Edgar Filing: Horizon Technology Finance Corp

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

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 ¨ ..

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

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

As of November 3, 2015, the Registrant had 11,644,940 shares of common stock, $0.001 par value, outstanding.

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 September 30, 2015 and December 31, 2014 (unaudited)	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (unaudited)	4
	Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2015 and 2014 (unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)	6
	Consolidated Schedules of Investments as of September 30, 2015 and December 31, 2014 (unaudited)	7
	Notes to the Consolidated Financial Statements (unaudited)	18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative And Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	52

	PART II
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
	Signatures	54
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 and per share data)

	September 30, 2015			December 31, 2014

Assets
Non-affiliate investments at fair value (cost of $252,812 and $209,838, respectively) (Note 4)	$	249,033		$	205,101
Investments in money market funds		275			27
Cash		12,559			8,417
Restricted investments in money market funds		1,448			2,906
Interest receivable		5,984			4,758
Other assets		3,360			3,987
Total assets	$	272,659		$	225,196

Liabilities
Borrowings (Note 6)	$	104,302		$	81,753
Distributions payable		4,017			3,322
Base management fee payable (Note 3)		385			356
Incentive fee payable (Note 3)		1,015			799
Other accrued expenses		693			718
Total liabilities		110,412			86,948

Commitments and Contingencies (Notes 7 and 8)

Net assets
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of September 30, 2015 and December 31, 2014		—			—
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 11,642,522 and 9,628,124 shares outstanding as of September 30, 2015 and December 31, 2014, respectively		12			10
Paid-in capital in excess of par		180,954			155,240
Distributions in excess of net investment income		(2,132	)		(1,102	)
Net unrealized depreciation on investments		(3,779	)		(4,737	)
Net realized loss on investments		(12,808	)		(11,163	)
Total net assets		162,247			138,248
Total liabilities and net assets	$	272,659		$	225,196
Net asset value per common share	$	13.94		$	14.36

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Investment income
Interest income on non-affiliate investments	$	7,705		$	6,786		$	20,865		$	21,714
Prepayment fee income on non-affiliate investments		373			410			1,101			945
Fee income on non-affiliate investments		349			543			583			1,312
Total investment income		8,427			7,739			22,549			23,971
Expenses
Interest expense		1,441			1,495			4,291			7,326
Base management fee (Note 3)		1,279			1,038			3,456			3,618
Performance based incentive fee(Note 3)		1,015			800			2,473			1,314
Administrative fee (Note 3)		300			335			877			872
Professional fees		273			607			991			2,721
General and administrative		218			223			776			823
Total expenses		4,526			4,498			12,864			16,674
Management and performance based incentive fees waived (Note 3)		(140	)		—			(207	)		(345	)
Net expenses		4,386			4,498			12,657			16,329
Net investment income before excise tax		4,041			3,241			9,892			7,642
(Credit) provision for excise tax		(20	)		40			—			120
Net investment income		4,061			3,201			9,892			7,522
Net realized and unrealized (loss) gain on investments
Net realized (loss) gain on investments		(1,463	)		2,325			(1,723	)		(4,190	)
Net unrealized appreciation (depreciation) on investments		940			(766	)		958			8,993
Net realized and unrealized (loss) gain on investments		(523	)		1,559			(765	)		4,803
Net increase in net assets resulting from operations	$	3,538		$	4,760		$	9,127		$	12,325
Net investment income per common share	$	0.35		$	0.33		$	0.90		$	0.78
Net increase in net assets per common share	$	0.30		$	0.50		$	0.83		$	1.28
Distributions declared per share	$	0.345		$	0.345		$	1.035		$	1.035
Weighted average shares outstanding		11,638,925			9,623,468			11,032,992			9,619,133

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 Stock				Paid-In Capital in Excess of			Accumulated Undistributed (Distributions in Excess of) Net Investment			Net Unrealized Depreciation on			Net Realized Loss on			Total Net
	Shares		Amount		Par			Income			Investments			Investments			Assets
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		—		—		—			7,522			8,993			(4,190	)		12,325
Issuance of common stock under dividend reinvestment plan		16,325		—		227			—			—			—			227
Distributions declared		—		—		—			(9,960	)		—			—			(9,960	)
Balance at September 30, 2014		9,625,274	$	10	$	155,202			(975	)	$	(4,033	)	$	(11,777	)	$	138,427

Balance at December 31, 2014		9,628,124	$	10	$	155,240		$	(1,102	)	$	(4,737	)	$	(11,163	)	$	138,248
Issuance of common stock, net of offering costs		2,000,000		2		26,504			—			—			—			26,506
Net increase in net assets resulting from operations		—		—		—			9,892			958			(1,723	)		9,127
Issuance of common stock under dividend reinvestment plan		14,398		—		181			—			—			—			181
Distributions declared		—		—		—			(11,815	)		—			—			(11,815	)
Reclassification of permanent tax differences (Note 2)		—		—		(971	)		893			—			78			—
Balance at September 30, 2015		11,642,522	$	12	$	180,954		$	(2,132	)	$	(3,779	)	$	(12,808	)	$	162,247

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	For the Nine Months Ended
	September 30,
	2015			2014
Cash flows from operating activities:
Net increase in net assets resulting from operations	$	9,127		$	12,325
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:
Amortization of debt issuance costs		733			2,370
Net realized loss on investments		1,723			4,190
Net unrealized appreciation on investments		(958	)		(8,993	)
Purchase of investments		(104,781	)		(66,836	)
Principal payments received on investments		58,593			83,906
Proceeds from sale of investments		1,078			5,119
Changes in assets and liabilities:
Net (increase) decrease in investments in money market funds		(248	)		388
Net decrease in restricted investments in money market funds		1,458			2,583
Increase in interest receivable		(399	)		(168	)
Increase in end-of-term payments		(827	)		(497	)
Decrease in unearned income		(56	)		(796	)
Decrease (increase) in other assets		773			(259	)
(Decrease) increase in other accrued expenses		(15	)		825
Increase (decrease) in base management fee payable		29			(84	)
Increase (decrease) in incentive fee payable		216			(52	)
Net cash (used in) provided by operating activities		(33,554	)		34,021
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs		26,506			—
Repayment of Asset-Backed Notes		(19,451	)		(34,441	)
Advances on credit facilities		42,000			—
Debt issuance costs		(420	)		—
Distributions paid		(10,939	)		(9,727	)
Net cash provided by (used in) financing activities		37,696			(44,168	)
Net increase (decrease) in cash		4,142			(10,147	)
Cash:
Beginning of period		8,417			25,341
End of period	$	12,559		$	15,194
Supplemental disclosure of cash flow information:
Cash paid for interest	$	3,474		$	4,968
Supplemental non-cash investing and financing activities:
Warrant investments received and recorded as unearned income	$	778		$	501
Distributions payable	$	4,017		$	3,321
End-of-term payments receivable	$	4,611		$	3,675
Receivable resulting from sale of investment	$	499		$	—

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(9)(10)	Amount		Investments (6)		Value
Debt Investments — 149.0 % (8)
Debt Investments — Life Science — 36.1% (8)
Argos Therapeutics, Inc. (2)(5)	Biotechnology	Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;	$	5,000	$	4,938	$	4,938
		Ceiling 10.75%), 5.00% ETP, Due 10/1/18)
		Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;		5,000		4,951		4,951
		Ceiling 10.75%), 5.00% ETP, Due 3/1/19)
New Haven Pharmaceuticals, Inc. (2)	Biotechnology	Term Loan (11.50% cash (Libor + 11.00%; Floor		1,301		1,292		1,292
		11.50%), 11.42% ETP, Due 3/1/19)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		434		430		430
		11.50%), 11.42% ETP, Due 3/1/19)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		2,000		1,986		1,986
		10.50%), 6.10% ETP, Due 3/1/19)
		Term Loan (10.00% cash (Libor + 9.50%; Floor		6,265		6,184		6,184
		10.00%), 4.00% ETP, Due 4/1/19)
Palatin Technologies, Inc. (2)(5)	Biotechnology	Term Loan (9.00% cash (Libor + 8.50%; Floor		5,000		4,934		4,934
		9.00%), 5.00% ETP, Due 1/1/19)
		Term Loan (9.00% cash (Libor + 8.50%; Floor		5,000		4,933		4,933
		9.00%), 5.00% ETP, Due 8/1/19)
Sample6, Inc. (2)	Biotechnology	Term Loan (9.50% cash (Libor + 9.00%; Floor		1,555		1,550		1,550
		9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)
		Term Loan (9.50% cash (Libor + 9.00%; Floor		945		939		939
		9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)
		Term Loan (9.50% cash (Libor + 9.00%; Floor		2,500		2,479		2,479
		9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)
Sunesis Pharmaceuticals, Inc. (2)(5)	Biotechnology	Term Loan (8.95% cash, 4.65% ETP, Due 10/1/16)		545		544		544
		Term Loan (9.00% cash, 4.65% ETP, Due 10/1/16)		818		814		814
IntegenX Inc. (2)	Medical Device	Term Loan (10.75% cash (Libor + 10.25%; Floor		3,750		3,699		3,699
		10.75%; Ceiling 12.75%), 3.50% ETP, Due 7/1/18)
Lantos Technologies, Inc. (2)	Medical Device	Term Loan (11.50% cash (Libor + 10.50%; Floor		3,500		3,448		3,388
		11.50%), 5.00% ETP, Due 2/1/18)
Mederi Therapeutics, Inc. (2)	Medical Device	Term Loan (12.02% cash (Libor + 11.82), 4.00% ETP,		2,925		2,897		2,801
		Due 7/1/17)
		Term Loan (12.02% cash (Libor + 11.82%), 4.00% ETP,		2,925		2,897		2,801
		Due 7/1/17)
NinePoint Medical, Inc. (2)	Medical Device	Term Loan (9.25% cash (Libor + 8.75%; Floor		5,000		4,928		4,928
		9.25%), 4.50% ETP, Due 3/1/19)
Tryton Medical, Inc. (2)	Medical Device	Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,		2,250		2,237		2,237
		Due 9/1/16)
ZetrOZ, Inc. (2)	Medical Device	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,500		1,480		1,406
		11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		1,500		1,476		1,406
		11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)
Total Debt Investments — Life Science						59,036		58,640
Debt Investments — Technology — 80.4% (8)
Ekahau, Inc. (2)	Communications	Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		854		849		849
		Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		285		283		283
mBlox, Inc. (2)	Communications	Term Loan (11.50% cash (Libor + 11.00%; Floor		5,000		4,974		4,974
		11.50%; Ceiling 13.00%), 3.40% ETP, Due 7/1/18)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		5,000		4,974		4,974
		11.50%; Ceiling 13.00%), 3.40% ETP, Due 7/1/18)
		Term Loan (12.00% cash, 100.0% ETP, Due 7/1/16)		1,000		1,000		1,000
		Term Loan (12.00% cash, 100.0% ETP, Due 7/1/16)		500		500		500
Overture Networks, Inc. (2)	Communications	Term Loan (10.75% cash, (Libor + 10.25%; Floor		4,104		4,087		4,087
		10.75%), 5.75% ETP, Due 12/1/17)
		Term Loan (10.75% cash (Libor + 10.25%; Floor		2,052		2,042		2,042
		10.75%), 5.75% ETP, Due 12/1/17)
		Term Loan (10.75% cash (Libor + 10.25%; Floor		1,000		991		991
		10.75%), 5.00% ETP, Due 11/1/18)
Additech, Inc. (2)	Consumer-related Technologies	Term Loan (11.75% cash (Libor + 11.25%; Floor		2,500		2,467		2,467
		11.75%; Ceiling 13.25%), 4.00% ETP, Due 7/1/18)
		Term Loan (11.75% cash (Libor + 11.25%; Floor		2,500		2,461		2,461
		11.75%; Ceiling 13.25%), 4.00% ETP, Due 1/1/19)
Gwynnie Bee, Inc. (2)	Consumer-related Technologies	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,667		1,642		1,642
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 11/1/17)

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(9)(10)	Amount		Investments (6)		Value
		Term Loan (11.00% cash (Libor + 10.50%; Floor		933		913		913
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 2/1/18)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		1,000		985		985
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 4/1/18)
Rhapsody International, Inc. (2)	Consumer-related Technologies	Term Loan (11.00% cash (Libor + 10.50%; Floor		7,500		7,261		7,261
		11.00%), 3.0% ETP, Due 10/1/19)
SavingStar, Inc. (2)	Consumer-related Technologies	Term Loan (10.90% cash (Libor + 10.40%; Floor		3,000		2,907		2,907
		10.90%), 3.0% ETP, Due 6/1/19)
IT Professional Solutions, Inc.	Internet and Media	Term Loan (11.45% cash (Libor + 11.25%), Due 1/1/16)		1,750		1,740		1,740
The NanoSteel Company, Inc. (2)	Materials	Term Loan (10.00% cash (Libor + 9.50%; Floor		5,000		4,861		4,861
		10.00%), 5.0% ETP, Due 7/1/19)
		Term Loan (10.00% cash (Libor + 9.50%; Floor		2,500		2,455		2,455
		10.00%), 5.0% ETP, Due 7/1/19)
Nanocomp Technologies, Inc. (2)	Networking	Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)		813		803		803
Powerhouse Dynamics, Inc. (2)	Power Management	Term Loan (11.20% cash (Libor + 10.70%; Floor		2,500		2,452		2,452
		11.20%), 3.0% ETP, Due 3/1/19)
Avalanche Technology, Inc. (2)	Semiconductors	Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;		1,878		1,872		1,872
		Ceiling 11.75%), 2.40% ETP, Due 4/1/17)
		Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;		2,185		2,178		2,178
		Ceiling 11.75%) ,2.40% ETP, Due 10/1/18)
		Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;		2,381		2,332		2,332
		Ceiling 11.75%), 2.00% ETP, Due 2/1/19)
InVisage Technologies, Inc. (2)	Semiconductors	Term Loan (12.00% cash (Libor + 11.50%; Floor		2,550		2,496		2,496
		12.00%; Ceiling 14.00%), 2.00% ETP, Due 4/1/18)
		Term Loan (12.00% cash (Libor + 11.50%; Floor		850		833		833
		12.00%; Ceiling 14.00%), 2.0% ETP, Due 10/1/18)
Luxtera, Inc. (2)	Semiconductors	Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;		1,930		1,905		1,905
		Ceiling 12.25%), 13.00% ETP, Due 7/1/17)
		Term Loan (10.25% cash (Libor + 9.75%; Floor 10.25%;		1,077		1,073		1,073
		Ceiling 12.25%), 13.00% ETP, Due 7/1/17)
		Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%),		833		828		828
		4.50% ETP, Due 12/1/18)
		Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%),		833		827		827
		4.50% ETP, Due 12/1/18)
Xtera Communications, Inc. (2)	Semiconductors	Term Loan (12.50% cash, 15.65% ETP, Due 12/31/16)		4,796		4,733		4,733
		Term Loan (12.50% cash, 21.75% ETP, Due 12/31/16)		1,333		1,314		1,314
Bridge2 Solutions, Inc.	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		4,000		3,959		3,959
		11.50%; Ceiling 14.50%), 2.00% ETP, Due 7/1/19)
Crowdstar, Inc. (2)	Software	Term Loan (10.75% cash (Libor + 10.25%; Floor		2,000		1,973		1,973
		10.75%), 3.00% ETP, Due 9/1/18)
Decisyon, Inc. (2)	Software	Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)		1,740		1,734		1,699
		Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)		883		875		858
Education Elements, Inc. (2)	Software	Term Loan (10.50% cash (Libor + 10.00%; Floor		2,000		1,965		1,965
		10.50%), 4.00% ETP, Due 1/1/19)
Lotame Solutions, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		3,410		3,396		3,396
		11.50%), 5.25% ETP, Due 9/1/17)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		1,500		1,494		1,494
		11.50%), 5.25% ETP, Due 9/1/17)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		2,100		2,077		2,077
		11.50%), 3.00% ETP, Due 4/1/18)
Netuitive, Inc. (2)	Software	Term Loan (12.75% cash, Due 7/1/16)		1,233		1,230		1,230
ScoreBig, Inc. (2)	Software	Term Loan (10.50% cash (Libor + 10.00%; Floor		3,500		3,445		3,445
		10.50%), 4.00% ETP, Due 4/1/19)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		3,500		3,445		3,445
		10.50%), 4.00% ETP, Due 4/1/19)
SIGNiX, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		3,000		2,948		2,948
		11.50%), Due 7/1/18)
SilkRoad Technology, Inc. (2)	Software	Term Loan (10.85% cash (Libor + 10.35%; Floor		7,500		7,431		7,431
		10.85%; Ceiling 12.85%), 3.00% ETP, Due 6/1/19)
Social Intelligence Corp. (2)	Software	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,227		1,210		1,196
		11.00%; Ceiling 13.00%), 3.50% ETP, Due 12/1/17)
SpringCM, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		4,500		4,444		4,444
		11.50%; Ceiling 13.00%), 2.00% ETP, Due 1/1/18)
Sys-Tech Solutions, Inc. (2)	Software	Term Loan (11.65% cash (Libor + 11.15%; Floor		5,800		5,765		5,765

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(9)(10)	Amount		Investments (6)		Value
		11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)
		Term Loan (11.65% cash (Libor + 11.15%; Floor		5,000		4,963		4,963
		11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)
VBrick Systems, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		2,200		2,185		2,185
		11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)
Vidsys, Inc. (2)	Software	Term Loan (13.00% cash, 7.58% ETP, Due 12/1/17)		2,910		2,909		2,896
xTech Holdings, Inc. (2)	Software	Term Loan (11.00% cash (Libor + 10.50%; Floor		2,000		1,954		1,954
		11.00%), 3.00% ETP, Due 4/1/19)
Total Debt Investments — Technology						130,440		130,361
Debt Investments — Cleantech — 8.3% (8)
Renmatix, Inc. (2)	Alternative Energy	Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)		426		426		426
		Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)		426		426		426
		Term Loan (10.25% cash, Due 10/1/16)		2,141		2,134		2,134
Semprius, Inc. (2)	Alternative Energy	Term Loan (10.25% cash, 5.00% ETP, Due 6/1/16)		1,274		1,254		1,254
Rypos, Inc. (2)	Energy Efficiency	Term Loan (11.80% cash, 4.25% ETP, Due 6/1/17)		2,430		2,400		2,400
		Term Loan (11.80% cash, 4.25% ETP, Due 1/1/18)		947		931		931
Lehigh Technologies, Inc. (2)	Waste Recycling	Term Loan (9.91% cash (Libor + 9.72%), 6.75% ETP,		3,000		2,959		2,959
		Due 8/1/19)
		Term Loan (9.91% cash (Libor + 9.72%), 6.75% ETP,		3,000		2,973		2,973
		Due 8/1/19)
Total Debt Investments — Cleantech						13,503		13,503
Debt Investments — Healthcare information and services — 24.2% (8)
Interleukin Genetics, Inc. (2)(5)	Diagnostics	Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%)		5,000		4,870		4,870
		4.50% ETP, Due 10/1/18)
LifePrint Group, Inc. (2)	Diagnostics	Term Loan (11.00% cash (Libor + 10.50%; Floor		2,800		2,762		2,627
		11.00%; Ceiling 12.50%), 3.00% ETP, Due 1/1/18)
Watermark Medical, Inc. (2)	Other Healthcare	Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;		3,500		3,493		3,493
		Ceiling 11.00%); 4.00% ETP, Due 4/1/18)
		Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;		3,500		3,493		3,493
		Ceiling 11.00%); 4.00% ETP, Due 4/1/18)
		Term Loan (10.00% cash (Libor + 9.50%; Floor 10.00%;		1,250		1,248		1,248
		Ceiling 11.00%); 4.00% ETP, Due 4/1/18)
Innovatient Solutions, Inc. (2)	Software	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,000		947		947
		11.00%, Ceiling 13.00%); 4.00% ETP, Due 7/1/18)
MedAvante, Inc. (2)	Software	Term Loan (9.75% cash (Libor + 9.25%; Floor		3,000		2,887		2,887
		9.75%), 4.00% ETP, Due 1/1/19)
		Term Loan (9.75% cash (Libor + 9.25%; Floor		3,000		2,954		2,954
		9.75%), 4.00% ETP, Due 1/1/19)
Medsphere Systems Corporation (2)	Software	Term Loan (10.50% cash (Libor + 10.00%; Floor		5,000		4,916		4,916
		10.50%), 7.00% ETP, Due 7/1/19)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		2,500		2,458		2,458
		10.50%), 7.00% ETP, Due 7/1/19)
Recondo Technology, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		1,384		1,379		1,379
		11.50%), 6.60% ETP, Due 12/1/17)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		2,500		2,493		2,493
		11.00%), 4.50% ETP, Due 12/1/17)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		2,500		2,494		2,494
		10.50%), 2.75% ETP, Due 12/1/17)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		3,000		2,962		2,962
		10.50%), 2.50% ETP, Due 1/1/19)
Total Debt Investments — Healthcare information and services						39,356		39,221
Total Debt Investments						242,335		241,725
Warrant Investments — 3.7% (8)
Warrants — Life Science — 0.8% (8)
ACT Biotech Corporation	Biotechnology	1,521,820 Preferred Stock Warrants		—		83		—
Argos Therapeutics, Inc. (2)(5)	Biotechnology	16,556 Common Stock Warrants		—		33		1
Celsion Corporation (5)	Biotechnology	5,708 Common Stock Warrants		—		15		—
Inotek Pharmaceuticals Corporation (5)	Biotechnology	33,762 Preferred Stock Warrants		—		17		145
New Haven Pharmaceuticals, Inc. (2)	Biotechnology	103,982 Preferred Stock Warrants		—		87		173
Nivalis Theraputics, Inc. (5)	Biotechnology	18,534 Common Stock Warrants		—		122		5
Palatin Technologies, Inc. (2)(5)	Biotechnology	608,058 Common Stock Warrants		—		51		67
Revance Therapeutics, Inc. (5)	Biotechnology	34,377 Common Stock Warrants		—		68		526
Sample6, Inc. (2)	Biotechnology	351,018 Preferred Stock Warrants		—		45		38

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(9)(10)	Amount		Investments (6)		Value
Sunesis Pharmaceuticals, Inc. (5)	Biotechnology	12,302 Common Stock Warrants		—		5		—
Tranzyme, Inc. (2)(5)	Biotechnology	6,460 Common Stock Warrants		—		6		—
AccuVein Inc. (2)	Medical Device	75,769 Preferred Stock Warrants		—		24		28
Direct Flow Medical, Inc.	Medical Device	176,922 Preferred Stock Warrants		—		144		39
EnteroMedics, Inc. (5)	Medical Device	141,026 Common Stock Warrants		—		347		—
IntegenX, Inc. (2)	Medical Device	158,006 Preferred Stock Warrants		—		33		24
Lantos Technologies, Inc. (2)	Medical Device	1,287,817 Preferred Stock Warrants		—		37		41
Mederi Therapeutics, Inc. (2)	Medical Device	248,736 Preferred Stock Warrants		—		26		39
Mitralign, Inc. (2)	Medical Device	641,909 Preferred Stock Warrants		—		52		36
NinePoint Medical, Inc. (2)	Medical Device	410,959 Preferred Stock Warrants		—		33		33
OraMetrix, Inc. (2)	Medical Device	812,348 Preferred Stock Warrants		—		78		—
Tryton Medical, Inc. (2)	Medical Device	122,362 Preferred Stock Warrants		—		15		10
ViOptix, Inc.	Medical Device	375,763 Preferred Stock Warrants		—		13		—
ZetrOZ, Inc. (2)	Medical Device	475,561 Preferred Stock Warrants		—		25		20
Total Warrants — Life Science						1,359		1,225
Warrants — Technology — 2.3% (8)
Ekahau, Inc. (2)	Communications	978,261 Preferred Stock Warrants		—		33		20
OpenPeak, Inc.	Communications	18,997 Common Stock Warrants		—		89		—
Overture Networks, Inc.	Communications	385,617 Preferred Stock Warrants		—		55		—
Additech, Inc. (2)	Consumer-related Technologies	150,000 Preferred Stock Warrants		—		33		27
Everyday Health, Inc. (5)	Consumer-related Technologies	43,783 Common Stock Warrants		—		69		22
Gwynnie Bee, Inc. (2)	Consumer-related Technologies	268,591 Preferred Stock Warrants		—		68		636
Rhapsody International Inc. (2)	Consumer-related Technologies	852,273 Common Stock Warrants		—		164		164
SavingStar, Inc. (2)	Consumer-related Technologies	79,088 Preferred Stock Warrants		—		48		47
SnagAJob.com, Inc.	Consumer-related Technologies	365,396 Preferred Stock Warrants		—		23		303
Tagged, Inc.	Consumer-related Technologies	190,868 Preferred Stock Warrants		—		27		65
XIOtech, Inc.	Data Storage	2,217,979 Preferred Stock Warrants		—		22		18
Cartera Commerce, Inc.	Internet and media	90,909 Preferred Stock Warrants		—		16		—
SimpleTuition, Inc.	Internet and media	189,573 Preferred Stock Warrants		—		63		66
The NanoSteel Company, Inc. (2)	Materials	147,424 Preferred Stock Warrants		—		93		91
IntelePeer, Inc.	Networking	141,549 Preferred Stock Warrants		—		39		33
Nanocomp Technologies, Inc. (2)	Networking	272,728 Preferred Stock Warrants		—		25		19
Aquion Energy, Inc.	Power Management	115,051 Preferred Stock Warrants		—		7		55
Powerhouse Dynamics, Inc. (2)	Power Management	290,698 Preferred Stock Warrants		—		28		27
Avalanche Technology, Inc. (2)	Semiconductors	607,435 Preferred Stock Warrants		—		101		41
eASIC Corporation (2)	Semiconductors	40,445 Preferred Stock Warrants		—		25		27
InVisage Technologies, Inc. (2)	Semiconductors	185,790 Preferred Stock Warrants		—		48		45
Kaminario, Inc.	Semiconductors	1,087,203 Preferred Stock Warrants		—		59		63
Luxtera, Inc.(2)	Semiconductors	2,304,667 Preferred Stock Warrants		—		48		108
NexPlanar Corporation	Semiconductors	216,001 Preferred Stock Warrants		—		36		126
Soraa, Inc. (2)	Semiconductors	180,000 Preferred Stock Warrants		—		80		98
Xtera Communications, Inc.	Semiconductors	983,607 Preferred Stock Warrants		—		206		—
Bolt Solutions Inc. (2)	Software	202,892 Preferred Stock Warrants		—		113		114
Bridge2 Solutions, Inc. (11)	Software	1,218 Preferred Stock Warrants		—		18		322
Clarabridge, Inc.	Software	53,486 Preferred Stock Warrants		—		14		82
Crowdstar, Inc. (2)	Software	75,428 Preferred Stock Warrants		—		14		14
Decisyon, Inc. (2)	Software	457,876 Preferred Stock Warrants		—		45		—
DriveCam, Inc.	Software	71,639 Preferred Stock Warrants		—		20		121
Education Elements, Inc. (2)	Software	136,070 Preferred Stock Warrants		—		16		16
Lotame Solutions, Inc. (2)	Software	288,115 Preferred Stock Warrants		—		22		267
Netuitive, Inc.	Software	41,569 Preferred Stock Warrants		—		48		—
Riv Data Corp. (2)	Software	237,361 Preferred Stock Warrants		—		13		12
ScoreBig, Inc. (2)	Software	481,198 Preferred Stock Warrants		—		55		55
SIGNiX, Inc. (2)	Software	63,365 Preferred Stock Warrants		—		48		47
SpringCM, Inc. (2)	Software	2,385,686 Preferred Stock Warrants		—		55		52
Sys-Tech Solutions, Inc.	Software	375,000 Preferred Stock Warrants		—		242		512
Vidsys, Inc.	Software	37,346 Preferred Stock Warrants		—		23		—
Visage Mobile, Inc.	Software	1,692,047 Preferred Stock Warrants		—		19		—
xTech Holdings, Inc. (2)	Software	111,111 Preferred Stock Warrants		—		30		30
Total Warrants — Technology						2,300		3,745
Warrants — Cleantech — 0.1% (8)
Renmatix, Inc.	Alternative Energy	53,022 Preferred Stock Warrants		—		67		64
Semprius, Inc.	Alternative Energy	519,981 Preferred Stock Warrants		—		25		—

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(9)(10)	Amount		Investments (6)		Value
Rypos, Inc. (2)	Energy Efficiency	5,627 Preferred Stock Warrants		—		44		31
Tigo Energy, Inc. (2)	Energy Efficiency	804,604 Preferred Stock Warrants		—		100		109
Lehigh Technologies, Inc. (2)	Waste Recycling	272,727 Preferred Stock Warrants		—		33		33
Total Warrants — Cleantech						269		237
Warrants — Healthcare information and services — 0.5% (8)
Accumetrics, Inc.	Diagnostics	100,928 Preferred Stock Warrants		—		107		63
BioScale, Inc. (2)	Diagnostics	315,618 Preferred Stock Warrants		—		54		—
Candescent Health, Inc. (2)	Diagnostics	519,992 Preferred Stock Warrants		—		378		—
Helomics Corporation	Diagnostics	13,461 Preferred Stock Warrants		—		73		—
Interleukin Genetics, Inc. (2)(5)	Diagnostics	2,492,523 Common Stock Warrants		—		112		50
LifePrint Group, Inc. (2)	Diagnostics	49,000 Preferred Stock Warrants		—		29		27
Singulex, Inc.	Other Healthcare	293,632 Preferred Stock Warrants		—		44		165
Talyst, Inc.	Other Healthcare	300,360 Preferred Stock Warrants		—		100		35
Watermark Medical, Inc. (2)	Other Healthcare	27,373 Preferred Stock Warrants		—		74		62
Innovatient Solutions, Inc. (2)	Software	157,895 Preferred Stock Warrants		—		35		35
MedAvante, Inc. (2)	Software	114,285 Preferred Stock Warrants		—		66		65
Medsphere Systems Corporation (2)	Software	7,097,791 Preferred Stock Warrants		—		60		59
Recondo Technology, Inc. (2)	Software	556,796 Preferred Stock Warrants		—		95		193
Total Warrants — Healthcare information and services						1,227		754
Total Warrants						5,155		5,961

Other Investments — 0.2% (8)
Vette Technology, LLC	Data Storage	Royalty Agreement Due 4/18/2019		—		4,445		300
Total Other Investments						4,445		300
Equity — 0.9% (8)
Insmed Incorporated (5)	Biotechnology	33,208 Common Stock		—		239		617
Revance Therapeutics, Inc.(5)	Biotechnology	4,861 Common Stock		—		73		145
Sunesis Pharmaceuticals, Inc. (5)	Biotechnology	78,493 Common Stock		—		83		63
Overture Networks Inc.	Communications	386,191 Common Stock		—		482		222
Total Equity						877		1,047
Total Portfolio Investment Assets — 153.5% (8)					$	252,812	$	249,033

Short Term Investments — Money Market Funds — 0.2% (8)
US Bank Money Market Deposit Account					$	275	$	275
Total Short Term Investments — Money Market Funds					$	275	$	275
Short Term Investments — Restricted Investments— 0.9% (8)
US Bank Money Market Deposit Account (2)					$	1,448	$	1,448
Total Short Term Investments — Restricted Investments					$	1,448	$	1,448

_____________________________

(1)

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

(2)

Has been pledged as collateral under the Key Facility or the 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 end-of-term payments (“ETPs”) and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. All debt investments are at fixed rates for the term of the debt investment, unless otherwise indicated. Debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of September 30, 2015 is provided.

(5)

Portfolio company is a public company.

(6)

For debt investments, represents principal balance less unearned income.

(7)

Warrants, Equity Interests and Other Investments are non-income producing.

(8)

Value as a percent of net assets.

(9)

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

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

September 30, 2015

(In thousands)

(10)

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

(11)

The Company received a contractual right to receive warrants from Bridge2 Solutions, Inc. and its affiliates (collectively, “Bridge2”) upon the earliest of December 31, 2015, a qualifying equity sale of Bridge2’s equity securities or an acquisition of Bridge2.

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(10)(11)	Amount		Investments (6)		Value
Debt Investments — 144.1% (9)
Debt Investments — Life Science — 31.4% (9)
Argos Therapeutics, Inc. (2)(5)	Biotechnology	Term Loan (9.25% cash (Libor + 8.75%; Floor 9.25%;	$	5,000	$	4,872	$	4,872
		Ceiling 10.75%), 5.00% ETP, Due 10/1/18)
Inotek Pharmaceuticals Corporation (2)	Biotechnology	Term Loan (11.00% cash, 3.00% ETP, Due 10/1/16)		2,795		2,777		2,777
New Haven Pharmaceuticals, Inc. (2)	Biotechnology	Term Loan (11.50% cash (Libor + 11.00%; Floor		1,301		1,292		1,292
		11.50%), 6.50% ETP, Due 11/1/17)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		434		431		431
		11.50%), 6.50% ETP, Due 11/1/17)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		2,000		1,967		1,967
		10.50%), 4.00% ETP, Due 7/1/18)
Palatin Technologies, Inc. (2)(5)	Biotechnology	Term Loan (9.00% cash (Libor + 8.50%; Floor		5,000		4,919		4,919
		9.00%), 5.00% ETP, Due 1/1/19)
Sample6, Inc. (2)	Biotechnology	Term Loan (9.50% cash (Libor + 9.00%; Floor		1,555		1,548		1,548
		9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)
		Term Loan (9.50% cash (Libor + 9.00%; Floor		945		912		912
		9.50%; Ceiling 11.00%), 4.00% ETP, Due 4/1/18)
Sunesis Pharmaceuticals, Inc. (2)(5)	Biotechnology	Term Loan (8.95% cash, 3.75% ETP, Due 10/1/15)		677		675		675
		Term Loan (9.00% cash, 3.75% ETP, Due 10/1/15)		1,016		1,008		1,008
Xcovery Holding Company, LLC (2)	Biotechnology	Term Loan (12.50% cash, Due 8/1/15)		292		292		292
		Term Loan (12.50% cash, Due 8/1/15)		459		459		459
		Term Loan (12.50% cash, Due 10/1/15)		101		101		101
AccuVein Inc. (2)	Medical Device	Term Loan (10.40% cash (Libor + 9.90%; Floor		4,000		3,956		3,956
		10.40%; Ceiling 11.90%), 5.00% ETP, Due 2/1/18)
		Term Loan (10.00% cash (Libor + 9.50%; Floor		1,000		981		981
		10.00%; Ceiling 12.50%), 4.00% ETP, Due 7/1/18)
IntegenX Inc. (2)	Medical Device	Term Loan (10.75% cash (Libor + 10.25%; Floor		3,750		3,685		3,685
		10.75%; Ceiling 12.75%), 3.50% ETP, Due 7/1/18)
Lantos Technologies, Inc. (2)	Medical Device	Term Loan (10.50% cash (Libor + 10.00%; Floor		3,500		3,449		3,449
		10.50%; Ceiling 12.00%), 3.00% ETP, Due 2/1/18)
Mederi Therapeutics, Inc. (2)	Medical Device	Term Loan (10.75% cash (Libor + 10.25%; Floor		3,000		2,969		2,969
		10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)
		Term Loan (10.75% cash (Libor + 10.25%; Floor		3,000		2,969		2,969
		10.75%; Ceiling 12.75%), 4.00% ETP, Due 7/1/17)
Tryton Medical, Inc. (2)	Medical Device	Term Loan (10.41% cash (Prime + 7.16%), 2.50% ETP,		2,813		2,789		2,789
		Due 9/1/16)
ZetrOZ, Inc. (2)	Medical Device	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,500		1,427		1,427
		11.00%; Ceiling 12.50%), 3.00% ETP, Due 4/1/18)
Total Debt Investments — Life Science						43,478		43,478
Debt Investments — Technology — 78.9% (9)
Ekahau, Inc. (2)	Communications	Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		1,279		1,267		1,267
		Term Loan (11.75% cash, 2.50% ETP, Due 2/1/17)		426		422		422
mBlox, Inc. (2)	Communications	Term Loan (11.50% cash (Libor + 11.00%; Floor		5,000		4,967		4,967
		11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		5,000		4,967		4,967
		11.50%; Ceiling 13.00%), 2.5% ETP, Due 7/1/18)
Overture Networks, Inc. (2)	Communications	Term Loan (10.75% cash, (Libor + 10.25%; Floor		4,104		4,071		4,071
		10.75%), 5.75% ETP, Due 12/1/17)
		Term Loan (10.75% cash (Libor + 10.25%; Floor		2,052		2,038		2,038
		10.75%), 5.75% ETP, Due 12/1/17)
Additech, Inc. (2)	Consumer-related Technologies	Term Loan (11.75% cash (Libor + 11.25%; Floor		2,500		2,417		2,417
		11.75%; Ceiling 13.25%), 4.00% ETP, Due 7/1/18)
Gwynnie Bee, Inc. (2)	Consumer-related Technologies	Term Loan (11.00% cash (Libor + 10.50%; Floor		2,000		1,966		1,966
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 11/1/17)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		1,000		974		974
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 2/1/18)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		1,000		980		980
		11.00%; Ceiling 12.50%), 2.0% ETP, Due 4/1/18)
Nanocomp Technologies, Inc. (2)	Networking	Term Loan (11.50% cash, 3.00% ETP, Due 11/1/17)		1,000		981		981
Avalanche Technology, Inc. (2)	Semiconductors	Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;		1,983		1,972		1,972
		Ceiling 11.75%), 2.40% ETP, Due 4/1/17)
		Term Loan (10.00% cash (Libor + 9.25%; Floor 10.00%;		2,246		2,179		2,179

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(10)(11)	Amount		Investments (6)		Value
		Ceiling 11.75%) ,2.40% ETP, Due 10/1/18)
eASIC Corporation (2)	Semiconductors	Term Loan (11.00% cash, 2.50% ETP, Due 4/1/17)		2,000		1,982		1,982
		Term Loan (10.75% cash, 2.50% ETP, Due 4/1/18)		2,000		1,983		1,983
InVisage Technologies, Inc. (2)	Semiconductors	Term Loan (12.00% cash (Libor + 11.50%; Floor		2,550		2,469		2,469
		12.00%; Ceiling 14.00%), 2.0% ETP, Due 4/1/18)
Kaminario, Inc. (2)	Semiconductors	Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)		2,275		2,255		2,255
		Term Loan (10.50% cash, 2.50% ETP, Due 11/1/16)		2,275		2,255		2,255
Luxtera, Inc. (2)	Semiconductors	Term Loan (10.25% cash, 13.00% ETP, Due 7/1/17)		2,632		2,590		2,590
		Term Loan (10.25% cash, 13.00% ETP, Due 7/1/17)		1,469		1,462		1,462
NexPlanar Corporation (2)	Semiconductors	Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)		2,368		2,352		2,352
		Term Loan (10.50% cash, 2.50% ETP, Due 12/1/16)		1,579		1,564		1,564
Xtera Communications, Inc. (2)	Semiconductors	Term Loan (11.50% cash, 15.65% ETP, Due 1/1/17)		5,846		5,708		5,708
		Term Loan (11.50% cash, 21.75% ETP, Due 1/1/17)		1,624		1,584		1,584
Courion Corporation (2)	Software	Term Loan (11.45% cash, Due 10/1/15)		1,279		1,277		1,277
		Term Loan (11.45% cash, Due 10/1/15)		1,279		1,277		1,277
Crowdstar, Inc. (2)	Software	Term Loan (10.75% cash (Libor + 10.25%; Floor		2,000		1,956		1,956
		10.75%), 3.00% ETP, Due 9/1/18)
Decisyon, Inc. (2)	Software	Term Loan (11.65% cash, 5.00% ETP, Due 9/1/16)		2,919		2,899		2,899
		Term Loan (11.65% cash, 5.00% ETP, Due 11/1/17)		1,000		986		986
Lotame Solutions, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		3,410		3,390		3,390
		11.50%), 5.25% ETP, Due 9/1/17)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		1,500		1,491		1,491
		11.50%), 5.25% ETP, Due 9/1/17)
		Term Loan (11.50% cash (Libor + 11.00%; Floor		2,100		2,070		2,070
		11.50%), 3.00% ETP, Due 4/1/18)
Netuitive, Inc. (2)	Software	Term Loan (12.75% cash, Due 7/1/16)		1,717		1,707		1,707
Raydiance, Inc. (2)	Software	Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)		3,490		3,468		3,468
		Term Loan (11.50% cash, 2.75% ETP, Due 9/1/16)		698		688		688
		Term Loan (11.50% cash (Libor + 11.00%; Floor		3,000		2,955		2,955
		11.50%; Ceiling 13.50%), 2.75% ETP, Due 2/1/18)
Razorsight Corporation (2)	Software	Term Loan (11.75% cash, 3.00% ETP, Due 11/1/16)		1,142		1,132		1,132
		Term Loan (11.75% cash, 3.00% ETP, Due 8/1/16)		1,000		990		990
		Term Loan (11.75% cash, 3.00% ETP, Due 7/1/17)		1,000		988		988
SIGNiX, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		3,000		2,902		2,902
		11.50%), Due 7/1/18)
Social Intelligence Corp. (2)	Software	Term Loan (11.00% cash (Libor + 10.50%; Floor		1,500		1,477		1,477
		11.00%; Ceiling 13.00%), 3.50% ETP, Due 12/1/17)
SpringCM, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		4,500		4,412		4,412
		11.50%; Ceiling 13.00%), 2.00% ETP, Due 1/1/18)
Sys-Tech Solutions, Inc. (2)	Software	Term Loan (11.65% cash (Libor + 11.15%; Floor		6,000		5,954		5,954
		11.65%; Ceiling 12.65%), 4.50% ETP, Due 3/1/18)
		Term Loan (11.65% cash (Libor + 11.15%; Floor		5,000		4,952		4,952
		11.65%; Ceiling 12.65%), 9.00% ETP, Due 5/1/18)
VBrick Systems, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		3,000		2,979		2,979
		11.50%; Ceiling 13.50%), 5.00% ETP, Due 7/1/17)
Vidsys, Inc. (2)	Software	Term Loan (11.00% cash, 7.58% ETP, Due 4/1/15)		3,000		2,993		2,993
Visage Mobile, Inc. (2)	Software	Term Loan (12.00% cash, 3.50% ETP, Due 9/1/16)		645		640		640
Total Debt Investments — Technology						108,988		108,988
Debt Investments — Cleantech — 9.3% (9)
Renmatix, Inc. (2)	Alternative Energy	Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)		1,148		1,145		1,145
		Term Loan (10.25% cash, 3.00% ETP, Due 2/1/16)		1,148		1,145		1,145
		Term Loan (10.25% cash, Due 10/1/16)		3,488		3,469		3,469
Semprius, Inc. (2)(8)	Alternative Energy	Term Loan (10.25% cash, 2.50% ETP, Due 6/1/16)		2,432		2,432		2,250
Aurora Algae, Inc. (2)	Consumer-related Technologies	Term Loan (10.50% cash, 2.00% ETP, Due 5/1/15)		397		396		396
Rypos, Inc. (2)	Energy Efficiency	Term Loan (11.80% cash, Due 1/1/17)		2,670		2,643		2,643
		Term Loan (11.80% cash, Due 9/1/17)		1,000		986		986
Tigo Energy, Inc. (2)	Energy Efficiency	Term Loan (13.00% cash, 3.16% ETP, Due 6/1/15)		786		785		785
Total Debt Investments — Cleantech						13,001		12,819
Debt Investments — Healthcare information and services — 24.5% (9)
Interleukin Genetics, Inc. (2)(5)	Diagnostics	Term Loan (9.00% cash (Libor + 8.50%; Floor 9.00%)		5,000		4,837		4,837
		4.50% ETP, Due 10/1/18)
LifePrint Group, Inc. (2)	Diagnostics	Term Loan (11.00% cash (Libor + 10.50%; Floor		3,000		2,949		2,747

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(10)(11)	Amount		Investments (6)		Value
		11.00%; Ceiling 12.50%), 3.00% ETP, Due 1/1/18)
Radisphere National Radiology Group, Inc. (2)	Diagnostics	Revolver (11.25% cash (Prime + 8.00%), Due 10/1/15)		10,092		10,053		10,053
Watermark Medical, Inc. (2)	Other Healthcare	Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)		3,500		3,473		3,473
		Term Loan (12.00% cash, 4.00% ETP, Due 4/1/17)		3,500		3,473		3,473
Recondo Technology, Inc. (2)	Software	Term Loan (11.50% cash (Libor + 11.00%; Floor		1,384		1,379		1,379
		11.50%), 6.60% ETP, Due 12/1/17)
		Term Loan (11.00% cash (Libor + 10.50%; Floor		2,500		2,490		2,490
		11.00%), 4.50% ETP, Due 12/1/17)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		2,500		2,490		2,490
		10.50%), 2.75% ETP, Due 12/1/17)
		Term Loan (10.50% cash (Libor + 10.00%; Floor		3,000		2,953		2,953
		10.50%), 2.50% ETP, Due 1/1/19)
Total Debt Investments — Healthcare information and services						34,097		33,895
Total Debt Investments						199,564		199,180
Warrant Investments — 3.4% (9)
Warrants — Life Science — 0.6% (9)
ACT Biotech Corporation	Biotechnology	1,521,820 Preferred Stock Warrants		—		83		—
Argos Therapeutics, Inc. (2)(5)	Biotechnology	16,556 Common Stock Warrants		—		33		31
Celsion Corporation (5)	Biotechnology	5,708 Common Stock Warrants		—		15		—
Inotek Pharmaceuticals Corporation	Biotechnology	33,762 Preferred Stock Warrants		—		17		15
N30 Pharmaceuticals, Inc.	Biotechnology	53,550 Common Stock Warrants		—		122		—
New Haven Pharmaceuticals, Inc. (2)	Biotechnology	55,347 Preferred Stock Warrants		—		42		136
Palatin Technologies, Inc. (2)(5)	Biotechnology	333,333 Common Stock Warrants		—		31		31
Revance Therapeutics, Inc. (5)	Biotechnology	34,377 Common Stock Warrants		—		68		120
Sample6, Inc. (2)	Biotechnology	351,018 Preferred Stock Warrants		—		45		39
Supernus Pharmaceuticals, Inc. (2)(5)	Biotechnology	42,083 Common Stock Warrants		—		93		165
Tranzyme, Inc. (2)(5)	Biotechnology	6,460 Common Stock Warrants		—		6		—
AccuVein Inc. (2)	Medical Device	75,769 Preferred Stock Warrants		—		24		29
Direct Flow Medical, Inc.	Medical Device	176,922 Preferred Stock Warrants		—		144		40
EnteroMedics, Inc. (5)	Medical Device	141,026 Common Stock Warrants		—		347		—
IntegenX, Inc. (2)	Medical Device	158,006 Preferred Stock Warrants		—		33		31
Lantos Technologies, Inc. (2)	Medical Device	858,545 Preferred Stock Warrants		—		24		23
Mederi Therapeutics, Inc. (2)	Medical Device	248,736 Preferred Stock Warrants		—		26		40
Mitralign, Inc. (2)	Medical Device	641,909 Preferred Stock Warrants		—		52		37
OraMetrix, Inc. (2)	Medical Device	812,348 Preferred Stock Warrants		—		78		—
Tengion, Inc. (2)(5)	Medical Device	1,864,876 Common Stock Warrants		—		123		—
Tryton Medical, Inc. (2)	Medical Device	122,362 Preferred Stock Warrants		—		15		13
ViOptix, Inc.	Medical Device	375,763 Preferred Stock Warrants		—		13		—
ZetrOZ, Inc. (2)	Medical Device	475,561 Preferred Stock Warrants		—		25		24
Total Warrants — Life Science						1,459		774
Warrants — Technology — 2.2% (9)
Ekahau, Inc. (2)	Communications	978,261 Preferred Stock Warrants		—		33		19
OpenPeak, Inc.	Communications	18,997 Common Stock Warrants		—		89		—
Overture Networks, Inc.	Communications	385,617 Preferred Stock Warrants		—		56		—
Additech, Inc. (2)	Consumer-related Technologies	150,000 Preferred Stock Warrants		—		33		33
Everyday Health, Inc. (5)	Consumer-related Technologies	43,783 Common Stock Warrants		—		69		179
Gwynnie Bee, Inc. (2)	Consumer-related Technologies	268,591 Preferred Stock Warrants		—		68		312
SnagAJob.com, Inc.	Consumer-related Technologies	365,396 Preferred Stock Warrants		—		23		305
Tagged, Inc.	Consumer-related Technologies	190,868 Preferred Stock Warrants		—		26		62
XIOtech, Inc.	Data Storage	2,217,979 Preferred Stock Warrants		—		22		18
Cartera Commerce, Inc.	Internet and media	90,909 Preferred Stock Warrants		—		16		159
SimpleTuition, Inc.	Internet and media	189,573 Preferred Stock Warrants		—		63		29
IntelePeer, Inc.	Networking	141,549 Preferred Stock Warrants		—		39		33
Nanocomp Technologies, Inc. (2)	Networking	272,728 Preferred Stock Warrants		—		25		24
Aquion Energy, Inc.	Power Management	115,051 Preferred Stock Warrants		—		7		56
Avalanche Technology, Inc. (2)	Semiconductors	352,828 Preferred Stock Warrants		—		101		98
eASIC Corporation (2)	Semiconductors	40,445 Preferred Stock Warrants		—		25		28
InVisage Technologies, Inc. (2)	Semiconductors	165,147 Preferred Stock Warrants		—		43		41
Kaminario, Inc.	Semiconductors	1,087,203 Preferred Stock Warrants		—		59		64
Luxtera, Inc.	Semiconductors	2,087,766 Preferred Stock Warrants		—		43		105

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

			Principal		Cost of		Fair
Portfolio Company (1)	Sector	Type of Investment (3)(4)(7)(10)(11)	Amount		Investments (6)		Value
NexPlanar Corporation	Semiconductors	216,001 Preferred Stock Warrants		—		36		56
Soraa, Inc. (2)	Semiconductors	180,000 Preferred Stock Warrants		—		80		77
Xtera Communications, Inc.	Semiconductors	983,607 Preferred Stock Warrants		—		206		—
Bolt Solutions, Inc. (2)	Software	202,892 Preferred Stock Warrants		—		113		118
Clarabridge, Inc.	Software	53,486 Preferred Stock Warrants		—		14		104
Courion Corporation	Software	772,543 Preferred Stock Warrants		—		107		—
Crowdstar, Inc. (2)	Software	75,428 Preferred Stock Warrants		—		14		14
Decisyon, Inc. (2)	Software	457,876 Preferred Stock Warrants		—		46		28
DriveCam, Inc.	Software	71,639 Preferred Stock Warrants		—		20		121
Lotame Solutions, Inc. (2)	Software	288,115 Preferred Stock Warrants		—		23		160
Netuitive, Inc.	Software	41,569 Preferred Stock Warrants		—		48		—
Raydiance, Inc. (2)	Software	1,051,120 Preferred Stock Warrants		—		71		67
Razorsight Corporation (2)	Software	259,404 Preferred Stock Warrants		—		43		44
SIGNiX, Inc. (2)	Software	63,365 Preferred Stock Warrants		—		48		48
Riv Data Corp. (2)	Software	237,361 Preferred Stock Warrants		—		13		12
SpringCM, Inc. (2)	Software	2,385,686 Preferred Stock Warrants		—		55		53
Sys-Tech Solutions, Inc.	Software	375,000 Preferred Stock Warrants		—		242		536
Vidsys, Inc.	Software	37,346 Preferred Stock Warrants		—		23		—
Visage Mobile, Inc.	Software	1,692,047 Preferred Stock Warrants		—		19		17
Total Warrants — Technology						2,061		3,020
Warrants — Cleantech — 0.1% (9)
Renmatix, Inc.	Alternative Energy	52,296 Preferred Stock Warrants		—		67		67
Semprius, Inc.	Alternative Energy	519,981 Preferred Stock Warrants		—		25		—
Rypos, Inc. (2)	Energy Efficiency	5,627 Preferred Stock Warrants		—		44		40
Tigo Energy, Inc. (2)	Energy Efficiency	804,604 Preferred Stock Warrants		—		99		33
Total Warrants — Cleantech						235		140
Warrants — Healthcare information and services — 0.5% (9)
Accumetrics, Inc.	Diagnostics	100,928 Preferred Stock Warrants		—		107		63
BioScale, Inc. (2)	Diagnostics	315,618 Preferred Stock Warrants		—		55		—
LifePrint Group, Inc. (2)	Diagnostics	49,000 Preferred Stock Warrants		—		29		29
Interleukin Genetics, Inc. (2)(5)	Diagnostics	2,492,523 Common Stock Warrants		—		112		112
Helomics Corporation	Diagnostics	13,461 Preferred Stock Warrants		—		73		—
Radisphere National Radiology Group, Inc. (2)	Diagnostics	519,992 Preferred Stock Warrants		—		378		—
Singulex, Inc.	Other Healthcare	293,632 Preferred Stock Warrants		—		44		141
Talyst, Inc.	Other Healthcare	300,360 Preferred Stock Warrants		—		100		52
Watermark Medical, Inc.	Other Healthcare	12,216 Preferred Stock Warrants		—		67		62
Recondo Technology, Inc. (2)	Software	556,796 Preferred Stock Warrants		—		95		210
Total Warrants — Healthcare information and services						1,060		669
Total Warrants						4,815		4,603

Other Investments — 0.2% (9)
Vette Technology, LLC	Data Storage	Royalty Agreement Due 4/18/2019		—		4,582		300
Total Other Investments						4,582		300
Equity — 0.7% (9)
Insmed Incorporated (5)	Biotechnology	33,208 Common Stock		—		239		514
Revance Therapeutics, Inc.(5)	Biotechnology	4,861 Common Stock		—		73		82
Sunesis Pharmaceuticals, Inc. (5)	Biotechnology	78,493 Common Stock		—		83		200
Overture Networks Inc.	Communications	386,191 Common Stock		—		482		222
Total Equity						877		1,018
Total Portfolio Investment Assets — 148.4% (9)					$	209,838	$	205,101

Short Term Investments — Money Market Funds — 0.0% (9)
US Bank Money Market Deposit Account					$	27	$	27
Total Short Term Investments — Money Market Funds					$	27	$	27
Short Term Investments — Restricted Investments— 2.1% (9)
US Bank Money Market Deposit Account (2)					$	2,906	$	2,906
Total Short Term Investments — Restricted Investments					$	2,906	$	2,906

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

December 31, 2014

(In thousands)

____________________________

(1)

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

(2)

Has been pledged as collateral under the Key Facility or 2013-1 Securitization.

(3)

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

(4)

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

(5)

Portfolio company is a public company.

(6)

For debt investments, represents principal balance less unearned income.

(7)

Warrants, Equity Interests and Other Investments are non-income producing.

(8)

Debt investment is on non-accrual status at December 31, 2014, and interest payments received were recognized as income on a cash basis.

(9)

Value as a percent of net assets.

(10)

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

(11)

See Notes to Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Organization

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

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

Horizon Credit I LLC (“Credit I”) was formed as a Delaware limited liability company on January 23, 2008, with CHF as its sole equity member. Credit I is a separate legal entity from the Company and CHF. There has been no activity at Credit I during the nine months ended September 30, 2015.

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

Horizon Credit III LLC (“Credit III”) was formed as a Delaware limited liability company on May 30, 2012, with the Company as the sole equity member. Credit III is a separate legal entity from the Company. There has been no activity at Credit III during the nine months ended September 30, 2015.

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 (the “2013-1 Securitization”) and issuing fixed-rate asset-backed notes in an aggregate principal amount of $90 million (the “Asset-Backed Notes”).

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

The Company’s investment strategy is to maximize the investment portfolio’s return by generating current income from the debt investments the Company makes and capital appreciation from the warrants the Company receives when making such debt investments. The Company has entered into an investment management agreement, which was amended and restated effective July 1, 2014 (the “Investment Management Agreement”), with Horizon Technology Finance Management LLC (the “Advisor”), under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

On March 24, 2015, the Company completed a follow-on public offering of 2,000,000 shares of its common stock at a public offering price of $13.95 per share, for total net proceeds to the Company of $26.7 million, after deducting underwriting commission and discounts and other offering expenses.

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 Articles 6 and 10 of Regulation S-X (“Regulation S-X”) under the Securities Act of 1933, as amended (the “Securities Act”). In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. 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, 2014.

Principles of consolidation

As required under GAAP and Regulation S-X, the Company will generally consolidate its investment in a company that is an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s subsidiaries in its consolidated financial statements.

Use of estimates

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

Fair value

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

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

See Note 5 for additional information regarding fair value.

Segments

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Investments

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

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. As of September 30, 2015, there were no investments on non-accrual status. For the three and nine months ended September 30, 2015, the Company recognized interest income payments of $0.04 million and $0.2 million, respectively, received from one portfolio company whose debt investment was on non-accrual status. As of December 31, 2014, there was one investment on non-accrual status with a cost of $2.4 million and a fair value of $2.3 million.

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

Certain debt investment agreements also require the borrower to make an ETP, that is accrued into interest receivable and taken into income over the life of the debt investment to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay all principal and interest due. The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the three months ended September 30, 2015 and 2014 was 6.5% and 6.0%, respectively. The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the nine months ended September 30, 2015 and 2014 was 7.1% and 5.9%, respectively.

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

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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 September 30, 2015 and December 31, 2014, included in other assets, was $2.1 million and $2.4 million, respectively. The accumulated amortization balances as of September 30, 2015 and December 31, 2014 were $3.7 million and $3.0 million, respectively. The amortization expense for the three months ended September 30, 2015 and 2014 was $0.2 million and $0.3 million, respectively. The amortization expense for the nine months ended September 30, 2015 and 2014 was $0.7 million and $2.4 million, respectively.

Income taxes

As a BDC, the Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income distributed to stockholders, among other things, the Company is required to meet certain source of income and asset diversification requirements and to timely distribute dividends out of assets legally available for distribution to its stockholders of an amount generally at least equal to 90% of its investment company taxable income, as defined by the Code, for each tax year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from corporate-level U.S. federal income taxes. Accordingly, no provision for federal income tax has been recorded in the financial statements. Taxable income differs from net increase in net assets resulting from operations which can be temporary, meaning they will reverse in the future or be permanent. In accordance with Section 946-205-45-3 of the Financial Accounting Standards Board’s (“FASB’s”), Accounting Standards Codification, as amended (“ASC”), permanent tax differences, such as non-deductible excise taxes paid, are reclassified from distributions in excess of net investment income and net realized loss on investments to paid-in-capital at the end of each year. These permanent book-to-tax differences are reclassified on the consolidated statements of changes in net assets to reflect their tax character but have no impact on total net assets. For the nine months ended September 30, 2015, the Company reclassified $1.0 million to paid-in capital from distributions in excess of net investment income of $0.9 million and net realized loss on investments of $0.1 million, which related to excise taxes paid in prior years.

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the nine months ended September 30, 2015, there was no U.S. federal excise tax recorded. For the nine months ended September 30, 2014, $0.1 million was recorded for U.S. federal excise tax.

The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, as modified by ASC Topic 946. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no material uncertain tax positions at September 30, 2015 and December 31, 2014. The 2014, 2013 and 2012 tax years remain subject to examination by U.S. federal and state tax authorities.

Distributions

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

Stock Repurchase Program

On September 28, 2015, the Board authorized a stock repurchase program which allows the Company to repurchase up to $5.0 million of its common stock at prices below the Company’s net asset value per share as reported in its most recent consolidated financial statements. Under the repurchase program, the Company may, but is not obligated to, repurchase shares of its outstanding common stock in the open market or in privately negotiated transactions from time to time. Any repurchases by the Company will comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended, and any applicable requirements of the 1940 Act. Unless extended by the Board, the repurchase program will terminate on the earlier of September 30, 2016 or the repurchase of $5.0 million of the Company’s common stock. During the three and nine months ended September 30, 2015, the Company did not make any repurchases of its common stock.

Transfers of financial assets

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

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

New accounting pronouncement

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) containing new guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, instead of being recorded as a separate asset. This guidance will be effective for annual and interim periods beginning on or after December 15, 2015. The Company is evaluating the impact ASU 2015-03 will have on its consolidated financial position and disclosures.

Note 3. Related party transactions

Investment Management Agreement

The Investment Management Agreement was reapproved by the Board in July 2015. 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 Advisor receives fees for providing services to the Company under the Investment Management Agreement, consisting of two components, a base management fee and an incentive fee.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The base management fee under the Investment Management Agreement through and including June 30, 2014 was calculated at an annual rate of 2.00% of the Company’s gross assets, payable monthly in arrears. As a result of an amendment and restatement of the Investment Management Agreement, the base management fee on and after July 1, 2014 is calculated at an annual rate of 2.00% of (i) the Company’s gross assets, less (ii) assets consisting of cash and cash equivalents, and is payable monthly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. In addition, the Advisor has agreed to waive its base management fee relating to the proceeds raised in the public offering of the Company’s common stock that closed on March 24, 2015, to the extent such fee is not otherwise waived and regardless of the application of the proceeds raised, until the earlier to occur of (i) March 31, 2016 or (ii) the last day of the second consecutive calendar quarter in which the Company’s net investment income exceeds distributions declared on its shares of common stock for the applicable quarter.

During the three and nine months ended September 30, 2015, the Advisor waived base management fees of $0.1 million and $0.2 million, respectively, which the Advisor would have otherwise earned on the proceeds raised in the public offering of the Company’s common stock that closed on March 24, 2015. During the first six months of the period ended September 30, 2014, the Advisor waived base management fees of $0.2 million, which the Advisor would have otherwise earned on cash held by the Company at the time of calculation. The base management fee payable at September 30, 2015 and December 31, 2014 was $0.4 million. After giving effect of the waivers, the base management fee expense was $1.1 million and $1.0 million for the three months ended September 30, 2015 and 2014, respectively. After giving effect of the waivers, the base management fee expense was $3.2 million and $3.4 million for the nine months ended September 30, 2015 and 2014, respectively.

The incentive fee has two parts, as follows:

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

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

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Commencing with the calendar quarter beginning July 1, 2014, the incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee cap and deferral mechanism which is determined based upon a look-back period of up to three years and will be expensed when incurred. For this purpose, the look-back period for the incentive fee based on Pre-Incentive Fee Net Investment Income (the “Incentive Fee Look-back Period”) commenced on July 1, 2014 and will increase by one quarter in length at the end of each of the 12 succeeding calendar quarters, after which time, the Incentive Fee Look-back Period will include the relevant calendar quarter and the 11 preceding full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income is subject to a cap (the “Incentive Fee Cap”) and a deferral mechanism through which the Advisor may recoup a portion of such deferred incentive fees (collectively, the “Incentive Fee Cap and Deferral Mechanism”). The Incentive Fee Cap is equal to (a) 20.00% of Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to the Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or a negative value in any calendar quarter, the Company will not pay an incentive fee on Pre-Incentive Fee Net Investment Income to the Advisor in that quarter. To the extent that the payment of incentive fees on Pre-Incentive Fee Net Investment Income is limited by the Incentive Fee Cap, the payment of such fees will be deferred and paid in subsequent calendar quarters up to three years after their date of deferment, subject to certain limitations, which are set forth in the Investment Management Agreement. The Company only pays incentive fees on Pre-Incentive Fee Net Investment Income to the extent allowed by the Incentive Fee Cap and Deferral Mechanism. “Cumulative Pre-Incentive Fee Net Return” during any Incentive Fee Look-back Period means the sum of (a) Pre-Incentive Fee Net Investment Income and the base management fee for each calendar quarter during the Incentive Fee Look-back Period and (b) the sum of cumulative realized capital gains and losses, cumulative unrealized capital appreciation and cumulative unrealized capital depreciation during the applicable Incentive Fee Look-back Period. As of September 30, 2015 and December 31, 2014, the quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income was not limited by the Incentive Fee Cap and Deferral Mechanism.

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

The performance based incentive fee expense was $1.0 million and $0.8 million for the three months ended September 30, 2015 and 2014, respectively. During the nine months ended September 30, 2014, the Advisor waived performance based incentive fees of $0.1 million which the Advisor would have otherwise earned. After giving effect of the waiver, the performance based incentive fee expense was $2.5 million and $1.2 million for the nine months ended September 30, 2015 and 2014, respectively. The performance based incentive fee payable as of September 30, 2015 and December 31, 2014 was $1.0 million and $0.8 million, respectively. The entire incentive fee payable as of September 30, 2015 and December 31, 2014 represented part one of the incentive fee.

Administration Agreement

The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief compliance officer and chief financial officer and their respective staffs. The administrative fee expense was $0.3 million for the three months ended September 30, 2015 and 2014. The administrative fee expense was $0.9 million for the nine months ended September 30, 2015 and 2014.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Investments

The following table shows the Company’s investments:

	September 30, 2015				December 31, 2014
	Cost		Fair Value		Cost		Fair Value
			(In thousands)
Money market funds	$	275	$	275	$	27	$	27
Restricted investments in money market funds	$	1,448	$	1,448	$	2,906	$	2,906
Non-affiliate investments
Debt	$	242,335	$	241,725	$	199,564	$	199,180
Warrants		5,155		5,961		4,815		4,603
Other		4,445		300		4,582		300
Equity		877		1,047		877		1,018
Total non-affiliate investments	$	252,812	$	249,033	$	209,838	$	205,101

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

	September 30, 2015				December 31, 2014
	Cost		Fair Value		Cost		Fair Value
			(In thousands)
Life Science
Biotechnology	$	36,901	$	37,754	$	22,203	$	22,586
Medical Device		23,889		22,936		23,129		22,462
Technology
Communications		20,359		19,942		18,392		17,973
Consumer-Related		19,068		19,900		6,556		7,228
Data Storage		4,467		318		4,604		318
Internet and Media		1,819		1,806		79		188
Materials		7,409		7,407		—		—
Networking		867		855		1,045		1,038
Power Management		2,487		2,534		7		56
Semiconductors		20,994		20,899		30,948		30,824
Software		60,197		60,967		54,482		54,905
Cleantech
Alternative Energy		4,332		4,304		8,283		8,076
Consumer-Related		—		—		396		396
Energy Efficiency		3,475		3,471		4,557		4,487
Waste Recycling		5,965		5,965		—		—
Healthcare Information and Services
Diagnostics		8,385		7,637		18,593		17,841
Other		8,452		8,496		7,157		7,201
Software		23,746		23,842		9,407		9,522
Total non-affiliate investments	$	252,812	$	249,033	$	209,838	$	205,101

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.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

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

Level 1

Quoted prices in active markets for identical assets and liabilities.

Level 2

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

Level 3

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

Investments are valued at fair value as determined in good faith by the Board, based on input of management, the audit committee and an independent valuation firm which is 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 period end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the same remaining maturities. At September 30, 2015 and December 31, 2014, the hypothetical market yield used ranged from 11% to 25% and 11% to 18%, 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.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

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

•

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

•

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

•

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

•

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

•

Historical portfolio experience on cancellations and exercises of the Company’s warrants are utilized as the basis for determining the estimated time to exit of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or 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 within the fair value hierarchy described above. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. Therefore, the Company has categorized these equity investments as Level 1 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of September 30, 2015 and December 31, 2014. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining its fair value measurements.

The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements as of September 30, 2015:

September 30, 2015

Fair

Valuation Techniques/

Unobservable

Weighted

Investment Type

Value

Methodologies

Input

Range

Average

(Dollars in thousands, except share data)

Debt investments

241,725

Discounted Expected Future Cash Flows

Hypothetical Market Yield

11% – 25%

13%

Warrant investments

5,146

Black-Scholes Valuation Model

Price per share
Average Industry Volatility

$0.00 – $576.05
18%

$39.12
18%

Marketability Discount

20%

Estimated Time to Exit

1 to 5 years

3 years

Other investments

300

Multiple Probability Weighted Cash Flow Model

Discount Rate
Probability Weighting

25%
100%

Equity investments

222

Market Comparable Companies

Price Per Share

$0.58

Total Level 3 investments

247,393

December 31, 2014

Fair

Valuation Techniques/

Unobservable

Weighted

Investment Type

Value

Methodologies

Input

Range

Average

(Dollars in thousands, except share data)

Debt investments

193,937

Discounted Expected Future Cash Flows

Hypothetical Market Yield

11% – 18%

13%

5,243

Multiple Probability Weighted Cash

Probability Weighting

10% – 65%

33%

Flow Model

Warrant investments

3,966

Black-Scholes Valuation Model

Price per share
Average Industry Volatility

$0.04 – $63.98
18%

$3.81
18%

Marketability Discount

20%

Estimated Time to Exit

1 to 5 years

3 years

Other investments

300

Multiple Probability Weighted Cash Flow Model

Discount Rate
Probability Weighting

25%
100%

Equity investments

222

Market Comparable Companies

Price Per Share

$0.57

Total Level 3 investments

203,668

Borrowings: The carrying amount of borrowings under the Company’s revolving credit facility (the “Key Facility”) with KeyBank National Association fka Key Equipment Finance Inc. (“Key”) approximates fair value due to the variable interest rate of the Key Facility and is categorized as Level 2 within the fair value hierarchy described above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed rate 2019 Notes (as defined in Note 6) is based on the closing public share price on the date of measurement. On September 30, 2015, the closing price of the 2019 Notes on the New York Stock Exchange was $25.20 per note, or $33.3 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. Based on market quotations on or around September 30, 2015, the Asset-Backed Notes (as defined in Note 6) were trading at par value, or $19.3 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.

Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

The following tables detail the assets and liabilities that are carried at fair value and measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

	September 30, 2015
	Total		Level 1		Level 2		Level 3
	(In thousands)
Money market funds	$	275	$	—	$	275	$	—
Restricted investments in money market funds	$	1,448	$	—	$	1,448	$	—
Debt investments	$	241,725	$	—	$	—	$	241,725
Warrant investments	$	5,961	$	—	$	815	$	5,146
Other investments	$	300	$	—	$	—	$	300
Equity investments	$	1,047	$	825	$	—	$	222

	December 31, 2014
	Total		Level 1		Level 2		Level 3
	(In thousands)
Money market funds	$	27	$	—	$	27	$	—
Restricted investments in money market funds	$	2,906	$	—	$	2,906	$	—
Debt investments	$	199,180	$	—	$	—	$	199,180
Warrant investments	$	4,603	$	—	$	637	$	3,966
Other investments	$	300	$	—	$	—	$	300