuance costs as of December 31, 2017 and 2016 was $2.1 million and $1.6 million, respectively.
These amounts are amortized and included in interest expense in the consolidated statements of operations over the life of the
borrowings. The accumulated amortization balances as of December 31, 2017 and 2016 were $1.8 million and $2.4 million, respectively.
The amortization expense for the years ended December 31, 2017, 2016 and 2015 was $0.8 million, $0.6 million and $0.9 million,
respectively.



94







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Income taxes



As a BDC, the Company
has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment
applicable to RICs. In order to qualify as a RIC and to avoid the imposition of corporate-level income tax on the portion of its
taxable income distributed to stockholders, among other things, the Company is required to meet certain source of income and asset
diversification requirements and to timely distribute dividends out of assets legally available for distribution to its stockholders
of an amount generally at least equal to 90% of its investment company taxable income, as defined by the Code and determined without
regard to any deduction for dividends paid, for each tax year. The Company, among other things, has made and intends to continue
to make the requisite distributions to its stockholders, which generally relieves the Company from corporate-level U.S. federal
income taxes. Accordingly, no provision for federal income tax has been recorded in the financial statements. Differences between
taxable income and net increase in net assets resulting from operations either can be temporary, meaning they will reverse in the
future, or permanent. In accordance with Topic 946, Financial Services—Investment Companies, of the Financial
Accounting Standards Board’s (“FASB’s”), Accounting Standards Codification, as amended (“ASC”),
permanent tax differences, such as non-deductible excise taxes paid, are reclassified from distributions in excess of net investment
income and net realized loss on investments to paid-in-capital at the end of each fiscal year. These permanent book-to-tax differences
are reclassified on the consolidated statements of changes in net assets to reflect their tax character but have no impact on total
net assets. For the year ended December 31, 2017, the Company reclassified $0.03 million to paid-in capital from distributions
in excess of net investment income, which related to excise taxes payable. For the year ended December 31, 2016, the Company reclassified
$0.1 million to paid-in capital from distributions in excess of net investment income, which related to excise taxes refunded in
2016. For the year ended December 31, 2015, the Company reclassified $1.0 million to paid-in capital from distributions in excess
of net investment income of $0.9 million and net realized loss on investments of $0.1 million, which related to excise taxes paid
in prior years.



Depending on the level
of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions
into the next tax year and incur a 4% U.S. federal excise tax on such income, as required. To the extent that the Company determines
that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues
excise tax, if any, on estimated excess taxable income as taxable income is earned. For the years ended December 31, 2017 and 2016,
$0.03 million and $0.1 million, respectively, was recorded for U.S. federal excise tax. For the year ended December 31, 2015, there
was no U.S. federal excise tax recorded.



The Company evaluates
tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not”
to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes, as modified by ASC Topic
946. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded
as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain
tax benefits in income tax expense. The Company had no material uncertain tax positions at December 31, 2017 and 2016. The 2016,
2015 and 2014 tax years remain subject to examination by U.S. federal and state tax authorities.



Distributions



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



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



95







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Stock Repurchase Program



On April 27, 2017, the
Board extended a previously authorized stock repurchase program which allows the Company to repurchase up to $5.0 million of its
common stock at prices below the Company’s net asset value per share as reported in its most recent consolidated financial
statements. Under the repurchase program, the Company may, but is not obligated to, repurchase shares of its outstanding common
stock in the open market or in privately negotiated transactions from time to time. Any repurchases by the Company will comply
with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended, and any applicable requirements of
the 1940 Act. Unless extended by the Board, the repurchase program will terminate on the earlier of June 30, 2018 or the repurchase
of $5.0 million of the Company’s common stock. During the year ended December 31, 2017, the Company repurchased 5,923 shares
of its common stock at an average price of $9.97 on the open market at a total cost of $0.1 million. During the year ended December
31, 2016, the Company repurchased 48,160 shares of its common stock at an average price of $10.66 on the open market at a total
cost of $0.5 million. During the year ended December 31, 2015, the Company repurchased 113,382 shares of its common stock at an
average price of $11.53 on the open market at a total cost of $1.3 million. From the inception of the stock repurchase program
through December 31, 2017, the Company repurchased 167,465 shares of its common stock at an average price of $11.22 on the open
market at a total cost of $1.9 million.



Transfers of financial assets



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



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



Recently issued accounting pronouncement



In April 2014, the FASB
issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which amends existing
revenue recognition guidance to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim
periods beginning on or after December 15, 2017. The Company has evaluated ASU 2014-09 and determined it will not have a material
impact on its consolidated financial statements and disclosures.



Note 3.  Related party transactions



Investment Management Agreement



The Investment Management
Agreement was reapproved by the Board on July 28, 2017. 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 to the Company
under the Investment Management Agreement, consisting of two components, a base management fee and an incentive fee.



96







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The base management fee
under the Investment Management Agreement is calculated at an annual rate of 2.00% of (i) the Company’s gross assets, less
(ii) assets consisting of cash and cash equivalents, and is payable monthly in arrears. For purposes of calculating the base management
fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. In addition, the Advisor agreed
to waive its base management fee relating to the proceeds raised in the 2015 Offering, to the extent such fee is not otherwise
waived and regardless of the application of the proceeds raised, until the earlier to occur of (i) March 31, 2016 or (ii) the last
day of the second consecutive calendar quarter in which the Company’s net investment income exceeds distributions declared
on its shares of common stock for the applicable quarter. As of December 31, 2015, the Company had met condition (ii) above as
net investment income exceeded distributions declared for the quarters ended September 30, 2015 and December 31, 2015.



During the year ended
December 31, 2015, the Advisor waived base management fees of $0.3 million, which the Advisor would have otherwise earned on the
proceeds raised in the 2015 Offering. The base management fee payable at December 31, 2017 and 2016 was $0.4 million and $0.3 million,
respectively. After giving effect of the waiver, the base management fee expense was $3.8 million, $4.7 million and $4.4 million
for the years ended December 31, 2017, 2016 and 2015, respectively.



The incentive fee has
two parts, as follows:



The first part,
which is subject to the Incentive Fee Cap and Deferral Mechanism, as defined below, is calculated and payable quarterly in arrears
based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose,
“Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any
other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting
fees or other fees received from portfolio companies) accrued during the calendar quarter, minus expenses for the quarter (including
the base management fee, expenses payable under the Administration Agreement (as defined below), and any interest expense and any
dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment
Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments
with payment-in-kind interest and zero coupon securities), accrued income the Company has not yet received in cash. The incentive
fee with respect to the Pre-Incentive Fee Net Investment Income is 20.00% of the amount, if any, by which the Pre-Incentive Fee
Net Investment Income for the immediately preceding calendar quarter exceeds a hurdle rate of 1.75% (which is 7.00% annualized)
of the Company’s net assets at the end of the immediately preceding calendar quarter, subject to a “catch-up”
provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, the Advisor receives
no incentive fee until the Pre-Incentive Fee Net Investment Income equals the hurdle rate of 1.75%, but then receives, as a “catch-up,”
100.00% of the Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income,
if any, that exceeds the hurdle rate but is less than 2.1875% quarterly (which is 8.75% annualized). The effect of this “catch-up”
provision is that, if Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter, the Advisor will receive
20.00% of the Pre-Incentive Fee Net Investment Income as if the hurdle rate did not apply.



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



97







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Commencing
with the calendar quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a
fee cap and deferral mechanism which is determined based upon a look-back period of up to three years and is expensed when incurred.
For this purpose, the look-back period for the incentive fee based on Pre-Incentive Fee Net Investment Income (the “Incentive
Fee Look-back Period”) commenced on July 1, 2014 and increased by one quarter in length at the end of each calendar quarter
until June 30, 2017, after which time, the Incentive Fee Look-back Period includes the relevant calendar quarter and the 11 preceding
full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income is subject to a cap (the
“Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such deferred incentive
fees (collectively, the “Incentive Fee Cap and Deferral Mechanism”). The Incentive Fee Cap is equal to (a) 20.00% of
Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive
fees of any kind paid to the Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or
a negative value in any calendar quarter, the Company will not pay an incentive fee on Pre-Incentive Fee Net Investment Income
to the Advisor in that quarter. To the extent that the payment of incentive fees on Pre-Incentive Fee Net Investment Income is
limited by the Incentive Fee Cap, the payment of such fees will be deferred and paid in subsequent calendar quarters up to three
years after their date of deferment, subject to certain limitations, which are set forth in the Investment Management Agreement.
The Company only pays incentive fees on Pre-Incentive Fee Net Investment Income to the extent allowed by the Incentive Fee Cap
and Deferral Mechanism. “Cumulative Pre-Incentive Fee Net Return” during any Incentive Fee Look-back Period means the
sum of (a) Pre-Incentive Fee Net Investment Income and the base management fee for each calendar quarter during the Incentive Fee
Look-back Period and (b) the sum of cumulative realized capital gains and losses, cumulative unrealized capital appreciation and
cumulative unrealized capital depreciation during the applicable Incentive Fee Look-back Period.



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



During the year ended
December 31, 2017, the Advisor waived performance based incentive fees of $0.1 million which the Advisor would have otherwise earned.
The performance based incentive fee expense was $1.6 million, $2.1 million and $3.5 million for the years ended December 31, 2017,
2016 and 2015, respectively. The incentive fee on Pre-Incentive Fee Net Investment Income was subject to the Incentive Fee Cap
and Deferral Mechanism for the years ended December 31, 2017 and 2016, which resulted in $1.1 million and $1.7 million, respectively,
of reduced expense and additional net investment income. As of December 31, 2015, the incentive fee on Pre-Incentive Fee Net Investment
Income was not limited by the Incentive Fee Cap and Deferral Mechanism. The performance based incentive fee payable at December
31, 2017 was $0.5 million. The entire incentive fee payable at December 31, 2017 represented part one of the incentive fee. There
was no performance based incentive fee payable at December 31, 2016.



Administration Agreement



The Company entered into
an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to
the Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s
allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration
Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable
portion of the costs of compensation and related expenses of the Company’s Chief Financial Officer and Chief Compliance Officer
and their respective staffs. The administrative fee expense was $0.7 million, $0.9 million and $1.1 million for the years ended
December 31, 2017, 2016 and 2015, respectively.



98







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Note 4.  Investments



The following table shows
the Company’s investments as of December 31, 2017 and 2016:



|                  |  | December 31, 2017 |         |  | December 31, 2016 |  
|----------------- |  | ----------------- | ------- |  | ----------------- | -
|                  |  | Cost              |         |  | Fair Value        |  
|                  |  |                   |         |  | (In thousands)    |  
|Investments       |  |                   |         |  |                   |  
|Debt              |  | $                 | 204,235 |  |                   | $
|Warrants          |  |                   | 6,182   |  |                   |  
|Other             |  |                   | 12,031  |  |                   |  
|Equity            |  |                   | 629     |  |                   |  
|Total investments |  | $                 | 223,077 |  |                   | $



The following table shows
the Company’s investments by industry sector as of December 31, 2017 and 2016:



|                                    |  | December 31, 2017 |         |  | December 31, 2016 |  
|----------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                    |  | Cost              |         |  | Fair Value        |  
|                                    |  |                   |         |  | (In thousands)    |  
|Life Science                        |  |                   |         |  |                   |  
|Biotechnology                       |  | $                 | 21,249  |  |                   | $
|Drug Delivery                       |  |                   | 6,918   |  |                   |  
|Medical Device                      |  |                   | 37,374  |  |                   |  
|Technology                          |  |                   |         |  |                   |  
|Communications                      |  |                   | 19,823  |  |                   |  
|Consumer-Related                    |  |                   | 11,359  |  |                   |  
|Data Storage                        |  |                   | 4,226   |  |                   |  
|Internet and Media                  |  |                   | 39,768  |  |                   |  
|Materials                           |  |                   | 9,511   |  |                   |  
|Networking                          |  |                   | 66      |  |                   |  
|Power Management                    |  |                   | 1,262   |  |                   |  
|Semiconductors                      |  |                   | 3,823   |  |                   |  
|Software                            |  |                   | 58,516  |  |                   |  
|Cleantech                           |  |                   |         |  |                   |  
|Alternative Energy                  |  |                   | 68      |  |                   |  
|Energy Efficiency                   |  |                   | 100     |  |                   |  
|Waste Recycling                     |  |                   | —       |  |                   |  
|Healthcare Information and Services |  |                   |         |  |                   |  
|Diagnostics                         |  |                   | 83      |  |                   |  
|Other                               |  |                   | 218     |  |                   |  
|Software                            |  |                   | 8,713   |  |                   |  
|Total investments                   |  | $                 | 223,077 |  |                   | $



Note 5.  Transactions with affiliated companies



An affiliated company
is generally a portfolio company in which the Company owns 5% or more of its voting securities. Transactions related to investments
in affiliated companies for the year ended December 31, 2017 were as follows:





|                       |  |                                     |   |  |           |   |     | Year ended December 31, 2017 |  |   |                                |  |  |                        |       |  |                         |  
|---------------------- |  | ----------------------------------- | - |  | --------- | - | --- | ---------------------------- |  | - | ------------------------------ |  |  | ---------------------- | ----- |  | ----------------------- | -
|Portfolio
    Company  |  | Fair value at
    December 31, 2016 |   |  | Purchases |   |     | Sales                        |  |   | Transfers in
    at fair value |  |  | Discount
    accretion |       |  | Net
    unrealized loss |  
|                       |  | (In thousands)                      |  
|Decisyon,
    Inc. (1) |  | $                                   | — |  |           | $ | 750 |                              |  | $ | —                              |  |  | $                      | 2,754 |  |                         | $
|Total Affiliates       |  | $                                   | — |  |           | $ | 750 |                              |  | $ | —                              |  |  | $                      | 2,754 |  |                         | $










| | (1) | During the year ended December 31, 2017, the Company's ownership in the portfolio company increased
to five percent of the portfolio company's voting securities.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



99







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



There were no transactions
related to investments in affiliated companies for the year ended December 31, 2016.



Note 6.  Fair value



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



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



The Company’s fair
value measurements are classified into a fair value hierarchy in accordance with ASC Topic 820, Fair Value Measurement,
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 which are engaged at the direction of the Board to assist in the valuation of each portfolio investment lacking a readily
available market quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied
valuation process. This valuation process is conducted at the end of each fiscal quarter, with at least 25% (based on fair value)
of the Company’s valuation of portfolio companies lacking readily available market quotations subject to review by an independent
valuation firm.



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



100







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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.



Debt investments:  The
fair value of 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,
2017 and 2016, the hypothetical market yields used ranged from 10% to 25% and 11% to 25%, respectively. Significant increases (decreases)
in this unobservable input would result in a significantly lower (higher) fair value measurement. These assets are recorded at
fair value on a recurring basis and are categorized as Level 3 within the fair value hierarchy described above.



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



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



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



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



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



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



| | • | Historical portfolio experience on cancellations and exercises of the Company’s warrants
are utilized as the basis for determining the estimated time to exit of the warrants in each financial reporting period. Warrants
may be exercised in the event of acquisitions, mergers or initial public offerings, 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.



101







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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



Other investments:Other investments are valued based on the facts and circumstances of the underlying contractual agreement. The Company currently
values these contractual agreements 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 these other investments as Level 3 within the fair value hierarchy
described above. These other investments are recorded at fair value on a recurring basis.



The following tables provide
a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of December
31, 2017 and 2016. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation
policy, the Company may also use other valuation techniques and methodologies when determining its fair value measurements.



The following table is
not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s
fair value measurements as of December 31, 2017:





|December
    31, 2017                            
|-------------------------------------------------
|                                                 
|Investment Type                                  
|(Dollars in thousands, except
    per share data)
|Debt
    investments                             
|                                                 
|                                                 
|                                                 
|                                                 
|                                                 
|Warrant
    investments                          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                 
|Other
    investments                            
|                                                 
|                                                 
|Equity
    investments                           
|Total
    Level 3 investments                    



102







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The following table is
not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s
fair value measurements as of December 31, 2016:





|December
    31, 2016                            
|-------------------------------------------------
|                                                 
|Investment Type                                  
|(Dollars in thousands, except
    per share data)
|Debt investments                                 
|                                                 
|                                                 
|                                                 
|Warrant investments                              
|                                                 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                 
|Other investments                                
|                                                 
|                                                 
|Equity
    investments                           
|Total
    Level 3 investments                    



Borrowings:  The
carrying amount of borrowings under the Company’s revolving credit facility (the “Key Facility”) with KeyBank
National Association (“Key”) approximates fair value due to the variable interest rate of the Key Facility and is categorized
as Level 2 within the fair value hierarchy described above. Additionally, the Company considers its creditworthiness in determining
the fair value of such borrowings. The fair value of the fixed rate 2022 Notes and 2019 Notes (as defined in Note 7) is based on
the closing public share price on the date of measurement. On December 31, 2017, the closing price of the 2022 Notes on the New
York Stock Exchange was $25.40 per note, or $38.0 million. Therefore, the Company has categorized this borrowing as Level 1 within
the fair value hierarchy described above.



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 that are carried at fair value and measured at fair value on a recurring basis as of December 31, 2017 and 2016 and
indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:



|                    |  | December 31, 2017 |        
|------------------- |  | ----------------- | -------
|                    |  | Total             |        
|                    |  | (In thousands)    |        
|Debt investments    |  | $                 | 203,793
|Warrant investments |  | $                 | 9,090  
|Other investments   |  | $                 | 7,700  
|Equity investments  |  | $                 | 1,516  



|                    |  | December 31, 2016 |        
|------------------- |  | ----------------- | -------
|                    |  | Total             |        
|                    |  | (In thousands)    |        
|Debt investments    |  | $                 | 186,186
|Warrant investments |  | $                 | 6,362  
|Other investments   |  | $                 | 600    
|Equity investments  |  | $                 | 855    



103







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The following table shows
a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the
year ended December 31, 2017:



|                                                            |  | December 31, 2017 |         
|----------------------------------------------------------- |  | ----------------- | --------
|                                                            |  | Debt Investments  |         
|                                                            |  | (In thousands)    |         
|Level 3 assets, beginning of period                         |  | $                 | 186,186 
|Purchase of investments                                     |  |                   | 135,556 
|Warrants and equity received and classified as Level 3      |  |                   | —       
|Principal payments received on investments                  |  |                   | (103,659
|Proceeds from sale of investments                           |  |                   | —       
|Net realized (loss) gain on investments                     |  |                   | (21,219 
|Unrealized appreciation (depreciation) included in earnings |  |                   | 16,427  
|Transfer from debt investments to other investments         |  |                   | (7,500  
|Other                                                       |  |                   | (1,998  
|Level 3 assets, end of period                               |  | $                 | 203,793 



The Company’s transfers
between levels are recognized at the end of each reporting period. During the year ended December 31, 2017, there were no transfers
between levels.



The change in unrealized
appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at December 31,
2017 includes $0.1 million in unrealized appreciation on debt and other investments, $0.3 million in unrealized depreciation on
warrant investments and $0.01 million in unrealized appreciation on equity investments.



The following table shows
a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the
year ended December 31, 2016:



|                                                            |  | December 31, 2016 |        
|----------------------------------------------------------- |  | ----------------- | -------
|                                                            |  | Debt Investments  |        
|                                                            |  | (In thousands)    |        
|Level 3 assets, beginning of period                         |  | $                 | 242,167
|Purchase of investments                                     |  |                   | 59,858 
|Warrants and equity received and classified as Level 3      |  |                   | —      
|Principal payments received on investments                  |  |                   | (95,639
|Proceeds from sale of investments                           |  |                   | —      
|Net realized (loss) gain on investments                     |  |                   | (7,597 
|Unrealized (depreciation) appreciation included in earnings |  |                   | (12,296
|Transfer from debt to other investments                     |  |                   | (383   
|Other                                                       |  |                   | 76     
|Level 3 assets, end of period                               |  | $                 | 186,186



The Company’s transfers
between levels are recognized at the end of each reporting period. During the year ended December 31, 2016, there were no transfers
between levels.



104







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The change in unrealized
depreciation included in the consolidated statement of operations attributable to Level 3 investments still held at December
31, 2016 includes $14.7 million in unrealized depreciation on debt and other investments, $0.3 million in unrealized appreciation
on warrants and $0.1 million in unrealized appreciation on equity.



The Company discloses
fair value information about financial instruments, whether or not recognized in the consolidated 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 2017 and 2016 have been measured as of the reporting date and have not been reevaluated or updated for purposes of these financial
statements subsequent to that date. As such, the fair values of these financial instruments subsequent to the reporting date may
be different than amounts reported at year-end.



As of December 31, 2017
and 2016, the recorded balances equaled fair values of all the Company’s financial instruments, except for the Company’s
2019 Notes and 2022 Notes, as previously described.



Off-balance-sheet instruments



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



Note 7.  Borrowings



The following table shows
the Company’s borrowings as of December 31, 2017 and 2016:



|                                                                    |  | December
    31, 2017 |         |  | December
    31, 2016   |  
|------------------------------------------------------------------- |  | --------------------- | ------- |  | ----------------------- | -
|                                                                    |  | Total
    Commitment  |         |  | Balance
    Outstanding |  
|                                                                    |  |                       |         |  |                         |  
|Key Facility                                                        |  | $                     | 95,000  |  |                         | $
|2022 Notes                                                          |  |                       | 37,375  |  |                         |  
|2019 Notes                                                          |  |                       | —       |  |                         |  
|Total before debt issuance costs                                    |  |                       | 132,375 |  |                         |  
|Unamortized debt issuance costs attributable
    to term borrowings |  |                       | —       |  |                         |  
|Total borrowings outstanding, net                                   |  | $                     | 132,375 |  |                         | $



In accordance with the
1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that the Company’s asset coverage,
as defined in the 1940 Act, is at least 200% after such borrowings. As of December 31, 2017, the asset coverage for borrowed amounts
was 242%.



105







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The Company entered into
the Key Facility with Key effective November 4, 2013. The Key Facility has an accordion feature which allows for an increase in
the total loan commitment to $150 million from the current $95 million commitment. The Key Facility is collateralized by all debt
investments and warrants held by Credit II and permits an advance rate of up to 50% of eligible debt investments held by Credit
II. The Key Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict
the debt investments securing the Key Facility to certain criteria for qualified debt investments and includes portfolio company
concentration limits as defined in the related loan agreement. The Key Facility has a three-year revolving period which ends on
August 12, 2018 followed by a two-year amortization period and matures on August 12, 2020. The interest rate is based upon the
one-month London Interbank Offered Rate (“LIBOR”), plus a spread of 3.25%, with a LIBOR floor of 0.75%. The LIBOR rate
was 1.56% and 0.77% on December 31, 2017 and 2016, respectively. The average rate for the years ended December 31, 2017 and 2016
was 4.33% and 4.00%, respectively. The Key Facility requires the payment of an unused line fee in an amount equal to 0.50% of any
unborrowed amount available under the facility annually. As of December 31, 2017 and 2016, the Company had borrowing capacity of
$37.0 and $32.0 million, respectively. At December 31, 2017 and 2016, $23.6 million and $4.6 million, respectively, was available,
subject to existing terms and advance rates.



On March 23, 2012, the
Company issued and sold an aggregate principal amount of $30.0 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 $3.0 million
of such notes (collectively, the “2019 Notes”). The 2019 Notes had a stated maturity of March 15, 2019 and were redeemable
in whole or in part at the Company’s option at any time or from time to time at a redemption price of $25 per security plus
accrued and unpaid interest. The 2019 Notes bore 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 were the Company’s direct unsecured obligations and (i) ranked
equally in right of payment with the Company’s future unsecured indebtedness; (ii) were senior in right of payment to any
of the Company’s future indebtedness that expressly provided it was subordinated to the 2019 Notes; (iii) were effectively
subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that was initially
unsecured to which the Company subsequently granted security), to the extent of the value of the assets securing such indebtedness,
and (iv) were structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s
subsidiaries. On October 30, 2017 (the “Redemption Date”), the Company redeemed all of the issued and outstanding 2019
Notes in an aggregate principal amount of $33.0 million and paid accrued interest of $0.3 million. The Company accelerated $0.2
million of unamortized debt issuance costs related to the 2019 Notes. The 2019 Notes were delisted effective on the Redemption
Date.



On September 29, 2017,
the Company issued and sold an aggregate principal amount of $32.5 million of 6.25% notes due in 2022 and on October 11, 2017,
pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $4.9 million of
such notes (collectively, the “2022 Notes”). The 2022 Notes have a stated maturity of September 15, 2022 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 September 15, 2019 at a
redemption price of $25 per security plus accrued and unpaid interest. The 2022 Notes bear interest at a rate of 6.25% per year,
payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2022 Notes are the Company’s direct
unsecured obligations and (i) rank equally in right of payment with the Company’s current and future unsecured indebtedness;
(ii) are senior in right of payment to any of the Company’s future indebtedness that expressly provides it is subordinated
to the 2022 Notes; (iii) are effectively subordinated to all of the Company’s existing and future secured indebtedness (including
indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the
assets securing such indebtedness, and (iv) are structurally subordinated to all existing and future indebtedness and other obligations
of any of the Company’s subsidiaries. As ofDecember 31,
2017, the Company was in material compliance with the terms of the 2022
Notes.The 2022 Notes are listed on the New York Stock Exchange under the symbol “HTFA”.



On June 28, 2013, the
Company completed the 2013-1 Securitization. In connection with the 2013-1 Securitization, 2013-1 Trust, a wholly owned subsidiary
of the Company, issued $90.0 million in the Asset-Backed Notes, which were rated A1(sf) by Moody’s Investors Service, Inc.
The Asset-Backed Notes were issued by 2013-1 Trust and were backed by a pool of loans made to certain portfolio companies of the
Company and secured by certain assets of such portfolio companies. The Asset-Backed Notes were secured obligations of 2013-1 Trust
and non-recourse to the Company. In connection with the issuance and sale of the Asset-Backed Notes, the Company made customary
representations, warranties and covenants. The Asset-Backed Notes bore interest at a fixed rate of 3.00% per annum and had a stated
maturity of May 15, 2018. As of December 31, 2016, the Asset-Backed Notes were repaid in full.



106







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The following table shows
information about our senior securities as of December 31, 2017, 2016, 2015, 2014 and 2013:



|Class and Year          |  | Total AmountOutstandingExclusive ofTreasurySecurities(1) |         |  | Asset Coverageper Unit(2) |   |        | InvoluntaryLiquidationPreferenceper Unit(3) |  |  | AverageMarketValue perUnit(4) | 
|----------------------- |  | -------------------------------------------------------- | ------- |  | ------------------------- | - | ------ | ------------------------------------------- |  |  | ----------------------------- | 
|                        |  | (In thousands, except unit data)                         |        
|Credit facilities       |  |                                                          |         |  |                           |   |        |                                             |  |  |                               | 
|2017                    |  | $                                                        | 58,000  |  |                           | $ | 3,973  |                                             |  |  | —                             | 
|2016                    |  | $                                                        | 63,000  |  |                           | $ | 3,733  |                                             |  |  | —                             | 
|2015                    |  | $                                                        | 68,000  |  |                           | $ | 4,048  |                                             |  |  | —                             | 
|2014                    |  | $                                                        | 10,000  |  |                           | $ | 22,000 |                                             |  |  | —                             | 
|2013                    |  | $                                                        | 10,000  |  |                           | $ | 25,818 |                                             |  |  | —                             | 
|2022 Notes              |  |                                                          |         |  |                           |   |        |                                             |  |  |                               | 
|2017                    |  | $                                                        | 37,375  |  |                           | $ | 6,166  |                                             |  |  | —                             | 
|2019 Notes              |  |                                                          |         |  |                           |   |        |                                             |  |  |                               | 
|2017                    |  |                                                          | —       |  |                           |   | —      |                                             |  |  | —                             | 
|2016                    |  | $                                                        | 33,000  |  |                           | $ | 7,127  |                                             |  |  | —                             | 
|2015                    |  | $                                                        | 33,000  |  |                           | $ | 8,342  |                                             |  |  | —                             | 
|2014                    |  | $                                                        | 33,000  |  |                           | $ | 6,667  |                                             |  |  | —                             | 
|2013                    |  | $                                                        | 33,000  |  |                           | $ | 7,824  |                                             |  |  | —                             | 
|2013-1 Securitization   |  |                                                          |         |  |                           |   |        |                                             |  |  |                               | 
|2017                    |  |                                                          | —       |  |                           |   | —      |                                             |  |  | —                             | 
|2016                    |  |                                                          | —       |  |                           |   | —      |                                             |  |  | —                             | 
|2015                    |  | $                                                        | 14,546  |  |                           | $ | 18,926 |                                             |  |  | —                             | 
|2014                    |  | $                                                        | 38,753  |  |                           | $ | 5,677  |                                             |  |  | —                             | 
|2013                    |  | $                                                        | 79,343  |  |                           | $ | 3,254  |                                             |  |  | —                             | 
|Total senior securities |  |                                                          |         |  |                           |   |        |                                             |  |  |                               | 
|2017                    |  | $                                                        | 95,375  |  |                           | $ | 2,416  |                                             |  |  | —                             | 
|2016                    |  | $                                                        | 96,000  |  |                           | $ | 2,450  |                                             |  |  | —                             | 
|2015                    |  | $                                                        | 115,546 |  |                           | $ | 2,383  |                                             |  |  | —                             | 
|2014                    |  | $                                                        | 81,753  |  |                           | $ | 2,691  |                                             |  |  | —                             | 
|2013                    |  | $                                                        | 122,343 |  |                           | $ | 2,110  |                                             |  |  | —                             | 










| | (1) | Total amount of senior securities outstanding at the end of the period presented.
| | --- | ---------------------------------------------------------------------------------

| | (2) | Asset coverage per unit is the ratio of the original cost less accumulated depreciation, amortization or impairment of the
Company’s total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate
amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000
of indebtedness.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The amount which the holder of such class of senior security would be entitled upon the voluntary liquidation of the applicable
issuer in preference to any security junior to it. The “ — ” in this column indicates that the SEC expressly
does not require this information to be disclosed for certain types of securities.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Not applicable to the Company’s credit facilities and 2013-1 Securitization because such securities are not registered
for public trading.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------



Note 8.  Federal income tax



The Company has elected
to be treated as a RIC under Subchapter M of the Code and to distribute substantially all of its taxable income. Accordingly, no
provision for federal, state or local 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.



107







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



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



|                                                                |  | Years Ended December 31, |        
|--------------------------------------------------------------- |  | ------------------------ | -------
|                                                                |  | 2017                     |        
|                                                                |  | (In thousands)           |        
|Net increase (decrease) in net assets resulting from operations |  | $                        | 9,591  
|Net unrealized (appreciation) depreciation on investments       |  |                          | (18,485
|Other book-tax differences                                      |  |                          | 806    
|Capital loss carry forward                                      |  |                          | 21,191 
|Taxable income before deductions for distributions              |  | $                        | 13,103 



The tax characters of
distributions paid are as follows:



|                |  | Years Ended December 31, |       
|--------------- |  | ------------------------ | ------
|                |  | 2017                     |       
|                |  | (In thousands)           |       
|Ordinary income |  | $                        | 13,818
|Total           |  | $                        | 13,818



The components of undistributed
ordinary income earnings on a tax basis were as follows:



|                                     |  | As of December 31, |        
|------------------------------------ |  | ------------------ | -------
|                                     |  | 2017               |        
|                                     |  | (In thousands)     |        
|Undistributed ordinary income        |  | $                  | 1,036  
|Long term capital loss carry forward |  |                    | (41,702
|Unrealized appreciation              |  |                    | 6,049  
|Unrealized depreciation              |  |                    | (7,027 
|Other temporary differences          |  |                    | 2,955  
|Total                                |  | $                  | (38,689



Depending on the level
of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions
into the next tax year and incur a 4% excise tax on such income, as required. For the years ended December 31, 2017 and 2016, the
Company elected to carry forward taxable income in excess of current year distributions of $1.0 million and $1.8 million, respectively.
At December 31, 2017 and 2016, a provision for excise tax of $0.03 million and $0.1 million, respectively, was recorded.



Capital losses in excess
of capital gains earned in a tax year may generally be carried forward, without expiration, and used to offset capital gains, subject
to certain limitations. During the years ended December 31, 2017, 2016 and 2015, the Company did not use any of its capital loss
carry forward to offset capital gains.



For federal income tax
purposes, the tax cost of investments at December 31, 2017 and 2016 was $223.1 million and $211.6 million, respectively. The gross
unrealized appreciation on investments at December 31, 2017 and 2016 was $6.0 million and $3.8 million, respectively. The gross
unrealized depreciation on investments at December 31, 2017 and 2016 was $7.0 million and $23.3 million, respectively.



Note 9.  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.



108







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



The balance of unfunded
commitments to extend credit was $33.3 million and $20.8 million as of December 31, 2017 and 2016, respectively. Commitments to
extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving
credit arrangements or similar transactions. These commitments are often subject to financial or non-financial milestones and other
conditions to borrow that must be achieved before the commitment can be drawn. In addition, the commitments generally have fixed
expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.



The following table provides
the Company’s unfunded commitments by portfolio company as of December 31, 2017:



|                            |  | December 31, 2017 |       
|--------------------------- |  | ----------------- | ------
|                            |  | Principal Balance |       
|                            |  | (In thousands)    |       
|Aerin Medical, Inc.         |  | $                 | 5,000 
|GeNO LLC                    |  |                   | 2,000 
|HealthEdge Software, Inc.   |  |                   | 11,250
|Intelepeer Holdings, Inc.   |  |                   | 3,000 
|Kixeye, Inc.                |  |                   | 3,000 
|PebblePost, Inc.            |  |                   | 4,000 
|Titan Pharmaceuticals, Inc. |  |                   | 3,000 
|Weblinc Corporation         |  |                   | 2,000 
|Total                       |  | $                 | 33,250



The table above also provides
the fair value of the Company’s unfunded commitment liability as of December 31, 2017 which totaled $0.4 million. The fair
value at inception of the delay draw credit agreements is equal to the fees and/or warrants received to enter into these agreements,
taking into account the remaining terms of the agreements and the counterparties’ credit profile. The unfunded commitment
liability reflects the fair value of these future funding commitments and is included in the Company’s consolidated statement
of assets and liabilities.



Note 10.  Concentrations
of credit risk



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



The Company’s largest
debt investments may vary from year to year as new debt investments are recorded and existing debt investments are repaid. The
Company’s five largest debt investments, at cost, represented 29% and 24% of total debt investments outstanding as of December
31, 2017 and 2016, respectively. No single debt investment represented more than 10% of the total debt investments as of December
31, 2017 or 2016. Investment income, consisting of interest and fees, can fluctuate significantly upon repayment of large debt
investments. Interest income from the five largest debt investments accounted for 14%, 17% and 14% of total interest and fee income
on investments for the years ended December 31, 2017, 2016 and 2015, respectively.



109







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Note 11.  Distributions



The Company’s distributions
are recorded on the declaration date. The following table summarizes the Company’s distribution activity for the years ended
December 31, 2017 and 2016:



|Date                         |  |                                                 |  |              |  | Amount    |       |  | Cash         |   |        | DRIP Shares |  |  | DRIP Share | 
|---------------------------- |  | ----------------------------------------------- |  | ------------ |  | --------- | ----- |  | ------------ | - | ------ | ----------- |  |  | ---------- | 
|Declared                     |  | Record Date                                     |  | Payment Date |  | Per Share |       |  | Distribution |   |        | Issued      |  |  | Value      | 
|                             |  | (In thousands, except share and per share data) | 
|Year Ended December, 2017    |  |                                                 |  |              |  |           |       |  |              |   |        |            
|10/27/17                     |  | 2/21/18                                         |  | 3/15/18      |  | $         | 0.10  |  |              | $ | —      |             |  |  | —          | 
|10/27/17                     |  | 1/22/18                                         |  | 2/15/18      |  |           | 0.10  |  |              |   | 1,139  |             |  |  | 1,185      | 
|10/27/17                     |  | 12/20/17                                        |  | 1/17/18      |  |           | 0.10  |  |              |   | 1,139  |             |  |  | 1,119      | 
|7/28/17                      |  | 11/20/17                                        |  | 12/15/17     |  |           | 0.10  |  |              |   | 1,139  |             |  |  | 1,227      | 
|7/28/17                      |  | 10/19/17                                        |  | 11/15/17     |  |           | 0.10  |  |              |   | 1,139  |             |  |  | 1,195      | 
|7/28/17                      |  | 9/20/17                                         |  | 10/16/17     |  |           | 0.10  |  |              |   | 1,138  |             |  |  | 1,205      | 
|4/27/17                      |  | 8/18/17                                         |  | 9/15/17      |  |           | 0.10  |  |              |   | 1,140  |             |  |  | 1,199      | 
|4/27/17                      |  | 7/20/17                                         |  | 8/15/17      |  |           | 0.10  |  |              |   | 1,140  |             |  |  | 1,159      | 
|4/27/17                      |  | 6/20/17                                         |  | 7/14/17      |  |           | 0.10  |  |              |   | 1,138  |             |  |  | 1,164      | 
|3/3/17                       |  | 5/19/17                                         |  | 6/15/17      |  |           | 0.10  |  |              |   | 1,137  |             |  |  | 1,202      | 
|3/3/17                       |  | 4/21/17                                         |  | 5/16/17      |  |           | 0.10  |  |              |   | 1,137  |             |  |  | 1,287      | 
|3/3/17                       |  | 3/20/17                                         |  | 4/18/17      |  |           | 0.10  |  |              |   | 1,134  |             |  |  | 1,510      | 
|                             |  |                                                 |  |              |  | $         | 1.20  |  |              | $ | 12,520 |             |  |  | 13,452     | 
|Year Ended December 31, 2016 |  |                                                 |  |              |  |           |       |  |              |   |        |             |  |  |            | 
|10/28/16                     |  | 2/22/17                                         |  | 3/15/17      |  | $         | 0.10  |  |              | $ | 1,134  |             |  |  | 1,665      | 
|10/28/16                     |  | 1/19/17                                         |  | 2/15/17      |  |           | 0.10  |  |              |   | 1,133  |             |  |  | 1,542      | 
|10/28/16                     |  | 12/20/16                                        |  | 1/13/17      |  |           | 0.10  |  |              |   | 1,137  |             |  |  | 1,550      | 
|7/29/16                      |  | 11/18/16                                        |  | 12/15/16     |  |           | 0.115 |  |              |   | 1,308  |             |  |  | 1,712      | 
|7/29/16                      |  | 10/20/16                                        |  | 11/15/16     |  |           | 0.115 |  |              |   | 1,308  |             |  |  | 1,896      | 
|7/29/16                      |  | 9/20/16                                         |  | 10/17/16     |  |           | 0.115 |  |              |   | 1,305  |             |  |  | 1,716      | 
|4/28/16                      |  | 8/19/16                                         |  | 9/15/16      |  |           | 0.115 |  |              |   | 1,307  |             |  |  | 1,535      | 
|4/28/16                      |  | 7/20/16                                         |  | 8/15/16      |  |           | 0.115 |  |              |   | 1,302  |             |  |  | 1,842      | 
|4/28/16                      |  | 6/20/16                                         |  | 7/15/16      |  |           | 0.115 |  |              |   | 1,305  |             |  |  | 1,734      | 
|3/3/16                       |  | 5/19/16                                         |  | 6/15/16      |  |           | 0.115 |  |              |   | 1,305  |             |  |  | 1,898      | 
|3/3/16                       |  | 4/20/16                                         |  | 5/16/16      |  |           | 0.115 |  |              |   | 1,283  |             |  |  | 3,821      | 
|3/3/16                       |  | 3/18/16                                         |  | 4/15/16      |  |           | 0.115 |  |              |   | 1,306  |             |  |  | 1,840      | 
|                             |  |                                                 |  |              |  | $         | 1.335 |  |              | $ | 15,133 |             |  |  | 22,751     | 



On March 1, 2018, the Board declared monthly
distributions per share, payable as set forth in the following table:



|Ex-Dividend Date |  | Record Date    |  | Payment Date   |  | Distributions Declared |     
|---------------- |  | -------------- |  | -------------- |  | ---------------------- | ----
|May 16, 2018     |  | May 17, 2018   |  | June 15, 2018  |  | $                      | 0.10
|April 18, 2018   |  | April 19, 2018 |  | May 15, 2018   |  | $                      | 0.10
|March 16, 2018   |  | March 19, 2018 |  | April 17, 2018 |  | $                      | 0.10



After paying distributions
of $1.10 per share deemed paid for tax purposes in 2017, declaring on October 27, 2017 a distribution of $0.10 per share payable
January 17, 2018, and taxable earnings of $1.14 per share in 2017, the Company’s undistributed spillover income as of December
31, 2017 was $0.09 per share. Spillover income includes any ordinary income and net capital gains from the preceding tax years
that were not distributed during such tax years.



Note 12.  Subsequent events



On February 14, 2018, DSC ABC, a borrower of
the Company, sold substantially all of its assets (the "DSC Assets") to StereoVision Imaging, Inc. ("SVI")
for approximately $2.7 million. The Company received the proceeds of the sale of the DSC Assets. In order to finance SVI's purchase
of the DSC Assets and to provide SVI working capital, the Company made a debt investment of $3.2 million in SVI.





On March 6, 2018,
the Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled
to receive under the Investment Management Agreement for the period commencing on January 1, 2018 and ending on December 31, 2018.
Such waived incentive fees will not be subject to recoupment.



110







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Note 13.  Financial highlights



The following table shows
financial highlights for the Company:



|                                                                |  | Years Ended December 31,                        |           
|--------------------------------------------------------------- |  | ----------------------------------------------- | ----------
|                                                                |  | 2017                                            |           
|                                                                |  | (In thousands, except share and per share data) |           
|Per share data:                                                 |  |                                                 |           
|Net asset value at beginning of period                          |  | $                                               | 12.09     
|Net investment income                                           |  |                                                 | 1.07      
|Realized loss on investments                                    |  |                                                 | (1.84     
|Unrealized appreciation (depreciation) on investments           |  |                                                 | 1.60      
|Net increase (decrease) in net assets resulting from operations |  |                                                 | 0.83      
|Net dilution from issuance of common stock                      |  |                                                 | —         
|Distributions declared(1)                                       |  |                                                 | (1.20     
|From net investment income                                      |  |                                                 | (1.20     
|From net realized gain on investments                           |  |                                                 | —         
|Return of capital                                               |  |                                                 | —         
|Net accretion from repurchase of common stock                   |  |                                                 | —         
|Other (2)                                                       |  |                                                 | —         
|Net asset value at end of period                                |  | $                                               | 11.72     
|Per share market value, beginning of period                     |  | $                                               | 10.53     
|Per share market value, end of period                           |  |                                                 | 11.22     
|Total return based on a market value (3)                        |  |                                                 | 17.9      
|Shares outstanding at end of period                             |  |                                                 | 11,520,406
|Ratios, net of waivers, to average net assets:                  |  |                                                 |           
|Expenses without incentive fees                                 |  |                                                 | 8.6       
|Incentive fees                                                  |  |                                                 | 1.2       
|Net expenses                                                    |  |                                                 | 9.8       
|Net investment income with incentive fees                       |  |                                                 | 9.0       
|Ratios, without waivers, to average net assets:                 |  |                                                 |           
|Expenses without incentive fees(4)                              |  |                                                 | 8.6       
|Incentive fees(4)                                               |  |                                                 | 1.3       
|Net expenses(4)                                                 |  |                                                 | 9.9       
|Net investment income with incentive fees(4)                    |  |                                                 | 8.9       
|Net assets at the end of the period                             |  | $                                               | 135,075   
|Average net asset value                                         |  | $                                               | 137,293   
|Average debt per share                                          |  | $                                               | 6.60      
|Portfolio turnover ratio                                        |  |                                                 | 79.4      








| | (1) | Distributions are determined based on taxable income calculated in accordance with income tax regulations,
which may differ from amounts determined under GAAP due to (i) changes in unrealized appreciation and depreciation, (ii) temporary
and permanent differences in income and expense recognition, and (iii) the amount of spillover income carried over from a given
tax year for distribution in the following tax year. The final determination of taxable income for each tax year, as well as the
tax attributes for distributions in such tax year, will be made after the close of the tax year.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes the impact of the different share amounts as a result of calculating per share data based
on the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as
of a period end or transaction date.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The total return equals the change in the ending market value over the beginning of period price
per share plus distributions paid per share during the period, divided by the beginning price.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | During the years ended December 31, 2015, 2014 and 2013, the Advisor waived $0.3 million, $0.2
million and $0.1 million, respectively, of base management fee. During the years ended December 31, 2017 and 2014, the Advisor
waived $0.1 million of incentive fee.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



111







Horizon Technology Finance Corporation and
Subsidiaries



Notes to Consolidated Financial Statements



Note 14.  Selected quarterly financial data (unaudited)



|                                                    |  | December 31, 2017                     |       |  | September 30, 2017 |   |        | June 30, 2017 |  |   | March 31, 2017 |  
|--------------------------------------------------- |  | ------------------------------------- | ----- |  | ------------------ | - | ------ | ------------- |  | - | -------------- | -
|                                                    |  | (In thousands, except per share data) |      
|Total investment income                             |  | $                                     | 6,163 |  |                    | $ | 6,774  |               |  | $ | 5,878          |  
|Net investment income                               |  | $                                     | 2,379 |  |                    | $ | 3,797  |               |  | $ | 2,754          |  
|Net realized and unrealized gain (loss)             |  | $                                     | 117   |  |                    | $ | (1,088 | )             |  | $ | (2,021         | )
|Net increase in net asset resulting from operations |  | $                                     | 2,496 |  |                    | $ | 2,709  |               |  | $ | 733            |  
|Net investment income per share (1)                 |  | $                                     | 0.21  |  |                    | $ | 0.33   |               |  | $ | 0.24           |  
|Net increase in net assets per share (1)            |  | $                                     | 0.21  |  |                    | $ | 0.24   |               |  | $ | 0.06           |  
|Net asset value per share at period end (2)         |  | $                                     | 11.72 |  |                    | $ | 11.81  |               |  | $ | 11.87          |  



|                                                               |  | December 31, 2016                     |        |   | September 30, 2016 |   |         | June 30, 2016 |  |   | March 31, 2016 |  
|-------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------ | - | ------- | ------------- |  | - | -------------- | -
|                                                               |  | (In thousands, except per share data) |       
|Total investment income                                        |  | $                                     | 6,987  |   |                    | $ | 7,608   |               |  | $ | 9,092          |  
|Net investment income                                          |  | $                                     | 3,815  |   |                    | $ | 4,375   |               |  | $ | 4,512          |  
|Net realized and unrealized loss                               |  | $                                     | (4,404 | ) |                    | $ | (10,018 | )             |  | $ | (4,590         | )
|Net (decrease) increase in net asset resulting from operations |  | $                                     | (589   | ) |                    | $ | (5,643  | )             |  | $ | (78            | )
|Net investment income per share (1)                            |  | $                                     | 0.33   |   |                    | $ | 0.38    |               |  | $ | 0.39           |  
|Net (decrease) increase  in net assets per share (1)           |  | $                                     | (0.05  | ) |                    | $ | (0.49   | )             |  | $ | (0.01          | )
|Net asset value per share at period end (2)                    |  | $                                     | 12.09  |   |                    | $ | 12.44   |               |  | $ | 13.27          |  



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

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



112







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, 2017,
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 RSM US 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



113







PART III



We will file a definitive
Proxy Statement for our 2018 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 2018 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 2018 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 2018 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal
year.



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



The information required
by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2018 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 Accounting Fees and Services



The information required
by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2018 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.



114







PART IV



Item 15.Exhibits, Financial Statement Schedules



(a)(1) Financial statements



(1) Financial
statements — Refer to Item 8 starting on page 73.



(2) Financial
statement schedules — None



(3) Exhibits



|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1        |  | Amended and Restated Certificate of Incorporation (Incorporated by reference to exhibit (a) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                                                                                                                                                                                                                                                                                                                  
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3.2        |  | Amended and Restated Bylaws (Incorporated by reference to exhibit (b) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                                                                                                                                                                                                                                                                                                                                        
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.1        |  | Form of Specimen Certificate (Incorporated by reference to exhibit (d) of the Company’s Pre-effective Amendment No. 3 to the Registration Statement on Form N-2, filed on July 19, 2010)                                                                                                                                                                                                                                                                                                                                      
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.2        |  | 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)                                                                                                                                                                                                                                          
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.3        |  | Second Supplemental Indenture, dated as of September 29, 2017, between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit (d)(12) of the Company’s Post-Effective Amendment No. 5 to the Registration Statement on Form N-2, File No. 333-201886, filed on September 29, 2017)                                                                                                                                                                                                              
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.4        |  | Form of 6.25% 2022 Notes due 2022 (included as part of Exhibit 4.3)                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.1       |  | Amended and Restated Investment Management Agreement (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on August 5, 2014)                                                                                                                                                                                                                                                                                                                                                         
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.2       |  | Form of Custodial Agreement (Incorporated by reference to exhibit (j) of the Company’s Pre-effective Amendment No. 3 to the Registration Statement on Form N-2, filed on July 19, 2010)                                                                                                                                                                                                                                                                                                                                       
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.3       |  | Form of Administration Agreement (Incorporated by reference to exhibit (k)(1) of the Company’s Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on July 2, 2010)                                                                                                                                                                                                                                                                                                                                
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.4       |  | Form of Trademark 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       |  | 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)                                                                                                                                                                                                                                                                                                                                 
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.6       |  | Amended and Restated Loan and Security Agreement, dated as of November 4, 2013, by and among Horizon Credit II LLC, as the borrower, the Lenders that are signatories thereto, as the lenders, and Key Equipment Finance Inc., as the arranger and the agent (Incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K, filed on March 11, 2014)                                                                                                                                                
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.7       |  | Amendment No. 1 to Amended and Restated Loan Agreement, dated as of August 12, 2015, by and among Horizon Credit II LLC, as the borrower, Alostar Bank of Commerce, as lender, and KeyBank National Association, as lender, arranger and agent (Incorporated by reference to Exhibit (k)(13) of Pre-effective Amendment No. 3 to the Company’s Registration Statement on Form N-2, filed on August 19, 2015)                                                                                                                  
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.8       |  | Amended and Restated Sale and Servicing Agreement, dated as of November 4, 2013, by and among Horizon Credit II LLC, as the buyer, Horizon Technology Finance Corporation, as the originator and the servicer, Horizon Technology Finance Management LLC, as the sub-servicer, U.S. Bank National Association, as the collateral custodian and backup servicer, and Key Equipment Finance Inc., as the agent (Incorporated by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K, filed on March 11, 2014)



115







|10.9  |  | Agreement Regarding Loan Assignment and Related Matters, dated as of November 4, 2013, by and among Horizon Credit II LLC, Wells Fargo Capital Finance, LLC and Key Equipment Finance Inc. (Incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K, filed on March 11, 2014)                                                                         
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                                                                                                                                      
|10.10 |  | Joinder Agreement, dated April 27, 2016, by and among MUFG Union Bank, N.A., as lender, KeyBank National Association as agent, Horizon Credit II LLC, as borrower, and the Company, as servicer (Incorporated by reference to Exhibit (k)(11) to the Post-Effective Amendment No. 2 to the Company’s Registration Statement on Form N-2, File No. 333-201886, filed on June 10, 2016)
|      |  |                                                                                                                                                                                                                                                                                                                                                                                      
|14.1  |  | Code of Ethics of the Company (Incorporated by reference to Exhibit 14.1 of the Company’s Annual Report on Form 10-K, filed on March 7, 2017)                                                                                                                                                                                                                                        
|      |  |                                                                                                                                                                                                                                                                                                                                                                                      
|21*   |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                                                                                      
|24    |  | Power of Attorney (included on signature page hereto)                                                                                                                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                      
|31.1* |  | Certificate of the Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a)                                                                                                                                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                                                                                      
|31.2* |  | Certificate of the Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a)                                                                                                                                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                      
|32.1* |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                      
|32.2* |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                      
|99.1  |  | Privacy Policy of the Company (Incorporated by reference to Exhibit 99.1 of the Company’s Annual Report on Form 10-K, filed on March 16, 2011)                                                                                                                                                                                                                                       








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



116







SIGNATURES



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



|                    | Horizon Technology Finance Corporation
|------------------- | --------------------------------------
|                    |                                       
|Date: March 6, 2018 | By:                                   
|                    |                                       
|                    |                                       



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



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



|Signature                  |  | Title                              |  | Date         
|-------------------------- |  | ---------------------------------- |  | -------------
|                           |  |                                    |  |              
|/s/ Robert D. Pomeroy, Jr. |  | Chairman of the Board of Directors |  |              
|Robert D. Pomeroy, Jr.     |  | and Chief Executive Officer        |  |              
|                           |  | (Principal Executive Officer)      |  | March 6, 2018
|                           |  |                                    |  |              
|/s/ Daniel R. Trolio       |  | Chief Financial Officer and        |  |              
|Daniel R. Trolio           |  | Treasurer (Principal Financial and |  |              
|                           |  | Accounting Officer)                |  | March 6, 2018
|                           |  |                                    |  |              
|/s/ Gerald A. Michaud      |  | President and Director             |  | March 6, 2018
|Gerald A. Michaud          |  |                                    |  |              
|                           |  |                                    |  |              
|/s/ James J. Bottiglieri   |  | Director                           |  | March 6, 2018
|James J. Bottiglieri       |  |                                    |  |              
|                           |  |                                    |  |              
|/s/ Edmund V. Mahoney      |  | Director                           |  | March 6, 2018
|Edmund V. Mahoney          |  |                                    |  |              
|                           |  |                                    |  |              
|/s/ Elaine A. Sarsynski    |  | Director                           |  | March 6, 2018
|Elaine A. Sarsynski        |  |                                    |  |              
|                           |  |                                    |  |              
|/s/ Joseph J. Savage       |  | Director                           |  | March 6, 2018
|Joseph J. Savage           |  |                                    |  |              



117