This preliminary prospectus supplement relates to an effective registration statement under the Securities Act of 1933, as amended, but the information in this preliminary prospectus supplement is not complete and may be changed. This preliminary prospectus supplement and the accompanying prospectus are not an offer to sell and are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Filed pursuant to Rule 497
File No. 333-178516

SUBJECT TO COMPLETION, DATED MARCH 21, 2019

PRELIMINARY PROSPECTUS SUPPLEMENT
(to Prospectus dated August 10, 2018)

2,000,000 Shares

Horizon Technology Finance Corporation

Common Stock

 

We are offering for sale 2,000,000 shares of our common stock. We have granted the underwriters a 30-day option to purchase up to 300,000 additional shares of our common stock at the public offering price, less underwriting discounts and commissions.

We are a non-diversified, closed-end management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended. We are externally managed by Horizon Technology Finance Management LLC, a registered investment adviser under the Investment Advisers Act of 1940, as amended. Our investment objective is to maximize our investment portfolio’s total return by generating current income from the debt investments we make and capital appreciation from the warrants we receive when making such debt investments. Substantially all of our investments consist of secured debt investments to development-stage companies in the technology, life science, healthcare information and services and cleantech industries.

Our common stock is listed on the Nasdaq Global Select Market, or Nasdaq, under the symbol “HRZN”. The last reported closing sale price for our common stock on March 20, 2019 was $12.26 per share. The net asset value per share of our common stock on December 31, 2018 (the last date prior to the date of this prospectus supplement on which we determined net asset value) was $11.64.

Investing in our common stock should be considered highly speculative, and involves a high degree of risk including the risk of a substantial loss of investment and the risk of leverage and dilution. Before purchasing any shares of our common stock, you should read the discussion of the principal risks of investing in our securities, which are summarized in “Risk Factors” beginning on page 17 of the accompanying prospectus.

This prospectus supplement and the accompanying prospectus contain important information you should know before investing in our common stock and should be retained for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission, or SEC. We maintain a website at www.horizontechfinance.com and intend to make all of the foregoing information available, free of charge, on or through our website. You may also obtain such information by contacting us at 312 Farmington Avenue, Farmington, Connecticut 06032, or by calling us collect at (860) 676-8654. The SEC maintains a website at www.sec.gov where such information is available without charge. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider information contained on our website to be part of this prospectus supplement or the accompanying prospectus.

		Per share				Total
Public offering price		$				$
Underwriting discounts and commissions		$				$
Proceeds, before expenses, to us(1)		$				$

The underwriters have the option to purchase from us up to an additional 300,000 shares of common stock at the public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus supplement. If the option to purchase additional shares is exercised in full, the total public offering price will be $     , the total underwriting discounts and commissions will be $      , and the total proceeds to us, before deducting estimated offering expenses payable by us of $100,000, will be $      .

Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the Shares on or about March   , 2019.

Book-Running Managers

Morgan Stanley		UBS Investment Bank		Janney Montgomery Scott

Prospectus supplement dated March   , 2019

TABLE OF CONTENTS

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

		Page
About This Prospectus Supplement			iii
Prospectus Supplement Summary			S-1
The Offering			S-6
Fees and Expenses			S-10
Use of Proceeds			S-13
Capitalization			S-14
Selected Consolidated Financial and Other Data			S-15
Management’s Discussion and Analysis of Financial Condition and Results of Operations			S-16
Underwriting			S-35
Legal Matters			S-39
Independent Registered Public Accounting Firm			S-39
Available Information			S-39
Index to Consolidated Financial Statements			SF-1

PROSPECTUS

		Page
About this Prospectus			ii
Prospectus Summary			1
Offerings			8
Fees and Expenses			12
Selected Consolidated Financial and Other Data			15
Selected Quarterly Financial Data			16
Risk Factors			17
Cautionary Note Regarding Forward-Looking Statements			49
Use of Proceeds			51
Price Range of Common Stock and Distributions			52
Ratio of Earnings to Fixed Charges			55
Management’s Discussion and Analysis of Financial Condition and Results of Operations			56
Senior Securities			78
Business			80
Portfolio Companies			91
Management			99
Certain Relationships and Related Transactions			107
Our Advisor			108
Investment Management and Administration Agreements			109
Determination of Net Asset Value			119
Dividend Reinvestment Plan			121
Description of Our Securities			123

TABLE OF CONTENTS

		Page
Description of Common Stock That We May Issue			124
Description of Preferred Stock That We May Issue			129
Description of Subscription Rights That We May Issue			131
Description of Debt Securities That We May Issue			132
Description of Warrants That We May Issue			143
Regulation			145
Brokerage Allocations and Other Practices			150
Plan of Distribution			151
Material U.S. Federal Income Tax Considerations			154
Custodian, Transfer Agent, Dividend Paying Agent and Registrar			163
Legal Matters			163
Independent Registered Public Accounting Firm			163
Where You Can Find More Information			164
Index to Consolidated Financial Statements			F-1

TABLE OF CONTENTS

ABOUT THIS PROSPECTUS SUPPLEMENT

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. Neither we nor the underwriters have authorized any other person to provide you with different information from that contained in this prospectus supplement or the accompanying prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell, or a solicitation of an offer to buy, any shares of our common stock by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any jurisdiction to whom it is unlawful to make such an offer or solicitation. The information contained in this prospectus supplement and the accompanying prospectus is complete and accurate only as of their respective dates, regardless of the time of their delivery or sale of our common stock. This prospectus supplement supersedes the accompanying prospectus to the extent it contains information different from or in addition to the information in that prospectus.

This document is in two parts. The first part is this prospectus supplement, which describes the terms of this offering of common stock and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which provides more information about us, our common stock and related matters. To the extent the information contained in this prospectus supplement differs from the information contained in the accompanying prospectus, the information in this prospectus supplement shall control. You should read this prospectus supplement and the accompanying prospectus together with the additional information described under the heading “Available Information” in this prospectus supplement before investing in our common stock.

Forward-Looking Statements

Information contained in this prospectus supplement and the accompanying prospectus may contain forward-looking statements, which can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” or “continue” or the negatives thereof or other variations thereon or comparable terminology. The matters described in the section titled “Risk Factors” in the accompanying prospectus and certain other factors noted throughout this prospectus supplement and the accompanying prospectus constitute cautionary statements identifying important factors with respect to any such forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. We undertake no obligation to revise or update any forward-looking statements but advise you to consult any additional disclosures that we may make directly to you or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT SUMMARY

This summary highlights some of the information in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all of the information that you may want to consider before investing in our common stock. To understand the terms of the common stock we are offering, you should read the entire prospectus supplement and the accompanying prospectus carefully. Together, these documents describe the specific terms of the shares we are offering. You should carefully read the sections titled “Risk Factors,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements” as well as the documents identified in the section titled “Available Information” in this prospectus supplement.

Horizon Technology Finance Corporation, a Delaware corporation, was formed on March 16, 2010 for the purpose of acquiring, continuing and expanding the business of its wholly owned subsidiary, Compass Horizon Funding Company LLC, a Delaware limited liability company, which we refer to as “Compass Horizon,” raising capital in its initial public offering, or IPO, and operating as an externally managed BDC under the Investment Company Act of 1940, as amended, or the 1940 Act. Except where the context suggests otherwise, the terms “we,” “us,” “our” and “Company” refer to Horizon Technology Finance Corporation and its consolidated subsidiaries. In addition, we refer to Horizon Technology Finance Management LLC, a Delaware limited liability company, as “HTFM,” our “Advisor” or our “Administrator.”

Our Company

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

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. In addition, for U.S. federal income tax purposes, we have elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance a portion of our investments through borrowings. On March 23, 2018, the Small Business Credit Availability Act, or SBCAA, amended Section 61(a) of the 1940 Act to add Section 61(a)(2) which enables BDCs to reduce their asset coverage requirements from 200% to 150%. This provision permits a BDC to double the maximum amount of leverage that it is permitted to incur, so long as the BDC meets certain disclosure requirements and obtains certain approvals. As defined in the 1940 Act, asset coverage of 150% means that for every $100 of net assets a BDC holds, it may raise up to $200 from borrowing and issuing senior securities. We received approval from our stockholders to reduce our asset coverage requirement from 200% to 150% on October 30, 2018. The amount of leverage that we may employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing. As a RIC, we generally do not have to pay corporate-level federal income taxes on our investment company taxable income and our net capital gain that we distribute to our stockholders as long as we meet certain source-of-income, distribution, asset diversification and other requirements.

TABLE OF CONTENTS

From the commencement of operations of Compass Horizon on March 4, 2008 through December 31, 2018, we funded 168 portfolio companies and invested $1.1 billion in debt investments. As of December 31, 2018, our debt investment portfolio consisted of 34 debt investments with an aggregate fair value of $216.4 million. As of December 31, 2018, 98.5%, or $213.2 million, of our debt investment portfolio at fair value consisted of Senior Term Loans. As of December 31, 2018, our net assets were $134.3 million, and all of our debt investments were secured by all or a portion of the tangible and intangible assets of the applicable portfolio company. The debt investments in our portfolio are generally not rated by any rating agency. If the individual debt investments in our portfolio were rated, they would be rated below “investment grade”. Debt investments that are unrated or rated below investment grade are sometimes referred to as “junk bonds” and have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal.

For the year ended December 31, 2018, our dollar-weighted annualized yield on average debt investments (excluding any yield from warrants, equity, other investments and Horizon Secured Loan Fund I, or HSLFI, a joint venture formed with Arena Sunset SPV, LLC, or Arena) was 15.3%. We calculate the dollar-weighted yield on average debt investments for any period as (1) total investment income (excluding income from HSLFI) during the period divided by (2) the average of the fair value of debt investments outstanding on (a) the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar month during the period. The dollar-weighted annualized yield on average debt investments is higher than what investors will realize because it does not reflect our expenses or any sales load paid by investors.

For the year ended December 31, 2018, our investment portfolio (including any yield from warrants, equity, other investments and HSLFI) had an overall total yield of 13.9%. We calculate the dollar-weighted yield on average investments for any period as (1) total investment income during the period divided by (2) the average of the fair value of investments outstanding on (a) the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar month during the period. The dollar-weighted annualized yield on average investments is higher than what investors will realize because it does not reflect our expenses or any sales load paid by investors.

As of December 31, 2018, our debt investments had a dollar-weighted average term of 46 months from inception and a dollar-weighted average remaining term of 36 months. As of December 31, 2018, substantially all of our debt investments had an original committed principal amount of between $3 million and $20 million, repayment terms of between 10 and 60 months and bore current pay interest at annual interest rates of between 10% and 15%.

For the year ended December 31, 2018, our total return based on market value was 11.0%. Total return based on market value is calculated as (x) the sum of (i) the closing sales price of our common stock on the last day of the period plus (ii) the aggregate amount of distributions paid per share during the period, less (iii) the closing sales price of our common stock on the first day of the period, divided by (y) the closing sales price of our common stock on the first day of the period.

In addition to our debt investments, as of December 31, 2018, we held warrants to purchase stock, predominantly preferred stock, in 67 portfolio companies, equity positions in nine portfolio companies and success fee arrangements in nine portfolio companies.

On June, 1 2018, we and Arena formed a joint venture, HSLFI, to make investments, either directly or indirectly through subsidiaries, primarily in the form of secured loans to development-stage companies in our Target Industries. HSLFI was formed as a Delaware limited liability company and is not consolidated by either us or Arena for financial reporting purposes. Investments held by HSLFI are measured at fair value. As of December 31, 2018, HSLFI had total assets of $26.4 million. HSLFI’s portfolio consisted of debt investments in four portfolio companies as of December 31, 2018. As of December 31, 2018, the largest investment in a single portfolio company in the HSLFI’s portfolio in aggregate principal amount was $8.3 million and the four largest investments in portfolio companies in HSLFI’s portfolio totaled $25.0 million. As of December 31, 2018, HSLFI had no investments on non-accrual status. HSLFI invests in portfolio companies in the same industries in which we may directly invest.

TABLE OF CONTENTS

We invest cash or securities in portfolio companies in HSLFI in exchange for limited liability company equity interests in HSLFI. As of December 31, 2018, we and Arena each owned 50.0% of the equity interests of HSLFI. We had an original commitment to fund $25.0 million of equity interests in HSLFI. As of December 31, 2018, $11.7 million was unfunded. Our investment in HSLFI consisted of an equity contribution of $13.3 million as of December 31, 2018.

Our advisor

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

Our Advisor is led by five senior managers including Robert D. Pomeroy, Jr., our Chief Executive Officer, Gerald A. Michaud, our President, Daniel R. Trolio, our Senior Vice President and Chief Financial Officer, John C. Bombara, our Senior Vice President, General Counsel and Chief Compliance Officer, and Daniel S. Devorsetz, our Senior Vice President and Chief Investment Officer.

Our strategy

Our investment objective is to maximize our investment portfolio’s total return by generating current income from the loans we make and capital appreciation from the warrants we receive when making such loans. To further implement our business strategy, we expect our Advisor to continue to employ the following core strategies:

TABLE OF CONTENTS

Market opportunity

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

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

TABLE OF CONTENTS

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

Competitive strengths

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

Consistently execute commitments and close transactions.  Our Advisor and its senior management and investment professionals have an extensive track record of originating, underwriting and managing Venture Loans. Our Advisor and its predecessor have directly originated, underwritten and managed Venture Loans with an aggregate original principal amount over $1.5 billion to more than 235 companies since operations commenced in 2004.

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

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

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

Well-known brand name.  Our Advisor has originated Venture Loans to more than 235 companies in our Target Industries under the “Horizon Technology Finance” brand.

Recent development

On March 5, 2019, our Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled to receive under the Investment Management Agreement for the period commencing on January 1, 2019 and ending on December 31, 2019. Such waived incentive fees will not be subject to recoupment.

On March 1, 2019 we declared monthly cash distributions of $.10 per share payable on each of April 16, May 15, and June 17, 2019. These monthly distributions will be payable to record holders as of March 19, April 18, and May 17, 2019, respectively. Participants in this offering will not be eligible to receive the dividend payable on April 16, 2019 to record holders as of March 19, 2019.

Company Information

Our administrative and executive offices and those of our Advisor are located at 312 Farmington Avenue, Farmington, Connecticut 06032, and our telephone number is (860) 676-8654. Our corporate website is located at www.horizontechfinance.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider any such information contained to be part of this prospectus supplement or the accompanying prospectus.

TABLE OF CONTENTS

THE OFFERING

TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF CONTENTS

FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in shares of our common stock will bear directly or indirectly. However, we caution you that some of the percentages indicated in the table below are estimates and may vary. The following table and example should not be considered a representation of our future expenses. Actual expenses may be greater or less than shown. Except where the context suggests otherwise, whenever this prospectus supplement and the accompanying prospectus contain a reference to fees or expenses paid by “you” or “us” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in the Company.

Stockholder Transaction Expenses
Sales Load (as a percentage of offering price)			%(1)
Offering Expenses (as a percentage of offering price)			%(2)
Dividend Reinvestment Plan Fees			—	(3)
Total Stockholder Transaction Expenses (as a percentage of offering price)				%
Annual Expenses (as a Percentage of Net Assets Attributable to Common Stock)(4)
Base Management Fee			3.36	%(5)
Incentive Fee Payable Under the Investment Management Agreement			2.38	%(6)
Interest Payments on Borrowed Funds			4.56	%(7)
Other Expenses (estimated for the current fiscal year)			1.77	%(8)
Acquired Fund Fees and Expenses			0.00	%(9)
Total Annual Expenses (estimated)			12.07	%(5)(10)

The first part, which is payable quarterly in arrears, subject to a Fee Cap and Deferral Mechanism, equals 20% of the excess, if any, of our Pre-Incentive Fee Net Investment Income over a 1.75% quarterly (7% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, our Advisor receives no incentive fee until our net investment income equals the hurdle rate of 1.75% but then receives, as a “catch-up,” 100% of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.1875%. The effect of this provision is that, if Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter, our Advisor will receive 20% of our Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply. The first part of the incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash.

The second part of the incentive fee equals 20% of our Incentive Fee Capital Gains, if any. Incentive Fee Capital Gains are our realized capital gains on a cumulative basis from inception through the end of each

TABLE OF CONTENTS

calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The second part of the incentive fee is payable, in arrears, at the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date). For a more detailed discussion of the calculation of this fee, see “Investment Management and Administration Agreements — Investment Management Agreement” in the accompanying prospectus.

The incentive payable to our Advisor represents our estimated annual expense incurred under the first part of the incentive fee payable under the Investment Management Agreement over the next twelve months. As of December 31, 2018, our cumulative realized capital gains and unrealized capital appreciation did not exceed our cumulative realized capital losses and unrealized capital depreciation. Given our strategy of investing primarily in Venture Loans, which are fixed-income assets, we believe it is unlikely that our cumulative realized capital gains and unrealized capital appreciation will exceed our cumulative realized capital losses and unrealized capital depreciation in the next twelve months. Consequently, we do not expect to incur any Incentive Fee Capital Gains during the next twelve months. As we cannot predict the occurrence of any capital gains from the portfolio, we have assumed no Incentive Fee Capital Gains.

TABLE OF CONTENTS

Example

The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown. In calculating the following expense amounts, we have assumed that our annual operating expenses remain at the levels set forth in the table above.

		1 Year				3 Years				5 Years				10 Years
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return		$	116.43			$	325.19			$	505.47			$	855.79

The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or lesser than those shown.

While the example assumes, as required by the applicable rules of the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under the Investment Management Agreement is unlikely to be significant assuming a 5% annual return and is not included in the example. This illustration assumes that we will not realize any capital gains (computed net of all realized capital losses and unrealized capital depreciation) in any of the indicated time periods. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our distributions to our common stockholders and our expenses would likely be higher. If the 5% annual return were derived entirely from capital gains, you would pay expenses on a $1,000 investment of $107.52, $303.32, $476.00 and $823.67 over periods of one year, three years, five years and ten years, respectively. See “Investment Management and Administration Agreements — Investment Management Agreement — Examples of Incentive Fee Calculation” in the accompanying prospectus for additional information regarding the calculation of incentive fees.

In addition, while the example assumes reinvestment of all dividends and other distributions at net asset value, or NAV participants in our DRIP receive a number of shares of our common stock determined by dividing the total dollar amount of the distribution payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the distribution. This price may be at, above or below NAV. See “Dividend Reinvestment Plan” in the accompanying prospectus for additional information regarding our DRIP.

TABLE OF CONTENTS

USE OF PROCEEDS

We estimate that the net proceeds from the sale of 2,000,000 shares of common stock offered by us pursuant to this prospectus supplement will be $     million (or $     million if the underwriters fully exercise their option to purchase additional shares), based on a public offering price of $     after deducting the underwriting discounts and commissions and estimated offering expenses of $100,000 payable by us.

We intend to initially use the net proceeds from this offering to repay outstanding debt borrowed under our Key Facility. However, through re-borrowing of the initial repayments under our Key Facility, we intend to use the net proceeds from this offering to make investments in accordance with our investment objective and strategies described in this prospectus supplement and the accompanying prospectus to pay our operating expenses and other cash obligations, and for general corporate purposes. We may be unable to invest a significant portion of the net proceeds from an offering or from exiting an investment or other capital on acceptable terms, which could harm our financial condition and operating results.

On December 31, 2018, we had $90.5 million outstanding under our Key Facility. Our Key Facility matures in April 2023, unless extended, and bears interest on a per annum basis equal to one-month LIBOR, plus a spread of 3.25%, with a LIBOR floor of 0.75%. As of December 31, 2018, the interest rate under our Key Facility was 5.60%. Amounts repaid under our Key Facility will remain available for future borrowings.

TABLE OF CONTENTS

CAPITALIZATION

The following table sets forth:

This table should be read in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes thereto included in this prospectus supplement and the accompanying prospectus.

		As of December 31, 2018
		Actual				As-Adjusted for this Offering
		(In thousands)
Cash		$	12,591			$
Key Facility			90,500
2022 Notes			37,375
Total borrowings		$	127,875			$
Net assets:
Preferred stock, par value $0.001 per share; 1,000,000 shares authorized, no shares issued and outstanding			—				—
Common stock, par value $0.001 per share; 100,000,000 shares authorized, 11,702,594 shares issued and 11,535,129 shares outstanding, actual and 13,702,594 shares issued and 13,535,129 shares outstanding, as adjusted			12
Paid-in capital in excess of par			179,616
Distributable earnings			(45,371	)
Total net assets		$	134,257			$

TABLE OF CONTENTS

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial data of the Company as of December 31, 2018, 2017, 2016, 2015 and 2014, and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 are derived from the consolidated financial statements that have been audited by RSM US LLP, an independent registered public accounting firm. These selected financial data should be read in conjunction with our financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus supplement and the accompanying prospectus.

		As of and for the years ended December 31,
(Dollars in thousands, except per share data and portfolio company counts)		2018				2017				2016				2015				2014
Statement of Operations Data:
Total investment income		$	31,090			$	25,777			$	32,984			$	31,110			$	31,254
Base management fee			4,578				3,786				4,727				4,747				4,648
Performance based incentive fee			4,393				1,714				2,126				3,501				2,112
All other expenses			9,403				8,034				9,119				9,212				13,962
Base management and performance based incentive fees waived			(1,184	)			(79 )				—				(346 )				(345 )
Net investment income before excise tax			13,900				12,322				17,012				13,996				10,877
Provision (credit) for excise tax			34				25				(87 )				—				160
Net investment income			13,866				12,297				17,099				13,996				10,717
Net realized gain (loss) on investments			645				(21,191 )				(7,776 )				(1,650 )				(3,576 )
Net unrealized (depreciation) appreciation on investments			(1,501 )				18,485				(14,236 )				(490 )				8,289
Net increase (decrease) in net assets resulting from operations		$	13,010			$	9,591			$	(4,913	)		$	11,856			$	15,430
Dollar amount of distributions declared		$	13,837			$	13,823			$	15,403			$	15,793			$	13,282
Per Share Data:
Net asset value		$	11.64			$	11.72			$	12.09			$	13.85			$	14.36
Net investment income			1.20				1.07				1.48				1.25				1.11
Net realized gain (loss) on investments			0.06				(1.84 )				(0.67 )				(0.15 )				(0.37 )
Net change in unrealized (depreciation) appreciation on investments			(0.13	)			1.60				(1.24 )				(0.04 )				0.86
Net increase (decrease) in net assets resulting from operations			1.13				0.83				(0.43 )				1.06				1.60
Per share distributions declared			1.20				1.20				1.335				1.38				1.38
Statement of Assets and Liabilities Data:
Investments, at fair value		$	248,441			$	222,099			$	194,003			$	250,267			$	205,101
Other assets			18,308				12,047				45,249				30,629				20,095
Total assets			266,749				234,146				239,252				280,896				225,196
Borrowings			126,853				94,075				95,597				114,954				81,753
Total liabilities			132,492				99,071				100,060				121,145				86,948
Total net assets		$	134,257			$	135,075			$	139,192			$	159,751			$	138,248
Other data:
Weighted yield on debt investments at fair value			15.3 %				15.1 %				14.9 %				14.2 %				15.3 %
Weighted yield on all investments at fair value			13.9	%			14.0 %				14.4 %				13.7 %				14.8 %
Number of portfolio companies at period end:
Debt investments			34				33				44				52				50
Warrants investments			67				72				78				83				75
Equity investments			9				6				5				6				4
Other investments			4				4				2				1				1

TABLE OF CONTENTS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with “Selected Consolidated Financial and Other Data” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus supplement and the accompanying prospectus. The information in this section contains forward-looking statements that involve risks and uncertainties. Please see “Risk Factors” in the accompanying prospectus and “Cautionary Note Regarding Forward-Looking Statements” in the accompanying prospectus for a discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

We are a specialty finance company that lends to and invests in development-stage companies in our Target Industries. Our investment objective is to maximize our investment portfolio’s total return by generating current income from the debt investments we make and capital appreciation from the warrants we receive when making such debt investments. We are focused on making Venture Loans to venture capital backed companies in our Target Industries, which we refer to as “Venture Lending.” We also selectively provide Venture Loans to publicly traded companies in our Target Industries. Our debt investments are typically secured by first liens or first liens behind a secured revolving line of credit, or Senior Term Loans. As of December 31, 2018, 98.5%, or $213.2 million, of our debt investment portfolio at fair value consisted of Senior Term Loans. Venture Lending is typically characterized by (1) the making of a secured debt investment after a venture capital or equity investment in the portfolio company has been made, which investment provides a source of cash to fund the portfolio company’s debt service obligations under the Venture Loan, (2) the senior priority of the Venture Loan which requires repayment of the Venture Loan prior to the equity investors realizing a return on their capital, (3) the relatively rapid amortization of the Venture Loan and (4) the lender’s receipt of warrants or other success fees with the making of the Venture Loan.

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. In addition, for U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance our investments through borrowings. On March 23, 2018, the SBCAA amended Section 61(a) of the 1940 Act to add Section 61(a)(2) which enables BDCs to reduce their asset coverage requirements from 200% to 150%. This provision permits a BDC to double the maximum amount of leverage that it is permitted to incur, so long as the BDC meets certain disclosure requirements and obtains certain approvals. As defined in the 1940 Act, asset coverage of 150% means that for every $100 of net assets a BDC holds, it may raise up to $200 from borrowing and issuing senior securities. We received approval from our stockholders to reduce our asset coverage requirement from 200% to 150% on October 30, 2018. The amount of leverage that we may employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing. As a RIC, we generally are not subject to corporate-level income taxes on our investment company taxable income, determined without regard to any deductions for dividends paid, and our net capital gain that we distribute as dividends for U.S. federal income tax purposes to our stockholders as long as we meet certain source-of-income, distribution, asset diversification and other requirements.

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

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

TABLE OF CONTENTS

Portfolio composition and investment activity

The following table shows our portfolio by type of investment as of December 31, 2018 and 2017:

		December 31, 2018												December 31, 2017
		Number of Investments				Fair Value				Percentage of Total Portfolio				Number of Investments				Fair Value				Percentage of Total Portfolio
		(Dollars in thousands)
Debt investments			34			$	216,401				87.1	%			33			$	203,793				91.8	%
Warrants			67				9,324				3.8				72				9,090				4.0
Other investments			4				7,640				3.1				4				7,700				3.5
Equity			9				1,833				0.7				6				1,516				0.7
Equity interest in HSLFI			1				13,243				5.3								—				—
Total						$	248,441				100.0	%						$	222,099				100.0	%

The following table shows total portfolio investment activity as of and for the years ended December 31, 2018 and 2017:

		December 31,
		2018				2017
		(In thousands)
Beginning portfolio		$	222,099			$	194,003
New debt investments			111,725				139,256
Less refinanced debt investments			(10,468	)			(3,700	)
Net new debt investments			101,257				135,556
Investment in controlled affiliate investments			13,262				—
Principal payments received on investments			(24,254	)			(30,477	)
Early pay-offs			(60,185	)			(72,613	)
Accretion of debt investment fees			2,390				1,881
New debt investment fees			(2,279	)			(1,705	)
New equity			1,090				—
Warrants received in settlement of fee income			161				—
Proceeds from sale of investments			(4,293	)			(1,840	)
Dividend income from controlled affiliate investments			(255	)			—
Distributions from controlled affiliate investments			255				—
Net realized gain (loss) on investments			553				(21,191	)
Net unrealized (depreciation) appreciation on investments			(1,501	)			18,485
Other			141				—
Ending portfolio		$	248,441			$	222,099

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

TABLE OF CONTENTS

The following table shows our debt investments by industry sector as of December 31, 2018 and 2017:

		December 31, 2018								December 31, 2017
		Debt Investments at Fair Value				Percentage of Total Portfolio				Debt Investments at Fair Value				Percentage of Total Portfolio
		(Dollars in thousands)
Life Science
Biotechnology			19,369				8.9	%		$	15,015				7.4	%
Drug Delivery			1,495				0.7				6,830				3.4
Medical Device			46,162				21.3				36,173				17.7
Technology
Communications			10,539				4.9				19,549				9.6
Consumer-Related			20,491				9.5				10,918				5.3
Data Storage			9,835				4.5				—				—
Internet and Media			36,984				17.1				38,899				19.1
Materials			8,372				3.9				9,324				4.6
Power Management			512				0.2				1,234				0.6
Semiconductors			3,413				1.6				3,345				1.6
Software			35,747				16.5				53,994				26.5
Healthcare Information and Services Software			23,482				10.9				8,512				4.2
Total		$	216,401				100.0	%		$	203,793				100.0	%

The largest debt investments in our portfolio may vary from year to year as new debt investments are originated and existing debt investments are repaid. Our five largest debt investments represented 32% and 29% of total debt investments outstanding as of December 31, 2018 and 2017, respectively. No single debt investment represented more than 10% of our total debt investments as of December 31, 2018 or 2017.

Debt investment asset quality

We use an internal credit rating system which rates each debt investment on a scale of 4 to 1, with 4 being the highest credit quality rating and 3 being the rating for a standard level of risk. A rating of 2 represents an increased level of risk and, while no loss is currently anticipated for a 2-rated debt investment, there is potential for future loss of principal. A rating of 1 represents a deteriorating credit quality and a high degree of risk of loss of principal. Our internal credit rating system is not a national credit rating system. As of December 31, 2018 and 2017, our debt investments had a weighted average credit rating of 3.1 and 3.0, respectively. The following table shows the classification of our debt investment portfolio by credit rating as of December 31, 2018 and 2017:

		December 31, 2018												December 31, 2017
		Number of Investments				Debt Investments at Fair Value				Percentage of Debt Investments				Number of Investments				Debt Investments at Fair Value				Percentage of Debt Investments
		(Dollars in thousands)
Credit Rating
4			6			$	41,677				19.3	%			4			$	18,701				9.2	%
3			23				155,439				71.8				25				176,560				86.6
2			5				19,285				8.9				3				5,632				2.8
1			—				—				—				1				2,900				1.4
Total			34			$	216,401				100.0	%			33			$	203,793				100.0	%

TABLE OF CONTENTS

As of December 31, 2018, there were no debt investments with an internal credit rating of 1. As of December 31, 2017, there was one debt investment with an internal credit rating of 1, with a cost of $3.0 million and a fair value of $2.9 million.

Horizon Secured Loan Fund I LLC

On June, 1 2018, we and Arena formed a joint venture, or HSLFI, to make investments, either directly or indirectly through subsidiaries, primarily in the form of secured loans to development-stage companies in our Target Industries. HSLFI was formed as a Delaware limited liability company and is not consolidated by either us or Arena for financial reporting purposes. Investments held by HSLFI are measured at fair value. As of December 31, 2018, HSLFI had total assets of $26.4 million. HSLFI’s portfolio consisted of debt investments in four portfolio companies as of December 31, 2018. As of December 31, 2018, the largest investment in a single portfolio company in the HSLFI’s portfolio in aggregate principal amount was $8.3 million and the four largest investments in portfolio companies in HSLFI’s portfolio totaled $25.0 million. As of December 31, 2018, HSLFI had no investments on non-accrual status. HSLFI invests in portfolio companies in the same industries in which we may directly invest.

We invest cash or securities in portfolio companies in HSLFI in exchange for limited liability company equity interests in HSLFI. As of December 31, 2018, we and Arena each owned 50.0% of the equity interests of HSLFI. We had an original commitment to fund $25.0 million of equity interests in HSLFI. As of December 31, 2018, $11.7 million was unfunded. Our investment in HSLFI consisted of an equity contribution of $13.3 million as of December 31, 2018.

We and Arena each appointed two members to HSLFI’s four-person board of managers. All material decisions with respect to HSLFI, including those involving its investment portfolio, require unanimous approval of a quorum of the board of managers. Quorum is defined as (i) the presence of two members of the board of managers; provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of three members of the board of managers, provided that the individual that was elected, designated or appointed by the member with only one individual present will be entitled to cast two votes on each matter; or (iii) the presence of all four members of the board of managers.

Horizon Funding I, LLC, or HFI, was formed as a Delaware limited liability company on May 9, 2018, with HSLFI as its sole member. HFI is a special purpose bankruptcy-remote entity and is a separate legal entity from HSLFI. Any assets conveyed to HFI are not available to creditors of HSLFI or any other entity other than HFI’s lenders.

In addition, on June 1, 2018, HSLFI entered into a sale and servicing agreement with HFI, as Issuer, and us, as Servicer, pursuant to which HSLFI will sell or contribute to HFI certain secured loans made to certain portfolio companies. HFI entered into a Note Funding Agreement, or the NYL Facility, with several entities owned or affiliated with New York Life Insurance Company, or the Noteholders, for an aggregate purchase price of up to $100.0 million, with an accordion feature of up to $200.0 million at the mutual discretion and agreement of HSLFI and the Noteholders. The Note Funding Agreement has an investment period that ends on June 1, 2020, if not extended, followed by a five year amortization period and a scheduled final payment date of June 10, 2025, subject to any extension of the investment period. Any notes issued by HFI will be collateralized by all investments held by HFI and permit an advance rate of up to 67% of the aggregate principal amount of eligible debt investments. The interest rate on the notes issued under the NYL Facility is based on the three year USD mid-market swap rate plus a margin of between 2.75% and 3.25% depending on the rating of such notes at the time of issuance. There were no advances made by the Noteholders as of December 31, 2018.

TABLE OF CONTENTS

The following table shows a summary of HSLFI’s investment portfolio:

		For the period June 1, 2018 through December 31, 2018
		(Dollars in thousands)
Total investments at fair value		$	24,734
Dollar-weighted annualized yield on average debt investments(1)			12.9	%
Number of portfolio companies in HSLFI			4
Largest portfolio company investment at fair value		$	8,154
Total of four largest portfolio company investments at fair value		$	24,734

The following table shows HSLFI’s individual investments as of December 31, 2018:

Portfolio Company(1)		Sector				Type of Investment(2)(3)(4)				Principal Amount				Cost of Investments(5)				Fair Value
		(Dollars in thousands)
Debt Investments — Life science
Celsion Corporation(6)(7)(8)			Biotechnology				Term Loan (9.98% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)			$	2,500			$	2,449			$	2,449
							Term Loan (9.98% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)				2,500				2,449				2,449
Total Debt Investments — Life science															4,898				4,898
Debt Investments — Technology
Intelepeer Holdings, Inc.(6)(7)			Communications				Term Loan (12.30% cash (Libor + 9.95%; Floor 11.25%), 2.50% ETP, Due 7/1/21)				4,000				3,948				3,948
							Term Loan (12.30% cash (Libor + 9.95%; Floor 11.25%), 2.50% ETP, Due 7/1/21)				4,000				3,948				3,948
New Signature US, Inc.(6)(7)(9)			Software				Term Loan (10.85% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 7/1/22)				8,250				8,098				8,098
Total Debt Investments —  Technology															15,994				15,994
Debt Investments — Healthcare information and services
HealthEdge Software, Inc.(6)(7)			Software				Term Loan (10.60% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 10/1/23)				3,750				3,699				3,699
Total Debt Investments —  Healthcare information and services															3,699				3,699
Total Debt Investments															24,591				24,591
Warrant Investments — Life science
Celsion Corporation(6)(7)(8)			Biotechnology				95,057 Common Stock Warrants								58				1
Total Warrant Investments — Life science															58				1
Warrant Investments — Technology
Intelepeer Holdings, Inc.(6)(7)			Communications				1,280,000 Preferred Stock Warrants								49				70
BSI Platform Holdings, LLC(6)(7)(9)			Software				412,500 Preferred Stock Warrants								57				56
Total Warrant Investments —  Technology															106				126

TABLE OF CONTENTS

Portfolio Company(1)		Sector				Type of Investment(2)(3)(4)				Principal Amount				Cost of Investments(5)				Fair Value
		(Dollars in thousands)
Warrant Investments — Healthcare information and services
HealthEdge Software, Inc.(6)(7)			Software				47,418 Preferred Stock Warrants							$	16			$	16
Total Warrant Investments —  Healthcare information and services															16				16
Total Warrant Investments															180				143
Total Portfolio Investment Assets														$	24,771			$	24,734
Short Term Investments — Money Market Funds
US Bank Money Market Deposit Account(6)														$	74			$	74
Total Short Term Investments —  Money Market Funds														$	74			$	74

The following table provides HSLFI’s unfunded commitments by portfolio company as of December 31, 2018:

		December 31, 2018
		Principal Balance				Fair Value of Unfunded Commitment Liability
		(In thousands)
New Signature US, Inc.		$	3,000			$	30
Total		$	3,000			$	30

TABLE OF CONTENTS

The following tables show certain summarized financial information for HSLFI as of December 31, 2018 and for the period June 1, 2018 through December 31, 2018:

		December 31, 2018
		(In thousands)
Selected Statement of Assets and Liabilities Information
Total investments at fair value (cost of $24,771)		$	24,734
Cash and cash equivalents			76
Investments in money market funds			74
Interest receivable			252
Other assets			1,306
Total assets		$	26,442
Other liabilities		$	81
Total liabilities			81
Members’ equity			26,361
Total liabilities and members’ equity		$	26,442

		For the period June 1, 2018 through December 31, 2018
		(In thousands)
Selected Statements of Operations Information
Interest income on investments		$	689
Total expenses		$	180
Net investment income		$	509
Net unrealized depreciation on investments		$	(37	)
Net increase in net assets resulting from operations		$	472

Consolidated results of operations of Horizon Technology Finance Corporation

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

The following table shows consolidated results of operations for the years ended December 31, 2018, 2017 and 2016:

		2018				2017				2016
		(In thousands)
Total investment income		$	31,090			$	25,777			$	32,984
Total expenses			18,374				13,534				15,972
Performance based incentive fees waived			(1,184	)			(79	)			—
Net expenses			17,190				13,455				15,972
Net investment income before excise tax			13,900				12,322				17,012
Provision (credit) for excise tax			34				25				(87	)
Net investment income			13,866				12,297				17,099
Net realized gain (loss) on investments			645				(21,191	)			(7,776	)
Net unrealized (depreciation) appreciation on investments			(1,501	)			18,485				(14,236	)
Net increase (decrease) in net assets resulting from operations		$	13,010			$	9,591			$	(4,913	)
Average debt investments, at fair value		$	200,911			$	170,685			$	221,257
Average borrowings outstanding		$	99,415			$	75,960			$	102,875

TABLE OF CONTENTS

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

Investment income

Total investment income increased by $5.3 million, or 20.6%, to $31.1 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017. For the year ended December 31, 2018, total investment income consisted primarily of $28.8 million in interest income from investments, which included $6.0 million in income from the accretion of origination fees and ETPs, $2.0 million in fee income and $0.2 million in dividend income. Interest income on debt investments increased by $5.0 million, or 21.1%, to $28.8 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017. Interest income on investments increased primarily due to an increase of $30.2 million, or 17.7%, in the average size of our debt investment portfolio and an increase in LIBOR which is the base rate for most of our variable rate debt investments for the year ended December 31, 2018 as compared to the year ended December 31, 2017. Fee income, which includes success fee and prepayment fee income on debt investments, remained flat at $2.0 million for the year ended December 31, 2018 compared to the year ended December 31, 2017.

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

The following table shows our dollar-weighted annualized yield for the years ended December 31, 2018 and 2017:

Investment type:		For the years ended December 31,
		2018				2017				2016
Debt investments(1)(2)			15.3	%			15.1	%			14.9	%
Debt investments and equity investment in HSLFI(1)(3)(4)			15.2	%			15.1	%			14.9	%
Equity investment in HSLFI(1)(4)(5)			9.0	%			—				—
All investments(1)(6)			13.9	%			14.0	%			14.4	%

TABLE OF CONTENTS

Investment income, consisting of interest income and fees on debt investments, can fluctuate significantly upon repayment of large debt investments. Interest income from the five largest debt investments in the aggregate accounted for 25%, 14% and 17% of investment income for the years ended December 31, 2018, 2017 and 2016, respectively.

Expenses

Total net expenses increased by $3.7 million, or 27.8%, to $17.2 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017. Total net expenses decreased by $2.5 million, or 15.8%, to $13.5 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Total expenses for each period consisted of interest expense, base management fee, incentive and administrative fees, professional fees and general and administrative expenses.

Interest expense increased by $1.2 million, or 23.1%, to $6.4 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017. Interest expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $23.5 million, or 30.9%, which was partially offset by the acceleration of $0.2 million of unamortized debt issuance costs related to the redemption of the 2019 Notes. Interest expense decreased by $0.7 million, or 12.1%, to $5.2 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Interest expense, which includes the amortization of debt issuance costs, decreased primarily due to a decrease in average borrowings of $26.9 million, or 26.2%, which was partially offset by the acceleration of $0.2 million of unamortized debt issuance costs related to the redemption of the 2019 Notes and an increase in our effective cost of debt for the year ended December 31, 2017 as compared to the year ended December 31, 2016.

Base management fee expense increased by $0.8 million, or 20.9%, to $4.6 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily due to an increase of $30.2 million, or 17.7%, in the average size of our investment portfolio for the year ended December 31, 2018 as compared to the year ended December 31, 2017. Base management fee expense decreased by $0.9 million, or 19.9%, to $3.8 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 primarily due to a decrease of $50.6 million, or 22.9%, in the average size of our investment portfolio for the year ended December 31, 2017 as compared to the year ended December 31, 2016.

On March 6, 2018, our Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled to receive under the Investment Management Agreement for the period commencing on January 1, 2018 and ending on December 31, 2018. Such waived incentive fees will not be subject to recoupment. During the year ended December 31, 2018, our Advisor waived performance based incentive fees of $1.2 million which our Advisor would have otherwise earned. This resulted in $1.2 million of reduced expense and additional net investment income for the year ended December 31, 2018.

Performance based incentive fee expense, net of waiver, increased by $1.6 million, or 96.3%, to $3.2 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017. This increase was due to (i) an increase of $3.1 million, or 22.6%, to $17.1 million in Pre-Incentive Fee Net Investment Income for the year ended December 31, 2018 as compared to the year ended December 31, 2017 and (ii) an increase in the Incentive Fee Cap calculated based on the incentive fee cap and deferral mechanism in our Investment Management Agreement. The incentive fee on pre-incentive fee net investment income was subject to the Incentive Fee Cap for the year ended December 31, 2018 due to the cumulative incentive fees paid exceeding 20% of cumulative pre-incentive fee net return during the applicable quarter and the 11 preceding full calendar quarters. Performance based incentive fee expense, net of waivers, decreased by $0.5 million, or 23.1%, to $1.6 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 due to a decrease of $5.3 million, or 27.5%, to $13.9 million in Pre-Incentive Fee Net Investment Income for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The Incentive Fee Cap and Deferral Mechanism resulted in $1.1 million of reduced incentive fee expense and thus increased net investment income for the year ended December 31, 2017. The incentive fee on Pre-Incentive Fee Net Investment Income was subject to the Incentive Fee Cap for the year ended

TABLE OF CONTENTS

December 31, 2017 due to the cumulative incentive fees paid exceeding 20% of cumulative pre-incentive fee net return during the applicable quarter and the 11 preceding full calendar quarters.

In 2018 and 2017, we elected to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income. For the years ended December 31, 2018 and 2017, we elected to carry forward taxable income in excess of current year distributions of $1.3 million and $1.0 million, respectively. At December 31, 2018 and 2017, excise tax payable of $0.03 million was recorded.

Administrative fee expense, professional fees and general and administrative expenses were $3.0 million, $2.9 million and $3.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Net realized gains and losses and net unrealized appreciation and depreciation

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

During the year ended December 31, 2018, we realized net gains totaling $0.6 million primarily due to gains realized on the sale of equity received upon the exercise of warrants. During the year ended December 31, 2017, we realized net losses totaling $21.2 million primarily due to the resolution of four debt investments partially offset by realized gains on the sale of equity received upon the exercise of warrants. One debt investment was settled, which resulted in a realized loss of $5.8 million and unrealized appreciation of $5.8 million. One debt investment was settled for net cash proceeds of $1.3 million, which resulted in a realized loss of $3.0 million and unrealized appreciation of $2.8 million. Two debt investments were settled for a royalty and sale agreements collectively fair valued at $7.5 million, which resulted in a realized loss of $12.4 million and unrealized appreciation of $11.8 million. During the year ended December 31, 2016, we realized net losses totaling $7.8 million primarily due to the resolution of three debt investments. One debt investment was settled for net cash proceeds of $3.6 million, which resulted in a realized loss of $4.5 million and unrealized appreciation of $4.6 million. One debt investment was settled for net cash proceeds of $0.2 million and a royalty and sale agreement fair valued at $0.4 million, which resulted in a realized loss of $2.2 million and unrealized appreciation of $2.2 million. One debt investment was settled for cash proceeds which resulted in a realized loss of $0.9 million and unrealized appreciation of $0.7 million.

During the year ended December 31, 2018, net unrealized depreciation on investments totaled $1.5 million which was primarily due to the unrealized depreciation on our warrant and equity investments in public companies. During the year ended December 31, 2017, net unrealized appreciation on investments totaled $18.5 million which was primarily due to the reversal of previously recorded unrealized depreciation on four debt investments that were settled during the period. During the year ended December 31, 2016, net unrealized depreciation on investments totaled $14.2 million which was primarily due to the unrealized depreciation on three debt investments offset by the reversal of previously recorded unrealized depreciation on one debt investment.

Liquidity and capital resources

As of December 31, 2018 and 2017, we had cash of $12.6 million and $6.6 million, respectively. Cash is available to fund new investments, reduce borrowings, pay expenses, repurchase common stock and pay distributions. Our primary sources of capital have been from our public and private equity offerings, use of our revolving credit facilities, issuance of our public debt offerings.

TABLE OF CONTENTS

On April 27, 2018, our Board extended a previously authorized stock repurchase program which allows us to repurchase up to $5.0 million of our common stock at prices below our NAV per share as reported in our most recent consolidated financial statements. Under the repurchase program, we may, but are not obligated to, repurchase shares of our outstanding common stock in the open market or in privately negotiated transactions from time to time. Any repurchases by us will comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act and any applicable requirements of the 1940 Act. Unless extended by our Board, the repurchase program will terminate on the earlier of June 30, 2019 or the repurchase of $5.0 million of our common stock. During the year ended December 31, 2018, we did not repurchase any shares of our common stock. During the year ended December 31, 2017, we repurchased 5,923 shares of our common stock at an average price of $9.97 on the open market at a total cost of $0.1 million. During the year ended December 31, 2016, we repurchased 48,160 shares of our common stock at an average price of $10.66 on the open market for a total cost of $0.5 million. From the inception of the stock repurchase program through December 31, 2018, we repurchased 167,465 shares of our common stock at an average price of $11.22 on the open market at a total cost of $1.9 million.

At December 31, 2018 and 2017, the outstanding principal balance under the Key Facility was $90.5 million and $58.0 million, respectively. As of December 31, 2018 and 2017, we had borrowing capacity under the Key Facility of $34.5 million and $37.0 million, respectively. At December 31, 2018 and 2017, $0.9 million and $23.6 million, respectively, was available, subject to existing terms and advance rates.

Our operating activities used cash of $12.1 million for the year ended December 31, 2018, and our financing activities provided cash of $18.1 million for the same period. Our operating activities used cash primarily for investments made in portfolio companies and HSLFI, partially offset by principal payments received on our debt investments. Our financing activities provided cash primarily from advances on our Key Facility partially offset by repayment of our Key Facility and payment of distributions to our stockholders.

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

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

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

In order to remain subject to taxation as a RIC, we intend to distribute to our stockholders all or substantially all of our investment company taxable income. In addition, as a BDC, we are required to maintain asset coverage of at least 150%. This requirement limits the amount that we may borrow.

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

TABLE OF CONTENTS

Current borrowings

The following table shows our borrowings as of December 31, 2018 and 2017:

		December 31, 2018												December 31, 2017
		Total Commitment				Balance Outstanding				Unused Commitment				Total Commitment				Balance Outstanding				Unused Commitment
		(In thousands)
Key Facility		$	125,000			$	90,500			$	34,500			$	95,000			$	58,000			$	37,000
2022 Notes			37,375				37,375				—				37,375				37,375				—
Total before debt issuance costs			162,375				127,875				34,500				132,375				95,375				37,000
Unamortized debt issuance costs attributable to term borrowings			—				(1,022	)			—				—				(1,300	)			—
Total borrowings outstanding, net		$	162,375			$	126,853			$	34,500			$	132,375			$	94,075			$	37,000

We entered into the Key Facility effective November 4, 2013. The interest rate on the Key Facility is based upon the one-month LIBOR plus a spread of 3.25%, with a LIBOR floor of 0.75%. The LIBOR rate was 2.50% and 1.56% as of December 31, 2018 and 2017, respectively. The interest rates in effect were 5.60% and 4.61% as of December 31, 2018 and 2017, respectively. The Key Facility requires the payment of an unused line fee in an amount equal to 0.50% of any unborrowed amount available under the facility annually.

The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million. On December 28, 2018, we amended the Key Facility, increasing the aggregate commitments under the Key Facility by $25 million to $125 million. The Key Facility is collateralized by debt investments held by Credit II and permits an advance rate of up to fifty percent (50%) of eligible debt investments held by Credit II. The Key Facility contains covenants that, among other things, require us to maintain a minimum net worth, to restrict the debt investments securing the Key Facility to certain criteria for qualified debt investments and to comply with portfolio company concentration limits as defined in the related loan agreement. The period during which we may request advances under the Key Facility, or the Revolving Period, extends through April 6, 2021. After the Revolving Period, we may not request new advances, and we must repay the outstanding advances under the Key Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Key Facility, particularly the condition that the principal balance of the Key Facility not exceed fifty percent (50%) of the aggregate principal balance of our eligible debt investments to our portfolio companies. The maturity of the Key Facility, the date on which all outstanding advances under the Key Facility are due and payable is on April 6, 2023.

On March 23, 2012, we issued and sold an aggregate principal amount of $30.0 million 2019 Notes, and on April 18, 2012, pursuant to the underwriters’ 30-day option to purchase additional notes, we sold an additional $3.0 million of the 2019 Notes. The 2019 Notes had a stated maturity of March 15, 2019 and were redeemable in whole or in part at our option at any time or from time to time at a redemption price of $25 per security plus accrued and unpaid interest. The 2019 Notes bore interest at a rate of 7.375% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2019 Notes were our direct, unsecured obligations and (1) ranked equally in right of payment with our future unsecured indebtedness; (2) were senior in right of payment to any of our future indebtedness that expressly provided it was subordinated to the 2019 Notes; (3) were effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that was initially unsecured to which we subsequently granted security), to the extent of the value of the assets securing such indebtedness and (4) were structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. On October 30, 2017, or the

TABLE OF CONTENTS

Redemption Date, we redeemed all of the issued and outstanding 2019 Notes in an aggregate principal amount of $33.0 million and paid accrued interest of $0.3 million. The 2019 Notes were delisted effective on the Redemption Date.

On September 29, 2017, we issued and sold an aggregate principal amount of $32.5 million 2022 Notes, and on October 11, 2017, pursuant to the underwriters’ 30-day option to purchase additional notes, we sold an additional $4.9 million of the 2022 Notes. The 2022 Notes have a stated maturity of September 15, 2022 and may be redeemed in whole or in part at our option at any time or from time to time on or after September 15, 2019 at a redemption price of $25 per security plus accrued and unpaid interest. The 2022 Notes bear interest at a rate of 6.25% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2022 Notes are our direct, unsecured obligations and (1) rank equally in right of payment with our current and future unsecured indebtedness; (2) are senior in right of payment to any of our future indebtedness that expressly provides it is subordinated to the 2022 Notes; (3) are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness and (4) are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. As of December, 31, 2018, we were in material compliance with the terms of the 2022 Notes. The 2022 Notes are listed on the New York Stock Exchange under the symbol “HTFA”.

Other assets

As of December 31, 2018 and 2017, other assets were $1.8 million and $1.5 million, respectively, which is primarily comprised of debt issuance costs and prepaid expenses.

Contractual obligations and off-balance sheet arrangements

The following table shows our significant contractual payment obligations and off-balance sheet arrangements as of December 31, 2018:

		Payments due by period
		Total				Less than 1 year				1 – 3 Years				3 – 5 Years				After 5 years
		(In thousands)
Borrowings		$	127,875			$	12,674			$	66,681			$	48,520			$	—
Unfunded commitments			27,500				27,500				—				—				—
Total		$	155,375			$	40,174			$	66,681			$	48,520			$	—

In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our unfunded commitments may be significant from time to time. As of December 31, 2018, we had such unfunded commitments of $27.5 million. These commitments are subject to the same underwriting and ongoing portfolio maintenance requirements as are the financial instruments that we hold on our balance sheet. In addition, these commitments are often subject to financial or non-financial milestones and other conditions to borrowing that must be achieved before the commitment can be drawn. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We regularly monitor our unfunded commitments and anticipated refinancings, maturities and capital raising, to ensure that we have sufficient liquidity to fund such unfunded commitments. As of December 31, 2018, we reasonably believed that our assets would provide adequate financial resources to satisfy all of our unfunded commitments.

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

TABLE OF CONTENTS

the compensation of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. See Note 3 to our consolidated financial statements for additional information regarding our Investment Management Agreement and our Administration Agreement.

Distributions

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

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

To the extent our taxable earnings in a tax year fall below the total amount of our distributions made to stockholders in respect of such tax year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should review any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary income or gains.

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

Related party transactions

We have entered into the Investment Management Agreement with the Advisor. The Advisor is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Our investment activities are managed by the Advisor and supervised by the Board, the majority of whom are independent directors. Under the Investment Management Agreement, we have agreed to pay the Advisor a base management fee as

TABLE OF CONTENTS

well as an incentive fee. During the years ended December 31, 2018, 2017 and 2016, we paid the Advisor $7.8 million, $5.4 million and $6.9 million, respectively, pursuant to the Investment Management Agreement.

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

We have also entered into the Administration Agreement with the Advisor. Under the Administration Agreement, we have agreed to reimburse the Advisor for our allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. In addition, pursuant to the terms of the Administration Agreement the Advisor provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. During the years ended December 31, 2018, 2017 and 2016, we paid the Advisor $0.7 million, $0.7 million and $0.9 million, respectively, pursuant to the Administration Agreement.

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

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

Critical accounting policies

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

We have identified the following items as critical accounting policies.

Valuation of investments

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

The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions. To the

TABLE OF CONTENTS

extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. The three categories within the hierarchy are as follows:

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

Income recognition

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if we otherwise do not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. For the year ended December 31, 2018, we did not receive any payments from debt investments on non-accrual status. For the year ended December 31, 2017, we recognized as interest income interest payments of $0.1 million received from one portfolio company whose debt investment was on non-accrual status. For the year ended December 31, 2016, we did not recognize interest income from debt investments on non-accrual status.

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

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

In connection with substantially all lending arrangements, we receive warrants to purchase shares of stock from the borrower. We record the warrants as assets at estimated fair value on the grant date using the Black-Scholes valuation model. We consider the warrants as loan fees and record them as unearned income on the grant date. The unearned income is recognized as interest income over the contractual life of the related

TABLE OF CONTENTS

debt investment in accordance with our income recognition policy. Subsequent to origination, the warrants are also measured at fair value using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss on investments. Gains and losses from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains and losses on investments.

Distributions from HSLFI are evaluated at the time of distribution to determine if the distribution should be recorded as dividend income or a return of capital. Generally, we will not record distributions from HSLFI as dividend income unless there are sufficient accumulated tax-basis earnings and profit in HSLFI prior to distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment. For the period June 1, 2018 (the commencement of HSLFI’s operations) through December 31, 2018, HSLFI distributed $0.3 million classified as dividend income to us.

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

Income taxes

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

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

We evaluate tax positions taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes, as modified by ASC Topic 946, Financial Services — Investment Companies. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, are recorded as a tax expense in the current year. It is our policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. We had no material uncertain tax positions at December 31, 2018 and 2017.

Recently adopted accounting pronouncements

In April 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which amends existing revenue recognition guidance to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017. As required, we adopted ASU 2014-09 effective January 1, 2018, and such adoption did not have an impact on our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13, which modifies disclosure requirements for the fair value measurement of Level 3 securities of public companies.

TABLE OF CONTENTS

This guidance is effective for annual and interim periods beginning on or after December 15, 2019 and early adoption is permitted. We elected to early adopt ASU 2018-13 for the year ended December 31, 2018. As a result, no significant changes were made to our disclosures in the notes to the consolidated financial statements.

SEC Disclosure Update and Simplification

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, or the SEC Release, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The SEC Release is effective for all filings on or after November 5, 2018. As required, we adopted the SEC Release for the year ended December 31, 2018. The SEC Release required changes to the presentation of our Consolidated Statements of Assets and Liabilities and the Consolidated Statements of Changes in Net Assets. Prior to adoption, we presented distributable earnings on the Consolidated Statements of Assets and Liabilities and the Consolidated Statement of Net Assets as three components: 1) distributions in excess of net investment income; 2) net unrealized depreciation on investments; and 3) net realized loss on investments. Upon adoption, we present distributable earnings in total on the Consolidated Statements of Assets and Liabilities and the Consolidated Statements of Changes in Net Assets. The changes in presentation have been retrospectively applied to the Consolidated Statement of Assets and Liabilities as of December 31, 2017 and to the Consolidated Statements of Changes in Net Assets for the years ended December 31, 2017 and 2016.

Recent development

On March 5, 2019, our Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled to receive under the Investment Management Agreement for the period commencing on January 1, 2019 and ending on December 31, 2019. Such waived incentive fees will not be subject to recoupment.

Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. During the periods covered by our financial statements, the interest rates on the debt investments within our portfolio were primarily at floating rates. We expect that our debt investments in the future will primarily have floating interest rates. As of December 31, 2018 and 2017, 99%, of the outstanding principal amount of our debt investments bore interest at floating rates. The initial commitments to lend to our portfolio companies are usually based on a floating LIBOR index.

Based on our December 31, 2018 consolidated statement of assets and liabilities (without adjustment for potential changes in the credit market, credit quality, size and composition of assets on the consolidated statement of assets and liabilities or other business developments that could affect net income) and the base index rates at December 31, 2018, the following table shows the annual impact on the change in net assets resulting from operations of changes in interest rates, which assumes no changes in our investments and borrowings:

Change in basis points		Investment Income				Interest Expense				Change in Net Assets(1)
		(In thousands)
Up 300 basis points		$	6,915			$	2,753			$	4,162
Up 200 basis points		$	4,584			$	1,835			$	2,749
Up 100 basis points		$	2,253			$	918			$	1,335
Down 300 basis points		$	(2,184	)		$	(1,467	)		$	(717	)
Down 200 basis points		$	(2,128	)		$	(1,467	)		$	(661	)
Down 100 basis points		$	(1,680	)		$	(918	)		$	(762	)

While our 2022 Notes bear interest at a fixed rate, our Key Facility has a floating interest rate provision, subject to a floor of 0.75% per annum, based on a LIBOR index which resets monthly, and any other credit

TABLE OF CONTENTS

facilities into which we enter in the future may have floating interest rate provisions. We have used hedging instruments in the past to protect us against interest rate fluctuations, and we may use them in the future. Such instruments may include caps, swaps, futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.

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

TABLE OF CONTENTS

UNDERWRITING

We are offering the common stock described in this prospectus supplement and the accompanying prospectus through a number of underwriters. Morgan Stanley & Co. LLC is acting as the representative of the underwriters. We have entered into an underwriting agreement with the representative. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus supplement, the number of shares of common stock listed next to its name in the following table:

Underwriter		Number of Shares
Morgan Stanley & Co. LLC
UBS Securities LLC
Janney Montgomery Scott LLC
Total

The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are severally obligated to take and pay for all shares of common stock offered hereby (other than those covered by the underwriters’ option to purchase additional shares described below) if any such shares are taken. We and the Advisor have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or the Securities Act.

Option to Purchase Additional Shares

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to an aggregate of 300,000 additional shares of common stock at the public offering price set forth on the cover page hereof, less the underwriting discounts and commissions. To the extent such option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of common stock as the number set forth next to such underwriter’s name in the preceding table bears to the total number of shares set forth next to the names of all underwriters in the preceding table.

Lock-Up Agreements

Each of us, our directors and executive officers has agreed that, without the prior written consent of the representative on behalf of the underwriters, it will not, during the period ending 90 days after the date of this prospectus supplement:

whether any transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise.

The restrictions described in the preceding paragraph are subject to several exceptions, including:

TABLE OF CONTENTS

The release of any securities subject to these lock-up agreements is considered on a case-by-case basis. Factors that would be considered by the representative in determining whether to release securities subject to these lock-up agreements may include the length of time before the lock-up agreement expires, the number of shares or other securities involved, the reason for a requested release, market conditions at the time of the requested release, the trading price of our common stock, historical trading volumes of our common stock and whether the person seeking the release is an officer, director or affiliate of ours.

Commissions and Discounts

The underwriters propose to offer the shares directly to the public at the public offering price set forth on the cover page of this prospectus supplement and to certain dealers at a price that represents a concession not in excess of $    per share below the public offering price. After the public offering of the shares, the offering price and other selling terms may be changed by the underwriters.

The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is $    per share. The following table shows the price per share of common stock and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters’ overallotment option.

Per share

Total

Without Additional Shares

With Additional Shares

Without Additional Shares

With Additional Shares

Initial price to public

$

$

$

$

Underwriting discounts and commissions payable by us on shares sold to the public

$

$

$

$

Proceeds, before expenses, to us(1)

$

$

$

$

Price Stabilization, Short Positions and Penalty Bids

In connection with this offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. A short sale involves syndicate sales of shares in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. Syndicate covering transactions involve purchases of shares in the open market after the distribution has been completed in order to cover syndicate short positions.

Stabilizing transactions consist of some bids or purchases of shares of our common stock made for the purpose of preventing or slowing a decline in the market price of the shares while the offering is in progress.

In addition, the underwriters may impose penalty bids, under which they may reclaim the selling concession from a syndicate member when the shares of our common stock originally sold by that syndicate member are purchased in a stabilizing transaction or syndicate covering transaction to cover syndicate short positions.

Similar to other purchase transactions, these activities may have the effect of raising or maintaining the market price of the common stock or preventing or slowing a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. Except for the sale of shares of our common stock in this offering, the underwriters may carry out these transactions on the Nasdaq, in the over-the-counter market or otherwise.

We and the underwriters do not make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the shares. In addition, we and the underwriters do not make any representation that the underwriters will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

TABLE OF CONTENTS

Sales Outside the United States

No action has been taken in any jurisdiction (except in the United States) that would permit a public offering of the common stock, or the possession, circulation or distribution of this prospectus supplement or accompanying prospectus or any other material relating to us or the common stock in any jurisdiction where action for that purpose is required. Accordingly, the common stock may not be offered or sold, directly or indirectly, and none of this prospectus supplement, the accompanying prospectus or any other offering material or advertisements in connection with the common stock may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction.

Each of the underwriters may arrange to sell common shares offered hereby in certain jurisdictions outside the United States, either directly or through affiliates, where it is permitted to do so.

Hong Kong

Shares of our common stock may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

Notice to Prospective Investors in the Dubai International Financial Centre

This document relates to an exempt offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority. This document is intended for distribution only to persons of a type specified in those rules. It must not be delivered to, or relied on by, any other person. The Dubai Financial Services Authority has no responsibility for reviewing or verifying any documents in connection with exempt offers. The Dubai Financial Services Authority has not approved this document nor taken steps to verify the information set out in it, and has no responsibility for it. The shares of our common stock which are the subject of the offering contemplated by this prospectus may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares of our common stock offered should conduct their own due diligence on our common stock. If you do not understand the contents of this document you should consult an authorized financial adviser.

Electronic Delivery

The underwriters may make this prospectus supplement and accompanying prospectus available in an electronic format. The prospectus supplement and accompanying prospectus in electronic format may be made available on a website maintained by any of the underwriters, and the underwriters may distribute such documents electronically. The underwriters may agree with us to allocate a limited number of common stock for sale to their online brokerage customers. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations.

The principal business addresses of the underwriters are: Morgan Stanley & Co. LLC, 180 Varick Street, 2^nd Floor, New York, NY 10014, UBS Securities LLC, 1285 Avenue of the Americas, New York, NY 10019 and Janney Montgomery Scott LLC, 1717 Arch Street, Philadelphia, PA 19103.

Conflicts of Interest

Certain of the underwriters and their affiliates were underwriters in connection with our IPO and our subsequent debt offering, for which they received customary fees.

TABLE OF CONTENTS

The underwriters and/or their affiliates from time to time provide and may in the future provide investment banking, commercial banking and financial advisory services to us, for which they have received and may receive customary compensation.

In addition, the underwriters and/or their affiliates may from time to time refer investment banking clients to us as potential portfolio investments. If we invest in those clients, we may utilize net proceeds from this offering to fund such investments, and the referring underwriter or its affiliate may receive placement fees from its client in connection with such financing, which placement fees may be paid out of the amount funded by us.

TABLE OF CONTENTS

LEGAL MATTERS

Certain legal matters regarding the shares of common stock offered by this prospectus supplement will be passed upon for us by Dechert LLP, Boston, MA. Dechert LLP has from time to time represented the underwriters on unrelated matters. Certain legal matters in connection with the shares of common stock offered hereby will be passed upon for the underwriters by Ropes & Gray LLP, New York, NY.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The consolidated financial statements and the effectiveness of internal control over financial reporting appearing in this prospectus supplement and elsewhere in the registration statement have been audited by RSM US LLP, an independent registered public accounting firm, as stated in their reports appearing elsewhere herein, and are included in reliance upon such reports and upon the authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

We have filed with the SEC a universal shelf registration statement, of which this prospectus supplement and the accompanying prospectus form a part, on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to our shares of common stock offered by this prospectus supplement and the accompanying prospectus. The registration statement contains additional information about us and our shares of common stock being offered by this prospectus supplement and the accompanying prospectus.

We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. The SEC maintains a website that contains reports, proxy and information statements and other information filed electronically by us with the SEC at www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov. We maintain a website at www.horizontechfinance.com and make all of our annual, quarterly and current reports, proxy statements and other publicly filed information available, free of charge, on or through our website. This information is also available, free of charge, by contacting us at 312 Farmington Avenue, Farmington, Connecticut 060302, Attention: Investor Relations, or by calling us collect at (860) 676-8654. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider such information to be part of this prospectus supplement or the accompanying prospectus.

TABLE OF CONTENTS

Index to Consolidated Financial Statements

		Page
Management’s Report on Internal Control over Financial Reporting			SF-2
Report of Independent Registered Public Accounting Firm			SF-3
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting			SF-4
Consolidated Statements of Assets and Liabilities as of December 31, 2018 and 2017			SF-6
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016			SF-7
Consolidated Statements of Changes in Net Assets for the Years Ended December 31, 2018, 2017 and 2016			SF-8
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016			SF-9
Consolidated Schedules of Investments as of December 31, 2018 and 2017			SF-10
Notes to the Consolidated Financial Statements			SF-22

TABLE OF CONTENTS

Management’s Report on Internal Control over Financial Reporting

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

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

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

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework issued in 2013. Based on the assessment, management believes that, as of December 31, 2018, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm that audited the financial statements has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, which appears in this annual report on Form 10-K.

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors
Horizon Technology Finance Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, of Horizon Technology Finance Corporation and Subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 2018, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 5, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of investments owned as of December 31, 2018 and 2017, by correspondence with the custodian or borrower or by other appropriate auditing procedures where replies from the custodian or borrower were not received. We believe that our audits provide a reasonable basis for our opinion.

/s/ RSM US LLP

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

New York, New York
March 5, 2019

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors
Horizon Technology Finance Corporation

Opinion on the Internal Control Over Financial Reporting

We have audited Horizon Technology Finance Corporation and Subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of assets and liabilities of the Company, including the consolidated schedules of investments, as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2018, and our report dated March 5, 2019 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

TABLE OF CONTENTS

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

/s/ RSM US LLP
New York, New York
March 5, 2019

TABLE OF CONTENTS

Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Statements of Assets and Liabilities
(In thousands, except share and per share data)

		December 31,
		2018				2017
Assets
Non-affiliate investments at fair value (cost of $229,772 and $219,303, respectively)		$	227,624			$	218,600
Non-controlled affiliate investments at fair value (cost of $7,887 and $3,774, respectively) (Note 5)			7,574				3,499
Controlled affiliate investments at fair value (cost of $13,262 and $0, respectively) (Note 5)			13,243				—
Total investments at fair value (cost of $250,921 and $223,077, respectively) (Note 4)			248,441				222,099
Cash			12,591				6,594
Interest receivable			3,966				3,986
Other assets			1,751				1,467
Total assets		$	266,749			$	234,146
Liabilities
Borrowings (Note 7)		$	126,853			$	94,075
Distributions payable			3,461				3,456
Base management fee payable (Note 3)			422				379
Incentive fee payable (Note 3)			991				541
Other accrued expenses			765				620
Total liabilities			132,492				99,071
Commitments and contingencies (Notes 8 and 9)
Net assets
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of December 31, 2018 and 2017			—				—
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 11,702,594 and 11,687,871 shares issued and 11,535,129 and 11,520,406 shares outstanding as of December 31, 2018 and 2017, respectively			12				12
Paid-in capital in excess of par			179,616				179,641
Distributable earnings(1)			(45,371	)			(44,578	)
Total net assets			134,257				135,075
Total liabilities and net assets		$	266,749			$	234,146
Net asset value per common share		$	11.64			$	11.72

 
 
See Notes to Consolidated Financial Statements

TABLE OF CONTENTS

Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Statements of Operations
(In thousands, except share and per share data)

		Year Ended December 31,
		2018				2017				2016
Investment income
Interest income on non-affiliate investments		$	28,061			$	23,538			$	31,397
Interest income on affiliate investments			725				225				—
Total interest income on investments			28,786				23,763				31,397
Fee income
Prepayment fee income on non-affiliate investments			1,159				1,432				794
Fee income on non-affiliate investments			867				567				793
Fee income on affiliate investments			23				15				—
Total fee income			2,049				2,014				1,587
Dividend income
Dividend income on controlled affiliate investments			255				—				—
Total dividend income			255				—				—
Total investment income			31,090				25,777				32,984
Expenses
Interest expense			6,363				5,167				5,878
Base management fee (Note 3)			4,578				3,786				4,727
Performance based incentive fee (Note 3)			4,393				1,714				2,126
Administrative fee (Note 3)			708				699				869
Professional fees			1,343				1,365				1,486
General and administrative			989				803				886
Total expenses			18,374				13,534				15,972
Performance based incentive fees waived (Note 3)			(1,184	)			(79	)			—
Net expenses			17,190				13,455				15,972
Net investment income before excise tax			13,900				12,322				17,012
Provision (credit) for excise tax (Note 8)			34				25				(87	)
Net investment income			13,866				12,297				17,099
Net realized and unrealized loss on investments
Net realized gain (loss) on non-affiliate investments			645				(21,191	)			(7,776	)
Net realized gain (loss) on investments			645				(21,191	)			(7,776	)
Net unrealized (depreciation) appreciation on non-affiliate investments			(1,445	)			18,506				(14,236	)
Net unrealized depreciation on affiliate investments			(37	)			(21	)			—
Net unrealized depreciation on controlled affiliate investments			(19	)			—				—
Net unrealized (depreciation) appreciation on investments			(1,501	)			18,485				(14,236	)
Net realized and unrealized loss on investments			(856	)			(2,706	)			(22,012	)
Net increase (decrease) in net assets resulting from operations		$	13,010			$	9,591			$	(4,913	)
Net investment income per common share		$	1.20			$	1.07			$	1.48
Net increase (decrease) in net assets per common share		$	1.13			$	0.83			$	(0.43	)
Distributions declared per share		$	1.20			$	1.20			$	1.335
Weighted average shares outstanding			11,527,777				11,516,846				11,543,708

 
 
See Notes to Consolidated Financial Statements

TABLE OF CONTENTS

Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Statements of Changes in Net Assets
(In thousands, except share data)

		Common Stock								Paid-In Capital in Excess of Par				Distributable Earnings(1)				Total Net Assets
		Shares				Amount
Balance at December 31, 2015			11,535,212			$	12			$	179,707			$	(19,968	)		$	159,751
Net decrease in net assets resulting from operations, net of excise tax:
Net investment income, net of excise tax			—				—				—				17,099				17,099
Net realized loss on investments			—				—				—				(14,236	)			(14,236	)
Net unrealized depreciation on investments			—				—				—				(7,776	)			(7,776	)
Issuance of common stock under dividend reinvestment plan			23,372				—				273				—				273
Repurchase of common stock			(48,160	)			—				(516	)			—				(516	)
Distributions declared			—				—				—				(15,403	)			(15,403	)
Reclassification of permanent tax differences (Note 2)			—				—				87				(87	)			—
Balance at December 31, 2016			11,510,424				12				179,551				(40,371	)			139,192
Net increase in net assets resulting from operations, net of excise tax:
Net investment income, net of excise tax			—				—				—				12,297				12,297
Net realized loss on investments			—				—				—				(21,191	)			(21,191	)
Net unrealized appreciation on investments			—				—				—				18,485				18,485
Issuance of common stock under dividend reinvestment plan			15,905				—				174				—				174
Repurchase of common stock			(5,923	)			—				(59	)			—				(59	)
Distributions declared			—				—				—				(13,823	)			(13,823	)
Reclassification of permanent tax differences (Note 2)			—				—				(25	)			25				—
Balance at December 31, 2017			11,520,406				12				179,641				(44,578	)			135,075
Net increase in net assets resulting from operations, net of excise tax:
Net investment income, net of excise tax			—				—				—				13,866				13,866
Net realized gain on investments			—				—				—				645				645
Net unrealized depreciation on investments			—				—				—				(1,501	)			(1,501	)
Financing costs			—				—				(155	)			—				(155	)
Issuance of common stock under dividend reinvestment plan			14,723				—				164				—				164
Distributions declared			—				—				—				(13,837	)			(13,837	)
Reclassification of permanent tax differences (Note 2)			—				—				(34	)			34				—
Balance at December 31, 2018			11,535,129			$	12			$	179,616			$	(45,371	)		$	134,257

 
 
See Notes to Consolidated Financial Statements

TABLE OF CONTENTS

Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Statements of Cash Flow
(In thousands)

		Year Ended December 31,
		2018				2017				2016
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations		$	13,010			$	9,591			$	(4,913	)
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash (used in) provided by operating activities:
Amortization of debt issuance costs			554				795				562
Net realized (gain) loss on investments			(645	)			21,191				7,776
Net unrealized depreciation (appreciation) on investments			1,501				(18,485	)			14,236
Purchase of investments			(101,257	)			(135,556	)			(59,858	)
Principal payments received on investments			84,439				103,790				95,710
Investments in controlled affiliate investments			(13,262	)			—				—
Proceeds from sale of investments			4,453				1,840				984
Dividend income from controlled affiliate investments			255				—				—
Distributions from controlled affiliate investments			(255	)			—				—
Equity received in settlement of fee income			(299	)			—				—
Warrants received in settlement of fee income			(161	)			—				—
Changes in assets and liabilities: