Edgar Filing: Horizon Technology Finance Corp

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

		FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014

		OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 814-00802

HORIZON TECHNOLOGY FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

As of May 6, 2014, the Registrant had 9,619,334 shares of common stock, $0.001 par value, outstanding.

PART I: FINANCIAL INFORMATION

HORIZON TECHNOLOGY FINANCE CORPORATION

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I
Item 1.	Consolidated Financial Statements	3

	Consolidated Statements of Assets and Liabilities as of March 31, 2014 and December 31, 2013 (unaudited)	3
	Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 (unaudited)	4
	Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2014 and 2013 (unaudited)	5
	Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 (unaudited)	6
	Consolidated Schedules of Investments as of March 31, 2014 and December 31, 2013 (unaudited)	7
	Notes to the Consolidated Financial Statements (unaudited)	15
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative And Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	45

PART II
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	45
	Signatures	46
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Assets and Liabilities (Unaudited)

(In thousands, except share data)

	March 31, 2014			December 31, 2013
Assets
Non-affiliate investments at fair value (cost of $233,056 and $234,310, respectively) (Note 4)	$	228,560		$	221,284
Cash		13,993			25,341
Investment in money market funds		2,101			1,188
Restricted investments in money market funds		5,730			5,951
Interest receivable		5,389			4,240
Other assets		6,369			5,733
Total assets	$	262,142		$	263,737

Liabilities
Borrowings (Note 6)	$	119,405		$	122,343
Dividends payable		3,318			3,315
Base management fee payable (Note 3)		330			439
Incentive fee payable (Note 3)		406			852
Other accrued expenses		903			953
Total liabilities		124,362			127,902

Net assets
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2014 and December 31, 2013		—			—
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 9,618,690 and 9,608,949 shares outstanding as of March 31, 2014 and December 31, 2013		10			10
Paid-in capital in excess of par		155,108			154,975
Accumulated undistributed net investment income		629			1,463
Net unrealized depreciation on investments		(4,496	)		(13,026	)
Net realized loss on investments		(13,471	)		(7,587	)
Total net assets		137,780			135,835
Total liabilities and net assets	$	262,142		$	263,737
Net asset value per common share	$	14.32		$	14.14

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(In thousands, except share data)

	For the Three Months Ended
	March 31,
	2014			2013
Investment income
Interest income on non-affiliate investments	$	7,180		$	7,346
Fee income on non-affiliate investments		354			22
Total investment income		7,534			7,368
Expenses
Interest expense		2,070			1,773
Base management fee (Note 3)		1,205			1,241
Performance based incentive fee (Note 3)		406			693
Administrative fee (Note 3)		244			285
Professional fees		835			382
General and administrative		250			221
Total expenses		5,010			4,595
Net investment income before excise tax		2,524			2,773
Provision for excise tax		(40	)		—
Net investment income		2,484			2,773
Net realized and unrealized gain on investments
Net realized loss on investments		(5,884	)		(210	)
Net unrealized appreciation on investments		8,530			420
Net realized and unrealized gain on investments		2,646			210
Net increase in net assets resulting from operations	$	5,130		$	2,983
Net investment income per common share	$	0.26		$	0.29
Net increase in net assets per common share	$	0.53		$	0.31
Dividends declared per share	$	0.345		$	0.345
Weighted average shares outstanding		9,613,829			9,570,789

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Changes in Net Assets (Unaudited)

(In thousands, except share data)

			Common		Paid-In Capital in Excess of		Accumulated Undistributed Net Investment			Net Unrealized Depreciation on			Net Realized Losses on			Total Net
	Shares		Stock		Par		Income			Investments			Investments			Assets
Balance at December 31, 2012		9,567,225	$	10	$	154,384	$	1,428		$	(10,772	)	$	(78	)	$	144,972
Net increase in net assets resulting from operations		—		—		—		2,773			420			(210	)		2,983
Issuance of common stock under dividend reinvestment plan		7,220		—		108		—			—			—			108
Dividends declared		—		—		—		(3,303	)		—			—			(3,303	)
Balance at March 31, 2013		9,574,445	$	10	$	154,492	$	898		$	(10,352	)	$	(288	)	$	144,760

Balance at December 31, 2013		9,608,949	$	10	$	154,975	$	1,463		$	(13,026	)	$	(7,587	)	$	135,835
Net increase in net assets resulting from operations		—		—		—		2,484			8,530			(5,884	)		5,130
Issuance of common stock under dividend reinvestment plan		9,741		—		133		—			—			—			133
Dividends declared		—		—		—		(3,318	)		—			—			(3,318	)
Balance at March 31, 2014		9,618,690	$	10	$	155,108	$	629		$	(4,496	)	$	(13,471	)	$	137,780

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	For the Three Months Ended
	March 31,
	2014			2013
Cash flows from operating activities:
Net increase in net assets resulting from operations	$	5,130		$	2,983
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
Amortization of debt issuance costs		492			183
Net realized loss on investments		6,913			18
Net unrealized appreciation on investments		(8,530	)		(420	)
Purchase of investments		(17,926	)		(28,500	)
Principal payments received on investments		11,773			9,962
Proceeds from sale of investments		720			—
Changes in assets and liabilities:
Net increase in investments in money market funds		(913	)		(1,559	)
Decrease in restricted investments in money market funds		221			—
Increase in interest receivable		(597	)		(88	)
Increase in end-of-term payments		(552	)		(614	)
Decrease in unearned loan income		(226	)		(228	)
(Increase) decrease in other assets		(1,129	)		199
Decrease in other accrued expenses		(50	)		(199	)
(Decrease) increase in base management fee payable		(109	)		31
Decrease in incentive fee payable		(446	)		(162	)
Net cash used in operating activities		(5,229	)		(18,394	)
Cash flows from financing activities:
Dividends paid		(3,181	)		(3,193	)
Net (decrease) increase in borrowings		(2,938	)		21,017
Net cash (used in) provided by financing activities		(6,119	)		17,824
Net decrease in cash		(11,348	)		(570	)
Cash:
Beginning of period		25,341			1,048
End of period	$	13,993		$	478
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,582		$	1,517
Supplemental non-cash investing and financing activities:
Warrant investments received & recorded as unearned loan income	$	106		$	172
Dividends payable	$	3,318		$	3,303
Net assets received in settlement of debt investment	$	985		$	—

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

March 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)	Amount		Investments (6)		Value
Debt Investments — 158.2% (9)
Debt Investments — Life Science — 23.0% (9)
Inotek Pharmaceuticals Corporation (2)	Biotechnology	Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)	$	3,500	$	3,466	$	3,466
N30 Pharmaceuticals, Inc. (2)	Biotechnology	Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)		514		512		512
		Term Loan (11.25% cash, 3.00% ETP, Due 10/1/15)		1,952		1,936		1,936
New Haven Pharmaceuticals, Inc. (2)	Biotechnology	Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)		1,451		1,431		1,431
		Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)		484		477		477
Sample6, Inc. (2)	Biotechnology	Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16)		1,996		1,979		1,979
Sunesis Pharmaceuticals, Inc. (2)(5)	Biotechnology	Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)		1,244		1,239		1,239
		Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)		1,867		1,839		1,839
Xcovery Holding Company, LLC (2)	Biotechnology	Term Loan (12.50% cash, Due 8/1/15)		745		744		744
		Term Loan (12.50% cash, Due 8/1/15)		1,172		1,171		1,171
		Term Loan (12.50% cash, Due 10/1/15)		222		222		222
Accuvein, Inc.	Medical Device	Term Loan (10.40% cash (Floor 10.40%; Ceiling 11.90%),		4,000		3,945		3,945
		5.00% ETP, Due 8/1/17)
Mederi Therapeutics, Inc.	Medical Device	Term Loan (10.75% cash (Floor 10.75%; Ceiling 12.75%),		3,000		2,960		2,960
		4.00% ETP, Due 7/1/17)
		Term Loan (10.75% cash (Floor 10.75%; Ceiling 12.75%),		3,000		2,920		2,920
		4.00% ETP, Due 7/1/17)
Mitralign, Inc. (2)	Medical Device	Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15)		1,390		1,378		1,378
		Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15)		969		961		961
		Term Loan (10.50% cash, 3.00% ETP, Due 7/1/16)		1,143		1,119		1,119
Tengion, Inc. (2)(5)	Medical Device	Term Loan (13.00% cash, Due 5/1/14)		351		350		350
Tryton Medical, Inc. (2)	Medical Device	Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,		3,000		2,966		2,966
		Due 9/1/16)
Total Debt Investments — Life Science						31,615		31,615
Debt Investments — Technology — 103.4% (9)
Ekahau, Inc.	Communications	Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		1,500		1,477		1,477
		Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		500		492		492
Overture Networks, Inc. (2)	Communications	Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)		5,000		4,944		4,944
		Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)		2,500		2,466		2,466
Optaros, Inc. (2)	Internet and Media	Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)		1,463		1,455		1,455
		Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)		451		448		448
SimpleTuition, Inc. (2)	Internet and Media	Term Loan (11.75% cash, Due 3/1/16)		3,524		3,487		3,487
Nanocomp Technologies, Inc.	Networking	Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)		1,000		981		981
Aquion Energy, Inc. (2)	Power Management	Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)		2,421		2,413		2,413
		Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)		2,421		2,413		2,413
		Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16)		2,703		2,691		2,691
Xtreme Power, Inc. (2)	Power Management	Term Loan (10.75% cash, 9.00% ETP, Due 5/1/16)		6,000		5,960		5,960
		Term Loan (15.00% cash, Due 4/14/14)		2,435		2,435		2,435
Avalanche Technology, Inc. (2)	Semiconductors	Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)		2,728		2,710		2,710
		Term Loan (10.00% cash, 2.00% ETP, Due 1/1/18)		2,500		2,460		2,460
eASIC Corporation (2)	Semiconductors	Term Loan (11.00% cash, 2.50% ETP, Due 4/1/17)		2,000		1,971		1,971
Kaminario, Inc. (2)	Semiconductors	Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)		3,000		2,961		2,961
		Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)		3,000		2,961		2,961
Luxtera, Inc. (2)	Semiconductors	Term Loan (10.25% cash, 8.00% ETP, Due 7/1/17)		2,632		2,568		2,568
		Term Loan (10.25% cash, 8.00% ETP, Due 7/1/17)		1,469		1,458		1,458
Newport Media, Inc. (2)	Semiconductors	Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)		3,500		3,429		3,429
		Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)		3,500		3,429		3,429
NexPlanar Corporation (2)	Semiconductors	Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)		3,000		2,969		2,969
		Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)		2,000		1,972		1,972
Soraa, Inc.	Semiconductors	Term Loan (10.75% cash (Floor 10.75%; Ceiling 13.075%),		2,500		2,457		2,457
		4.00% ETP, Due 11/1/17)
		Term Loan (10.75% cash (Floor 10.75%; Ceiling 13.075%),		2,500		2,457		2,457
		4.00% ETP, Due 11/1/17)
		Term Loan (10.75% cash (Floor 10.75%; Ceiling 13.075%),		2,500		2,457		2,457
		4.00% ETP, Due 11/1/17)
		Term Loan (10.75% cash (Floor 10.75%; Ceiling 13.075%),		2,500		2,457		2,457
		4.00% ETP, Due 11/1/17)
Xtera Communications, Inc. (2)	Semiconductors	Term Loan (11.50% cash, 14.77% ETP, Due 7/1/15)		6,468		6,448		6,448
		Term Loan (11.50% cash, 13.65% ETP, Due 2/1/16)		1,731		1,721		1,721
Bolt Solutions, Inc. (2)	Software	Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)		4,264		4,234		4,234
		Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)		4,264		4,234		4,234
Construction Software Technologies, Inc. (2)	Software	Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)		4,200		4,176		4,176

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

March 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)	Amount		Investments (6)		Value
		Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)		4,200		4,176		4,176
Courion Corporation (2)	Software	Term Loan (11.45% cash, Due 10/1/15)		2,331		2,325		2,325
		Term Loan (11.45% cash, Due 10/1/15)		2,331		2,325		2,325
Decisyon, Inc. (2)	Software	Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)		4,000		3,940		3,940
Kontera Technologies, Inc. (2)	Software	Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)		4,000		3,957		3,957
		Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)		4,000		3,957		3,957
Lotame Solutions, Inc. (2)	Software	Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)		4,000		3,975		3,975
		Term Loan (11.50% cash, 3.00% ETP, Due 9/1/16)		1,500		1,489		1,489
Netuitive, Inc. (2)	Software	Term Loan (11.75% cash, Due 1/1/16)		2,105		2,083		2,083
Raydiance, Inc. (2)	Software	Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)		4,855		4,812		4,812
		Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)		971		950		950
Razorsight Corporation (2)	Software	Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)		1,500		1,481		1,481
		Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)		1,457		1,436		1,436
	Software	Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)		1,000		982		982
Sys-Tech Solutions, Inc. (2)	Software	Term Loan (11.65% cash, Due 6/1/16)		7,100		6,598		6,598
VBrick Systems, Inc.	Software	Term Loan (11.50% cash (Floor 10.50%; Ceiling 3.50%),		3,000		2,972		2,972
		5.00% ETP, Due 7/1/17)
Vidsys, Inc. (2)	Software	Term Loan (11.00% cash, 6.50% ETP, Due 6/1/16)		3,000		2,976		2,976
Visage Mobile, Inc. (2)	Software	Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)		896		885		885
Total Debt Investments — Technology						142,510		142,510
Debt Investments — Cleantech — 13.5% (9)
Renmatix, Inc. (2)	Alternative Energy	Term Loan (10.25% cash, 9.00% ETP, Due 2/1/16)		1,816		1,806		1,806
		Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)		1,816		1,806		1,806
		Term Loan (10.25% cash, Due 10/1/16)		4,733		4,696		4,696
Semprius, Inc. (2)(8)	Alternative Energy	Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)		3,135		3,115		2,805
Aurora Algae, Inc. (2)	Energy Efficiency	Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)		1,068		1,065		1,065
Rypos, Inc. (2)	Energy Efficiency	Term Loan (11.80% cash, Due 1/1/17)		3,000		2,955		2,955
		Term Loan (11.80% cash, Due 9/1/17)		1,000		980		980
Tigo Energy, Inc. (2)	Energy Efficiency	Term Loan (13.00% cash, 3.16% ETP, Due 6/1/15)		1,874		1,864		1,864
Cereplast, Inc. (5)(8)	Waste Recycling	Term Loan (12.00% cash, Due 8/1/14)		1,081		978		328
		Term Loan (12.00% cash, Due 8/1/14)		1,160		1,141		352
Total Debt Investments — Cleantech						20,406		18,657
Debt Investments — Healthcare information and services — 18.3% (9)
Radisphere National Radiology Group, Inc. (2)	Diagnostics	Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)		12,000		11,921		11,921
Watermark Medical, Inc. (2)	Other Healthcare	Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)		3,500		3,457		3,457
		Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)		3,500		3,457		3,457
Recondo Technology, Inc. (2)	Software	Term Loan (11.50% cash, 4.14% ETP, Due 4/1/16)		1,384		1,360		1,360
		Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)		2,500		2,476		2,476
		Term Loan (10.50% cash, 2.50% ETP, Due 1/1/18)		2,500		2,471		2,471
Total Debt Investments — Healthcare information and services						25,142		25,142
Total Debt Investments						219,673		217,924
Warrant Investments — 4.9% (9)
Warrants — Life Science — 2.1% (9)
ACT Biotech Corporation	Biotechnology	1,521,820 Preferred Stock Warrants		—		83		—
Ambit Biosciences, Inc.(5)	Biotechnology	44,795 Common Stock Warrants		—		143		6
Anacor Pharmaceuticals, Inc. (2)(5)	Biotechnology	84,583 Common Stock Warrants		—		93		1,143
Celsion Corporation (5)	Biotechnology	5,708 Common Stock Warrants		—		15		—
Inotek Pharmaceuticals Corporation	Biotechnology	114,387 Preferred Stock Warrants		—		17		16
N30 Pharmaceuticals, Inc.	Biotechnology	214,200 Preferred Stock Warrants		—		122		247
New Haven Pharmaceuticals, Inc.	Biotechnology	34,729 Preferred Stock Warrants		—		22		25
Revance Therapeutics, Inc. (5)	Biotechnology	34,377 Common Stock Warrants		—		68		586
Sample6, Inc.	Biotechnology	200,582 Preferred Stock Warrants		—		27		23
Sunesis Pharmaceuticals, Inc. (5)	Biotechnology	116,203 Common Stock Warrants		—		83		520
Supernus Pharmaceuticals, Inc. (2)(5)	Biotechnology	42,083 Preferred Stock Warrants		—		94		190
Tranzyme, Inc. (5)	Biotechnology	77,902 Common Stock Warrants		—		6		—
Accuvein, Inc.	Biotechnology	58,284 Preferred Stock Warrants		—		18		18
Direct Flow Medical, Inc.	Medical Device	176,922 Preferred Stock Warrants		—		144		112
EnteroMedics, Inc. (5)	Medical Device	141,026 Common Stock Warrants		—		347		—
Mederi Therapeutics, Inc.	Medical Device	248,736 Preferred Stock Warrants		—		26		27
Mitralign, Inc.	Medical Device	295,238 Common Stock Warrants		—		49		35
OraMetrix, Inc. (2)	Medical Device	812,348 Preferred Stock Warrants		—		78		—
Tengion, Inc. (2)(5)	Medical Device	1,864,876 Common Stock Warrants		—		124		—
Tryton Medical, Inc. (2)	Medical Device	47,977 Preferred Stock Warrants		—		14		14

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

March 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)	Amount		Investments (6)		Value
ViOptix, Inc.	Medical Device	375,763 Preferred Stock Warrants		—		13		—
Total Warrants — Life Science						1,586		2,962
Warrants — Technology — 2.0% (9)
Ekahau, Inc.	Communications	978,261 Preferred Stock Warrants		—		33		26
OpenPeak, Inc.	Communications	18,997 Preferred Stock Warrants		—		89		—
Overture Networks, Inc.	Communications	344,574 Preferred Stock Warrants		—		55		43
Everyday Health, Inc. (5)	Consumer-related Technologies	43,783 Common Stock Warrants		—		69		152
SnagAJob.com, Inc.	Consumer-related Technologies	365,396 Preferred Stock Warrants		—		23		269
Tagged, Inc.	Consumer-related Technologies	190,868 Preferred Stock Warrants		—		27		73
XIOtech, Inc.	Data Storage	2,217,979 Preferred Stock Warrants		—		22		19
Cartera Commerce, Inc.	Internet and media	90,909 Preferred Stock Warrants		—		16		161
Optaros, Inc.	Internet and media	477,403 Preferred Stock Warrants		—		21		13
SimpleTuition, Inc.	Internet and media	189,573 Preferred Stock Warrants		—		63		8
IntelePeer, Inc.	Networking	141,549 Preferred Stock Warrants		—		39		34
Motion Computing, Inc.	Networking	104,283 Preferred Stock Warrants		—		4		18
Nanocomp Technologies, Inc.	Networking	204,546 Preferred Stock Warrants		—		19		19
Aquion Energy, Inc.	Power Management	115,051 Preferred Stock Warrants		—		7		57
Xtreme Power, Inc.	Power Management	2,466,821 Preferred Stock Warrants		—		76		—
Avalanche Technology, Inc.	Semiconductors	244,649 Preferred Stock Warrants		—		56		56
eASIC Corporation`	Semiconductors	1,877,799 Preferred Stock Warrants		—		16		15
Kaminario, Inc.	Semiconductors	1,087,203 Preferred Stock Warrants		—		59		55
Luxtera, Inc.	Semiconductors	2,087,766 Preferred Stock Warrants		—		43		113
Newport Media, Inc.	Semiconductors	188,764 Preferred Stock Warrants		—		40		37
NexPlanar Corporation	Semiconductors	216,001 Preferred Stock Warrants		—		36		56
Soraa, Inc.	Semiconductors	180,000 Preferred Stock Warrants		—		80		80
Xtera Communications, Inc.	Semiconductors	983,607 Preferred Stock Warrants		—		206		—
Bolt Solutions, Inc.	Software	202,892 Preferred Stock Warrants		—		113		123
Clarabridge, Inc.	Software	53,486 Preferred Stock Warrants		—		14		104
Construction Software Technologies, Inc. (2)	Software	386,415 Preferred Stock Warrants		—		69		299
Courion Corporation	Software	772,543 Preferred Stock Warrants		—		106		91
Decisyon, Inc.	Software	314,686 Preferred Stock Warrants		—		44		39
DriveCam, Inc.	Software	71,639 Preferred Stock Warrants		—		20		120
Kontera Technologies, Inc. (2)	Software	99,476 Preferred Stock Warrants		—		102		82
Lotame Solutions, Inc.	Software	216,810 Preferred Stock Warrants		—		4		143
Netuitive, Inc.	Software	748,453 Preferred Stock Warrants		—		75		45
Raydiance, Inc.	Software	735,784 Preferred Stock Warrants		—		51		49
Razorsight Corporation	Software	259,404 Preferred Stock Warrants		—		44		40
Sys-Tech Solutions, Inc.	Software	375,000 Preferred Stock Warrants		—		242		241
Vidsys, Inc.	Software	37,346 Preferred Stock Warrants		—		23		—
Visage Mobile, Inc.	Software	1,692,047 Preferred Stock Warrants		—		20		18
Total Warrants — Technology						2,026		2,698
Warrants — Cleantech — 0.4% (9)
Renmatix, Inc.	Alternative Energy	52,296 Preferred Stock Warrants		—		68		70
Semprius, Inc.	Alternative Energy	519,981 Preferred Stock Warrants		—		25		—
Enphase Energy, Inc. (5)	Energy Efficiency	161,959 Common Stock Warrants		—		175		243
Rypos, Inc.	Energy Efficiency	5,627 Preferred Stock Warrants		—		44		41
Solarbridge Technologies, Inc. (2)	Energy Efficiency	7,381,412 Preferred Stock Warrants		—		235		164
Tigo Energy, Inc. (2)	Energy Efficiency	804,604 Preferred Stock Warrants		—		100		26
Cereplast, Inc. (5)	Waste Recycling	365,000 Common Stock Warrants		—		175		—
Total Warrants — Cleantech						822		544
Warrants — Healthcare information and services — 0.4% (9)
Accumetrics, Inc.	Diagnostics	100,928 Preferred Stock Warrants		—		107		63
BioScale, Inc. (2)	Diagnostics	315,618 Preferred Stock Warrants		—		54		—
Precision Therapeutics, Inc.	Diagnostics	13,461 Preferred Stock Warrants		—		73		—
Radisphere National Radiology Group, Inc. (2)	Diagnostics	519,992 Preferred Stock Warrants		—		378		—
Patientkeeper, Inc.	Other Healthcare	396,410 Preferred Stock Warrants		—		269		29
Singulex, Inc.	Other Healthcare	293,632 Preferred Stock Warrants		—		44		141
Talyst, Inc.	Other Healthcare	300,360 Preferred Stock Warrants		—		101		53
Watermark Medical, Inc.	Other Healthcare	12,216 Preferred Stock Warrants		—		66		64
Recondo Technology, Inc.	Software	436,088 Preferred Stock Warrants		—		73		177
Total Warrants — Healthcare information and services						1,165		527
Total Warrants						5,599		6,731

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

March 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)	Amount		Investments (6)		Value
Other Investments — 0.3% (9)
Vette Technology, LLC	Data Storage	Royalty Agreement Due 4/18/2019		—		4,702		400
Total Other Investments						4,702		400
Equity — 2.5% (9)
Insmed Incorporated (5)	Biotechnology	33,208 Common Stock		—		227		632
Revance Therapeutics, Inc.(5)	Biotechnology	4,861 Common Stock		—		73		153
Overture Networks Inc.	Communications	386,191 Common Stock		—		482		420
Solarbridge Technologies, Inc. (2)	Energy Efficiency	11,716,760 Preferred Stock		—		2,300		2,300
Cereplast, Inc. (5)	Waste Recycling	200,000 Common Stock		—		—		—
Total Equity						3,082		3,505
Total Portfolio Investment Assets — 165.9% (9)					$	233,056	$	228,560
Short Term Investments — Money Market Funds — 1.5% (9)
US Bank Money Market					$	2,101	$	2,101
Total Short Term Investments — Money Market Funds					$	2,101	$	2,101
Short Term Investments — Restricted Investments— 4.2% (9)
US Bank Money Market (2)					$	5,730	$	5,730
Total Short Term Investments — Restricted Investments					$	5,730	$	5,730

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

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

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

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

(5)	Portfolio company is a public company.

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

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

(8)	Debt is on non-accrual status at March 31, 2014 and is, therefore, considered non-income producing.

(9)	Value as a percent of net assets.

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2013

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)	Amount		Investments (6)		Value
Debt Investments — 157.5% (9)
Debt Investments — Life Science — 22.9% (9)
Inotek Pharmaceuticals Corporation (2)	Biotechnology	Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)	$	3,500	$	3,460	$	3,460
N30 Pharmaceuticals, Inc. (2)	Biotechnology	Term Loan (11.25% cash, 3.00% ETP, Due 9/1/14)		760		756		756
		Term Loan (11.25% cash, 3.00% ETP, Due 10/1/15)		2,230		2,209		2,209
New Haven Pharmaceuticals, Inc. (2)	Biotechnology	Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)		1,500		1,476		1,476
		Term Loan (11.50% cash, 3.00% ETP, Due 5/1/16)		500		492		492
Sample6, Inc. (2)	Biotechnology	Term Loan (11.00% cash, 3.00% ETP, Due 1/1/16)		2,252		2,229		2,229
Sunesis Pharmaceuticals, Inc. (2)(5)	Biotechnology	Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)		1,425		1,418		1,418
		Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)		2,138		2,100		2,100
Xcovery Holding Company, LLC (2)	Biotechnology	Term Loan (12.50% cash, Due 8/1/15)		781		779		779
		Term Loan (12.50% cash, Due 8/1/15)		1,228		1,226		1,226
		Term Loan (12.50% cash, Due 10/1/15)		231		231		231
Mederi Therapeutics, Inc.	Medical Device	Term Loan (10.75% cash (Floor 10.75%; Ceiling 2.75%),		3,000		2,957		2,957
		4.00% ETP, Due 7/1/17)
		Term Loan (10.75% cash (Floor 10.75%; Ceiling 2.75%),		3,000		2,917		2,917
		4.00% ETP, Due 7/1/17)
Mitralign, Inc. (2)	Medical Device	Term Loan (12.00% cash, 3.00% ETP, Due 10/1/15)		1,587		1,571		1,571
		Term Loan (10.88% cash, 3.00% ETP, Due 11/1/15)		1,100		1,089		1,089
		Term Loan (10.50% cash, 3.00% ETP, Due 7/1/16)		1,143		1,115		1,115
PixelOptics, Inc. (8)	Medical Device	Term Loan (10.75% cash, 3.00% ETP, Due 11/1/14)		5,000		4,985		562
		Term Loan (10.00% cash, Due 1/31/14)		219		219		219
Tengion, Inc. (2)(5)	Medical Device	Term Loan (13.00% cash, Due 5/1/14)		1,382		1,373		1,373
Tryton Medical, Inc. (2)	Medical Device	Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,		3,000		2,962		2,962
		Due 9/1/16)
Total Debt Investments — Life Science						35,564		31,141
Debt Investments — Technology — 98.3% (9)
Ekahau, Inc.	Communications	Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		1,500		1,474		1,474
		Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		500		490		490
Overture Networks, Inc. (2)	Communications	Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)		5,000		4,935		4,935
		Term Loan (10.75% cash, 4.75% ETP, Due 12/1/16)		2,500		2,460		2,460
Optaros, Inc. (2)	Internet and Media	Term Loan (11.95% cash, 3.00% ETP, Due 10/1/15)		1,670		1,660		1,660
		Term Loan (11.95% cash, 3.00% ETP, Due 3/1/16)		500		497		497
SimpleTuition, Inc. (2)	Internet and Media	Term Loan (11.75% cash, Due 3/1/16)		3,909		3,862		3,862
Nanocomp Technologies, Inc.	Networking	Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)		1,000		963		963
Aquion Energy, Inc. (2)	Power Management	Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)		2,704		2,693		2,693
		Term Loan (10.25% cash, 4.00% ETP, Due 3/1/16)		2,704		2,693		2,693
		Term Loan (10.25% cash, 4.00% ETP, Due 6/1/16)		2,978		2,966		2,966
Xtreme Power, Inc. (2)(8)	Power Management	Term Loan (10.75% cash, 9.00% ETP, Due 5/1/16)		6,000		5,947		4,692
Avalanche Technology, Inc. (2)	Semiconductors	Term Loan (10.00% cash, 2.00% ETP, Due 7/1/16)		2,996		2,973		2,973
		Term Loan (10.00% cash, 2.00% ETP, Due 1/1/18)		2,500		2,455		2,455
eASIC Corporation (2)	Semiconductors	Term Loan (11.00% cash, 2.50% ETP, Due 4/1/17)		2,000		1,968		1,968
Kaminario, Inc. (2)	Semiconductors	Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)		3,000		2,954		2,954
		Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)		3,000		2,954		2,954
Luxtera, Inc. (2)	Semiconductors	Term Loan (10.25% cash, 8.00% ETP, Due 12/1/15)		2,734		2,714		2,714
		Term Loan (10.25% cash, 8.00% ETP, Due 3/1/16)		1,519		1,506		1,506
Newport Media, Inc. (2)	Semiconductors	Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)		3,500		3,418		3,418
		Term Loan (11.00% cash, 2.86% ETP, Due 10/1/16)		3,500		3,418		3,418
NexPlanar Corporation (2)	Semiconductors	Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)		3,000		2,964		2,964
		Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)		2,000		1,967		1,967
Xtera Communications, Inc. (2)	Semiconductors	Term Loan (11.50% cash, 14.77% ETP, Due 7/1/15)		6,468		6,441		6,441
		Term Loan (11.50% cash, 13.65% ETP, Due 2/1/16)		1,731		1,718		1,718
Bolt Solutions, Inc. (2)	Software	Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)		4,856		4,819		4,819
		Term Loan (11.65% cash, 4.00% ETP, Due 5/1/16)		4,856		4,819		4,819
Construction Software Technologies, Inc. (2)	Software	Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)		4,200		4,172		4,172
		Term Loan (11.75% cash, 5.00% ETP, Due 10/1/16)		4,200		4,172		4,172
Courion Corporation (2)	Software	Term Loan (11.45% cash, Due 10/1/15)		2,662		2,654		2,654
		Term Loan (11.45% cash, Due 10/1/15)		2,662		2,654		2,654
Decisyon, Inc. (2)	Software	Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)		4,000		3,932		3,932
Kontera Technologies, Inc. (2)	Software	Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)		4,000		3,949		3,949
		Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)		4,000		3,949		3,949

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2013

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)	Amount		Investments (6)		Value
Lotame Solutions, Inc. (2)	Software	Term Loan (11.50% cash, 3.00% ETP, Due 10/1/16)		4,000		3,971		3,971
		Term Loan (11.50% cash, 3.00% ETP, Due 9/1/16)		1,500		1,486		1,486
Netuitive, Inc. (2)	Software	Term Loan (11.75% cash, Due 1/1/16)		2,359		2,330		2,330
Raydiance, Inc. (2)	Software	Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)		5,000		4,948		4,948
		Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)		1,000		975		975
Razorsight Corporation (2)	Software	Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)		1,500		1,477		1,477
		Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)		1,500		1,475		1,475
	Software	Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)		1,000		980		980
Sys-Tech Solutions, Inc. (2)	Software	Term Loan (11.65% cash, Due 6/1/16)		7,100		6,919		6,919
VBrick Systems, Inc.	Software	Term Loan (11.50% cash (Floor 10.50%; Ceiling 3.50%),		3,000		2,970		2,970
		5.00% ETP, Due 7/1/17)
Vidsys, Inc. (2)	Software	Term Loan (11.00% cash, 6.50% ETP, Due 6/1/16)		3,000		2,970		2,970
Visage Mobile, Inc. (2)	Software	Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)		974		962		962
Total Debt Investments — Technology						134,673		133,418
Debt Investments — Cleantech — 17.6% (9)
Renmatix, Inc. (2)	Alternative Energy	Term Loan (10.25% cash, 9.00% ETP, Due 2/1/16)		2,028		2,015		2,015
		Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)		2,028		2,015		2,015
		Term Loan (10.25% cash, Due 10/1/16)		5,000		4,956		4,956
Semprius, Inc. (2)(8)	Alternative Energy	Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)		3,203		3,183		2,785
Aurora Algae, Inc. (2)	Energy Efficiency	Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)		1,280		1,276		1,276
Rypos, Inc.	Energy Efficiency	Term Loan (11.80% cash, Due 1/1/17)		3,000		2,928		2,928
Solarbridge Technologies, Inc. (2)(8)	Energy Efficiency	Term Loan (12.15% cash, 3.21 ETP, Due 12/1/16)		7,000		6,785		5,000
Tigo Energy, Inc. (2)	Energy Efficiency	Term Loan (13.00% cash, 3.16% ETP, Due 6/1/15)		2,214		2,199		2,199
Cereplast, Inc. (5)(8)	Waste Recycling	Term Loan (12.00% cash, Due 8/1/14)		1,081		978		328
		Term Loan (12.00% cash, Due 8/1/14)		1,160		1,141		352
Total Debt Investments — Cleantech						27,476		23,854
Debt Investments — Healthcare information and services — 18.7% (9)
BioScale, Inc. (2)	Diagnostics	Term Loan (11.51% cash, Due 1/1/14)		232		232		232
Radisphere National Radiology Group, Inc. (2)	Diagnostics	Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)		12,000		11,908		11,908
Watermark Medical, Inc. (2)	Other Healthcare	Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)		3,500		3,452		3,452
		Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)		3,500		3,452		3,452
Recondo Technology, Inc. (2)	Software	Term Loan (11.50% cash, 4.14% ETP, Due 4/1/16)		1,384		1,356		1,356
		Term Loan (11.00% cash, 3.00% ETP, Due 1/1/17)		2,500		2,473		2,473
	Other Healthcare	Term Loan (10.50% cash, 2.50% ETP, Due 1/1/18)		2,500		2,468		2,468
Total Debt Investments — Healthcare information and services						25,341		25,341
Total Debt Investments						223,054		213,754
Warrant Investments — 4.5% (9)
Warrants — Life Science — 2.1% (9)
ACT Biotech Corporation	Biotechnology	1,521,820 Preferred Stock Warrants		—		83		—
Ambit Biosciences, Inc.(5)	Biotechnology	44,795 Common Stock Warrants		—		143		9
Anacor Pharmaceuticals, Inc. (2)(5)	Biotechnology	84,583 Common Stock Warrants		—		93		882
Celsion Corporation (5)	Biotechnology	5,708 Common Stock Warrants		—		15		—
Inotek Pharmaceuticals Corporation	Biotechnology	114,387 Preferred Stock Warrants		—		17		15
N30 Pharmaceuticals, Inc.	Biotechnology	214,200 Preferred Stock Warrants		—		122		247
New Haven Pharmaceuticals, Inc.	Biotechnology	34,729 Preferred Stock Warrants		—		22		20
Revance Therapeutics, Inc.	Biotechnology	687,091 Preferred Stock Warrants		—		223		945
Sample6, Inc.	Biotechnology	200,582 Preferred Stock Warrants		—		27		23
Sunesis Pharmaceuticals, Inc. (5)	Biotechnology	116,203 Common Stock Warrants		—		83		308
Supernus Pharmaceuticals, Inc. (2)(5)	Biotechnology	42,083 Preferred Stock Warrants		—		94		132
Tranzyme, Inc. (5)	Biotechnology	77,902 Common Stock Warrants		—		6		—
Direct Flow Medical, Inc.	Medical Device	176,922 Preferred Stock Warrants		—		144		132
EnteroMedics, Inc. (5)	Medical Device	141,026 Common Stock Warrants		—		347		—
Mederi Therapeutics, Inc.	Medical Device	248,736 Preferred Stock Warrants		—		26		26
Mitralign, Inc.	Medical Device	295,238 Common Stock Warrants		—		49		35
OraMetrix, Inc. (2)	Medical Device	812,348 Preferred Stock Warrants		—		78		—
PixelOptics, Inc.	Medical Device	381,612 Preferred Stock Warrants		—		96		—
Tengion, Inc. (2)(5)	Medical Device	1,864,876 Common Stock Warrants		—		124		—
Tryton Medical, Inc. (2)	Medical Device	47,977 Preferred Stock Warrants		—		14		14
ViOptix, Inc.	Medical Device	375,763 Preferred Stock Warrants		—		13		—
Total Warrants — Life Science						1,819		2,788

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2013

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)	Amount		Investments (6)		Value
Warrants — Technology — 1.8% (9)
Ekahau, Inc.	Communications	978,261 Preferred Stock Warrants		—		34		26
OpenPeak, Inc.	Communications	18,997 Preferred Stock Warrants		—		89		—
Overture Networks, Inc.	Communications	344,574 Preferred Stock Warrants		—		55		42
Everyday Health, Inc.	Consumer-related Technologies	65,674 Preferred Stock Warrants		—		69		94
SnagAJob.com, Inc.	Consumer-related Technologies	365,396 Preferred Stock Warrants		—		23		269
Tagged, Inc.	Consumer-related Technologies	190,868 Preferred Stock Warrants		—		26		72
XIOtech, Inc.	Data Storage	2,217,979 Preferred Stock Warrants		—		22		19
Cartera Commerce, Inc.	Internet and media	90,909 Preferred Stock Warrants		—		16		160
Optaros, Inc.	Internet and media	477,403 Preferred Stock Warrants		—		21		13
SimpleTuition, Inc.	Internet and media	189,573 Preferred Stock Warrants		—		63		9
IntelePeer, Inc.	Networking	141,549 Preferred Stock Warrants		—		39		34
Motion Computing, Inc.	Networking	104,283 Preferred Stock Warrants		—		4		18
Nanocomp Technologies, Inc.	Networking	204,546 Preferred Stock Warrants		—		19		19
Aquion Energy, Inc.	Power Management	115,051 Preferred Stock Warrants		—		8		57
Xtreme Power, Inc.	Power Management	2,466,821 Preferred Stock Warrants		—		76		—
Avalanche Technology, Inc.	Semiconductors	244,649 Preferred Stock Warrants		—		56		66
eASIC Corporation`	Semiconductors	1,877,799 Preferred Stock Warrants		—		16		15
Kaminario, Inc.	Semiconductors	1,087,203 Preferred Stock Warrants		—		59		54
Luxtera, Inc.	Semiconductors	1,827,485 Preferred Stock Warrants		—		34		105
Newport Media, Inc.	Semiconductors	188,764 Preferred Stock Warrants		—		40		47
NexPlanar Corporation	Semiconductors	216,001 Preferred Stock Warrants		—		36		56
Xtera Communications, Inc.	Semiconductors	983,607 Preferred Stock Warrants		—		206		—
Bolt Solutions, Inc.	Software	202,892 Preferred Stock Warrants		—		113		124
Clarabridge, Inc.	Software	53,486 Preferred Stock Warrants		—		14		104
Construction Software Technologies, Inc. (2)	Software	386,415 Preferred Stock Warrants		—		69		335
Courion Corporation	Software	772,543 Preferred Stock Warrants		—		106		89
Decisyon, Inc.	Software	314,686 Preferred Stock Warrants		—		44		39
DriveCam, Inc.	Software	71,639 Preferred Stock Warrants		—		20		120
Kontera Technologies, Inc. (2)	Software	99,476 Preferred Stock Warrants		—		102		82
Lotame Solutions, Inc.	Software	216,810 Preferred Stock Warrants		—		4		3
Netuitive, Inc.	Software	748,453 Preferred Stock Warrants		—		75		45
Raydiance, Inc.	Software	735,784 Preferred Stock Warrants		—		51		48
Razorsight Corporation	Software	259,404 Preferred Stock Warrants		—		44		40
Sys-Tech Solutions, Inc.	Software	375,000 Preferred Stock Warrants		—		242		239
Vidsys, Inc.	Software	37,346 Preferred Stock Warrants		—		23		—
Visage Mobile, Inc.	Software	1,692,047 Preferred Stock Warrants		—		20		18
Total Warrants — Technology						1,938		2,461
Warrants — Cleantech — 0.2% (9)
Renmatix, Inc.	Alternative Energy	52,296 Preferred Stock Warrants		—		68		69
Semprius, Inc.	Alternative Energy	519,981 Preferred Stock Warrants		—		26		—
Enphase Energy, Inc. (5)	Energy Efficiency	161,959 Common Stock Warrants		—		175		126
Rypos, Inc.	Energy Efficiency	5,627 Preferred Stock Warrants		—		44		41
Solarbridge Technologies, Inc. (2)	Energy Efficiency	3,645,302 Preferred Stock Warrants		—		236		—
Tigo Energy, Inc. (2)	Energy Efficiency	804,604 Preferred Stock Warrants		—		100		26
Cereplast, Inc. (5)	Waste Recycling	365,000 Common Stock Warrants		—		175		—
Total Warrants — Cleantech						824		262
Warrants — Healthcare information and services — 0.4% (9)
Accumetrics, Inc.	Diagnostics	100,928 Preferred Stock Warrants		—		107		63
BioScale, Inc. (2)	Diagnostics	315,618 Preferred Stock Warrants		—		54		—
Precision Therapeutics, Inc.	Diagnostics	13,461 Preferred Stock Warrants		—		73		—
Radisphere National Radiology Group, Inc. (2)	Diagnostics	519,992 Preferred Stock Warrants		—		378		—
Patientkeeper, Inc.	Other Healthcare	396,410 Preferred Stock Warrants		—		269		29
Singulex, Inc.	Other Healthcare	293,632 Preferred Stock Warrants		—		44		140
Talyst, Inc.	Other Healthcare	300,360 Preferred Stock Warrants		—		100		53
Watermark Medical, Inc.	Other Healthcare	12,216 Preferred Stock Warrants		—		66		64
Recondo Technology, Inc.	Software	436,088 Preferred Stock Warrants		—		73		176
Total Warrants — Healthcare information and services						1,164		525
Total Warrants						5,745		6,036

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2013

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)	Amount		Investments (6)		Value
Other Investments — 0.3% (9)
Vette Technology, LLC	Data Storage	Royalty Agreement Due 4/18/2019		—		4,729		400
Total Other Investments						4,729		400
Equity — 0.8% (9)
Insmed Incorporated (5)	Biotechnology	33,208 Common Stock		—		227		565
Revance Therapeutics, Inc.	Biotechnology	72,925 Preferred Stock		—		73		109
Overture Networks Inc.	Communications	386,191 Common Stock		—		482		420
Cereplast, Inc. (5)	Waste Recycling	200,000 Common Stock		—		—		—
Total Equity						782		1,094
Total Portfolio Investment Assets — 163.1% (9)					$	234,310	$	221,284
Short Term Investments — Money Market Funds — 0.9% (9)
US Bank Money Market					$	1,188	$	1,188
Total Short Term Investments — Money Market Funds					$	1,188	$	1,188
Short Term Investments — Restricted Investments— 4.4% (9)
US Bank Money Market (2)					$	5,951	$	5,951
Total Short Term Investments — Restricted Investments					$	5,951	$	5,951

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

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

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

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

(5)	Portfolio company is a public company .

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

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

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

(9)	Value as a percent of net assets.

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

Note 1. Organization

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

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

Horizon Credit I LLC (“Credit I”) was formed as a Delaware limited liability company on January 23, 2008, with CHF as the sole equity member. Credit I is a special purpose bankruptcy remote entity and is a separate legal entity from the Company and CHF. There has been no activity at Credit I during the three months ended March 31, 2014.

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

Horizon Credit III LLC (“Credit III”) was formed as a Delaware limited liability company on May 30, 2012, with the Company as the sole equity member. Credit III is a special purpose bankruptcy remote entity and is a separate legal entity from the Company. Any assets conveyed to Credit III are not available to creditors of the Company or any other entity other than Credit III’s lenders.

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

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

HPO Assets LLC (“HPO”) was formed as a Delaware limited liability company on January 21, 2014, with the Company as the sole equity member. HPO is a separate legal entity from the Company. HPO was formed to take title to assets, if any, acquired by the Company in connection with the bankruptcy sale of the assets of PixelOptics, Inc. and to then sell such assets. On January 31, 2014, HPO acquired fixed assets and intellectual property of PixelOptics, Inc. in full settlement of the debt investment.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

HCP Assets LLC (“HCP”) was formed as a Delaware limited liability company on January 21, 2014, with the Company as the sole equity member. HCP is a separate legal entity from the Company. HCP was formed to take title to assets, if any, acquired by the Company in connection with the foreclosure or bankruptcy sale of the assets of Cereplast, Inc. and to then sell such assets. There has been no activity in HCP since its inception.

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

Note 2. Basis of Presentation and Significant Accounting Policies

The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Article 6 or 10 of Regulation S-X. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2013.

Principles of Consolidation

As required under GAAP and Regulation S-X, the Company will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s subsidiaries in its consolidated financial statements.

Use of Estimates

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

Fair Value

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

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

See Note 5 for additional information regarding fair value.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

Segments

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

Investments

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

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a loan becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the loan is placed on non-accrual status and the recognition of interest income is discontinued. Interest payments received on loans that are on non-accrual status are treated as reductions of principal until the principal is repaid. As of March 31, 2014, there were two investments on non-accrual status with a cost basis of $5.2 million and a fair value of $3.5 million. As of December 31, 2013, there were five investments on non-accrual status with a cost of $23.2 million and a fair value of $13.9 million.

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

Certain loan agreements also require the borrower to make an end-of-term payment (“ETP”) that is accrued into interest income over the life of the loan to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay all principal and interest due.

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

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

Debt Issuance Costs

Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities. Debt issuance costs are recognized as assets and are amortized as interest expense over the term of the related debt financing. The unamortized balance of debt issuance costs as of March 31, 2014 and December 31, 2013, included in other assets, was $4.6 million and $5.1 million, respectively. The accumulated amortization balances as of March 31, 2014 and December 31, 2013 were $2.5 million and $2.0 million, respectively. The amortization expense for the three months ended March 31, 2014 and 2013 was $0.5 million and $0.2 million, respectively.

Income Taxes

As a BDC, the Company also has elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each tax year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes.

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three months ended March 31, 2014, $0.04 million was recorded for U.S. federal excise tax. For the three months ended March 31, 2013, no amount was recorded for U.S. federal excise tax.

The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no material uncertain tax positions at March 31, 2014 and December 31, 2013. The 2012, 2011 and 2010 tax years remain subject to examination by U.S. federal and state tax authorities.

Dividends

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

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

Transfers of Financial Assets

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

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

New Accounting Pronouncement

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

Note 3. Related Party Transactions

Investment Management Agreement

On October 28, 2010, the Company entered into the Investment Management Agreement with the Advisor, which was renewed in August 2013, under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company. Under the terms of the Investment Management Agreement, the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.

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

The base management fee under the Investment Management Agreement is calculated at an annual rate of 2.00% of the Company’s gross assets, payable monthly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. The management fee payable at March 31, 2014 and December 31, 2013 was $0.3 million and $0.4 million, respectively. The base management fee expense was $1.2 million for both of the three months ended March 31, 2014 and 2013.

The incentive fee has two parts, as follows:

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

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

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

The performance based incentive fee expense was $0.4 million and $0.7 million for the three months ended March 31, 2014 and 2013, respectively. The incentive fee payable as of March 31, 2014 and December 31, 2013 was $0.4 million and $0.9 million, respectively. The entire incentive fee payable as of March 31, 2014 and December 31, 2013 represents part one of the incentive fee.

Administration Agreement

The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the Company. For providing these services, facilities and personnel, the Company will reimburse the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief compliance officer and chief financial officer and their respective staffs. For the three months ended March 31, 2014 and 2013, $0.2 million and $0.3 million, respectively, were charged to operations under the Administration Agreement.

Note 4. Investments

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

	March 31, 2014				December 31, 2013
	Cost		Fair Value		Cost		Fair Value
Money market funds	$	2,101	$	2,101	$	1,188	$	1,188
Restricted investments in money market funds	$	5,730	$	5,730	$	5,951	$	5,951
Non-affiliate investments
Debt	$	219,673	$	217,924	$	223,054	$	213,754
Warrants		5,599		6,731		5,745		6,036
Other Investments		4,702		400		4,729		400
Equity		3,082		3,505		782		1,094
Total non-affiliate investments	$	233,056	$	228,560	$	234,310	$	221,284

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

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

	March 31, 2014				December 31, 2013
	Cost		Fair Value		Cost		Fair Value
Life Science
Biotechnology	$	16,089	$	18,557	$	17,604	$	19,631
Medical Device		17,412		16,805		20,079		14,972
Technology
Consumer-Related Technologies		119		494		118		435
Networking		1,043		1,052		1,025		1,034
Software		64,890		65,357		67,510		67,869
Data Storage		4,724		419		4,751		419
Internet and Media		5,490		5,572		6,119		6,201
Communications		10,038		9,868		10,019		9,847
Semiconductors		47,421		47,297		37,897		37,793
Power Management		15,995		15,969		14,382		13,101
Cleantech
Energy Efficiency		9,718		9,638		13,743		11,596
Waste Recycling		2,294		680		2,294		680
Alternative Energy		11,516		11,183		12,263		11,840
Healthcare Information and Services
Diagnostics		12,533		11,984		12,752		12,203
Other Healthcare Related Services		7,394		7,201		7,384		7,190
Software		6,380		6,484		6,370		6,473
Total non-affiliate investments	$	233,056	$	228,560	$	234,310	$	221,284

Note 5. Fair Value

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

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

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

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

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

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.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

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

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

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

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

Debt Investments: For variable rate debt investments which re-price frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values. The fair value of fixed rate debt investments is estimated by discounting the expected future cash flows using the year end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the same remaining maturities. At March 31, 2014 and December 31, 2013, the discount rates used ranged from 9% to 18% and 9% to 25%, respectively. Significant increases (decreases) in this unobservable input would result in a significantly lower (higher) fair value measurement. These assets are recorded at fair value on a recurring basis and are categorized as Level 3 within the fair value hierarchy described above.

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

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

•

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

•

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

•

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

•

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

•

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

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

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

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

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

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of March 31, 2014 and December 31, 2013. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining its fair value measurements.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements for the three months ended March 31, 2014:

March 31, 2014

Fair

Valuation Techniques/

Unobservable

Investment Type

Value

Methodologies

Input

Range

Debt investments

214,440

Discounted Expected Future Cash Flows

Hypothetical Market Yield

9% - 18%

3,484

Multiple Probability Weighted Cash

Probability Weighting

0% - 100%

Flow Model

Warrant investments

3,890

Black-Scholes Valuation Model

Price per share

$0.0 – 63.98

Average Industry Volatility

19%

Marketability Discount

20%

Estimated Time to Exit

1 to 9 years

Other investments

400

Multiple Probability Weighted Cash

Discount Rate

25%

Flow Model

Probability Weighting

100%

Equity investments

2,720

Most Recent Equity Investment

Price Per Share

$0.19 – $1.09

Total Level 3 investments

224,934

December 31, 2013

Fair

Valuation Techniques/

Unobservable

Investment Type

Value

Methodologies

Input

Range

Debt investments

199,815

Discounted Expected Future Cash Flows

Hypothetical Market Yield

9% - 25%

13,939

Multiple Probability Weighted Cash

Probability Weighting

10% - 100%

Flow Model

Warrant investments

4,579

Black-Scholes Valuation Model

Price per share

$0.0 – $63.98

Average Industry Volatility

19%

Marketability Discount

20%

Estimated Time to Exit

1 to 10 years

Other investments

400

Multiple Probability Weighted Cash

Discount Rate

25%

Flow Model

Probability Weighting

0 to 100%

Equity investments

529

Most Recent Equity Investment

Price Per Share

$1.09 – $1.50

Total Level 3 investments

219,262

Borrowings: The carrying amount of borrowings under the Credit Facilities (as defined in Note 6) approximates fair value due to the variable interest rate of the Credit Facilities and are categorized as Level 2 within the fair value hierarchy described above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed rate 2019 Notes (as defined in Note 6) is based on the closing public share price on the date of measurement. At March 31, 2014, the 2019 Notes were trading on the New York Stock Exchange for $25.80 per note, or $34.1 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. Based on market quotations on March 31, 2014, the Asset-Backed Notes (as defined in Note 6) were trading at par value, or $76.4 million, and are categorized as Level 3 within the fair value hierarchy described above. These liabilities are not recorded at fair value on a recurring basis.

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

The following tables detail the assets and liabilities that are carried at fair value and measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

	March 31, 2014
	Total		Level 1		Level 2		Level 3
Money market funds	$	2,101	$	—	$	2,101	$	—
Restricted investments in money market funds	$	5,730	$	—	$	5,730	$	—
Debt investments	$	217,924	$	—	$	—	$	217,924
Warrant investments	$	6,731	$	—	$	2,841	$	3,890
Other investments	$	400	$	—	$	—	$	400
Equity investments	$	3,505	$	785	$	—	$	2,720

	December 31, 2013
	Total		Level 1		Level 2		Level 3
Money market funds	$	1,188	$	—	$	1,188	$	—
Restricted investments in money market funds	$	5,951	$	—	$	5,951	$	—
Debt investments	$	213,754	$	—	$	—	$	213,754
Warrant investments	$	6,036	$	—	$	1,457	$	4,579
Other investments	$	400	$	—	$	—	$	400
Equity investments	$	1,094	$	565	$	—	$	529

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2014:

	Three Months Ended March 31, 2014
	Debt Investments			Warrant Investments			Equity Investments			Other Investments			Total
Level 3 assets, beginning of period	$	213,754		$	4,579		$	529		$	400		$	219,262
Purchase of investments		17,926			—			—			—			17,926
Warrants and equity received and classified as Level 3		—			106			—			—			106
Principal payments received on investments		(11,746	)		—			—			(27	)		(11,773	)
Proceeds from sale of investments		—			(720	)		—			—			(720	)
Net realized (loss) gain on investments		(7,382	)		469			—			—			(6,913	)
Unrealized appreciation (depreciation) included in earnings		7,551			(224	)		—			27			7,354
Transfer out of Level 3		—			(320	)		(109	)		—			(429	)
Transfer from debt to equity investments		(2,300	)		—			2,300			—			—
Other		121			—			—			—			121
Level 3 assets, end of period	$	217,924		$	3,890		$	2,720		$	400		$	224,934

The Company’s transfers between levels are recognized at the end of the applicable reporting period. During the three months ended March 31, 2014, there were no transfers between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in two portfolio companies and equity held in one portfolio company, with an aggregate value of $0.4 million, that were transferred into Level 2 upon the portfolio companies becoming public companies during the period. Because the fair value of warrants held in publicly traded companies is determined based on inputs that are readily available in public markets or can be derived from information available in public markets, the Company has categorized the warrants as Level 2 within the fair value hierarchy described above as of March 31, 2014. During the three months ended March 31, 2014, there was one transfer between debt investments and equity investments. The transfer out of debt investments relates to the settlement of one of the Company’s debt investments for a cash payment of $2.7 million and $2.3 million in newly issued preferred stock of the applicable portfolio company.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at March 31, 2014 includes $1.3 million unrealized appreciation on loans and $0.2 million unrealized appreciation on warrants.

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2013:

	Three Months Ended March 31, 2013
	Debt Investments			Warrant Investments		Equity Investments		Other Investments		Total
Level 3 assets, beginning of period	$	220,297		$	4,914	$	526	$	2,100	$	227,837
Purchase of investments		28,500			—		—		—		28,500
Warrants and equity received and classified as Level 3		—			172		—		—		172
Principal payments received on investments		(9,962	)		—		—		—		(9,962	)
Unrealized (depreciation) appreciation included in earnings		(70	)		292		36		—		258
Transfer from debt to equity investments		(73	)		—		73		—		—
Other		57			—		—		—		57
Level 3 assets, end of period	$	238,749		$	5,378	$	635	$	2,100	$	246,862

During the three months ended March 31, 2013, there were no transfers between levels.

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

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

As of March 31, 2014 and December 31, 2013, the recorded balances equaled fair values of all the Company’s financial instruments, except for the Company’s 2019 Notes, as previously described.

Off-balance-sheet instruments

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

Note 6. Borrowings

A summary of the Company’s borrowings as of March 31, 2014 and December 31, 2013 is as follows:

	March 31, 2014						December 31, 2013
	Total Commitment		Balance Outstanding		Unused Commitment		Total Commitment		Balance Outstanding		Unused Commitment
Asset-Backed Notes	$	90,000	$	76,405	$	—	$	90,000	$	79,343	$	—
Fortress Facility		75,000		10,000		65,000		75,000		10,000		65,000
Key Facility		50,000		—		50,000		50,000		—		50,000
2019 Notes		33,000		33,000		—		33,000		33,000		—
Total	$	248,000	$	119,405	$	115,000	$	248,000	$	122,343	$	115,000

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that the Company’s asset coverage, as defined in the 1940 Act, is at least 200% after such borrowings. As of March 31, 2014, the asset coverage ratio for borrowed amounts was 215%.

On November 4, 2013, the Company renewed and amended the revolving credit facility (“Wells Facility”) previously administered by Wells Fargo Capital Finance LLC (“Wells”) and facilitated the assignment of all rights and obligations of Wells under the Wells Facility to Key Equipment Finance (“Key”) (here and after referred to as the “Key Facility”). The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million from the current $50 million commitment provided by Key. The Key Facility is collateralized by all loans and warrants held by Credit II and permits an advance rate of up to 50% of eligible loans held by Credit II. The Key Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the Key Facility to certain criteria for qualified loans and includes portfolio company concentration limits as defined in the related loan agreement. The Key Facility has a three-year revolving period followed by a two-year amortization period and matures on November 4, 2018. The interest rate is based upon the one-month London Interbank Offered Rate, or LIBOR, plus a spread of 3.25%, with a LIBOR floor of 0.75%. The rate at March 31, 2014 and December 31, 2013 was 4.00%. There were no advances made under the Key Facility during the three months ended March 31, 2014.

On March 23, 2012, the Company issued and sold an aggregate principal amount of $30 million of 7.375% senior unsecured notes due in 2019, and, on April 18, 2012, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $3 million of such notes (collectively, the “2019 Notes”). The 2019 Notes will mature on March 15, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after March 15, 2015 at a redemption price of $25 per security plus accrued and unpaid interest. The 2019 Notes bear interest at a rate of 7.375% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2019 Notes are the Company’s direct unsecured obligations and (i) rank equally in right of payment with the Company’s future senior unsecured indebtedness; (ii) are senior in right of payment to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2019 Notes; (iii) are effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness and (iv) are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. As of March 31, 2014, the Company was in material compliance with the terms of the 2019 Notes. The 2019 Notes are listed on the New York Stock Exchange under the symbol “HTF.”

The Company entered into a term loan credit facility (the “Fortress Facility” and together with the Key Facility, the “Credit Facilities”) with Fortress Credit Co LLC (“Fortress”) effective August 23, 2012. The Fortress Facility is collateralized by all loans and warrants held by Credit III. The Fortress Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the Fortress Facility to certain criteria for qualified loans and includes portfolio company concentration limits as defined in the related loan agreement. The Fortress Facility, among other things, has a three-year term subject to two one-year extensions with a draw period of up to four years. The Fortress Facility requires the payment of an unused line fee in an amount equal to 1.00% of unborrowed amounts available under the facility annually and has an effective advance rate of 66% against eligible loans. The Fortress Facility generally bears interest based upon the one-month LIBOR plus a spread of 6.00%, with a LIBOR floor of 1.00%. The rate at March 31, 2014 and December 31, 2013 was 7.00%, and the average rate for the three months ended March 31, 2014 and 2013 was 7.00%.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

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

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

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

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

Under the terms of the Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through principal collections from the underlying securitized debt portfolio, which may be used to make monthly interest and principal payments on the Asset-Backed Notes. The Company has segregated these funds and classified them as restricted investments in money market funds on the Consolidated Statement of Assets and Liabilities. The balance of restricted investments in money market funds was $5.7 million and $6.0 million as of March 31, 2014 and December 31, 2013, respectively.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

Note 7. Financial Instruments with Off-Balance-Sheet Risk

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

The balance of unfunded commitments to extend credit was $7.0 million and $9.0 million as of March 31, 2014 and December 31, 2013, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving credit arrangements or similar transactions. Commitments may also include a financial or non-financial milestone that has to be achieved before the commitment can be drawn. Commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Note 8. Concentrations of Credit Risk

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

The largest loans may vary from period to period as new loans are recorded and repaid. The Company’s five largest loans represented 21% and 22% of total loans outstanding as of March 31, 2014 and December 31, 2013, respectively. No single loan represented more than 10% of the total loans as of March 31, 2014 and December 31, 2013. Loan income, consisting of interest and fees, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for 22% and 23% of total interest income and fee income on investments for the three months ended March 31, 2014 and 2013, respectively.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

Note 9. Dividends and Distributions

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

Date Declared	Record Date	Payment Date	Amount Per Share		Cash Distribution		DRIP Shares Issued		DRIP Share Value
Three Months Ended March 31, 2014
3/6/14	5/20/14	6/16/14	$	0.115	$	—		—	$	—
3/6/14	4/17/14	5/15/14		0.115		—		—		—
3/6/14	3/19/14	4/15/14		0.115		1,098		644		8
			$	0.345	$	1,098		644	$	8
Year Ended December 31, 2013
11/1/13	2/17/14	3/17/14	$	0.115	$	1,062		3,444	$	44
11/1/13	1/20/14	2/14/14		0.115		1,058		3,249		47
11/1/13	12/16/13	1/15/14		0.115		1,061		3,048		44
8/2/13	11/19/13	12/16/13		0.115		1,045		4,225		59
8/2/13	10/17/13	11/15/13		0.115		937		11,851		167
8/2/13	9/18/13	10/15/13		0.115		1,051		3,882		52
5/3/13	8/19/13	9/16/13		0.115		1,057		3,376		46
5/3/13	7/17/13	8/15/13		0.115		1,060		2,980		42
5/3/13	6/20/13	7/15/13		0.115		1,070		2,191		31
3/8/13	5/20/13	6/17/13		0.115		1,086		1,099		15
3/8/13	4/18/13	5/15/13		0.115		1,087		1,035		15
3/8/13	3/20/13	4/15/13		0.115		1,046		3,867		55
			$	1.380	$	11,559		40,803	$	573
Year Ended December 31, 2012
11/27/12	2/21/13	3/15/13	$	0.115	$	1,050		3,392	$	50
11/27/12	1/18/13	2/15/13		0.115		1,087		898		14
11/27/12	12/20/12	1/15/13		0.115		1,056		2,930		44
11/2/12	11/16/12	11/30/12		0.450		4,243		4,269		61
8/7/12	8/17/12	8/31/12		0.450		4,105		11,608		193
5/3/12	5/17/12	5/31/12		0.450		3,402		2,299		37
3/12/12	3/23/12	3/30/12		0.450		3,378		3,517		58
			$	2.145	$	18,321		28,913	$	457

On May 1, 2014, the Board declared monthly dividends per share, payable as set forth in the table below.

Record Dates	Payment Date	Dividends Declared
August 19, 2014	September 15, 2014	$	0.115
July 21, 2014	August 15, 2014	$	0.115
June 18, 2014	July 17, 2014	$	0.115

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except shares and per share data)

Note 10. Financial Highlights

The financial highlights for the Company are as follows:

	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013

Per share data:
Net asset value at beginning of period	$	14.14		$	15.15
Net investment income		0.26			0.29
Realized loss on investments		(0.61	)		(0.02	)
Unrealized appreciation on investments		0.88			0.04
Net increase in net assets resulting from operations		0.53			0.31
Dividends declared		(0.35	)		(0.35	)
Issuance of common stock under dividend reinvestment plan		—			0.01
Net asset value at end of period	$	14.32		$	15.12
Per share market value, end of period	$	12.51		$	14.61
Total return based on market value		(9.5	)%⁽¹⁾		0.2	%⁽¹⁾
Shares outstanding at end of period		9,618,690			9,574,445
Ratios to average net assets:
Expenses without incentive fees⁽³⁾		13.5	%⁽²⁾		10.8	%⁽²⁾
Incentive fees		1.2	%⁽²⁾		1.9	%⁽²⁾
Total expenses⁽³⁾		14.7	%⁽²⁾		12.7	%⁽²⁾
Net investment income with incentive fees⁽³⁾		7.3	%⁽²⁾		9.6	%⁽²⁾
Average net asset value	$	136,807		$	144,866
Average debt per share	$	12.42		$	9.68
Portfolio turnover ratio		8.08	%		12.38	%

(1)

The total return for the three months ended March 31, 2014 and 2013, equals the change in the ending market value over the beginning of period price per share plus dividends paid per share during the period, divided by the beginning price.

(2)

Annualized.

(3)

During the three months ended March 31, 2014, the Advisor waived $0.1 million of base management fee and $0.1 million of incentive fee. Had these expenses not been waived, the ratio of expenses without incentive fee to average net assets, the ratio of total expenses to average net assets and the ratio of net investment income with incentive fee to average net assets would have been 13.5%, 14.7% and 7.3%, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this quarterly report on Form 10-Q, except where the context suggests otherwise, the terms “we,” “us,” “our” and “Horizon Technology Finance” refer to Horizon Technology Finance Corporation and its consolidated subsidiaries. The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Amounts are stated in thousands, except shares and per share data and where otherwise noted.

Forward-Looking Statements

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

•

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

•

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

•

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

•

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

•

the ability of our Advisor to attract and retain highly talented professionals and to operate effectively at existing staffing levels;

•

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 ability to qualify and maintain qualification as a RIC and as a business development company;

•

the adequacy of our cash resources and working capital;

•

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

•

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

•

the ability of our portfolio companies to achieve their objective;

•

our ability to cause a subsidiary to become a licensed Small Business Investment Company;

•

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

•

our contractual arrangements and relationships with third parties;

•

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

•

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

We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks” and similar expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in “Risk Factors” and elsewhere in our annual report on Form 10-K for the year ended December 31, 2013, and elsewhere in this quarterly report on Form 10-Q.

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this quarterly report on Form 10-Q, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission, or the SEC, including, periodic reports on Form 10-Q and Form 10-K and current reports on Form 8-K.

Overview

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

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

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

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

Portfolio Composition and Investment Activity

The following table shows our portfolio by asset class as of March 31, 2014 and December 31, 2013:

	March 31, 2014							December 31, 2013
	# of Investments		Fair Value		Percentage of Total Portfolio			# of Investments		Fair Value		Percentage of Total Portfolio
Term loans		47	$	206,002		90.2	%		48	$	201,846		91.2	%
Revolving loans		1		11,922		5.2			1		11,908		5.4
Total loans		48		217,924		95.4			49		213,754		96.6
Warrants		74		6,731		2.9			73		6,036		2.7
Other investments		1		400		0.2			1		400		0.2
Equity		4		3,505		1.5			3		1,094		0.5
Total			$	228,560		100.0	%			$	221,284		100.0	%

Total portfolio investment activity as of and for the three months ended March 31, 2014 and 2013 was as follows:

	For the Three Months Ended March 31,
	2014			2013
Beginning portfolio	$	221,284		$	228,613
New loan funding		17,926			28,500
Less refinanced balances and participation		—			—
Net new loan funding		17,926			28,500
Principal payments received on investments		(11,773	)		(9,962	)
Accretion of loan fees		406			548
New loan fees		(180	)		(320	)
New equity		—			73
Sale of investments		(720	)		—
Net realized loss on investments		(6,913	)		(18	)
Net unrealized appreciation on investments		8,530			420
Other		—			(73	)
Ending Portfolio	$	228,560		$	247,781

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

The following table shows our loan portfolio by industry sector as of March 31, 2014 and December 31, 2013:

	March 31, 2014					December 31, 2013
	Loans at Fair Value		Percentage of Total Portfolio			Loans at Fair Value		Percentage of Total Portfolio
Life Science
Biotechnology	$	15,016		6.9	%	$	16,376		7.7	%
Medical Device		16,599		7.6			14,765		6.9
Technology
Networking		981		0.4			963		0.5
Software		63,963		29.4			66,583		31.1
Internet and Media		5,390		2.5			6,019		2.8
Communications		9,379		4.3			9,359		4.4
Semiconductors		46,885		21.5			37,450		17.5
Power Management		15,912		7.3			13,044		6.1
Cleantech
Energy Efficiency		6,864		3.1			11,403		5.3
Waste Recycling		680		0.3			680		0.3
Alternative Energy		11,113		5.1			11,771		5.5
Healthcare Information and Services
Diagnostics		11,921		5.5			12,140		5.7
Other Healthcare Related Services		6,914		3.2			6,904		3.2
Software		6,307		2.9			6,297		3.0
Total	$	217,924		100.0	%	$	213,754		100.0	%

The largest loans may vary from year to year as new loans are originated and existing loans are repaid. Our five largest loans represented 21% and 22% of total loans outstanding as of March 31, 2014 and December 31, 2013, respectively. No single loan represented more than 10% of our total loans as of March 31, 2014 and December 31, 2013.