Horizon Technology Finance 10Q 2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

	FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

	OR

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

FOR THE TRANSITION PERIOD FROM _____TO

COMMISSION FILE NUMBER: 814-00802

HORIZON TECHNOLOGY FINANCE CORPORATION

(Exact name of registrant as specified in its charter)


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

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

(860) 676-8654

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ◻ No ◻

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


Large accelerated filer	◻	Accelerated filer	⌧
Non-accelerated filer	◻	Smaller reporting company	◻
Emerging growth company	◻


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

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

The number of shares of the registrant’s common stock traded under the symbol “HRZN” on the Nasdaq Global Select Market, $0.001 par value per share, outstanding as of July 28, 2020 was 17,293,480.

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


Title of each class	Ticker symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	HRZN	The Nasdaq Stock Market LLC
6.25% Notes due 2022	HTFA	The New York Stock Exchange

Table of Contents

HORIZON TECHNOLOGY FINANCE CORPORATION

FORM 10-Q

TABLE OF CONTENTS

		Page
	PART I
Item 1	Consolidated Financial Statements.	3

	Consolidated Statements of Assets and Liabilities as of June 30, 2020 (unaudited) and December 31, 2019	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (unaudited)	4
	Consolidated Statements of Changes in Net Assets for the three and six months ended June 30, 2020 and 2019 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)	6
	Consolidated Schedules of Investments as of June 30, 2020 (unaudited) and December 31, 2019	7
	Notes to the Consolidated Financial Statements (unaudited)	18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 4.	Controls and Procedures	67

	PART II	67
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibits	69
	Signatures	70
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Assets and Liabilities

(Dollars in thousands, except share and per share data)


	June 30,		December 31,
	2020		2019
Assets	(Unaudited)
Non-affiliate investments at fair value (cost of $354,879 and $295,256, respectively)	$	348,834	$	294,304
Non-controlled affiliate investments at fair value (cost of $6,819 and $6,891, respectively) (Note 5)		7,046		8,597
Controlled affiliate investments at fair value (cost of $16,684) (Note 5)		—		16,650
Total investments at fair value (cost of $361,698 and $318,831, respectively) (Note 4)		355,880		319,551
Cash		22,837		6,465
Investments in money market funds		14,499		9,787
Restricted investments in money market funds		1,189		1,133
Interest receivable		6,678		5,530
Other assets		2,186		1,535
Total assets	$	403,269	$	344,001

Liabilities
Borrowings (Note 7)	$	193,559	$	152,050
Distributions payable		5,188		4,669
Base management fee payable (Note 3)		567		519
Incentive fee payable (Note 3)		1,676		1,613
Other accrued expenses		1,047		1,095
Total liabilities		202,037		159,946

Commitments and contingencies (Note 8)

Net assets
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of June 30, 2020 and December 31, 2019		—		—
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 17,459,235 and 15,730,755 shares issued and 17,291,770 and 15,563,290 shares outstanding as of June 30, 2020 and December 31, 2019, respectively		17		16
Paid-in capital in excess of par		247,924		226,660
Distributable earnings		(46,709)		(42,621)
Total net assets		201,232		184,055
Total liabilities and net assets	$	403,269	$	344,001
Net asset value per common share	$	11.64	$	11.83

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except share and per share data)


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Investment income
Interest income on investments
Interest income on non-affiliate investments	$	11,918	$	9,018	$	21,312	$	16,452
Interest income on affiliate investments		176		216		357		438
Total interest income on investments		12,094		9,234		21,669		16,890
Fee income
Amendment fee income on non-affiliate investments		1,028		126		1,064		130
Prepayment fee income on non-affiliate investments		711		439		756		734
Fee income on non-affiliate investments		—		235		24		250
Fee income on affiliate investments		3		5		7		10
Total fee income		1,742		805		1,851		1,124
Dividend (expense) income
Dividend (expense) income on controlled affiliate investments		(312)		431		118		761
Total dividend (expense) income		(312)		431		118		761
Total investment income		13,524		10,470		23,638		18,775
Expenses
Interest expense		2,561		2,115		4,723		4,163
Base management fee (Note 3)		1,668		1,365		3,249		2,662
Performance based incentive fee (Note 3)		1,676		1,961		2,747		3,909
Administrative fee (Note 3)		254		208		507		419
Professional fees		346		274		848		765
General and administrative		313		243		575		460
Total expenses		6,818		6,166		12,649		12,378
Performance based incentive fee waived (Note 3)		—		(708)		—		(1,848)
Net expenses		6,818		5,458		12,649		10,530
Net investment income		6,706		5,012		10,989		8,245
Net realized and unrealized gain (loss) on investments
Net realized (loss) gain on non-affiliate investments		(701)		(4,598)		2,778		(3,447)
Net realized loss on controlled affiliate investments		(24)		—		(12)		—
Net realized (loss) gain on investments		(725)		(4,598)		2,766		(3,447)
Net unrealized appreciation (depreciation) on non-affiliate investments		2,985		2,264		(4,806)		749
Net unrealized (depreciation) appreciation on non-controlled affiliate investments		(932)		1,867		(1,475)		2,019
Net unrealized depreciation on controlled affiliate investments		(109)		(7)		(258)		(3)
Net unrealized appreciation (depreciation) on investments		1,944		4,124		(6,539)		2,765
Net realized and unrealized gain (loss) on investments		1,219		(474)		(3,773)		(682)
Net increase in net assets resulting from operations	$	7,925	$	4,538	$	7,216	$	7,563
Net investment income per common share	$	0.40	$	0.37	$	0.65	$	0.65
Net increase in net assets per common share	$	0.47	$	0.34	$	0.43	$	0.60
Distributions declared per share	$	0.30	$	0.30	$	0.65	$	0.60
Weighted average shares outstanding		16,943,155		13,540,657		16,829,821		12,610,593

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Changes in Net Assets (Unaudited)

(Dollars in thousands, except share data)


				Paid-In Capital
	Common Stock			in Excess of		Distributable		Total Net
	Shares	Amount		Par		Earnings		Assets
Balance at March 31, 2019	13,538,481	$	14	$	202,818	$	(46,408)	$	156,424
Issuance of common stock, net of offering costs	—		—		(15)		—		(15)
Net increase in net assets resulting from operations, net of excise tax:
Net investment income, net of excise tax	—		—		—		5,012		5,012
Net realized loss on investments	—		—		—		(4,598)		(4,598)
Net unrealized appreciation on investments	—		—		—		4,124		4,124
Issuance of common stock under dividend reinvestment plan	4,392		—		52		—		52
Distributions declared	—		—		—		(3,863)		(3,863)
Balance at June 30, 2019	13,542,873		14		202,855		(45,733)		157,136

Balance at March 31, 2020	16,852,610		17		242,886		(49,446)		193,457
Issuance of common stock, net of offering costs	432,491		—		4,971		—		4,971
Net increase in net assets resulting from operations, net of excise tax:
Net investment income, net of excise tax	—		—		—		6,706		6,706
Net realized loss on investments	—		—		—		(725)		(725)
Net unrealized appreciation on investments	—		—		—		1,944		1,944
Issuance of common stock under dividend reinvestment plan	6,669		—		67		—		67
Distributions declared	—		—		—		(5,188)		(5,188)
Balance at June 30, 2020	17,291,770	$	17	$	247,924	$	(46,709)	$	201,232


				Paid-In Capital
	Common Stock			in Excess of		Distributable		Total Net
	Shares	Amount		Par		Earnings		Assets
Balance at December 31, 2018	11,535,129	$	12	$	179,616	$	(45,371)	$	134,257
Issuance of common stock, net of offering costs	2,000,000		2		23,145		—		23,147
Net increase in net assets resulting from operations, net of excise tax:
Net investment income, net of excise tax	—		—		—		8,245		8,245
Net realized loss on investments	—		—		—		(3,447)		(3,447)
Net unrealized appreciation on investments	—		—		—		2,765		2,765
Issuance of common stock under dividend reinvestment plan	7,744		—		94		—		94
Distributions declared	—		—		—		(7,925)		(7,925)
Balance at June 30, 2019	13,542,873		14		202,855		(45,733)		157,136

Balance at December 31, 2019	15,563,290		16		226,660		(42,621)		184,055
Issuance of common stock, net of offering costs	1,717,901		1		21,147		—		21,148
Net increase in net assets resulting from operations, net of excise tax:
Net investment income, net of excise tax	—		—		—		10,989		10,989
Net realized gain on investments	—		—		—		2,766		2,766
Net unrealized depreciation on investments	—		—		—		(6,539)		(6,539)
Issuance of common stock under dividend reinvestment plan	10,579		—		117		—		117
Distributions declared	—		—		—		(11,304)		(11,304)
Balance at June 30, 2020	17,291,770	$	17	$	247,924	$	(46,709)	$	201,232

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)


	For the six months ended June 30,
	2020		2019
Cash flows from operating activities:
Net increase in net assets resulting from operations	$	7,216	$	7,563
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
Amortization of debt issuance costs		555		344
Net realized (gain) loss on investments		(2,766)		3,447
Net unrealized depreciation (appreciation) on investments		6,539		(2,765)
Purchase of investments		(105,554)		(93,137)
Principal payments received on investments		61,168		65,204
Proceeds from sale of investments		6,256		1,905
Distributions from controlled affiliate investment		—		530
Dividends from controlled affiliate investment		(118)		(761)
Warrants received in settlement of fee income		(978)		—
Changes in assets and liabilities:
Decrease (increase) in interest receivable		250		(533)
Increase in end-of-term payments		(1,398)		(558)
Decrease in unearned income		(876)		(741)
Decrease in other assets		(59)		(383)
(Decrease) increase in other accrued expenses		(48)		133
Increase in base management fee payable		48		37
Increase in incentive fee payable		63		262
Net cash used in operating activities		(29,702)		(19,453)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs		21,148		23,147
Advances on credit facility		58,250		28,500
Repayment of credit facility		(17,000)		(30,000)
Debt issuance costs		(888)		—
Distributions paid		(10,668)		(7,229)
Net cash provided by financing activities		50,842		14,418
Net increase (decrease) in cash, cash equivalents and restricted cash		21,140		(5,035)
Cash, cash equivalents and restricted cash:
Beginning of period		17,385		12,591
End of period	$	38,525	$	7,556

Supplemental disclosure of cash flow information:
Cash paid for interest	$	4,078	$	3,737
Supplemental non-cash investing and financing activities:
Warrant investments received and recorded as unearned income	$	750	$	1,367
Distributions payable	$	5,188	$	4,063
Acquisition of controlled affiliate investment	$	16,498	$	—
End-of-term payments receivable	$	5,298	$	3,573
Non-cash income	$	2,527	$	1,081

	Six months ended June 30,
	2020		2019
Cash	$	22,837	$	7,556
Investments in money market funds		14,499		—
Restricted investments in money market funds		1,189		—
Total cash, cash equivalents and restricted cash	$	38,525	$	7,556

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

June 30, 2020

(Dollars in thousands)


			Principal		Cost of		Fair
Portfolio Company (1)(3)	Sector	Type of Investment (4)(7)(9)(10)	Amount		Investments (6)		Value
Non-Affiliate Investments — 173.3% (8)
Non-Affiliate Debt Investments — 167.6% (8)
Non-Affiliate Debt Investments — Life Science — 88.4% (8)
Castle Creek Pharmaceuticals Holdings, Inc.(2)(12)	Biotechnology	Term Loan (9.30% cash (Libor + 7.50%; Floor 9.30%), 5.00% ETP, Due 3/1/24)	$	5,000	$	4,875	$	4,875
		Term Loan (9.30% cash (Libor + 7.50%; Floor 9.30%), 5.00% ETP, Due 3/1/24)		5,000		4,928		4,928
		Term Loan (9.30% cash (Libor + 7.50%; Floor 9.30%), 5.00% ETP, Due 3/1/24)		5,000		4,928		4,928
		Term Loan (9.30% cash (Libor + 7.50%; Floor 9.30%), 5.00% ETP, Due 3/1/24)		5,000		4,928		4,928
Celsion Corporation (2)(5)(12)	Biotechnology	Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)		2,500		2,471		2,471
		Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)		2,500		2,471		2,471
		Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)		2,500		2,521		2,479
		Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)		2,500		2,521		2,479
Emalex Biosciences, Inc. (2)(12)	Biotechnology	Term Loan (9.75% cash (Libor + 7.95%; Floor 9.75%), 5.00% ETP, Due 12/1/23)		2,500		2,346		2,346
		Term Loan (9.75% cash (Libor + 7.95%; Floor 9.75%), 5.00% ETP, Due 12/1/23)		2,500		2,450		2,450
Encore Dermatology, Inc. (2)(12)	Biotechnology	Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 4.00% ETP, Due 4/1/23)		5,000		5,031		4,701
		Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 4.00% ETP, Due 4/1/23)		5,000		4,940		4,688
		Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 4.00% ETP, Due 4/1/23)		5,000		4,940		4,688
Espero BioPharma, Inc. (2)(12)(14)	Biotechnology	Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), 5.10% ETP, Due 8/15/20) (11)		5,053		5,053		2,465
		Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), 5.10% ETP, Due 8/15/20) (11)		4,820		4,820		2,344
		Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)		200		200		98
		Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)		100		100		49
		Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)		100		100		49
		Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)		100		100		49
		Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)		150		150		73
		Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)		100		100		49
		Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), Due 8/15/20) (11)		50		50		24
LogicBio, Inc.(2)(5)(12)	Biotechnology	Term Loan (8.75% cash (Libor + 6.25%; Floor 8.75%), 4.50% ETP, Due 6/1/24)		5,000		4,973		4,973
Mustang Bio, Inc. (2)(5)(12)	Biotechnology	Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)		5,000		4,938		4,938
		Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)		5,000		4,938		4,938
		Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)		5,000		5,036		4,953
Provivi, Inc. (2)(12)	Biotechnology	Term Loan (9.50% cash (Libor + 8.50%; Floor 9.50%), 5.50% ETP, Due 12/1/24)		5,000		4,752		4,752
		Term Loan (9.50% cash (Libor + 8.50%; Floor 9.50%), 5.50% ETP, Due 12/1/24)		5,000		4,901		4,901
vTv Therapeutics Inc. (2)(5)(12)	Biotechnology	Term Loan (10.50% cash (Libor + 10.00%; Floor 10.50%), 6.00% ETP, Due 8/1/20)		521		520		520
		Term Loan (10.50% cash (Libor + 10.00%; Floor 10.50%), 8.50% ETP, Due 1/1/21)		1,094		1,088		1,088
Titan Pharmaceuticals, Inc. (2)(5)(12)	Drug Delivery	Term Loan (9.50% cash (Libor + 8.40%; Floor 9.50%), 5.00% ETP, Due 6/1/22)		1,600		1,547		1,547
Bardy Diagnostics, Inc. (2)(12)	Medical Device	Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)		5,000		4,935		4,935
		Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)		5,000		4,935		4,935
		Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)		1,000		987		987
		Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)		1,000		987		987
		Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)		1,000		987		987

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

June 30, 2020

(Dollars in thousands)


			Principal		Cost of		Fair
Portfolio Company (1)(3)	Sector	Type of Investment (4)(7)(9)(10)	Amount		Investments (6)		Value
		Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)		1,000		987		987
		Term Loan (8.90% cash (Libor + 7.00%; Floor 8.90%), 5.00% ETP, Due 9/1/24)		1,000		987		987
Ceribell, Inc. (2)(12)	Medical Device	Term Loan (8.25% cash (Libor + 6.70%; Floor 8.25%), 5.50% ETP, Due 10/1/24)		5,000		4,871		4,871
		Term Loan (8.25% cash (Libor + 6.70%; Floor 8.25%), 5.50% ETP, Due 10/1/24)		5,000		4,935		4,935
Conventus Orthopaedics, Inc. (2)(12)	Medical Device	Term Loan (9.25% cash (Libor + 8.00%; Floor 9.25%), 8.33% ETP, Due 1/1/24)		5,311		5,242		5,242
		Term Loan (9.25% cash (Libor + 8.00%; Floor 9.25%), 8.33% ETP, Due 1/1/24)		5,311		5,242		5,242
CSA Medical, Inc. (2)(12)	Medical Device	Term Loan (10.00% cash (Libor + 8.20%; Floor 10.00%), 5.00% ETP, Due 1/1/24)		3,750		3,697		3,697
		Term Loan (10.00% cash (Libor + 8.20%; Floor 10.00%), 5.00% ETP, Due 1/1/24)		250		247		247
		Term Loan (10.00% cash (Libor + 8.20%; Floor 10.00%), 5.00% ETP, Due 3/1/24)		4,000		3,948		3,948
CVRx, Inc. (2)(12)	Medical Device	Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 10/1/24)		5,000		4,941		4,941
		Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 10/1/24)		5,000		4,941		4,941
		Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 10/1/24)		5,000		4,941		4,941
		Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 10/1/24)		5,000		4,941		4,941
Lantos Technologies, Inc. (2)(12)(14)	Medical Device	Term Loan (10.00% cash (Libor + 8.43%; Floor 10.00%), 10.00% ETP, Due 9/1/21)		3,042		2,823		1,900
MacuLogix, Inc. (2)(12)	Medical Device	Term Loan (10.08% cash (Libor + 7.68%; Floor 10.08%), 4.00% ETP, Due 10/1/23)		7,500		7,370		7,121
		Term Loan (10.08% cash (Libor + 7.68%; Floor 10.08%), 4.00% ETP, Due 10/1/23)		4,050		4,000		3,865
Magnolia Medical Technologies, Inc. (2)(12)	Medical Device	Term Loan (9.75% cash (Prime + 5.00%; Floor 9.75%), 4.00% ETP, Due 3/1/25)		5,000		4,859		4,859
		Term Loan (9.75% cash (Prime + 5.00%; Floor 9.75%), 4.00% ETP, Due 3/1/25)		5,000		4,930		4,930
VERO Biotech LLC (2)(12)	Medical Device	Term Loan (9.25% cash (Libor + 8.00%; Floor 9.25%), 5.00% ETP, Due 1/1/22)		3,167		3,142		3,142
		Term Loan (9.25% cash (Libor + 8.00%; Floor 9.25%), 5.00% ETP, Due 1/1/22)		3,167		3,142		3,142
Total Non-Affiliate Debt Investments — Life Science						185,733		177,952
Non-Affiliate Debt Investments — Technology — 71.9% (8)
Betabrand Corporation (2)(12)	Consumer-related Technologies	Term Loan (10.05% cash (Libor + 7.50%; Floor 10.05%), 5.75% ETP, Due 9/1/23)		4,250		4,159		4,159
		Term Loan (10.05% cash (Libor + 7.50%; Floor 10.05%), 5.75% ETP, Due 9/1/23)		4,250		4,191		4,192
		Term Loan (10.05% cash (Libor + 7.50%; Floor 10.05%), 5.75% ETP, Due 9/1/23)		1,125		1,092		1,092
Mohawk Group Holdings, Inc. (2)(5)(12)	Consumer-related Technologies	Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)		5,000		4,928		4,928
		Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)		5,000		4,928		4,928
		Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)		5,000		4,928		4,928
Updater, Inc.(2)(12)	Consumer-related Technologies	Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%),0.56% ETP, Due 12/20/24)		5,000		4,942		4,672
		Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%), 0.56% ETP, Due 12/20/24)		5,000		4,942		4,672
		Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%), 0.56% ETP, Due 12/20/24)		10,000		9,883		9,345
Canara, Inc. (2)(12)	Data Storage	Term Loan (11.00% cash (Libor + 8.60%; Floor 11.00%), 1.00% ETP, Due 2/1/23)		5,000		4,891		4,891
		Term Loan (11.00% cash (Libor + 8.60%; Floor 11.00%), 1.00% ETP, Due 2/1/23)		5,000		4,890		4,890
Kaminario, Inc. (2)(12)	Data Storage	Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 3.00% ETP, Due 1/1/23)		5,000		4,948		4,948
		Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 3.00% ETP, Due 1/1/23)		5,000		4,948		4,948
		Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 3.00% ETP, Due 7/1/23)		5,000		4,863		4,863
IgnitionOne, Inc. (2)(12)(14)	Internet and Media	Term Loan (10.39% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)		1,873		1,789		1,789
		Term Loan (10.39% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)		1,873		1,789		1,789

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

June 30, 2020

(Dollars in thousands)


			Principal		Cost of		Fair
Portfolio Company (1)(3)	Sector	Type of Investment (4)(7)(9)(10)	Amount		Investments (6)		Value
		Term Loan (10.39% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)		1,984		1,706		1,706
		Term Loan (10.39% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)		1,873		1,789		1,789
Skillshare, Inc.(2)(12)	Internet and Media	Term Loan (9.50% cash (Libor + 7.50%; Floor 9.50%), 5.00% ETP, Due 1/1/25)		3,000		2,752		2,752
		Term Loan (9.50% cash (Libor + 7.50%; Floor 9.50%), 5.00% ETP, Due 1/1/25)		3,000		2,951		2,951
		Term Loan (9.50% cash (Libor + 7.50%; Floor 9.50%), 5.00% ETP, Due 1/1/25)		3,000		2,951		2,951
The NanoSteel Company, Inc. (2)(12)	Materials	Term Loan (11.00% cash (Libor + 8.50%; Floor 11.00%), 14.88% ETP, Due 6/1/22)		4,250		4,203		4,188
		Term Loan (11.00% cash (Libor + 8.50%; Floor 11.00%), 14.88% ETP, Due 6/1/22)		4,250		4,203		4,188
Keypath Education, LLC (2)(12)	Software	Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 2.50% ETP, Due 10/1/24)		3,750		3,574		3,574
		Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 2.50% ETP, Due 10/1/24)		3,750		3,677		3,677
		Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 2.50% ETP, Due 10/1/24)		2,500		2,451		2,451
New Signature US, Inc. (2)(12)(13)	Software	Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 7/1/22)		8,250		8,331		8,195
		Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 7/1/22)		2,750		2,727		2,727
		Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 2/1/23)		3,000		3,024		2,974
		Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 2/1/23)		1,000		989		989
OutboundEngine, Inc. (2)(12)	Software	Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)		4,000		3,939		3,939
		Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)		3,500		3,447		3,447
		Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)		500		503		494
Revinate, Inc. (2)(12)	Software	Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 4.00% ETP, Due 11/1/23)		4,000		4,029		3,962
		Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 4.00% ETP, Due 11/1/23)		1,000		929		929
		Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 4.00% ETP, Due 11/1/23)		5,000		4,937		4,937
xAd, Inc. (2)(12)	Software	Term Loan (10.00% cash (Libor + 8.70%; Floor 10.00%), 5.0% ETP, Due 1/1/22)		3,646		3,601		3,601
		Term Loan (10.00% cash (Libor + 8.70%; Floor 10.00%), 5.0% ETP, Due 1/1/22)		3,646		3,601		3,601
		Term Loan (10.00% cash (Libor + 8.70%; Floor 10.00%), 5.0% ETP, Due 1/1/22)		2,188		2,161		2,161
		Term Loan (10.00% cash (Libor + 8.70%; Floor 10.00%), 5.0% ETP, Due 1/1/22)		1,458		1,441		1,441
Total Non-Affiliate Debt Investments — Technology						146,027		144,658
Non-Affiliate Debt Investments — Healthcare information and services — 7.3% (8)
Kate Farms, Inc. (2)(12)	Other Healthcare	Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)		5,000		4,930		4,930
		Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)		5,000		4,930		4,930
		Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)		2,500		2,460		2,460
		Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)		2,500		2,460		2,460
Total Non-Affiliate Debt Investments — Healthcare information and services						14,780		14,780
Total Non- Affiliate Debt Investments						346,540		337,390
Non-Affiliate Warrant Investments — 5.2% (8)
Non-Affiliate Warrants — Life Science — 0.8% (8)
Alpine Immune Sciences, Inc. (5)(12)	Biotechnology	4,632 Common Stock Warrants				122		—
Castle Creek Pharmaceuticals, Inc. (2)(12)	Biotechnology	2,428 Preferred Stock Warrants				144		142
Celsion Corporation (2)(5)(12)	Biotechnology	142,568 Common Stock Warrants				65		174
Corvium, Inc. (2)(12)	Biotechnology	661,956 Preferred Stock Warrants				53		19
Emalex Biosciences, Inc. (2)(12)	Biotechnology	73,602 Preferred Stock Warrants				107		107
Encore Dermatology, Inc. (2)(12)	Biotechnology	1,511 Preferred Stock Warrants				113		—
Espero BioPharma, Inc. (2)(12)	Biotechnology	1,507,917 Common Stock Warrants				183		—
LogicBio, Inc. (2)(5)(12)	Biotechnology	7,843 Common Stock Warrants				8		2
Mustang Bio, Inc. (2)(5)(12)	Biotechnology	252,161 Common Stock Warrants				146		95
Rocket Pharmaceuticals Corporation (5)(12)	Biotechnology	7,051 Common Stock Warrants				17		9
Palatin Technologies, Inc. (2)(5)(12)	Biotechnology	274,725 Common Stock Warrants				20		1
Provivi, Inc. (2)(12)	Biotechnology	123,457 Preferred Stock Warrants				147		147
Strongbridge U.S. Inc. (2)(5)(12)	Biotechnology	160,714 Common Stock Warrants				72		220

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

June 30, 2020

(Dollars in thousands)


			Cost of		Fair
Portfolio Company (1)(3)	Sector	Type of Investment (4)(7)(9)(10)	Investments (6)		Value
Sunesis Pharmaceuticals, Inc. (5)(12)	Biotechnology	2,050 Common Stock Warrants		5		—
vTv Therapeutics Inc. (2)(5)(12)	Biotechnology	95,293 Common Stock Warrants		44		—
Titan Pharmaceuticals, Inc. (2)(5)(12)	Drug Delivery	373,333 Common Stock Warrants		95		—
AccuVein Inc. (2)(12)	Medical Device	1,174,881 Preferred Stock Warrants		23		26
Aerin Medical, Inc. (2)(12)	Medical Device	1,818,183 Preferred Stock Warrants		65		62
Bardy Diagnostics, Inc. (2)(12)	Medical Device	346,154 Preferred Stock Warrants		56		55
Ceribell, Inc. (2)(12)	Medical Device	117,521 Preferred Stock Warrants		50		50
Conventus Orthopaedics, Inc. (2)(12)	Medical Device	6,313,826 Preferred Stock Warrants		149		77
CSA Medical, Inc. (2)(12)	Medical Device	1,375,727 Preferred Stock Warrants		153		115
CVRx, Inc.(2)(12)	Medical Device	750,000 Preferred Stock Warrants		76		74
Lantos Technologies, Inc. (2)(12)	Medical Device	560,832 Preferred Stock Warrants		253		—
MacuLogix, Inc. (2)(12)	Medical Device	454,460 Preferred Stock Warrants		238		92
Magnolia Medical Technologies, Inc. (2)(12)	Medical Device	283,772 Preferred Stock Warrants		64		64
Meditrina, Inc. (2)(12)	Medical Device	221,510 Preferred Stock Warrants		83		78
VERO Biotech LLC (2)(12)	Medical Device	408 Common Stock Warrants		53		49
Total Non-Affiliate Warrants — Life Science				2,604		1,658
Non-Affiliate Warrants — Technology — 3.9% (8)
Intelepeer Holdings, Inc. (2)(12)	Communications	3,078,084 Preferred Stock Warrants		177		104
PebblePost, Inc. (2)(12)	Communications	598,850 Preferred Stock Warrants		93		142
Betabrand Corporation (2)(12)	Consumer-related Technologies	261,198 Preferred Stock Warrants		106		97
Caastle, Inc. (2)(12)	Consumer-related Technologies	268,591 Preferred Stock Warrants		67		821
Le Tote, Inc. (2)(12)	Consumer-related Technologies	202,974 Preferred Stock Warrants		63		345
Mohawk Group Holdings, Inc. (2)(5)(12)	Consumer-related Technologies	76,923 Common Stock Warrants		195		2
Rhapsody International Inc. (2)(12)	Consumer-related Technologies	852,273 Common Stock Warrants		164		—
Updater, Inc.(2)(12)	Consumer-related Technologies	108,333 Common Stock Warrants		34		35
Canara, Inc. (2)(12)	Data Storage	500,000 Preferred Stock Warrants		242		417
Silk, Inc. (2)(12)	Data Storage	26,816,363 Preferred Stock Warrants		234		216
Global Worldwide LLC (2)(12)	Internet and Media	245,810 Preferred Stock Warrants		75		9
Rocket Lawyer Incorporated (2)(12)	Internet and Media	261,721 Preferred Stock Warrants		91		70
Skillshare, Inc. (2)(12)	Internet and Media	138,653 Preferred Stock Warrants		162		2,555
The NanoSteel Company, Inc. (2)(12)	Materials	818,807 Preferred Stock Warrants		233		87
Kinestral, Inc. (2)(12)	Power Management	5,002,574 Preferred Stock Warrants		1,585		1,315
Avalanche Technology, Inc. (2)(12)	Semiconductors	202,602 Preferred Stock Warrants		101		167
Soraa, Inc. (2)(12)	Semiconductors	203,616 Preferred Stock Warrants		80		—
BSI Platform Holdings, LLC (2)(12)(13)	Software	468,750 Preferred Stock Warrants		56		544
Education Elements, Inc. (2)(12)	Software	238,121 Preferred Stock Warrants		28		22
Keypath Education, Inc.(2)(12)	Software	900,000 Preferred Stock Warrants		158		157
Lotame Solutions, Inc. (2)(12)	Software	288,115 Preferred Stock Warrants		22		268
OutboundEngine, Inc. (2)(12)	Software	620,000 Preferred Stock Warrants		80		76
Revinate, Inc. (2)(12)	Software	615,475 Preferred Stock Warrants		44		42
Riv Data Corp. (2)(12)	Software	321,428 Preferred Stock Warrants		12		291
ShopKeep.com, Inc. (2)(12)	Software	193,962 Preferred Stock Warrants		118		105
SIGNiX, Inc. (12)	Software	133,560 Preferred Stock Warrants		225		—
Skyword, Inc. (12)	Software	301,055 Preferred Stock Warrants		48		3
Weblinc Corporation (2)(12)	Software	195,122 Preferred Stock Warrants		42		—
xAd, Inc. (2)(12)	Software	4,343,348 Preferred Stock Warrants		177		—
Total Non-Affiliate Warrants — Technology				4,712		7,890
Non-Affiliate Warrants — Sustainability — 0.0% (8)
Tigo Energy, Inc. (2)(12)	Energy Efficiency	804,604 Preferred Stock Warrants		100		—
Total Non-Affiliate Warrants — Sustainability				100		—
Non-Affiliate Warrants — Healthcare information and services — 0.5% (8)
ProterixBio, Inc. (2)(12)	Diagnostics	2,676 Common Stock Warrants		42		—
Kate Farms, Inc. (2)(12)	Other Healthcare	82,965 Preferred Stock Warrants		101		91
Watermark Medical, Inc. (2)(12)	Other Healthcare	27,373 Preferred Stock Warrants		74		—
Ontrak, Inc. (2)(5)(12)	Software	51,185 Common Stock Warrants		193		681
Medsphere Systems Corporation (2)(12)	Software	7,097,792 Preferred Stock Warrants		60		188
Total Non-Affiliate Warrants — Healthcare information and services				470		960
Total Non-Affiliate Warrants				7,886		10,508

Non-Affiliate Other Investments — 0.3% (8)
ZetrOZ, Inc. (12)	Medical Device	Royalty Agreement		33		500
Total Non-Affiliate Other Investments				33		500

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

June 30, 2020

(Dollars in thousands)


				Principal		Cost of		Fair
Portfolio Company (1)(3)	Sector		Type of Investment (4)(7)(9)(10)	Amount		Investments (6)		Value
Non-Affiliate Equity — 0.2% (8)
Sunesis Pharmaceuticals, Inc. (5)	Biotechnology		13,082 Common Stock				83		4
SnagAJob.com, Inc. (12)	Consumer-related Technologies		82,974 Common Stock				9		83
Zeta Global Holdings Corp. (2)(12)	Internet and Media		18,405 Common Stock				240		240
Formetrix, Inc. (2)(12)	Materials		74,286 Common Stock				74		74
Clarabridge, Inc. (12)	Software		17,142 Common Stock				14		35
Total Non-Affiliate Equity							420		436
Total Non-Affiliate Portfolio Investment Assets						$	354,879	$	348,834
Non-controlled Affiliate Investments — 3.5% (8)
Non-controlled Affiliate Debt Investments — Technology — 2.6% (8)
Decisyon, Inc. (12)	Software		Term Loan (12.50% cash (Libor + 12.308%; Floor 12.50%), 12.00% ETP, Due 6/1/21)	$	1,182	$	1,182	$	1,021
			Term Loan (12.50% cash (Libor + 12.308%; Floor 12.50%), 12.00% ETP, Due 6/1/21)		646		633		547
			Term Loan (12.02% cash, Due 6/1/21)		227		227		196
			Term Loan (12.03% cash, Due 6/1/21)		227		227		196
			Term Loan (12.24% cash, Due 6/1/21)		685		685		592
			Term Loan (13.08% cash, Due 6/1/21)		277		277		239
			Term Loan (13.10% cash, Due 6/1/21)		184		184		159
StereoVision Imaging, Inc. (2)(12)	Software		Term Loan (8.50% Cash (Libor + 7.03%; Floor 8.50%), 14.06% ETP, Due 1/1/22)		2,783		2,382		2,382
Total Non-controlled Affiliate Debt Investments — Technology							5,797		5,332

Non-controlled Affiliate Warrants — Technology — 0.0% (8)
Decisyon, Inc. (12)	Software		82,967 Common Stock Warrants				46		—
Total Non-controlled Affiliate Warrants — Technology							46		—
Non-controlled Affiliate Equity — Technology — 0.9% (8)
Decisyon, Inc. (12)	Software		45,365,936 Common Stock				185		75
StereoVision Imaging, Inc. (2)(12)	Software		1,943,572 Common Stock				791		1,639
Total Non-controlled Affiliate Equity							976		1,714
Total Non-controlled Affiliate Portfolio Investment Assets						$	6,819	$	7,046

Total Portfolio Investment Assets — 176.8% (8)		��				$	361,698	$	355,880

Short Term Investments — Unrestricted Investments — 7.2% (8)
US Bank Money Market Deposit Account						$	14,499	$	14,499
Total Short Term Investments —Unrestricted Investments						$	14,499	$	14,499

Short Term Investments — Restricted Investments—0.6% (8)
US Bank Money Market Deposit Account						$	1,189	$	1,189
Total Short Term Investments —Restricted Investments						$	1,189	$	1,189

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

(2)Has been pledged as collateral under the revolving credit facility (the “Key Facility”) with KeyBank National Association (“Key”), the Note Funding Agreement (the “NYL Facility”) with several entities owned or affiliated with New York Life Insurance Company (“Noteholders”) and/or the term debt securitization in connection with which an affiliate of the Company made an offering of $100.0 million in aggregate principal amount of fixed rate asset-backed notes that were issued in conjunction with the $160.0 million securitization of secured loans the Company completed on August 13, 2019 (“the Asset-Backed Notes”).

(3)All non-affiliate investments are investments in which the Company owns less than 5% of the voting securities of the portfolio company. All non-controlled affiliate investments are investments in which the Company owns 5% or more of the voting securities of the portfolio company but not more than 25% of the voting securities of the portfolio company. All controlled affiliate investments are investments in which the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement).

(4)All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include end-of-term payments (“ETPs”), and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt investments are at variable rates for the term of the debt investment, unless otherwise indicated. All debt investments based on the London InterBank Offered Rate (“LIBOR”) are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of June 30, 2020 is provided.

(5)Portfolio company is a public company.

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

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

(8)Value as a percent of net assets.

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments (Unaudited)

June 30, 2020

(Dollars in thousands)

(9)The Company did not have any non-qualifying assets under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act) as of June 30, 2020. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.

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

(11)Debt investment has a payment-in-kind (“PIK”) feature.

(12)The fair value of the investment was valued using significant unobservable inputs.

(13)New Signature US, Inc. is a subsidiary of BSI Platform Holdings, LLC.

(14)Debt investment is on non-accrual status as of June 30, 2020.

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2019

(Dollars in thousands)


			Principal			Cost of	Fair
Portfolio Company (1)(3)	Sector	Type of Investment (4)(7)(9)(10)	Amount			Investments (6)	Value
Non-Affiliate Investments — 160.0% (8)
Non-Affiliate Debt Investments — 153.5% (8)
Non-Affiliate Debt Investments — Life Science — 55.9% (8)
Celsion Corporation (2)(5)(12)	Biotechnology	Term Loan (9.98% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)	$	2,500	$	2,464	$	2,464
		Term Loan (9.98% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)		2,500		2,464		2,464
Encore Dermatology, Inc. (2)(12)	Biotechnology	Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 3.00% ETP, Due 4/1/23)		5,000		4,929		4,929
		Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 3.00% ETP, Due 4/1/23)		5,000		4,929		4,929
Espero BioPharma, Inc. (2)(12)	Biotechnology	Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), 5.10% ETP, Due 3/31/20) (11)		5,053		5,053		5,053
		Term Loan (12.00% cash (Libor + 9.25%; Floor 12.00%), 5.10% ETP, Due 3/31/20) (11)		4,802		4,802		4,802
LogicBio, Inc.(2)(5)(12)	Biotechnology	Term Loan (8.75 % cash (Libor + 6.25%; Floor 8.75%), 4.50% ETP, Due 6/1/24		5,000		4,970		4,970
Mustang Bio, Inc. (2)(5)(12)	Biotechnology	Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)		5,000		4,827		4,827
		Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)		5,000		4,924		4,924
vTv Therapeutics Inc. (2)(5)(12)	Biotechnology	Term Loan (11.69% cash (Libor + 10.00%; Floor 10.50%), 6.00% ETP, Due 5/1/20)		1,042		1,034		1,034
		Term Loan (11.69% cash (Libor + 10.00%; Floor 10.50%), 6.00% ETP, Due 10/1/20)		1,406		1,393		1,393
Titan Pharmaceuticals, Inc. (2)(5)(12)	Drug Delivery	Term Loan (10.09% cash (Libor + 8.40%; Floor 9.50%), 5.00% ETP, Due 6/1/22)		1,600		1,533		1,533
Conventus Orthopaedics, Inc. (2)(12)	Medical Device	Term Loan (9.69% cash (Libor + 8.00%; Floor 9.25%), 8.33% ETP, Due 7/1/23)		5,311		5,233		5,233
		Term Loan (9.69% cash (Libor + 8.00%; Floor 9.25%), 8.33% ETP, Due 7/1/23)		5,311		5,233		5,233
CSA Medical, Inc. (2)(12)	Medical Device	Term Loan (10.00% cash (Libor + 8.20%; Floor 10.00%), 5.00% ETP, Due 1/1/24)		3,750		3,637		3,637
		Term Loan (10.00% cash (Libor + 8.20%; Floor 10.00%), 5.00% ETP, Due 1/1/24)		250		246		246
CVRx, Inc. (2)(12)	Medical Device	Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 4/1/24)		5,000		4,934		4,934
		Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 4/1/24)		5,000		4,934		4,934
		Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 4/1/24)		5,000		4,934		4,934
		Term Loan (10.00% cash (Libor + 7.80%; Floor 10.00%), 3.50% ETP, Due 4/1/24)		5,000		4,934		4,934
Lantos Technologies, Inc. (2)(12)	Medical Device	Term Loan (10.12% cash (Libor + 8.43%; Floor 10.00%), 10.00% ETP, Due 4/1/21)		3,433		3,143		3,143
MacuLogix, Inc. (2)(12)	Medical Device	Term Loan (10.08% cash (Libor + 7.68%; Floor 10.08%), 4.00% ETP, Due 10/1/23)		7,500		7,356		7,356
		Term Loan (10.08% cash (Libor + 7.68%; Floor 10.08%), 4.00% ETP, Due 10/1/23)		4,050		3,993		3,993
Meditrina, Inc. (2)(12)	Medical Device	Term Loan (9.70% cash (Libor + 7.10%; Floor 9.70%), 4.00% ETP, Due 5/1/20)		3,000		2,966		2,966
VERO Biotech LLC (2)(12)	Medical Device	Term Loan (9.69% cash (Libor + 8.00%; Floor 9.25%), 5.00% ETP, Due 1/1/22)		4,000		3,967		3,967
		Term Loan (10.35% cash (Libor + 8.00%; Floor 9.25%), 5.00% ETP, Due 1/1/22)		4,000		3,967		3,967
Total Non-Affiliate Debt Investments — Life Science						102,799		102,799
Non-Affiliate Debt Investments — Technology — 84.8% (8)
Audacy Corporation (2)(12)(15)	Communications	Term Loan (9.59% cash (Libor + 7.90%; Floor 9.50%), 5.00% ETP, Due 7/1/22)		3,641		3,580		1,300
		Term Loan (9.59% cash (Libor + 7.90%; Floor 9.50%), Due 2/1/20)		550		550		200
Betabrand Corporation (2)(12)	Consumer-related Technologies	Term Loan (10.05% cash (Libor + 7.50%; Floor 10.05%), 4.50% ETP, Due 9/1/23)		4,250		4,115		4,115
		Term Loan (10.05% cash (Libor + 7.50%; Floor 10.05%), 4.50% ETP, Due 9/1/23)		4,250		4,182		4,182
Mohawk Group Holdings, Inc. (2)(5)(12)	Consumer-related Technologies	Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)		5,000		4,914		4,914
		Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)		5,000		4,914		4,914
		Term Loan (9.90% cash (Libor + 7.40%; Floor 9.90%), 4.00% ETP, Due 1/1/23)		5,000		4,914		4,914
Updater, Inc.(2)(12)	Consumer-related Technologies	Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%),0.56% ETP, Due 12/20/24)		5,000		4,935		4,935
		Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%), 0.56% ETP, Due 12/20/24)		5,000		4,935		4,935

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2019

(Dollars in thousands)


			Principal		Cost of		Fair
Portfolio Company (1)(3)	Sector	Type of Investment (4)(7)(9)(10)	Amount		Investments (6)		Value
		Term Loan (11.50% cash (Prime + 5.75%; Floor 11.50%, Ceiling 14.00%), 0.56% ETP, Due 12/20/24)		10,000		9,870		9,870
Canara, Inc. (2)(12)	Data Storage	Term Loan (11.00% cash (Libor + 8.60%; Floor 11.00%), 1.00% ETP, Due 2/1/23)		5,000		4,868		4,868
		Term Loan (11.00% cash (Libor + 8.60%; Floor 11.00%), 1.00% ETP, Due 2/1/23)		5,000		4,868		4,868
Kaminario, Inc. (2)(12)	Data Storage	Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 3.00% ETP, Due 1/1/23)		5,000		4,938		4,938
		Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 3.00% ETP, Due 1/1/23)		5,000		4,938		4,938
		Term Loan (10.65% cash (Libor + 8.40%; Floor 10.65%), 3.00% ETP, Due 1/1/23)		5,000		4,840		4,840
IgnitionOne, Inc. (2)(12)	Internet and Media	Term Loan (11.92% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)		3,000		2,911		2,911
		Term Loan (11.92% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)		3,000		2,911		2,911
		Term Loan (11.92% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)		3,000		2,812		2,812
		Term Loan (11.92% cash (Libor + 10.23%; Floor 10.23%), 2.00% ETP, Due 4/1/22)		3,000		2,911		2,911
Skillshare, Inc.(2)(12)	Internet and Media	Term Loan (9.50% cash (Libor + 7.50%; Floor 9.50%), 5.00% ETP, Due 1/1/25)		3,000		2,747		2,747
		Term Loan (9.50% cash (Libor + 7.50%; Floor 9.50%), 5.00% ETP, Due 1/1/25)		3,000		2,946		2,946
		Term Loan (9.50% cash (Libor + 7.50%; Floor 9.50%), 5.00% ETP, Due 1/1/25)		3,000		2,946		2,946
Verve Wireless, Inc. (2)(12)	Internet and Media	Term Loan (15.80% cash (Libor + 8.80%; Floor 10.80%), 3.33% ETP, Due 9/1/21)		2,400		2,320		2,320
The NanoSteel Company, Inc. (2)(12)	Materials	Term Loan (11.00% cash (Libor + 8.50%; Floor 11.00%), 4.00% ETP, Due 6/1/22)		4,250		4,205		4,205
		Term Loan (11.00% cash (Libor + 8.50%; Floor 11.00%), 4.00% ETP, Due 6/1/22)		4,250		4,205		4,205
Kinestral Technologies, Inc.(2)(12)	Power Management	Term Loan (9.95% cash (Libor + 7.75%; Floor 9.95%), 5.00% ETP, Due 12/1/22)		6,000		5,442		5,442
		Term Loan (9.95% cash (Libor + 7.75%; Floor 9.95%), 5.00% ETP, Due 12/1/22)		6,000		5,765		5,765
Bridge2 Solutions, LLC. (2)(12)	Software	Term Loan (11.00% cash (Libor + 8.40%; Floor 11.00%), 2.00% ETP, Due 6/1/23)		6,250		6,120		6,120
		Term Loan (11.00% cash (Libor + 8.40%; Floor 11.00%), 2.00% ETP, Due 6/1/23)		6,250		6,120		6,120
		Term Loan (11.00% cash (Libor + 8.40%; Floor 11.00%), 2.00% ETP, Due 9/1/23)		2,000		1,926		1,926
New Signature US, Inc. (2)(12)(13)	Software	Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 7/1/22)		2,750		2,721		2,721
		Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 2/1/23)		1,000		987		987
OutboundEngine, Inc. (2)(12)	Software	Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)		4,000		3,929		3,929
		Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)		3,500		3,438		3,438
Revinate, Inc. (2)(12)	Software	Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 4.00% ETP, Due 6/1/23)		1,000		928		928
		Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 4.00% ETP, Due 11/1/23)		5,000		4,932		4,932
SIGNiX, Inc. (12)(15)	Software	Term Loan (12.69% cash (Libor + 11.00%; Floor 11.50%), 8.67% ETP, Due 2/1/20)		1,571		1,569		500
xAd, Inc. (2)(12)	Software	Term Loan (10.39% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21)		4,583		4,533		4,533
		Term Loan (10.39% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21)		4,583		4,533		4,533
		Term Loan (10.39% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21)		2,750		2,720		2,720
		Term Loan (10.39% cash (Libor + 8.70%; Floor 10.00%), 4.75% ETP, Due 11/1/21)		1,833		1,813		1,813
Total Non-Affiliate Debt Investments — Technology						159,751		156,052
Non-Affiliate Debt Investments — Healthcare information and services — 12.8% (8)
Kate Farms, Inc. (2)(12)	Other Healthcare	Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)		5,000		4,852		4,852
		Term Loan (9.75% cash (Libor + 7.45%; Floor 9.75%), 5.00% ETP, Due 10/1/23)		5,000		4,919		4,919

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2019

(Dollars in thousands)


			Principal		Cost of		Fair
Portfolio Company (1)(3)	Sector	Type of Investment (4)(7)(9)(10)	Amount		Investments (6)		Value
HealthEdge Software, Inc. (2)(12)	Software	Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 7/1/22)		3,571		3,533		3,533
		Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 1/1/23)		3,214		3,180		3,180
		Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 4/1/23)		3,482		3,444		3,444
		Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 1/1/24)		3,750		3,707		3,707
Total Non-Affiliate Debt Investments — Healthcare information and services						23,635		23,635
Total Non- Affiliate Debt Investments						286,185		282,486
Non-Affiliate Warrant Investments — 5.9% (8)
Non-Affiliate Warrants — Life Science — 0.7% (8)
Alpine Immune Sciences, Inc. (5)(12)	Biotechnology	4,632 Common Stock Warrants				122		—
Celsion Corporation (2)(5)(12)	Biotechnology	95,057 Common Stock Warrants				65		6
Corvium, Inc. (2)(12)	Biotechnology	661,956 Preferred Stock Warrants				52		20
Encore Dermatology, Inc. (2)(12)	Biotechnology	1,510,878 Preferred Stock Warrants				113		—
Espero BioPharma, Inc. (2)(5)(12)	Biotechnology	1,507,917 Common Stock Warrants				184		—
LogicBio, Inc. (2)(5)(12)	Biotechnology	7,843 Common Stock Warrants				8		3
Mustang Bio, Inc. (2)(5)(12)	Biotechnology	216,138 Common Stock Warrants				140		222
Rocket Pharmaceuticals Corporation (5)(12)	Biotechnology	7,051 Common Stock Warrants				17		16
Palatin Technologies, Inc. (2)(5)(12)	Biotechnology	274,725 Common Stock Warrants				20		16
Revance Therapeutics, Inc. (5)(12)	Biotechnology	34,113 Common Stock Warrants				68		77
Strongbridge U.S. Inc. (2)(5)(12)	Biotechnology	160,714 Common Stock Warrants				72		25
Sunesis Pharmaceuticals, Inc. (5)(12)	Biotechnology	2,050 Common Stock Warrants				5		—
vTv Therapeutics Inc. (2)(5)(12)	Biotechnology	95,293 Common Stock Warrants				44		—
Titan Pharmaceuticals, Inc. (2)(5)(12)	Drug Delivery	373,333 Common Stock Warrants				95		—
AccuVein Inc. (2)(12)	Medical Device	1,174,881 Preferred Stock Warrants				24		29
Aerin Medical, Inc. (2)(12)	Medical Device	1,818,183 Preferred Stock Warrants				66		69
Conventus Orthopaedics, Inc. (2)(12)	Medical Device	1,145,000 Preferred Stock Warrants				149		158
CSA Medical, Inc. (12)	Medical Device	1,260,345 Preferred Stock Warrants				147		146
CVRx, Inc.(2)(12)	Medical Device	750,000 Preferred Stock Warrants				76		84
Lantos Technologies, Inc. (2)(12)	Medical Device	560,832 Preferred Stock Warrants				253		44
MacuLogix, Inc. (2)(12)	Medical Device	454,460 Preferred Stock Warrants				238		154
Meditrina, Inc. (2)(12)	Medical Device	221,510 Preferred Stock Warrants				83		85
NinePoint Medical, Inc. (2)(12)	Medical Device	29,102 Preferred Stock Warrants				33		6
VERO Biotech LLC (2)(12)	Medical Device	408 Common Stock Warrants				53		55
Total Non-Affiliate Warrants — Life Science						2,127		1,215
Non-Affiliate Warrants — Technology — 4.8% (8)
Audacy Corporation (2)(12)	Communications	1,545,575 Preferred Stock Warrants				193		—
Intelepeer Holdings, Inc. (2)(12)	Communications	2,134,617 Preferred Stock Warrants				145		75
PebblePost, Inc. (2)(12)	Communications	598,850 Preferred Stock Warrants				93		159
Betabrand Corporation (2)(12)	Consumer-related Technologies	248,210 Preferred Stock Warrants				101		104
Caastle, Inc. (2)(12)	Consumer-related Technologies	268,591 Preferred Stock Warrants				67		832
Le Tote, Inc. (2)(12)	Consumer-related Technologies	202,974 Preferred Stock Warrants				63		361
Mohawk Group Holdings, Inc. (2)(12)	Consumer-related Technologies	76,923 Common Stock Warrants				195		2
Rhapsody International Inc. (2)(12)	Consumer-related Technologies	852,273 Common Stock Warrants				164		—
Updater, Inc.(2)(12)	Consumer-related Technologies	108,333 Common Stock Warrants				34		34
Canara, Inc. (2)(12)	Data Storage	500,000 Preferred Stock Warrants				242		288
Kaminario, Inc. (2)(12)	Data Storage	18,616,925 Preferred Stock Warrants				234		272
Global Worldwide LLC (2)(12)	Internet and Media	245,810 Preferred Stock Warrants				75		9
IgnitionOne, Inc. (2)(12)	Internet and Media	262,910 Preferred Stock Warrants				672		—
Rocket Lawyer Incorporated (2)(12)	Internet and Media	261,721 Preferred Stock Warrants				91		77
Skillshare, Inc. (2)(12)	Internet and Media	173,717 Preferred Stock Warrants				162		162
Verve Wireless, Inc. (2)(12)	Internet and Media	112,805 Common Stock Warrants				121		—
The NanoSteel Company, Inc. (2)(12)	Materials	467,277 Preferred Stock Warrants				233		7
Kinestral, Inc. (2)(12)	Power Management	3,454,774 Preferred Stock Warrants				606		606
Avalanche Technology, Inc. (2)(12)	Semiconductors	202,602 Preferred Stock Warrants				101		170
Soraa, Inc. (2)(12)	Semiconductors	203,616 Preferred Stock Warrants				80		—
Bridge2 Solutions, Inc. (2)(12)	Software	172,958 Common Stock Warrants				768		2,230
BSI Platform Holdings, LLC (2)(12)(13)	Software	187,500 Preferred Stock Warrants				26		20
Clarabridge, Inc. (12)	Software	53,486 Preferred Stock Warrants				17		106
Education Elements, Inc. (2)(12)	Software	238,121 Preferred Stock Warrants				28		23
Lotame Solutions, Inc. (2)(12)	Software	288,115 Preferred Stock Warrants				22		280
OutboundEngine, Inc. (2)(12)	Software	600,000 Preferred Stock Warrants				77		83
Revinate, Inc. (2)(12)	Software	459,770 Preferred Stock Warrants				36		38
Riv Data Corp. (2)(12)	Software	321,428 Preferred Stock Warrants				12		253

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2019

(Dollars in thousands)


			Principal		Cost of		Fair
Portfolio Company (1)(3)	Sector	Type of Investment (4)(7)(9)(10)	Amount		Investments (6)		Value
ShopKeep.com, Inc. (2)(12)	Software	193,962 Preferred Stock Warrants				118		116
SIGNiX, Inc. (12)	Software	133,560 Preferred Stock Warrants				225		—
Skyword, Inc. (12)	Software	301,056 Preferred Stock Warrants				48		4
Sys-Tech Solutions, Inc. (2)(12)	Software	375,000 Preferred Stock Warrants				242		2,331
Weblinc Corporation (2)(12)	Software	195,122 Preferred Stock Warrants				42		—
xAd, Inc. (2)(12)	Software	4,343,348 Preferred Stock Warrants				177		249
Total Non-Affiliate Warrants — Technology						5,510		8,891
Non-Affiliate Warrants — Sustainability — 0.1% (8)
Tigo Energy, Inc. (2)(12)	Energy Efficiency	804,604 Preferred Stock Warrants				100		—
Total Non-Affiliate Warrants — Sustainability						100		—
Non-Affiliate Warrants — Healthcare information and services — 0.4% (8)
ProterixBio, Inc. (2)(12)	Diagnostics	2,676 Common Stock Warrants				42		—
Kate Farms, Inc. (2)(12)	Other Healthcare	69,137 Preferred Stock Warrants				86		86
Watermark Medical, Inc. (2)(12)	Other Healthcare	27,373 Preferred Stock Warrants				74		63
Catasys, Inc. (2)(5)(12)	Software	51,185 Common Stock Warrants				193		304
HealthEdge Software, Inc. (2)(12)	Software	205,481 Preferred Stock Warrants				84		73
Medsphere Systems Corporation (2)(12)	Software	7,097,792 Preferred Stock Warrants				60		197
Total Non-Affiliate Warrants — Healthcare information and services						539		723
Total Non-Affiliate Warrants						8,276		10,829
Non-Affiliate Other Investments — 0.3% (8)
ZetrOZ, Inc. (12)	Medical Device	Royalty Agreement				61		500
Total Non-Affiliate Other Investments						61		500

Non-Affiliate Equity — 0.3% (8)
Palatin Technologies, Inc. (2)(5)	Biotechnology	5,249 Common Stock				31		4
Revance Therapeutics, Inc.(5)	Biotechnology	5,125 Common Stock				73		83
Sunesis Pharmaceuticals, Inc. (5)	Biotechnology	13,082 Common Stock				83		4
SnagAJob.com, Inc. (12)	Consumer-related Technologies	82,974 Common Stock				9		84
Verve Wireless, Inc. (2)(12)	Internet and Media	100,598 Preferred Stock				224		—
Zeta Global Holdings Corp. (2)(12)	Internet and Media	18,405 Common Stock				240		240
Formetrix, Inc. (2)(12)	Materials	74,286 Common Stock				74		74
Total Non-Affiliate Equity						734		489
Total Non-Affiliate Portfolio Investment Assets					$	295,256	$	294,304

Non-controlled Affiliate Investments — 4.7% (8)
Non-controlled Affiliate Debt Investments — Technology — 3.2% (8)
Decisyon, Inc. (12)	Software	Term Loan (13.998% cash (Libor + 12.31%; Floor 12.50%), 12.00% ETP, Due 6/1/21)	$	1,206	$	1,206	$	1,206
		Term Loan (14.41% cash (Libor + 12.31%; Floor 12.50%), 12.00% ETP, Due 6/1/21)		660		639		639
		Term Loan (12.02% cash, Due 6/1/21)		234		234		234
		Term Loan (12.03% cash, Due 6/1/21)		234		234		234
		Term Loan (12.24% cash, Due 6/1/21)		704		704		704
		Term Loan (13.08% cash, Due 6/1/21)		283		283		283
		Term Loan (13.10% cash, Due 6/1/21)		187		187		187
StereoVision Imaging, Inc. (12)	Software	Term Loan (8.72% Cash (Libor + 7.03%; Floor 8.50%), 8.50% ETP, Due 9/1/21) (11)		2,783		2,382		2,382
Total Non-controlled Affiliate Debt Investments — Technology						5,869		5,869

Non-controlled Affiliate Warrants — Technology — 0.0% (8)
Decisyon, Inc. (12)	Software	82,967 Common Stock Warrants				46		—
Total Non-controlled Affiliate Warrants — Technology						46		—
Non-controlled Affiliate Equity — Technology — 1.5% (8)
Decisyon, Inc. (12)	Software	45,365,936 Common Stock				185		75
StereoVision Imaging, Inc. (12)	Software	1,943,572 Common Stock				791		2,653
Total Non-controlled Affiliate Equity						976		2,728
Total Non-controlled Affiliate Portfolio Investment Assets					$	6,891	$	8,597

Controlled Affiliate Investments — 9.0% (8)
Controlled Affiliate Equity — Financial — 9.0% (8)
Horizon Secured Loan Fund I LLC (12)(14)	Investment funds				$	16,684	$	16,650
Total Controlled Affiliate Equity						16,684		16,650
Total Controlled Affiliate Portfolio Investment Assets					$	16,684	$	16,650

Total Portfolio Investment Assets — 173.7% (8)					$	318,831	$	319,551

See Notes to Consolidated Financial Statements

Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2019

(Dollars in thousands)


				Cost of	Fair
Portfolio Company (1)(3)	Sector	Type of Investment (4)(7)(9)(10)		Investments (6)	Value
Short Term Investments — Unrestricted Investments — 5.3% (8)
US Bank Money Market Deposit Account			$	9,787	$	9,787
Total Short Term Investments —Unrestricted Investments			$	9,787	$	9,787

Short Term Investments — Restricted Investments—0.6% (8)
US Bank Money Market Deposit Account			$	1,133	$	1,133
Total Short Term Investments —Restricted Investments			$	1,133	$	1,133

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

(2)	Has been pledged as collateral under the Key Facility and/or the the Asset-Backed Notes.

(3)

All non-affiliate investments are investments in which the Company owns less than 5% of the voting securities of the portfolio company. All non-controlled affiliate investments are investments in which the Company owns 5% or more of the voting securities of the portfolio company but not more than 25% of the voting securities of the portfolio company. All controlled affiliate investments are investments in which the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement).

(4)

All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to the Company’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETPs, and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt investments are at variable rates for the term of the debt investment, unless otherwise indicated. All debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2019 is provided.

(5)	Portfolio company is a public company.

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

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

(8)	Value as a percent of net assets.

(9)

As of December 31, 2019, 4.9% and 4.8% of the Company’s total assets on a cost and fair value basis, respectively, are in non-qualifying assets. Under the 1940 Act, the Company may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.

(11)Debt investment has a PIK feature.

(12)The fair value of the investment was valued using significant unobservable inputs.

(13)New Signature US, Inc. is a subsidiary of BSI Platform Holdings, LLC.

(14)On June 1, 2018, the Company entered into an agreement with Arena Sunset SPV, LLC (“Arena”) to co-invest through Horizon Secured Loan Fund I LLC (“HSLFI”), a joint venture, which is expected to make investments, either directly or indirectly through subsidiaries, primarily in the form of secured loans to development-stage companies in the technology, life science, healthcare information and services and sustainability industries. All HSLFI investment decisions require unanimous approval of a quorum of HSLFI’s board of managers, which consists of two representatives of the Company and Arena. Although the Company owns more than 25% of the voting securities of HSLFI, the Company does not have sole control over significant actions of HSLFI for purposes of the 1940 Act or otherwise.

(15)Debt investment is on non-accrual status as of December 31, 2019.

See Notes to Consolidated Financial Statements

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Organization

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

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

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

The Company formed Horizon Funding 2019-1 LLC (“2019-1 LLC”) as a Delaware limited liability company on May 2, 2019 and Horizon Funding Trust 2019-1 on May 15, 2019 (“2019-1 Trust” and, together with the 2019-1 LLC, the “2019-1 Entities”). The 2019-1 Entities are special purpose bankruptcy remote entities and are separate legal entities from the Company. The Company formed the 2019-1 Entities for purposes of securitizing the Asset-Backed Notes.

The Company formed Horizon Funding I, LLC (“HFI”) 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.

On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI, including, without limitation, undistributed amounts owed to Arena and interest accrued and unpaid on the debt investments of HSLFI through the date of purchase. As of April 21, 2020, HSLFI and its subsidiary, HFI, are consolidated by the Company.The Company has also established an additional wholly owned subsidiary, which is structured as a Delaware limited liability company, to hold the assets of a portfolio company acquired in connection with foreclosure or bankruptcy, which is a separate legal entity from the Company.

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

Note 2. Basis of presentation and significant accounting policies

The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X (“Regulation S-X”) under the Securities Act of 1933, as amended (the “Securities Act”). In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications, consisting soley of normal recurring accruals, that are necessary for the fair presentation of financial results as of and for the periods presented. All

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

intercompany balances and transactions have been eliminated. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2019.

Principles of consolidation

As required under GAAP and Regulation S-X, the Company will generally consolidate its investment in a company that is an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly-owned subsidiaries in its consolidated financial statements. Although the Company owned more than 25% of the voting securities of HSLFI through April 21, 2020, the Company did not have sole control over significant actions of HSLFI for purposes of the 1940 Act or otherwise, and thus did not consolidate its interest prior to April 21, 2020.

Assets related to transactions that do not meet ASC Topic 860 requirements for accounting sale treatment are reflected in the Company’s Consolidated Statements of Assets and Liabilites as investments. Those assets are owned by special purpose entities, including 2019-1 Entities, that are consolidated in the Company’s consolidated financial statements. The creditors of the special purpose entities have received security interests in such assets and such assets are not intended to be available to the creditors of the Company (or any affiliate of the Company).

Use of estimates

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

Fair value

The Company records all of its investments at fair value in accordance with relevant GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. The Company has categorized its investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as more fully described in Note 6. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

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

See Note 6 for additional information regarding fair value.

Segments

The Company has determined that it has a single reporting segment and operating unit structure. The Company lends to and invests in portfolio companies in various technology, life science, healthcare information and services and

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

sustainability industries. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these debt investments and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment.

Investments

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

Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management’s judgment at the time the debt investment is placed on non-accrual status. As of June 30, 2020, there were three debt investments on non-accrual status with a cost of $20.6 million and a fair value of $14.2 million. As of December 31, 2019, there were two investments on non-accrual status with a cost of $5.7 million and a fair value of $2.0 million. For the three and six months ended June 30, 2020, the Company recognized, as interest income, payments of $0.03 million received from one portfolio company whose debt investment was on non-accrual status. For the three and six months ended June 30, 2019, the Company did not recognize any interest income from debt investments on non-accrual status.

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

Certain debt investment agreements also require the borrower to make an ETP, that is accrued into interest receivable and taken into income over the life of the debt investment to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay the ETP when due. The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the three months ended June 30, 2020 and 2019 was 5.6%. The proportion of the Company’s total investment income that resulted from the portion of ETPs not received in cash for the six months ended June 30, 2020 and 2019 was 6.4% and 6.7%, respectively.

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

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Distributions from HSLFI were evaluated at the time of distribution to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Company did not record distributions from HSLFI as dividend income unless there was sufficient accumulated tax-basis earnings and profit in HSLFI prior to distribution. Distributions that were classified as a return of capital were recorded as a reduction in the cost basis of the investment. For the period January 1, 2020 through April 21, 2020, HSLFI made no distributions classified as dividend income or a return of capital to the Company. For the three and six months ended June 30, 2019, HSLFI distributed $0.3 million and $0.5 million, respectively, classified as dividend income to the Company.

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

Debt issuance costs

Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt securities. The unamortized balance of debt issuance costs as of June 30, 2020 and December 31, 2019 was $3.6 million and $3.3 million, respectively. These amounts are amortized and included in interest expense in the consolidated statements of operations over the life of the borrowings. The accumulated amortization balances as of June 30, 2020 and December 31, 2019 were $3.7 million and $3.1 million, respectively. The amortization expense for the three months ended June 30, 2020 and 2019 was $0.4 million and $0.2 million, respectively. The amortization expense for the six months ended June 30, 2020 and 2019 was $0.6 million and $0.3 million, respectively.

Income taxes

As a BDC, the Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC and to avoid the imposition of corporate-level income tax on the portion of its taxable income distributed to stockholders, among other things, the Company is required to meet certain source of income and asset diversification requirements and to timely distribute dividends out of assets legally available for distribution to its stockholders of an amount generally at least equal to 90% of its investment company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid, for each tax year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which generally relieves the Company from corporate-level U.S. federal income taxes. Accordingly, no provision for federal income tax has been recorded in the financial statements. Differences between taxable income and net increase in net assets resulting from operations either can be temporary, meaning they will reverse in the future, or permanent. In accordance with Topic 946, Financial Services—Investment Companies, as amended, of the Financial Accounting Standards Board’s (“FASB’s”), Accounting Standards Codification, as amended (“ASC”), permanent tax differences, such as non-deductible excise taxes paid, are reclassified from distributions in excess of net investment income and net realized loss on investments to paid-in-capital at the end of each fiscal year. These permanent book-to-tax differences are reclassified on the consolidated statements of changes in net assets to reflect their tax character but have no impact on total net assets. For the year ended December 31, 2019, the Company reclassified $0.2 million to paid-in capital from distributions in excess of net investment income, which related to excise taxes payable.

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and incur a 4% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three and six months ended June 30, 2020 and 2019, there was no U.S. federal excise tax recorded.

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes, as modified by ASC Topic 946. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no material uncertain tax positions at June 30, 2020 and December 31, 2019. The Company’s income tax returns for the 2018, 2017 and 2016 tax years remain subject to examination by U.S. federal and state tax authorities.

Distributions

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

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

Stockholders’ Equity

On March 26, 2019, the Company completed a follow-on public offering of 2,000,000 shares of its common stock at a public offering price of $12.14 per share, for total net proceeds to the Company of $23.1 million, after deducting underwriting commission and discounts and other offering expenses

On August 2, 2019 the Company entered into an At-The-Market (“ATM”) sales agreement (the “Equity Distribution Agreement”), with Goldman Sachs & Co. LLC and B. Riley FBR, Inc. (each a “Sales Agent” and, collectively, the “Sales Agents”). The Equity Distribution Agreement provides that Horizon may offer and sell its shares from time to time through the Sales Agents up to $50.0 million worth of its common stock, in amounts and at times to be determined by the Company. Sales of the Company’s common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at-the-market,” as defined in Rule 415 under the Securities Act, including sales made directly on the NASDAQ or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.

During the three months ended June 30, 2020, the Company sold 432,491 shares of common stock under the Equity Distribution Agreement. For the same period, the Company received total accumulated net proceeds of approximately $5.0 million, including $0.1 million of offering expenses, from these sales.

During the six months ended June 30, 2020, the Company sold 1,717,901 shares of common stock under the Equity Distribution Agreement. For the same period, the Company received total accumulated net proceeds of approximately $21.1 million, including $0.5 million of offering expenses, from these sales.

The Company generally uses net proceeds from these offerings to make investments, to pay down liabilities and for general corporate purposes. As of June 30, 2020, shares representing approximately $3.8 million of its common stock remain available for issuance and sale under the Equity Distribution Agreement.

Stock Repurchase Program

On April 24, 2020, the Board extended a previously authorized stock repurchase program which allows the Company to repurchase up to $5.0 million of its common stock at prices below the Company’s net asset value per share as reported

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

in its most recent consolidated financial statements. Under the repurchase program, the Company may, but is not obligated to, repurchase shares of its outstanding common stock in the open market or in privately negotiated transactions from time to time. Any repurchases by the Company will comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and any applicable requirements of the 1940 Act. Unless extended by the Board, the repurchase program will terminate on the earlier of June 30, 2021 or the repurchase of $5.0 million of the Company’s common stock. During the three and six months ended June 30, 2020 and 2019, the Company did not make any repurchases of its common stock. From the inception of the stock repurchase program through June 30, 2020, the Company repurchased 167,465 shares of its common stock at an average price of $11.22 on the open market at a total cost of $1.9 million.

Transfers of financial assets

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

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

Recently issued accounting pronouncement

In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently assessing the impact of ASU 2020-04 and the LIBOR transition on its consolidated financial statements.

Note 3. Related party transactions

Investment Management Agreement

At a special meeting of the stockholders on October 30, 2018, the stockholders approved a new Investment Management Agreement which became effective on March 7, 2019. The new Investment Management Agreement replaced the previously effective Amended and Restated Investment Management Agreement dated as of October 28, 2010 and amended effective July 1, 2014. Under the terms of the Investment Management Agreement, the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.

The Advisor’s services under the Investment Management Agreement are not exclusive to the Company, and the Advisor is free to furnish similar services to other entities so long as its services to the Company are not impaired. The Advisor is a registered investment adviser with the SEC. The Advisor receives fees for providing services to the Company

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

under the Investment Management Agreement, consisting of two components, a base management fee and an incentive fee.

Through October 30, 2018, the base management fee was calculated at an annual rate of 2.00% of the Company’s gross assets (less cash and cash equivalents) including any assets acquired with the proceeds of leverage. From and after October 31, 2018, the first date on which the reduced asset coverage requirements in Section 61(a)(2) of the 1940 Act applied to the Company, the base management fee was and will be calculated at an annual rate of 2.00% of the Company’s gross assets (less cash and cash equivalents) including any assets acquired with the proceeds of leverage; provided, that, to the extent the Company’s gross assets (less cash and cash equivalents) exceed $250 million, the base management fee on the amount of such excess over $250 million will be calculated at an annual rate of 1.60% of the Company’s gross assets (less cash and cash equivalents) including any assets acquired with the proceeds of leverage. The base management fee is payable monthly in arrears and is prorated for any partial month.

The base management fee payable at June 30, 2020 and December 31, 2019 was $0.6 million and $0.5 million, respectively. The base management fee expense was $1.7 million and $1.4 million for the three months ended June 30, 2020 and 2019, respectively. The base management fee expense was $3.2 million and $2.7 million for the six months ended June 30, 2020 and 2019, respectively.

The incentive fee has two parts, as follows:

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

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

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

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

On March 5, 2019, the Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled to receive under the Investment Management Agreement for the period commencing on January 1, 2019 and ending on December 31, 2019. Such waived incentive fees will not be subject to recoupment. During the three and six months ended June 30, 2019, the Advisor waived performance based incentive fees of $0.7 million and $1.8 million, respectively, which the Advisor would have otherwise been paid by the Company.

The net performance based incentive fee expense was $1.7 million and $1.3 million, respectively, for the three months ended June 30, 2020 and 2019, respectively. The net performance based incentive fee expense was $2.7 million and $2.1 million for the six months ended June 30, 2020 and 2019, respectively. The performance based incentive fee payable as of June 30, 2020 and December 31, 2019 was $1.7 million and $1.6 million, respectively. The entire incentive fee payable as of June 30, 2020 and December 31, 2019 represented part one of the incentive fee.

Administration Agreement

The Company entered into an administration agreement (the “Administration Agreement”) with the Advisor to provide administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s Chief Financial Officer and Chief Compliance Officer and their respective staffs. The administrative fee expense was $0.3 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively. The

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Notes to Consolidated Financial Statements

administrative fee expense was $0.5 million and $0.4 million for the six months ended June 30, 2020 and 2019, respectively.

Note 4. Investments

The following table shows the Company’s investments as of June 30, 2020 and December 31, 2019:


	June 30, 2020				December 31, 2019
	Cost		Fair Value		Cost		Fair Value

	(In thousands)
Investments
Debt	$	352,337	$	342,722	$	292,054	$	288,355
Warrants		7,932		10,508		8,322		10,829
Other		33		500		61		500
Equity		1,396		2,150		1,710		3,217
Equity interest in HSLFI		—		—		16,684		16,650
Total investments	$	361,698	$	355,880	$	318,831	$	319,551

The following table shows the Company’s investments by industry sector as of June 30, 2020 and December 31, 2019:


	June 30, 2020				December 31, 2019
	Cost		Fair Value		Cost		Fair Value

	(In thousands)
Life Science
Biotechnology	$	92,498	$	85,615	$	42,886	$	42,265
Drug Delivery		1,642		1,547		1,628		1,533
Medical Device		94,313		92,952		60,660		60,807
Technology
Communications		270		246		4,561		1,734
Consumer-Related		44,631		44,299		43,412		44,196
Data Storage		25,016		25,173		24,928		25,012
Internet and Media		16,295		18,601		24,089		22,992
Materials		8,713		8,537		8,717		8,491
Power Management		1,585		1,315		11,813		11,813
Semiconductors		181		167		181		170
Software		61,204		61,688		54,998		59,530
Sustainability
Energy Efficiency		100		—		100		—
Healthcare Information and Services
Diagnostics		42		—		42		—
Other		14,955		14,871		9,931		9,920
Software		253		869		14,201		14,438
Investment funds
HSLFI		—		—		16,684		16,650
Total investments	$	361,698	$	355,880	$	318,831	$	319,551

Horizon Secured Loan Fund I LLC

On June 1, 2018, the Company and Arena formed a joint venture, HSLFI, to make investments, either directly or indirectly through subsidiaries, primarily in secured loans to development-stage companies in the technology, life science, healthcare information and services and sustainability industries. HSLFI was formed as a Delaware limited liability company and was not consolidated by either the Company or Arena for financial reporting purposes. On April 21, 2020,

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Notes to Consolidated Financial Statements

the Company purchased all of the limited liability company interests of Arena in HSLFI, including, without limitation, undistributed amounts owed to Arena and interest accrued and unpaid on the debt investments of HSLFI through the date of purchase, for $17.1 million. In addition, Arena received 50% of the warrants held by HSLFI or HFI at closing. HSLFI is now wholly-owned by the Company and in future reporting periods, the assets and liabilities of HSLFI and HFI will be consolidated with the assets and liabilities of the Company. The transaction is accounted for as an asset acquisition under GAAP.

Investments held by HSLFI were measured at fair value using the same valuation methodology as described in Note 6. As of December 31, 2019, HSLFI had total assets of $48.3 million. HSLFI’s portfolio consisted of debt investments in eight portfolio companies as of December 31, 2019. As of December 31, 2019, the largest investment in a single portfolio company in the HSLFI’s portfolio in aggregate principal amount was $11.3 million and the five largest investments in portfolio companies in the HSLFI totaled $30.3 million. As of December 31, 2019, HSLFI had no investments on non-accrual status. HSLFI invested in portfolio companies in the same industries in which the Company may directly invest.

The Company invested cash or securities in portfolio companies in HSLFI in exchange for limited liability company equity interests in HSLFI. As of December 31, 2019, the Company and Arena each owned 50.0% of the equity interests of HSLFI. The Company had an original commitment to fund $25.0 million of equity interests in HSLFI. As of December 31, 2019, $9.8 million was unfunded. The Company’s investment in HSLFI consisted of an equity contribution of $15.2 million as of December 31, 2019. During the period January 1, 2020 through April 21, 2020, there were no distributions from HSLFI. During the three and six months ended June 30, 2019, HSLFI distributed $0.6 million and $1.1 million, respectively.

The Company 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, required unanimous approval of a quorum of the board of managers. Quorum was 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.

HFI entered into the NYL Facility with 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’s investment period has ended. On June 1, 2018, HSLFI sold or contributed to HFI certain secured loans made to certain portfolio companies pursuant to a sale and servicing agreement with HFI, as Issuer, and the Company, as Servicer (the “Sale and Servicing Agreement”), as amended by that certain Amendment No. 1 to the Sale and Servicing Agreement, dated June 19, 2019 (the “Amendment No. 1”). Any notes issued by HFI were collateralized by all investments held by HFI and permitted an advance rate of up to 67% of the aggregate principal amount of eligible debt investments. The notes were issued pursuant to that certain indenture by and between HFI and U.S. Bank National Association, dated as of June 1, 2018 (the “Indenture”). The interest rate on the notes issued under the NYL Facility was 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 $15.0 million in advances made by the Noteholders as of December 31, 2019 at an interest rate of 4.98%.

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Notes to Consolidated Financial Statements

The following table shows HSLFI’s investments as of December 31, 2019:


			Principal		Cost of		Fair
Portfolio Company ⁽¹⁾	Sector	Type of Investment ^(2)(3)(4)	Amount		Investments⁽⁵⁾		Value
(Dollars in thousands)
Debt Investments — Life science
Celsion Corporation (6)(7)(8)	Biotechnology	Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)	$	2,500	$	2,464	$	2,464
		Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)		2,500		2,464		2,464
Encore Dermatology, Inc. (6)(7)	Biotechnology	Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 3.00% ETP, Due 4/1/23)		5,000		4,929		4,929
Mustang Bio, Inc. (6)(7)(8)	Biotechnology	Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)		5,000		4,924		4,924
Total Debt Investments — Life science						14,781		14,781
Debt Investments — Technology
Bridge2 Solutions, LLC (6)(7)	Software	Term Loan (11.00% cash (Libor + 8.4%; Floor 11.00%), 2.00% ETP, Due 9/1/23)		500		481		481
New Signature US, Inc. (6)(7)(9)	Software	Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 7/1/22)		8,250		8,163		8,163
		Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 2/1/23)		3,000		2,961		2,961
OutboundEngine, Inc. (6)(7)	Software	Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)		500		491		491
Revinate, Inc. (6)(7)	Software	Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 3.00% ETP, Due 6/1/23)		4,000		3,952		3,952
Total Debt Investments — Technology						16,048		16,048
Debt Investments — Healthcare information and services
HealthEdge Software, Inc. (6)(7)	Software	Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 10/1/23)		3,750		3,709		3,709
Total Debt Investments — Healthcare information and services						3,709		3,709
Total Debt Investments						34,538		34,538

Warrant Investments — Life science
Celsion Corporation (6)(7)(8)	Biotechnology	95,057 Common Stock Warrants				58		6
Encore Dermatology, Inc. (6)(7)	Biotechnology	503,626 Preferred Stock Warrants				38		—
Mustang Bio, Inc. (6)(7)(8)	Biotechnology	72,046 Common Stock Warrants				45		74
CSA Medical, Inc. (6)(7)	Medical Device	17,751 Preferred Stock Warrants				2		2
Total Warrant Investments — Life science						143		82
Warrant Investments — Technology
Intelepeer Holdings, Inc. (6)(7)	Communications	2,081,934 Preferred Stock Warrants				82		72
Bridge2 Solutions, LLC (6)(7)	Software	2,500 Common Stock Warrants				18		34
BSI Platform Holdings, LLC (6)(7)(9)	Software	562,500 Preferred Stock Warrants				77		62
OutboundEngine, Inc. (6)(7)	Software	40,000 Preferred Stock Warrants				5		6
Revinate Inc. (6)(7)	Software	216,362 Preferred Stock Warrants				16		18
Total Warrant Investments — Technology						198		192
Warrant Investments — Healthcare information and services
HealthEdge Software, Inc. (6)(7)	Software	47,418 Preferred Stock Warrants				16		17
Total Warrant Investments — Healthcare information and services						16		17
Total Warrant Investments						357		291

Total Portfolio Investment Assets					$	34,895	$	34,829

Short Term Investments — Unrestricted Investments
US Bank Money Market Deposit Account (6)					$	11,201	$	11,201
Total Short Term Investments — Unrestricted Investments					$	11,201	$	11,201

Short Term Investments — Restricted Money Market Funds
US Bank Money Market Deposit Account (6)					$	138	$	138
Total Short Term Investments — Restricted Money Market Funds					$	138	$	138

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

(2)

All interest is payable in cash due monthly in arrears, unless otherwise indicated, and applies only to HSLFI’s debt investments. Interest rate is the annual interest rate on the debt investment and does not include ETPs and any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees. Debt investments are at variable rates for the term of the debt investment, unless otherwise indicated. All debt investments based on LIBOR are based on one-month LIBOR. For each debt investment, the current interest rate in effect as of December 31, 2019 is provided.

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(3)

ETPs are contractual fixed-interest payments due in cash at the maturity date of the applicable debt investment, including upon any prepayment, and are a fixed percentage of the original principal balance of the debt investments unless otherwise noted. Interest will accrue during the life of the debt investment on each ETP and will be recognized as non-cash income until it is actually paid.

(4)	Warrants are non-income producing.

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

(6)	Has been pledged as collateral under the NYL Facility.

(7)	The fair value of the investment was valued using significant unobservable inputs.

(8)	Portfolio company is a public company.

(9)	New Signature US, Inc. is a subsidiary of BSI Platform Holdings, LLC.

The following tables show certain summarized financial information for HSLFI as of December 31, 2019, for the period January 1, 2020 through April 21, 2020 and for the three and six months ended June 30, 2019:


	December 31,
	2019

Selected Statement of Assets and Liabilities Information
Total investments at fair value (cost of $34,895)	$	34,829
Cash and cash equivalents		503
Investments in money market funds		11,201
Restricted investments in money market funds		138
Interest receivable		477
Other assets		1,109
Total assets	$	48,257

Borrowings	$	14,955
Other liabilities		126
Total liabilities		15,081
Members’ equity		33,176
Total liabilities and members’ equity	$	48,257


	For the period		For the three		For the six
	January 1, 2020		months ended		months ended
	through		June 30,		June 30,
	April 21, 2020		2019		2019

	(In thousands)
Selected Statements of Operations Information
Interest income on investments	$	1,353	$	1,148	$	1,997
Total investment income	$	1,465	$	1,148	$	1,997
Total expenses	$	1,229	$	286	$	475
Net investment income	$	236	$	862	$	1,522
Net realized gain on investments	$	120		—	$	—
Net unrealized depreciation on investments	$	(392)	$	(14)	$	(6)
Net (decrease) increase in net assets resulting from operations	$	(36)	$	848	$	1,516

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Note 5. Transactions with affiliated companies

A non-controlled affiliated company is generally a portfolio company in which the Company owns 5% or more of such portfolio company’s voting securities but not more than 25% of such portfolio company’s voting securities.

Transactions related to investments in non-controlled affiliated companies for the six months ended June 30, 2020 were as follows:


					Six months ended June 30, 2020
	Fair value at						Transfers				Net		Fair value at
Portfolio	December 31,				Principal		in/(out) at		Discount		unrealized		June 30,		Net realized		Interest
Company	2019		Purchases		Payments		fair value		accretion		gain/(loss)		2020		gain/(loss)		income

	(In thousands)
Decisyon, Inc.	$	1,206	$	—	$	(25)	$	—	$	—	$	(160)	$	1,021	$	—	$	88
		639		—		(14)		—		7		(85)		547		—		46
		234		—		(7)		—		—		(31)		196		—		15
		234		—		(7)		—		—		(31)		196		—		14
		704		—		(19)		—		—		(93)		592		—		43
		283		—		(7)		—		—		(37)		239		—		18
		187		—		(4)		—		—		(24)		159		—		12
		75		—		—		—		—		—		75		—		—
StereoVision, Inc.		2,382		—		—		—		—		—		2,382		—		121
		2,653		—		—		—		—		(1,014)		1,639		—		—
Total non-controlled affiliates	$	8,597	$	—	$	(83)	$	—	$	7	$	(1,475)	$	7,046	$	—	$	357

Transactions related to investments in non-controlled affiliated companies for the year ended December 31, 2019 were as follows:


					Year ended December 31, 2019
	Fair value at						Transfers				Net		Fair value at
Portfolio	December 31,				Principal		in/(out) at		Discount		unrealized		December 31,		Net realized		Interest
Company	2018		Purchases		Payments		fair value		accretion		gain/(loss)		2019		gain/(loss)		income

	(In thousands)
Decisyon, Inc.	$	1,464	$	—	$	(316)	$	—	$	—	$	58	$	1,206	$	—	$	212
		764		—		(173)		—		17		31		639		—		112
		240		—		(16)		—		—		10		234		—		31
		240		—		(16)		—		—		10		234		—		31
		721		—		(46)		—		—		29		704		—		93
		289		—		(17)		—		—		11		283		—		39
		192		—		(13)		—		—		8		187		—		26
		75		—		—		—		—		—		75		—		—
StereoVision, Inc.		2,798		—		(416)		—		—		—		2,382		—		295
		791		—		—		—		—		1,862		2,653		—		—
Total non-controlled affiliates	$	7,574	$	—	$	(1,013)	$	—	$	17	$	2,019	$	8,597	$	—	$	839

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Notes to Consolidated Financial Statements

A controlled affiliated company is generally a portfolio company in which the Company owns more than 25% of such portfolio company’s voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Transactions related to investments in controlled affiliated companies for the six months ended June 30, 2020 were as follows:


					Six months ended June 30, 2020

	Fair value at						Transfers				Net				Fair value at
Portfolio	December 31,						in/(out) at		Dividends		unrealized		Net realized		June 30,		Dividend
Company	2019		Purchases		Distributions		fair value		declared		gain/(loss)		gain/(loss)		2020		income

	(In thousands)
HSLFI⁽¹⁾	$	16,650	$	—	$	—	$	(16,498)	$	118	$	(12)	$	(258)	$	—	$	118
Total controlled affiliates	$	16,650	$	—	$	—	$	(16,498)	$	118	$	(12)	$	(258)	$	—	$	118

(1)

The Company and Arena were the members of HSLFI, a joint venture formed as a Delaware limited liability company that was not consolidated by either member for financial reporting purposes. The members provided cash or securities in portfolio companies to HSLFI in exchange for limited liability company equity interests. All HSLFI investment decisions required unanimous approval of a quorum of HSLFI’s board of managers, which consisted of two representatives of the Company and Arena. Because management of HSLFI was shared equally between the Company and Arena, the Company did not have sole control over significant actions of HSLFI for purposes of the 1940 Act or otherwise. On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI. As of June 30, 2020, HLSFI is consolidated by the Company.

Transactions related to investments in controlled affiliated companies for the year ended December 31, 2019 were as follows:


					Year ended December 31, 2019

	Fair value at						Transfers				Net				Fair value at
Portfolio	December 31,						in/(out) at		Dividends		unrealized		Net realized		December 31,		Dividend
Company	2018		Purchases		Distributions		fair value		declared		gain/(loss)		gain/(loss)		2019		income

	(In thousands)
HSLFI⁽¹⁾	$	13,243	$	1,900	$	(715)	$	—	$	2,236	$	(14)	$	—	$	16,650	$	2,236
Total controlled affiliates	$	13,243	$	1,900	$	(715)	$	—	$	2,236	$	(14)	$	—	$	16,650	$	2,236

(1)

Note 6. Fair value

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

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Notes to Consolidated Financial Statements

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

The Company’s fair value measurements are classified into a fair value hierarchy in accordance with ASC Topic 820, Fair Value Measurement, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three categories within the hierarchy are as follows:

Level 1

Quoted prices in active markets for identical assets and liabilities.

Level 2

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

Level 3

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

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

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

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

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

Debt investments: The fair value of debt investments is estimated by discounting the expected future cash flows using the period end rates at which similar debt investments would be made to borrowers with similar credit ratings and for the

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Notes to Consolidated Financial Statements

same remaining maturities. At June 30, 2020 and December 31, 2019, the hypothetical market yields used ranged from 10% to 25% and 10% to 16%, respectively. Significant increases (decreases) in this unobservable input would result in a significantly lower (higher) fair value measurement. These assets are recorded at fair value on a recurring basis and are categorized as Level 3 within the fair value hierarchy described above.

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

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

●

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

●

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

●

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

●

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

●

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

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

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

Equity investments: The fair value of an equity investment in a privately held company is initially the face value of the amount invested. The Company adjusts the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing. The Company may make adjustments to fair value, absent a new equity

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

financing event, based upon positive or negative changes in a portfolio company’s financial or operational performance. Significant increases (decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement. The Company has categorized these equity investments as Level 3 within the fair value hierarchy described above. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. Therefore, the Company has categorized these equity investments as Level 1 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.

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

The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements of its investments as of June 30, 2020 and December 31, 2019. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining its fair value measurements.

The following table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements as of June 30, 2020:


June 30, 2020
	Fair		Valuation Techniques/	Unobservable			Weighted
Investment Type	Value		Methodologies	Input	Range		Average⁽¹⁾

			(Dollars in thousands, except per share data)
Debt investments	$	328,549	Discounted Expected Future Cash Flows	Hypothetical Market Yield		10% – 25%		12	%
		7,073	Liquidation Scenario	Probability Weighting		100%		100	%
		7,100	Multiple Probability Weighted Cash Flow Model	Probability Weighting		15% – 50%		33	%

Warrant investments		9,325	Black-Scholes Valuation Model	Price Per Share		$0.00 – $980.00	$	21.52
				Average Industry Volatility		22%		22	%
				Marketability Discount		20%		20	%
				Estimated Time to Exit		1 to 4 years		3	years

Other investments		500	Multiple Probability Weighted Cash Flow Model	Discount Rate		25%		25	%
				Probability Weighting		100%		100	%

Equity investments		2,146	Last Equity Financing	Price Per Share		$0.00 – $13.04	$	2.49
Total Level 3 investments	$	354,693

(1)	Weighted average is calculated by multiplying (a) the unobservable input for each investment in the investment type by (b) (1) the fair value of the related investment in the investment type divided by (2) the total fair value of the investment type.

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements


December 31, 2019
	Fair		Valuation Techniques/	Unobservable			Weighted
Investment Type	Value		Methodologies	Input	Range		Average⁽¹⁾

			(Dollars in thousands, except per share data)
Debt investments	$	262,635	Discounted Expected Future Cash Flows	Hypothetical Market Yield		10% – 16%		12	%
		13,864	Liquidation Scenario	Probability Weighting		13% – 100%		50	%
		11,856	Multiple Probability Weighted Cash Flow Model	Probability Weighting		10% – 60%		38	%

Warrant investments		5,598	Black-Scholes Valuation Model	Price Per Share		$0.00 – $980.00	$	12.42
				Average Industry Volatility		22%		22	%
				Marketability Discount		20%		20	%
				Estimated Time to Exit		1 to 4 years		3	years
				Price Per Share		$6.22 – $12.90	$	9.48
		4,561	Estimated Proceeds	Discount Rate		0% – 20%		10	%

Other investments		500	Multiple Probability Weighted Cash Flow Model	Discount Rate		25%		25	%
				Probability Weighting		100%		100	%

Equity investments		3,125	Last Equity Financing	Price Per Share		$0.00 – $13.04	$	2.71
Total Level 3 investments	$	302,139

(1)	Weighted average is calculated by multiplying (a) the unobservable input for each investment in the investment type by (b) (1) the fair value of the related investment in the investment type divided by (2) the total fair value of the investment type.

Borrowings: The Key Facility approximates fair value due to the variable interest rate of the Key Facility and is categorized as Level 2 within the fair value hierarchy described above. The fair value of the NYL Facility also approximates its carrying value and is categorized as Level 2. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value of the fixed-rate 2022 Notes (as defined in Note 7) is based on the closing public share price on the date of measurement. On June 30, 2020, the closing price of the 2022 Notes on the New York Stock Exchange was $24.85 per note, or $37.2 million. Therefore, the Company has categorized this borrowing as Level 1 within the fair value hierarchy described above. Based on market quotations on June 30, 2020, the Asset-Backed Notes (as defined in Note 7) were trading at par value, or $100.0 million, and are categorized as Level 3 within the fair value hierarchy described above. These borrowings are not recorded at fair value on a recurring basis.

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

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following tables detail the assets that are carried at fair value and measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:


	June 30, 2020
	Level 1		Level 2		Level 3		Total

	(In thousands)
Investments in money market funds	$	—	$	14,499	$	—	$	14,499
Restricted investments in money market funds	$	—	$	1,189	$	—	$	1,189
Debt investments	$	—	$	—	$	342,722	$	342,722
Warrant investments		—		1,183		9,325		10,508
Other investments		—		—		500		500
Equity investments		4		—		2,146		2,150
Total investments	$	4	$	1,183	$	354,693	$	355,880


	December 31, 2019
	Level 1		Level 2		Level 3		Total

	(In thousands)
Investments in money market funds	$	—	$	9,787	$	—	$	9,787
Restricted investments in money market funds	$	—	$	1,133	$	—	$	1,133
Debt investments	$	—	$	—	$	288,355	$	288,355
Warrant investments		—		670		10,159		10,829
Other investments		—		—		500		500
Equity investments		92		—		3,125		3,217
Equity interest in HSLFI⁽¹⁾		—		—		—		16,650
Total investments	$	92	$	670	$	302,139	$	319,551

(1)	The fair value of Company’s equity interest in HSLFI is determined using the net asset value of the Company’s ownership interest in member’s capital.

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended June 30, 2020:


	Three months ended June 30, 2020
	Debt		Warrant		Equity		Other
	Investments		Investments		Investments		Investments		Total

	(In thousands)
Level 3 assets, beginning of period	$	307,557	$	6,080	$	3,125	$	500	$	317,262
Purchase of investments		71,406		—		—		—		71,406
Warrants and equity received and classified as Level 3		—		1,362		—		—		1,362
Principal payments received on investments		(35,234)		—		—		—		(35,234)
Proceeds from sale of investments		(6)		(570)		—		—		(576)
Net realized (loss) gain on investments		(961)		260		—		—		(701)
Unrealized appreciation (depreciation) included in earnings		30		2,135		(993)		—		1,172
Transfer of investment		—		(14)		14		—		—
Other		(70)		72		—		—		2
Level 3 assets, end of period	$	342,722	$	9,325	$	2,146	$	500	$	354,693

During the three months ended June 30, 2020, there were no transfers in or out of Level 3.

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended June 30, 2019:


	Three months ended June 30, 2019
	Debt		Warrant		Equity		Other
	Investments		Investments		Investments		Investments		Total

	(In thousands)
Level 3 assets, beginning of period	$	235,268	$	8,525	$	1,289	$	6,420	$	251,502
Purchase of investments		55,055		—		—		—		55,055
Warrants and equity received and classified as Level 3		—		610		—		—		610
Principal payments received on investments		(46,517)		—		—		(74)		(46,591)
Proceeds from sale of investments		—		(92)		(45)		—		(137)
Net realized (loss) gain on investments		—		(128)		4		(4,144)		(4,268)
Unrealized (depreciation) appreciation included in earnings		(1,530)		(225)		1,862		3,998		4,105
Transfer out of Level 3		—		(190)		—		—		(190)
Other		11		—		—		—		11
Level 3 assets, end of period	$	242,287	$	8,500	$	3,110	$	6,200	$	260,097

During the three months ended June 30, 2019, there was one transfer out of Level 3. The transfer out of Level 3 related to warrants held in one portfolio company with an aggregate fair value of $0.2 million that was transferred to Level 2 upon the portfolio company becoming a public company. During the three months ended June 30, 2019, there were no transfers to Level 3.

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2020:


	Six months ended June 30, 2020
	Debt		Warrant		Equity		Other
	Investments		Investments		Investments		Investments		Total

	(In thousands)
Level 3 assets, beginning of period	$	288,355	$	10,159	$	3,125	$	500	$	302,139
Purchase of investments		122,052		—		—		—		122,052
Warrants and equity received and classified as Level 3		—		1,729		—		—		1,729
Principal payments received on investments		(61,140)		—		—		(28)		(61,168)
Proceeds from sale of investments		(36)		(5,798)		—		—		(5,834)
Net realized (loss) gain on investments		(931)		3,683		(225)		—		2,527
Unrealized (depreciation) appreciation included in earnings		(5,622)		(506)		(768)		28		(6,868)
Transfer of investment		—		(14)		14		—		—
Other		44		72		—		—		116
Level 3 assets, end of period	$	342,722	$	9,325	$	2,146	$	500	$	354,693

During the six months ended June 30, 2020, there were no transfers in or out of Level 3.

The change in unrealized depreciation included in the consolidated statement of operations attributable to Level 3 investments still held at June 30, 2020 includes $8.8 million in unrealized depreciation on debt and other investments, $2.1 million in unrealized appreciation on warrant investments and $1.0 million in unrealized depreciation on equity.

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2019:


	Six months ended June 30, 2019
	Debt		Warrant		Equity		Other
	Investments		Investments		Investments		Investments		Total

	(In thousands)
Level 3 assets, beginning of period	$	216,401	$	8,632	$	1,289	$	7,640	$	233,962
Purchase of investments		93,137		—		—		—		93,137
Warrants and equity received and classified as Level 3		—		988		—		—		988
Principal payments received on investments		(65,122)		—		—		(82)		(65,204)
Proceeds from sale of investments		—		(875)		(45)		—		(920)
Net realized gain (loss) on investments		—		276		4		(4,144)		(3,864)
Unrealized (depreciation) appreciation included in earnings		(1,546)		(331)		1,862		2,786		2,771
Transfer out of Level 3		—		(190)		—		—		(190)
Other		(583)		—		—		—		(583)
Level 3 assets, end of period	$	242,287	$	8,500	$	3,110	$	6,200	$	260,097

During the six months ended June 30, 2019, there was one transfer out of Level 3. The transfer out of Level 3 related to warrants held in one portfolio company with an aggregate fair value of $0.2 million that was transferred to Level 2 upon the portfolio company becoming a public company. During the six months ended June 30, 2019, there were no transfers to Level 3.

The change in unrealized appreciation included in the consolidated statement of operations attributable to Level 3 investments still held at June 30, 2019 includes $2.9 million in unrealized depreciation on debt and other investments, $0.2 million in unrealized depreciation on warrant investments and $1.9 million in unrealized appreciation on equity investments.

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

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

As of June 30, 2020 and December 31, 2019, all of the balances of all the Company’s financial instruments were recorded at fair value, except for the Company’s borrowings, as previously described.

Market risk

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

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 7. Borrowings

The following table shows the Company’s borrowings as of June 30, 2020 and December 31, 2019:


	June 30, 2020						December 31, 2019
	Total		Balance		Unused		Total		Balance		Unused
	Commitment		Outstanding		Commitment		Commitment		Outstanding		Commitment

	(In thousands)
Key Facility	$	125,000	$	45,000	$	80,000	$	125,000	$	17,000	$	108,000
NYL Facility		100,000		13,250		86,750		—		—		—
Asset-Backed Notes		100,000		100,000		—		100,000		100,000		—
2022 Notes		37,375		37,375		—		37,375		37,375		—
Total before debt issuance costs		362,375		195,625		166,750		262,375		154,375		108,000
Unamortized debt issuance costs attributable to term borrowings		—		(2,066)		—		—		(2,325)		—
Total borrowings outstanding, net	$	362,375	$	193,559	$	166,750	$	262,375	$	152,050	$	108,000

On March 23, 2018, President Trump signed into law the Small Business Credit Availability Act as part of an omnibus spending bill, which, among other things, amends the 1940 Act to reduce the minimum required asset coverage applicable to BDCs under the 1940 Act from 200% to 150% if certain approval and disclosure requirements are met. Before such reduced asset coverage requirement can apply to the Company, such reduced asset coverage requirement must be approved by either (a) a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Board, in which case such reduced asset coverage requirement would take effect on the first anniversary of the date of such Board approval, or (b) a majority of votes cast by the stockholders of the Company at a special or annual meeting at which a quorum is present, in which case such reduced asset coverage requirement shall take effect on the day after such approval. On June 7, 2018, a “required majority” of the Board approved the reduced asset coverage requirements and separately recommended that the Company’s stockholders approve the reduced asset coverage requirements at a special meeting of the Company’s stockholders. The Company held a special meeting on October 30, 2018 during which the reduced asset coverage requirements were approved by stockholders. The reduced asset coverage requirements took effect October 31, 2018.

As of June 30, 2020, with certain limited exceptions, as a BDC, the Company is only allowed to borrow amounts such that the Company’s asset coverage, as defined in the 1940 Act, is at least 150% after such borrowings. As of June 30, 2020, the asset coverage for borrowed amounts was 203%.

The Company entered into the Key Facility with Key effective November 4, 2013. On June 29, 2020, the Company amended the Key Facility, among other things, to amend the LIBOR floor from 0.75% to 1.00% and to extend the revolving period to September 30, 2021. The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million from the $125 million commitment. The Key Facility is collateralized by all debt investments and warrants held by Credit II and permits an advance rate of up to 50% of eligible debt investments held by Credit II. The Key Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the debt investments securing the Key Facility to certain criteria for qualified debt investments and includes portfolio company concentration limits as defined in the related loan agreement. The Key Facility is scheduled to mature on April 6, 2023. The interest rate is based upon the one-month LIBOR, plus a spread of 3.25%, with a LIBOR floor of 1.00%. The LIBOR rate was 0.16% and 1.76% on June 30, 2020 and December 31, 2019, respectively. The average interest rate for the three months ended June 30, 2020 and 2019 was 4.08% and 5.73%, respectively. The average interest rate for the six months ended June 30, 2020 and 2019 was 4.50% and 5.74%, respectively. The Key Facility requires the payment of an unused line fee in an amount up to 0.50% on an annualized basis of any unborrowed amount available under the facility. As of June 30, 2020 and December 31, 2019, the Company had borrowing capacity under the Key Facility of $80.0 million and $108.0 million, respectively. At June 30, 2020 and December 31, 2019, $22.7 million and $24.2 million, respectively, was available, subject to existing terms and advance rates.

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

On September 29, 2017, the Company issued and sold an aggregate principal amount of $32.5 million of 6.25% notes due in 2022 and on October 11, 2017, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $4.9 million of such notes (collectively, the “2022 Notes”). The 2022 Notes have a stated maturity of September 15, 2022 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after September 15, 2019 at a redemption price of $25 per security plus accrued and unpaid interest. The 2022 Notes bear interest at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year. The 2022 Notes are the Company’s direct unsecured obligations and (i) rank equally in right of payment with the Company’s current and future unsecured indebtedness; (ii) are senior in right of payment to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2022 Notes; (iii) are effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness, and (iv) are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. As of June 30, 2020, the Company was in material compliance with the terms of the 2022 Notes. The 2022 Notes are listed on the New York Stock Exchange under the symbol “HTFA”.

On August 13, 2019, the Company completed a term debt securitization in connection with which an affiliate of the Company made an offering of the Asset-Backed Notes. The Asset-Backed Notes were rated A+(sf) by Morningstar Credit Ratings, LLC on August 13, 2019. There has been no change in the rating since August 13, 2019.

The Asset-Backed Notes were issued by the 2019-1 Trust pursuant to a note purchase agreement, dated as of August 13, 2019, by and among the Company and Keybanc Capital Markets Inc. as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of the Company and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.21% per annum. The Asset-Backed Notes have a two-year reinvestment period and a stated maturity of September 15, 2027.

At June 30, 2020 and December 31, 2019, the Asset-Backed Notes had an outstanding principal balance of $100.0 million.

Under the terms of the Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the Asset-Backed Notes. The Company has segregated these funds and classified them as restricted investments in money market funds. At June 30, 2020 and December 31, 2019, there was approximately $1.2 million and $1.1 million of restricted investments, respectively.

On April 21, 2020, the Company purchased all of the limited liability company interests of Arena in HSLFI, which is a party to the NYL Facility. HFI entered into the NYL Facility with 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. On June 1, 2018, HSLFI sold or contributed to HFI certain secured loans made to certain portfolio companies pursuant to into the Sale and Servicing Agreement. Any notes issued by HFI are 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 notes were issued pursuant to the Indenture.

On June 5, 2020, the Company amended the NYL Facility to extend the investment period to June 5, 2022. The investment period will be followed by a five year amortization period. The stated final payment date was extended to June 15, 2027, subject to any extension of the investment period. 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 3.55% and 5.15% with an interest rate floor, depending on the rating of such notes at the time of issuance. Any obligation to make additional advances was conditioned on the occurrence of certain conditions, which were satisfied June 26, 2020. There were $13.3 million in advances made by the Noteholders as of June 30, 2020 at an interest rate of 4.60%.

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 8. Financial instruments with off-balance-sheet risk

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

The balance of unfunded commitments to extend credit was $75.9 million and $49.5 million as of June 30, 2020 and December 31, 2019, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving credit arrangements or similar transactions. These commitments are often subject to financial or non-financial milestones and other conditions to borrow that must be achieved before the commitment can be drawn. In addition, the commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. This includes the undrawn revolver commitments discussed in Note 4.

The following table provides the Company’s unfunded commitments by portfolio company as of June 30, 2020:


	June 30, 2020
			Fair Value of
			Unfunded
	Principal		Commitment
	Balance		Liability

	(In thousands)
Betabrand Corporation	$	1,125	$	32
Ceribell, Inc.		10,000		64
Castle Creek Biosciences, Inc.		5,000		54
Emalex Biosciences, Inc.		10,000		104
Keypath Education Holdings, LLC		5,000		103
LogicBio, Inc.		5,000		—
Maculogix, Inc.		3,750		37
Magnolia Medical Technologies, Inc.		10,000		71
Provivi, Inc.		10,000		149
Revinate, Inc.		5,000		60
Skillshare, Inc.		11,000		199
Total	$	75,875	$	873

The table above also provides the fair value of the Company’s unfunded commitment liability as of June 30, 2020, which totaled $0.9 million. The fair value at inception of the delay draw credit agreements is equal to the fees and/or warrants received to enter into these agreements, taking into account the remaining terms of the agreements and the counterparties’ credit profile. The unfunded commitment liability reflects the fair value of these future funding commitments and is included in the Company’s consolidated statement of assets and liabilities.

Note 9. Concentrations of credit risk

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

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The Company’s largest debt investments may vary from period to period as new debt investments are recorded and existing debt investments are repaid. The Company’s five largest debt investments, at cost, represented 25% and 28% of total debt investments outstanding as of June 30, 2020 and December 31, 2019, respectively. No single debt investment represented more than 10% of the total debt investments as of June 30, 2020 and December 31, 2019. Investment income, consisting of interest and fees, can fluctuate significantly upon repayment of large debt investments. Interest income from the five largest debt investments accounted for 26% and 27% of total interest and fee income on investments for the three months ended June 30, 2020 and 2019, respectively. Interest income from the five largest debt investments accounted for 24% and 28% of total interest and fee income on investments for the six months ended June 30, 2020 and 2019, respectively.

Note 10. Distributions

The Company’s distributions are recorded on the declaration date. The following table summarizes the Company’s distribution activity for the six months ended June 30, 2020 and for the year ended December 31, 2019:


									DRIP	DRIP
Date					Amount		Cash		Shares	Share
Declared	Record Date		Payment Date		Per Share		Distribution		Issued	Value

					(In thousands, except share and per share data)
Six Months Ended June 30, 2020
4/24/20		8/18/20		9/15/20	$	0.10	$	—	—	$	—
4/24/20		7/17/20		8/14/20		0.10		—	—		—
4/24/20		6/18/20		7/15/20		0.10		1,703	1,710		20
2/28/20		5/19/20		6/16/20		0.10		1,667	1,646		18
2/28/20		4/17/20		5/15/20		0.10		1,667	1,879		19
2/28/20		3/18/20		4/15/20		0.15		2,496	3,144		30
					$	0.65	$	7,533	8,379	$	87
Year Ended December 31, 2019
10/25/19		2/19/20		3/16/20	$	0.10	$	1,659	1,561	$	18
10/25/19		1/17/20		2/14/20		0.10		1,660	1,234		17
10/25/19		12/18/19		1/15/20		0.10		1,519	1,115		15
7/26/19		11/19/19		12/16/19		0.10		1,467	1,215		15
7/26/19		10/18/19		11/15/19		0.10		1,442	1,226		16
7/26/19		9/19/19		10/16/19		0.10		1,412	1,258		15
4/26/19		8/19/19		9/17/19		0.10		1,366	1,274		15
4/26/19		7/18/19		8/15/19		0.10		1,339	1,261		15
4/26/19		6/19/19		7/16/19		0.10		1,338	1,339		16
3/1/19		5/17/19		6/17/19		0.10		1,339	1,308		15
3/1/19		4/18/19		5/15/19		0.10		1,332	1,885		22
3/1/19		3/19/19		4/16/19		0.10		1,139	1,199		15
					$	1.20	$	17,012	15,875	$	194

On July 24, 2020, the Board declared monthly distributions per share, payable as set forth in the following table:


Ex-Dividend Date	Record Date	Payment Date	Distributions Declared
September 16, 2020	September 17, 2020	October 16, 2020	$	0.10
October 19, 2020	October 20, 2020	November 16, 2020	$	0.10
November 17, 2020	November 18, 2020	December 15, 2020	$	0.10

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

After paying distributions of $0.35 per share and earning net investment income of $0.40 per share for the quarter, the Company’s undistributed spillover income as of June 30, 2020 was $0.42 per share. Spillover income includes any ordinary income and net capital gains from the preceding tax years that were not distributed during such tax years.

Note 11. Financial highlights

The following table shows financial highlights for the Company:


	Six months ended June 30,
	2020			2019

	(In thousands, except share and per share data)
Per share data:
Net asset value at beginning of period	$	11.83		$	11.64
Net investment income		0.65			0.65
Realized gain (loss) on investments		0.17			(0.27)
Unrealized (depreciation) appreciation on investments		(0.39)			0.22
Net increase in net assets resulting from operations		0.43			0.60
Distributions declared⁽¹⁾		(0.65)			(0.60)
From net investment income		(0.65)			(0.60)
From net realized gain on investments		—			—
Return of capital		—			—
Other ⁽²⁾		0.03			(0.04)
Net asset value at end of period	$	11.64		$	11.60
Per share market value, beginning of period	$	12.93		$	11.25
Per share market value, end of period	$	10.90		$	11.80
Total return based on a market value ⁽³⁾		(10.7)	%		10.2	%
Shares outstanding at end of period		17,291,770			13,542,873
Ratios, net of waivers, to average net assets:
Expenses without incentive fees		10.3	%⁽⁴⁾		11.3	%⁽⁴⁾
Incentive fees		2.8	%⁽⁴⁾		2.8	%⁽⁴⁾
Net expenses		13.1	%⁽⁴⁾		14.1	%⁽⁴⁾
Net investment income with incentive fees		11.4	%⁽⁴⁾		11.0	%⁽⁴⁾
Ratios, without waivers, to average net assets:
Expenses without incentive fees⁽⁴⁾		10.3	%⁽⁴⁾		11.3	%⁽⁴⁾
Incentive fees⁽⁴⁾		2.8	%⁽⁴⁾		5.2	%⁽⁴⁾
Net expenses⁽⁴⁾		13.1	%⁽⁴⁾		16.5	%⁽⁴⁾
Net investment income with incentive fees⁽⁴⁾		11.4	%⁽⁴⁾		8.6	%⁽⁴⁾
Net assets at the end of the period	$	201,232		$	157,136
Average net asset value	$	192,914		$	149,272
Average debt per share	$	10.04		$	10.06
Portfolio turnover ratio		16.2	%⁽⁶⁾		36.2	%⁽⁷⁾

(1)

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

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

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

(4)	Annualized.

(5)	During the six months ended June 30, 2019, the Advisor waived $1.8 million of performance based incentive fee.

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Horizon Technology Finance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(6)	Calculated by dividing the lesser of purchases or the sum of (1) principal prepayments and (2) maturities by the monthly average debt investment balance.

(7)	Calculated by dividing net debt investment purchases by the monthly average debt investment balance.

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

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

COVID-19

As the global spread of COVID-19 continues, we experienced increased market volatility and economic uncertainty that may have materially affected the valuation of portfolio investments, and may continue to; such changes to the valuation of portfolio investments accordingly affect our net asset value. We are continuing to assess what additional adverse financial and operational consequences may result from the global spread of COVID-19 and the associated economic turbulence, however, the extent of such consequences remains uncertain as of the filing of this Form 10-Q

Forward-looking statements

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

●

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

●

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

●

general economic and political trends and other external factors, including the current COVID-19 pandemic;

●

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

●

the impact of increased competition;

●

the impact of investments we intend to make and future acquisitions and divestitures;

●

the unfavorable resolution of legal proceedings;

●

our business prospects and the prospects of our portfolio companies, including our and their ability to achieve our respective objectives as a result of the current COVID-19 pandemic;

●

the impact, extent and timing of technological changes and the adequacy of intellectual property protection;

●

our regulatory structure and tax status;

●

our ability to qualify and maintain qualification as a regulated investment company, or RIC, and as a business development company, or BDC;

●

the adequacy of our cash resources and working capital;

●

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

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●

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

●

the ability of our portfolio companies to achieve their objective;

●

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

●

the impact of the Small Business Credit Availability Act, or SBCAA, on our operations and the BDC industry;

●

our contractual arrangements and relationships with third parties;

●

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

●

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

●

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

●

our ability to fund unfunded commitments, including unfunded commitments.

We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks” and similar expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in “Risk Factors” and elsewhere in our annual report on Form 10-K for the year ended December 31, 2019, and elsewhere in this quarterly report on Form 10-Q.

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

Overview

We are a specialty finance company that lends to and invests in development-stage companies in the technology, life science, healthcare information and services and sustainability industries, which we refer to 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 collectively as “Venture Loans,” to venture capital and private equity backed companies and publicly traded companies in our Target Industries, which we refer to as “Venture Lending.” 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 June 30, 2020, 100%, or $342.7 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 Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986,

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as amended, or the Code. As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance our investments through borrowings. Section 61(a) of the 1940 Act to add Section 61(a)(2) 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. 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 Funding Company LLC, or Compass Horizon, our predecessor company, commenced operations in March 2008. We were formed in March 2010 for the purpose of acquiring Compass Horizon and continuing its business as a public entity.

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

Portfolio composition and investment activity

The following table shows our portfolio by type of investment as of June 30, 2020 and December 31, 2019:


	June 30, 2020					December 31, 2019
				Percentage of					Percentage of
	Number of	Fair		Total		Number of	Fair		Total
	Investments	Value		Portfolio		Investments	Value		Portfolio

	(Dollars in thousands)
Debt investments	35	$	342,722	96.3	%	35	$	288,355	90.2	%
Warrants	64		10,508	3.0		66		10,829	3.4
Other investments	1		500	0.1		1		500	0.2
Equity	7		2,150	0.6		9		3,217	1.0
Equity interest in HSLFI	—		—	—		1		16,650	5.2
Total		$	355,880	100.0	%		$	319,551	100.0	%

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The following table shows total portfolio investment activity as of and for the three and six months ended June 30, 2020 and 2019:


	For the three months ended				For the six months ended
	June 30,				June 30,
	2020		2019		2020		2019

	(In thousands)
Beginning portfolio	$	334,506	$	266,152	$	319,551	$	248,441
New debt investments		54,908		55,055		105,554		93,137
Less refinanced debt investments		—		(10,000)		—		(10,000)
Net new debt investments		54,908		45,055		105,554		83,137
Principal payments received on investments		(4,938)		(5,133)		(13,925)		(9,656)
Early pay-offs		(30,296)		(31,458)		(47,243)		(45,548)
Accretion of debt investment fees		1,222		1,090		2,287		1,748
New debt investment fees		(633)		(568)		(1,213)		(1,106)
Warrants received in settlement of fee income		978		—		978		—
Proceeds from sale of investments		(576)		(137)		(6,256)		(1,905)
Dividend income from controlled affiliate investment		(312)		431		118		761
Distributions from controlled affiliate investment		—		(298)		—		(530)
Net realized (loss) gain on investments		(725)		(4,598)		2,766		(3,447)
Net unrealized appreciation (depreciation) on investments		1,944		4,124		(6,539)		2,765
Other		(198)		99		(198)		99
Ending portfolio	$	355,880	$	274,759	$	355,880	$	274,759

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

The following table shows our debt investments by industry sector as of June 30, 2020 and December 31, 2019:


	June 30, 2020				December 31, 2019
	Debt		Percentage of		Debt		Percentage of
	Investments at		Total		Investments at		Total
	Fair Value		Portfolio		Fair Value		Portfolio

	(Dollars in thousands)
Life Science
Biotechnology	$	84,695	24.7	%	$	41,789	14.5	%
Drug Delivery		1,547	0.5			1,533	0.6
Medical Device		91,710	26.8			59,477	20.6
Technology
Communications		—	—			1,500	0.5
Consumer-Related		42,916	12.5			42,779	14.8
Data Storage		24,540	7.2			24,452	8.5
Internet and Media		15,727	4.6			22,504	7.8
Materials		8,376	2.4			8,410	2.9
Power Management		—	—			11,207	3.9
Software		58,431	17.1			51,069	17.7
Healthcare Information and Services
Other Healthcare		14,780	4.2			9,771	3.4
Software		—	—			13,864	4.8
Total	$	342,722	100.0	%	$	288,355	100.0	%

The largest debt investments in our portfolio may vary from period to period as new debt investments are originated and existing debt investments are repaid. Our five largest debt investments represented 25% and 28% of total debt

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investments outstanding as of June 30, 2020 and December 31, 2019, respectively. No single debt investment represented more than 10% of our total debt investments as of June 30, 2020 and December 31, 2019.

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 June 30, 2020 and December 31, 2019, our debt investments had a weighted average credit rating of 2.9 and 3.1, respectively. The following table shows the classification of our debt investment portfolio by credit rating as of June 30, 2020 and December 31, 2019:


	June 30, 2020					December 31, 2019
		Debt		Percentage			Debt		Percentage
	Number of	Investments at		of Debt		Number of	Investments at		of Debt
	Investments	Fair Value		Investments		Investments	Fair Value		Investments

	(Dollars in thousands)
Credit Rating
4	2	$	23,539	6.9	%	4	$	45,339	15.7	%
3	25		265,365	77.4		26		216,128	75.0
2	6		46,718	13.6		3		24,888	8.6
1	2		7,100	2.1		2		2,000	0.7
Total	35	$	342,722	100.0	%	35	$	288,355	100.0	%

As of June 30, 2020, there were two debt investments with an internal credit rating of 1, with a cost of $13.5 million and a fair value of $7.1 million. As of December 31, 2019, there were two debt investments with an internal credit rating of 1, with an aggregate cost of $5.7 million and an aggregate fair value of $2.0 million.

Horizon Secured Loan Fund I LLC

On June 1, 2018, we and Arena Sunset SPV, LLC, or Arena, formed a joint venture, Horizon Secured Loan Fund I, or HSLFI, to make investments, either directly or indirectly through subsidiaries, primarily in the form of secured loans to development-stage companies in the technology, life science, healthcare information and services and sustainability industries. HSLFI was formed as a Delaware limited liability company and was not consolidated by either us or Arena for financial reporting purposes. On April 21, 2020, we purchased all of the limited liability company interests of Arena in HSLFI, including, without limitation, undistributed amounts owed to Arena and interest accrued and unpaid on the debt investments of HSLFI through the date of purchase, for $17.1 million. In addition, Arena received 50% of the warrants held by HSLFI or Horizon Funding I, LLC, or HFI, at closing. HSLFI is now wholly-owned by us and in future reporting periods, the assets and liabilities of HSLFI and HFI will be consolidated with the assets and liabilities by us.

Investments held by HSLFI were measured at fair value. As of December 31, 2019, HSLFI had total assets of $48.3 million. HSLFI’s portfolio consisted of debt investments in eight portfolio companies as of December 31, 2019. As of December 31, 2019, the largest investment in a single portfolio company in the HSLFI’s portfolio in aggregate principal amount was $11.3 million and the five largest investments in portfolio companies in the HSLFI totaled $30.3 million. As of December 31, 2019, HSLFI had no investments on non-accrual status. HSLFI invested in portfolio companies in the same industries in which we may directly invest.

We invested cash or securities in portfolio companies in HSLFI in exchange for limited liability company equity interests in HSLFI. As of December 31, 2019, 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, 2019, $9.8 million was unfunded. Our investment in HSLFI consisted of an equity contribution of $15.2 million as of December 31, 2019. During the period January 1, 2020 through April 21, 2020, there were no distributions from HSLFI. For the three and six months ended June 30, 2019, HSLFI distributed $0.6 million and $1.1 million, respectively.

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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, required unanimous approval of a quorum of the board of managers. Quorum wass 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.

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

In addition, on June 1, 2018, HSLFI entered into the Sale and Servicing Agreement. 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’s investment period has ended. Any notes issued by HFI was collateralized by all investments held by HFI and permitted an advance rate of up to 67% of the aggregate principal amount of eligible debt investments. The notes were issued pursuant to the Indenture. The interest rate on the notes issued under the NYL Facility was 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 $15.0 million in advances made by the Noteholders as of December 31, 2019 at an interest rate of 4.98%.

The following table shows a summary of HSLFI’s investment portfolio for the period January 1, 2020 through April 21, 2020 and the three and six months ended June 30, 2019:


	For the period			For the three			For the six
	January 1, 2020			months ended			months ended
	through			June 30,			June 30,
	April 21, 2020			2019			2019

					(Dollars in thousands)
Total investments at fair value	$	—		$	38,896		$	38,896
Dollar-weighted annualized yield on average debt investments⁽¹⁾		14.3	%		13.1	%		12.7	%
Number of portfolio companies in HSLFI		—			6			6
Largest portfolio company investment at fair value	$	—		$	11,158		$	11,158

(1)

HSLFI calculates the yield on dollar-weighted average debt investments for any period measured as (1) total investment income during the period divided by (2) the average of the fair value of debt investments outstanding on (a) the last day of the calendar month immediately preceding the first day of the period and (b) the last day of each calendar month during the period. The yield on dollar-weighted average debt investments represents the portfolio yield and does not reflect HSLFI’s expenses.

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The following table shows HSLFI’s total portfolio investment activity as of and for the three and six months ended June 30, 2019:


	For the three months ended		For the six months ended
	June 30,		June 30,
	2019		2019

Beginning portfolio	$	28,962	$	24,734
New debt investments		10,000		14,227
Accretion of debt investment fees		45		77
New debt investment fees		(97)		(136)
Net unrealized depreciation on investments		(14)		(6)
Ending portfolio	$	38,896	$	38,896

The following table shows HSLFI’s investments as of December 31, 2019:


			Principal		Cost of		Fair
Portfolio Company ⁽¹⁾	Sector	Type of Investment ^(2)(3)(4)	Amount		Investments⁽⁵⁾		Value
(Dollars in thousands)
Debt Investments — Life science
Celsion Corporation (6)(7)(8)	Biotechnology	Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)	$	2,500	$	2,464	$	2,464
		Term Loan (9.63% cash (Libor + 7.63%; Floor 9.63%), 4.00% ETP, Due 7/1/22)		2,500		2,464		2,464
Encore Dermatology, Inc. (6)(7)	Biotechnology	Term Loan (10.00% cash (Libor + 7.50%; Floor 10.00%), 3.00% ETP, Due 4/1/23)		5,000		4,929		4,929
Mustang Bio, Inc. (6)(7)(8)	Biotechnology	Term Loan (9.00% cash (Libor + 6.50%; Floor 9.00%), 5.00% ETP, Due 10/1/22)		5,000		4,924		4,924
Total Debt Investments — Life science						14,781		14,781
Debt Investments — Technology
Bridge2 Solutions, LLC (6)(7)	Software	Term Loan (11.00% cash (Libor + 8.4%; Floor 11.00%), 2.00% ETP, Due 9/1/23)		500		481		481
New Signature US, Inc. (6)(7)(9)	Software	Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 7/1/22)		8,250		8,163		8,163
		Term Loan (10.50% cash (Libor + 8.50%; Floor 10.50%), 3.50% ETP, Due 2/1/23)		3,000		2,961		2,961
OutboundEngine, Inc. (6)(7)	Software	Term Loan (11.15% cash (Libor + 8.40%; Floor 11.15%), 3.00% ETP, Due 7/1/23)		500		491		491
Revinate, Inc. (6)(7)	Software	Term Loan (9.50% cash (Libor + 7.00%; Floor 9.50%), 3.00% ETP, Due 6/1/23)		4,000		3,952		3,952
Total Debt Investments — Technology						16,048		16,048
Debt Investments — Healthcare information and services
HealthEdge Software, Inc. (6)(7)	Software	Term Loan (9.94% cash (Libor + 8.25%; Floor 9.25%), 3.00% ETP, Due 10/1/23)		3,750		3,709		3,709
Total Debt Investments — Healthcare information and services						3,709		3,709
Total Debt Investments						34,538		34,538

Warrant Investments — Life science
Celsion Corporation (6)(7)(8)	Biotechnology	95,057 Common Stock Warrants				58		6
Encore Dermatology, Inc. (6)(7)	Biotechnology	503,626 Preferred Stock Warrants				38		—
Mustang Bio, Inc. (6)(7)(8)	Biotechnology	72,046 Common Stock Warrants				45		74
CSA Medical, Inc. (6)(7)	Medical Device	17,751 Preferred Stock Warrants				2		2
Total Warrant Investments — Life science						143		82
Warrant Investments — Technology
Intelepeer Holdings, Inc. (6)(7)	Communications	2,081,934 Preferred Stock Warrants				82		72
Bridge2 Solutions, LLC (6)(7)	Software	2,500 Common Stock Warrants				18		34
BSI Platform Holdings, LLC (6)(7)(9)	Software	562,500 Preferred Stock Warrants				77		62
OutboundEngine, Inc. (6)(7)	Software	40,000 Preferred Stock Warrants				5		6
Revinate Inc. (6)(7)	Software	216,362 Preferred Stock Warrants				16		18
Total Warrant Investments — Technology						198		192
Warrant Investments — Healthcare information and services
HealthEdge Software, Inc. (6)(7)	Software	47,418 Preferred Stock Warrants				16		17
Total Warrant Investments — Healthcare information and services						16		17
Total Warrant Investments						357		291

Total Portfolio Investment Assets					$	34,895	$	34,829

Short Term Investments — Unrestricted Investments
US Bank Money Market Deposit Account (6)					$	11,201	$	11,201

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Total Short Term Investments — Unrestricted Investments	$	11,201	$	11,201

Short Term Investments — Restricted Money Market Funds
US Bank Money Market Deposit Account (6)	$	138	$	138
Total Short Term Investments — Restricted Money Market Funds	$	138	$	138

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

(2)

(3)

(4)	Warrants are non-income producing.

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

(6)	Has been pledged as collateral under the NYL Facility.

(7)	The fair value of the investment was valued using significant unobservable inputs.

(8)	Portfolio company is a public company.

(9)	New Signature US, Inc. is a subsidiary of BSI Platform Holdings, LLC.

The following tables show certain summarized financial information for HSLFI as of December 31, 2019, for the period January 1, 2020 through April 21, 2020 and the three and six months ended June 30, 2019:


	December 31,
	2019

Selected Statement of Assets and Liabilities Information
Total investments at fair value (cost of $34,895)	$	34,829
Cash and cash equivalents		503
Investments in money market funds		11,201
Restricted investments in money market funds		138
Interest receivable		477
Other assets		1,109
Total assets	$	48,257

Borrowings	$	14,955
Other liabilities		126
Total liabilities		15,081
Members’ equity		33,176
Total liabilities and members’ equity	$	48,257

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	For the period		For the three		For the six
	January 1, 2020		months ended		months ended
	through		June 30,		June 30,
	April 21, 2020		2019		2019

	(In thousands)
Selected Statements of Operations Information
Interest income on investments	$	1,353	$	1,148	$	1,997
Total investment income	$	1,465	$	1,148	$	1,997
Total expenses	$	1,229	$	286	$	475
Net investment income	$	236	$	862	$	1,522
Net realized gain on investments	$	120		—	$	—
Net unrealized depreciation on investments	$	(392)	$	(14)	$	(6)
Net (decrease) increase in net assets resulting from operations	$	(36)	$	848	$	1,516

Consolidated results of operations

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

Comparison of the three months ended June 30, 2020 and 2019

The following table shows consolidated results of operations for the three months ended June 30, 2020 and 2019:


	For the three months ended
	June 30,
	2020		2019

	(In thousands)
Total investment income	$	13,524	$	10,470
Total expenses		6,818		6,166
Performance based incentive fee waived		—		(708)
Net expenses		6,818		5,458
Net investment income		6,706		5,012
Net realized loss on investments		(725)		(4,598)
Net unrealized appreciation on investments		1,944		4,124
Net increase in net assets resulting from operations	$	7,925	$	4,538
Average debt investments, at fair value	$	328,036	$	239,284
Average borrowings outstanding	$	182,521	$	129,034

Net increase 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, quarterly comparisons of net increase in net assets resulting from operations may not be meaningful.

Investment income

Total investment income increased by $3.1 million, or 29.2%, to $13.5 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. For the three months ended June 30, 2020, total investment income consisted primarily of $12.1 million in interest income from investments, which included $3.3 million in income from the accretion of origination fees and ETPs, $1.7 million in fee income and $0.3 million in dividend expense. Interest income on debt investments increased by $2.9 million, or 31.0%, to $12.1 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Interest income on debt investments for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 increased primarily due to an increase of $88.8 million, or 37.1%, in the average size of our debt investment portfolio, partially offset by a decrease in one-month LIBOR which is the base rate for most of our variable rate debt investments. Fee income, which includes success fee, other fee

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and prepayment fee income on debt investments, increased by $0.9 million, or 116.4%, to $1.7 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily due to a higher average prepayment fee rate earned and an increase in amendment fee income.

The following table shows our dollar-weighted annualized yield for the three months ended June 30, 2020 and 2019:


	For the three months ended
	June 30,
Investment type:	2020		2019
Debt investments⁽¹⁾⁽²⁾	16.9	%	16.8	%
Equity interest in HSLFI and debt investments⁽¹⁾⁽³⁾	16.3	%	16.6	%
Equity interest in HSLFI⁽¹⁾⁽⁴⁾	—	%	13.0
All investments⁽¹⁾⁽⁵⁾	15.8	%	15.5	%

(1)

We calculate the dollar-weighted annualized yield on average investment type for any period as (1) total related investment income during the period divided by (2) the average of the fair value of the investment type 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 investment type is higher than what investors will realize because it does not reflect our expenses or any sales load paid by investors

(2)	Excludes any yield from warrants, equity, other investments and equity interest in HSLFI. Related investment income includes interest income and fee income from debt investments.

(3)	Excludes any yield from warrants, equity and other investments. Related investment income includes interest income and fee income from debt investments and dividend income from equity interest in HSLFI.

(4)	Excludes any yield from debt investments, warrants, equity and other investments. Related investment income includes dividend income from equity interest in HSLFI.

(5)	Includes any yield from debt investments, warrants, equity, other investments and equity interest in HSFLI. Related investment income includes interest income, fee income and dividend income.

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 26% and 27% of investment income for the three months ended June 30, 2020 and 2019, respectively.

Expenses

Net expenses increased by $1.4 million, or 24.9%, to $6.8 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. 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 $0.4 million, or 21.1%, to $2.6 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. Interest expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $53.5 million, or 41.5%, offset by a reduction in our effective cost of debt, for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Base management fee expense increased by $0.3 million, or 22.2%, to $1.7 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. Base management fee increased primarily due to an increase of $88.8 million, or 37.1%, in the average size of our investment portfolio for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, offset by the reduced management fee rate on which the base management fee is calculated for assets in excess of $250 million.

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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. During the three months ended June 30, 2019, our Advisor waived performance based incentive fees of $0.7 million which our Advisor would have otherwise been paid. This resulted in $0.7 million of reduced expense and additional net investment income for the three months ended June 30, 2019.

Performance based incentive fee expense, net of the waiver above, increased by $0.4 million, or 33.8%, to $1.7 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. This increase was due to an increase of $2.1 million, or 33.8%, in Pre-Incentive Fee Net Investment Income for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Administrative fee expense, professional fees and general and administrative were $0.9 million and $0.7 million for the three months ended June 30, 2020 and 2019, 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 three months ended June 30, 2020, we realized net losses totaling $0.7 million primarily due to the realized loss on the settlement of one of our debt investments offset by a realized gain from the consideration we received from the termination of warrants upon the sale of a portfolio company. During the three months ended June 30, 2019, we realized net losses totaling $4.6 million primarily due to the expiration of one of our royalty agreements which was included in other investments.

During the three months ended June 30, 2020, net unrealized appreciation on investments totaled $1.9 million which was primarily due to (1) the unrealized appreciation on one of our warrant investments and (2) the reversal of previously recorded unrealized depreciation from the settlement of three of our debt investments partially offset by (1) the unrealized depreciation on two of our debt investments and (2) the unrealized depreciation on one of our equity investments. During the three months ended June 30, 2019, net unrealized appreciation on investments totaled $4.1 million which was primarily due to (1) a reversal of previously recorded unrealized depreciation on one of our royalty agreements which was included in other investments and (2) unrealized appreciation on one of our equity investments. These amounts were partially offset by unrealized depreciation on one of our debt investments.

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Comparison of the six months ended June 30, 2020 and 2019

The following table shows consolidated results of operations for the six months ended June 30, 2020 and 2019:


	For the six months ended
	June 30,
	2020		2019

	(In thousands)
Total investment income		23,638	$	18,775
Total expenses		12,649		12,378
Performance based incentive fee waived		—		(1,848)
Net expenses		12,649		10,530
Net investment income		10,989		8,245
Net realized gain (loss) on investments		2,766		(3,447)
Net unrealized (depreciation) appreciation on investments		(6,539)		2,765
Net increase in net assets resulting from operations	$	7,216	$	7,563
Average debt investments, at fair value	$	310,830	$	229,943
Average borrowings outstanding	$	168,981	$	126,878

Investment income

Total investment income increased by $4.9 million, or 25.9%, to $23.6 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. For the six months ended June 30, 2020, total investment income consisted primarily of $21.7 million in interest income from investments, which included $5.3 million in income from the accretion of origination fees and ETPs, $1.9 million in fee income and $0.1 million in dividend income. Interest income on debt investments increased by $4.8 million, or 28.3%, to $21.7 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Interest income on debt investments for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 increased primarily due to an increase of $80.9 million, or 35.2%, in the average size of our debt investment portfolio, partially offset by a decrease in one-month LIBOR which is the base rate for most of our variable rate debt investments. Fee income, which includes success fee, other fee and prepayment fee income on debt investments, increased by $0.7 million, or 64.7%, to $1.9 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to an increase in amendment fee income.

The following table shows our dollar-weighted annualized yield for the six months ended June 30, 2020 and 2019:


	For the six months ended
	June 30,
Investment type:	2020		2019
Debt investments⁽¹⁾⁽²⁾	15.1	%	15.7	%
Equity interest in HSLFI and debt investments⁽¹⁾⁽³⁾	14.8	%	15.4	%
Equity interest in HSLFI⁽¹⁾⁽⁴⁾	—	%	11.5	%
All investments⁽¹⁾⁽⁵⁾	14.2	%	14.4	%

(1)

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(2)	Excludes any yield from warrants, equity, other investments and equity interest in HSLFI. Related investment income includes interest income and fee income from debt investments.

(3)	Excludes any yield from warrants, equity and other investments. Related investment income includes interest income and fee income from debt investments and dividend income from equity interest in HSLFI.

(4)	Excludes any yield from debt investments, warrants, equity and other investments. Related investment income includes dividend income from equity interest in HSLFI.

(5)	Includes any yield from debt investments, warrants, equity, other investments and equity interest in HSFLI. Related investment income includes interest income, fee income and dividend income.

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 24% and 27% of investment income for the six months ended June 30, 2020 and 2019, respectively.

Expenses

Net expenses increased by $2.1 million, or 20.1%, to $12.6 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. 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 $0.6 million, or 13.5%, to $4.7 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. Interest expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $42.1 million, or 33.2%, offset by a reduction in our effective cost of debt, for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Base management fee expense increased by $0.6 million, or 22.1%, to $3.2 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. Base management fee increased primarily due to an increase of $80.9 million, or 35.2%, in the average size of our investment portfolio for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, offset by the reduced management fee rate on which the base management fee is calculated for assets in excess of $250 million.

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. During the six months ended June 30, 2019, our Advisor waived performance based incentive fees of $1.8 million which our Advisor would have otherwise been paid. This resulted in $1.8 million of reduced expense and additional net investment income for the six months ended June 30, 2019.

Performance based incentive fee expense, net of the waiver above, increased by $0.7 million, or 33.3%, to $2.7 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 . This increase was due to an increase of $3.4 million, or 33.3%, in Pre-Incentive Fee Net Investment Income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Administrative fee expense, professional fees and general and administrative were $1.9 million and $1.6 million for the six months ended June 30, 2020 and 2019, respectively.

Net realized gains and losses and net unrealized appreciation and depreciation

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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 six months ended June 30, 2020, we realized net gains totaling $2.8 million primarily due to the realized gain from the consideration we received from the termination of warrants upon the sale of three portfolio companies offset by the realized loss on the settlement of one of our debt investmetns. During the six months ended June 30, 2019, we realized net losses totaling $3.4 million primarily due to the expiration of one of our royalty agreements which was included in other investments which was partially offset by a gain on the sale of our equity investment in one portfolio company and from the consideration we received from the termination of warrants upon the sale of one portfolio company.

During the six months ended June 30, 2020, net unrealized depreciation on investments totaled $6.5 million which was primarily due to (1) the unrealized depreciation on five of our debt investments, (2) the unrealized depreciation on one of our equity investments and (3) the reversal of previously recorded unrealized appreciation from the termination of warrants upon the sale of two portfolio companies partially offset by (1) the unrealized appreciation on one of our warrant investments and (2) the reversal of previously recorded unrealized depreciation from the settlement of three of our debt investments. During the six months ended June 30, 2019, net unrealized appreciation on investments totaled $2.8 million which was primarily due to the net unrealized appreciation on two of our royalty agreements which were included in other investments and the unrealized appreciation on one of our equity investments, partially offset by the unrealized depreciation on one of our debt investments.

Liquidity and capital resources

As of June 30, 2020 and December 31, 2019, we had cash and investments in money market funds of $37.3 million and $16.3 million, respectively. Cash is available to fund new investments, reduce borrowings, pay expenses, repurchase common stock and pay distributions. In addition, as of June 30, 2020 and December 31, 2019, we had $1.2 million and $1.1 million, respectively, of restricted investments in money market funds. Restricted investments in money market funds may be used to make monthly interest and principal payments on our Asset-Backed Notes. Our primary sources of capital have been from our public and private equity offerings, use of our revolving credit facilities and issuance of our public debt offerings.

On March 26, 2019, we completed a follow-on public offering of 2,000,000 shares of our common stock at a public offering price of $12.14 per share, for total net proceeds to us of $23.1 million, after deducting underwriting commission and discounts and other offering expenses.

On August 2, 2019 we entered into an At-The-Market (“ATM”) sales agreement (the “Equity Distribution Agreement”), with Goldman Sachs & Co. LLC and B. Riley FBR, Inc. (each a “Sales Agent” and, collectively, the “Sales Agents”). The Equity Distribution Agreement provides that we may offer and sell shares of common stock from time to time through the Sales Agents representing up to $50.0 million worth of our common stock, in amounts and at times to be determined by us.

During the three months ended June 30, 2020, we sold 432,491 shares of common stock under the Equity Distribution Agreement. For the same period, we received total accumulated net proceeds of approximately $5.0 million, including $0.1 million of offering expenses, from these sales.

During the six months ended June 30, 2020, we sold 1,717,901 shares of common stock under the Equity Distribution Agreement. For the same period, we received total accumulated net proceeds of approximately $21.1 million, including $0.5 million of offering expenses, from these sales.

On April 24, 2020, our Board extended a previously authorized stock repurchase program which allows us to repurchase up to $5.0 million of our common stock at prices below our net asset value per share as reported in our most recent consolidated financial statements. Under the repurchase program, we may, but are not obligated to, repurchase shares of our outstanding common stock in the open market or in privately negotiated transactions from time to time. Any repurchases by us will comply with the requirements of Rule 10b-18 under the 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

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repurchase program will terminate on the earlier of June 30, 2021 or the repurchase of $5.0 million of our common stock. During the three and six months ended June 30, 2020 and 2019, we did not make any repurchases of our common stock. From the inception of the stock repurchase program through June 30, 2020, 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 June 30, 2020 and December 31, 2019, the outstanding principal balance under our revolving credit facility, or the Key Facility, with KeyBank National Association was $45.0 million and $17.0 million, respectively. As of June 30, 2020 and December 31, 2019, we had borrowing capacity under the Key Facility of $80.0 million and $108.0 million, respectively. At June 30, 2020 and December 31, 2019, $22.7 million and $24.2 million, respectively, were available, subject to existing terms and advance rates.

At June 30, 2020, the outstanding principal balance under the NYL Facility was $13.3 million. As of June 30, 2020, we had borrowing capacity under the NYL Facility of $86.8 million. At June 30, 2020, $13.3 million was available, subject to existing terms and advance rates.

Our operating activities used cash of $29.7 million for the six months ended June 30, 2020, and our financing activities provided cash of $50.8 million for the same period. Our operating activities used cash primarily to purchase investments in portfolio companies partially offset by principal payments received on our debt investments. Our financing activities provided cash primarily from advances on our credit facilities and the sale of shares through our ATM for net proceeds of $21.1 million, after deducting underwriting commission and discounts and other offering expenses, partially offset by cash used to repay our Key Facility and pay distributions to our stockholders.

Our operating activities used cash of $19.5 million for the six months ended June 30, 2019, and our financing activities provided cash of $14.4 million for the same period. Our operating activities used cash primarily to purchase investments in portfolio companies partially offset by principal payments received on our debt investments. Our financing activities provided cash primarily from the completion of a follow-on public offering of 2.0 million shares of common stock for net proceeds of $23.1 million, after deducting underwriting commission and discounts and other offering expenses and advances on our Key Facility, partially offset by cash used to repay our Key Facility 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.

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Current borrowings

The following table shows our borrowings as of June 30, 2020 and December 31, 2019:


	June 30, 2020						December 31, 2019
	Total		Balance		Unused		Total		Balance		Unused
	Commitment		Outstanding		Commitment		Commitment		Outstanding		Commitment

	(In thousands)
Key Facility	$	125,000	$	45,000	$	80,000	$	125,000	$	17,000	$	108,000
NYL Facility		100,000		13,250		86,750		—		—		—
Asset-Backed Notes		100,000		100,000		—		100,000		100,000		—
2022 Notes		37,375		37,375		—		37,375		37,375		—
Total before debt issuance costs		362,375		195,625		166,750		262,375		154,375		108,000
Unamortized debt issuance costs attributable to term borrowings		—		(2,066)		—		—		(2,325)		—
Total borrowings outstanding, net	$	362,375	$	193,559	$	166,750	$	262,375	$	152,050	$	108,000

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 1.00%. The LIBOR rate was 0.16% and 1.76% as of June 30, 2020 and December 31, 2019, respectively. The interest rates in effect were 4.25% and 4.94% as of June 30, 2020 and December 31, 2019, 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 June 29, 2020, we amended the Key Facility, among other things, to amend the LIBOR floor from 0.75% to 1.00% and to extend the period during which we may request advances under the Key Facility, or the Revolving Period, to September 30, 2021. The Key Facility is collateralized by debt investments held by Horizon Credit II LLC, or 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. 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 September 29, 2017, we issued and sold an aggregate principal amount of $32.5 million of our 6.25% notes due 2022, or the 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 June 30, 2020, we were in material compliance with the terms of the 2022 Notes. The 2022 Notes are listed on the New York Stock Exchange under the symbol “HTFA”.

On August 13, 2019, the Asset-Backed Notes were issued by the 2019-1 Trust pursuant to a note purchase agreement, dated as of August 13, 2019, by and among us and Keybanc Capital Markets Inc. as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of ours and secured by certain assets of those portfolio companies and

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are to be serviced by us. Interest on the Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.21% per annum. The Asset-Backed Notes have a two-year reinvestment period and a stated maturity of September 15, 2027. The Asset-Backed Notes were rated A+(sf) by Morningstar Credit Ratings, LLC on August 13, 2019. There has been no change in the rating since August 13, 2019.

At June 30, 2020, and December 31, 2019, the Asset-Backed Notes had an outstanding principal balance of $100.0 million.

Under the terms of the Asset-Backed Notes, we are required to maintain a reserve cash balance, funded through proceeds from the sale of the Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the Asset-Backed Notes. The Company has segregated these funds and classified them as restricted investments in money market funds. At June 30, 2020, and December 31, 2019, there was approximately $1.2 million and $1.1 million, respectively, of restricted investments.

On April 21, 2020, we purchased all of the limited liability company interests of Arena in HSLFI, including, which is a party to the NYL Facility. HFI entered into the NYL Facility with 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. On June 1, 2018, HSLFI sold or contributed to HFI certain secured loans made to certain portfolio companies pursuant to into the Sale and Servicing Agreement. Any notes issued by HFI are 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.

On June 5, 2020, we amended the NYL Facility to extend the investment period to June 5, 2022. The investment period will be followed by a five year amortization period. The stated final payment date was extended to June 15, 2027, subject to any extension of the investment period. 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 3.55% and 5.15% with an interest rate floor, depending on the rating of such notes at the time of issuance. Any obligation to make additional advances was conditioned on the occurrence of certain conditions, which were satisfied June 26, 2020. There were $13.3 million in advances made by the Noteholders as of June 30, 2020 at an interest rate of 4.60%.

Other assets

As of June 30, 2020 and December 31, 2019, other assets were $2.2 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 June 30, 2020:


	Payments due by period
			Less than		1 – 3		3 – 5		After 5
	Total		1 year		Years		Years		years

	(In thousands)
Borrowings	$	195,625	$	14,964	$	159,267	$	21,394	$	—
Unfunded commitments		75,875		45,875		30,000		—		—
Total	$	271,500	$	60,839	$	189,267	$	21,394	$	—

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 June 30, 2020, we had such unfunded commitments of $75.9 million. This includes no undrawn revolver commitments. 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

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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 June 30, 2020, we reasonably believed that our assets would provide adequate financial resources to satisfy all of our unfunded commitments.

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

Distributions

In order to qualify and be subject to tax as a RIC, we must meet certain source-of-income, asset diversification and annual distribution requirements. Generally, in order to qualify as a RIC, we must derive at least 90% of our gross income for each tax year from dividends, interest, payments with respect to certain securities, loans, gains from the sale or other disposition of stock, securities or foreign currencies, income derived from certain publicly traded partnerships, 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” dividend reinvestment plan, or 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

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receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes, stockholders participating in our DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes. If our common stock is trading above net asset value, a stockholder receiving distributions in the form of additional shares of our common stock will be treated as receiving a distribution of an amount equal to the fair market value of such shares of our common stock. We may use newly issued shares to implement the DRIP, or we may purchase shares in the open market in connection with our obligations under the DRIP.

Related party transactions

We have entered into the Investment Management Agreement with the Advisor. The Advisor is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Our investment activities are managed by the Advisor and supervised by the Board, the majority of whom are independent directors. Under the Investment Management Agreement, we have agreed to pay the Advisor a base management fee as well as an incentive fee. During the three months ended June 30, 2020 and 2019, the Advisor earned $3.3 million and $2.6 million, respectively, pursuant to the Investment Management Agreement. During the six months ended June 30, 2020 and 2019, the Advisor earned $6.0 million and $4.7 million, respectively, pursuant to the Investment Management Agreement.

Through March 6, 2019, our Advisor was 60% owned by HTF Holdings LLC, which was wholly-owned by Horizon Technology Finance Principals LLC f/k/a Horizon Technology Finance, LLC (“HTF Principals”). HTF Principals was wholly-owned by Robert D. Pomeroy, Jr. and Gerald A. Michaud. By virtue of their ownership interest in HTF Principals, our Chief Executive Officer, Robert D. Pomeroy, Jr. and our President, Gerald A. Michaud controlled our Advisor. Effective as of March 7, 2019, HTF Principals owns seventy-five percent (75%) of the Advisor. By virtue of their ownership interest in Horizon Principals, our Chief Executive Officer, Robert D. Pomeroy, Jr. and our President, Gerald A. Michaud 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 three months ended June 30, 2020 and 2019, the Advisor earned $0.3 million and $0.2 million, respectively, pursuant to the Administration Agreement. During the six months ended June 30, 2020 and 2019, the Advisor earned $0.5 million and $0.4 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. 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.

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We have identified the following items as critical accounting policies.

Valuation of investments

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

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

Level 1

Quoted prices in active markets for identical assets and liabilities.

Level 2

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

Level 3

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 three and six months ended June 30, 2020, we recognized as interest income interest payments of $0.03 million received from one portfolio company whose debt investment was on non-accrual status. For the three and six months ended June 30, 2019, we did not recognize any 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

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origination fees, net of certain direct origination costs, are deferred, and along with unearned income, are amortized as a level yield adjustment over the respective term of the debt investment. All other income is recorded into income when earned. Fees for counterparty debt investment commitments with multiple debt investments are allocated to each debt investment based upon each debt investment’s relative fair value. When a debt investment is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the debt investment is returned to accrual status.

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

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

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 January 1, 2020 through April 21, 2020, there were no distributions from HSLFI. For the three and six months ended June 30, 2019, HSLFI distributed $0.3 million and $0.5 million, respectively, 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

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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 June 30, 2020 and December 31, 2019.

Recently issued accounting pronouncement

In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, or ASU 2020-04. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently assessing the impact of ASU 2020-04 and the LIBOR transition on our consolidated financial statements.

Item 3. 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 June 30, 2020 and December 31, 2019, 100% and 99%, respectively, of the outstanding principal amount of our debt investments bore interest at floating rates. The initial commitments to lend to our portfolio companies are usually based on a floating LIBOR index.

Based on our June 30, 2020 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 June 30, 2020, 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:


	Investment		Interest		Change in Net
Change in basis points	Income		Expense		Assets⁽¹⁾

	(In thousands)
Up 300 basis points	$	3,942	$	994	$	2,948
Up 200 basis points	$	1,166	$	538	$	628
Up 100 basis points	$	243	$	82	$	161
Down 300 basis points	$	—	$	—	$	—
Down 200 basis points	$	—	$	—	$	—
Down 100 basis points	$	(178)	$	—	$	(178)

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

While our 2022 Notes and our Asset-Backed Notes bear interest at a fixed rate, our Key Facility and our NYL Facility have a floating interest rate provision. The Key Facility is subject to a floor of 1.00% per annum, based on a LIBOR index which resets monthly and the NYL Facility is based on the three year USD mid-market swap rate plus a margin of between 3.55% and 5.15% with an interest rate floor, depending on the rating of such notes at the time of issuance. Any other credit facilities into which we enter in the future may have floating interest rate provisions. We have used hedging instruments in the past to protect us against interest rate fluctuations, and we may use them in the future. Such instruments may include caps, swaps, futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates. Engaging in commodity interest transactions such as swap transactions or futures contracts for the Company may cause the Investment Adviser to fall within the definition of “commodity pool operator” under the Commodity Exchange Act (the “CEA”) and related Commodity Futures Trading Commission (the “CFTC”) regulations. On January 31, 2020, the Investment Adviser claimed an exclusion from the definition of the term “commodity pool operator” under the CEA and the CFTC regulations in connection with its

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management of the Company and, therefore, is not subject to CFTC registration or regulation under the CEA as a commodity pool operator with respect to its management of the Company.

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.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

As of June 30, 2020, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

(b) Changes in internal controls over financial reporting.

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

PART II

Item 1: Legal Proceedings.

Neither we nor our Advisor is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or against our Advisor.

Item 1A: Risk Factors.

In addition to other information set forth in this report, you should carefully consider the factors set forth below and in “Item 1A Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results. There have been no material changes during the six months ended June 30, 2020 to the risk factors set forth in “Item 1A. Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2019, except as set forth below.

The COVID-19 pandemic could materially and adversely affect our portfolio companies and the results of our operations.

In late 2019 and early 2020, a novel coronavirus (SARS-CoV-2) and related respiratory disease (COVID 19) emerged in China and spread rapidly to across the world, including to the United States. This outbreak has led, and for an unknown period of time, will continue to lead to disruptions in local, regional, national and global markets and economies affected

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thereby. With respect to the U.S. credit markets (in particular for middle market loans), this outbreak has resulted in, and until fully resolved is likely to continue to result in, the following, among other things: (i) government imposition of various forms of “stay at home” orders and the closing of “non-essential” businesses, resulting in significant disruption to the businesses of many middle-market loan borrowers including supply chains, demand and practical aspects of their operations, as well as in lay-offs of employees, and, while these effects are hoped to be temporary, some effects could be persistent or even permanent; (ii) increased draws by borrowers on revolving lines of credit; (iii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; (iv) volatility and disruption of these markets including greater volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility, and liquidity issues; and (v) rapidly evolving proposals and/or actions by state and federal governments to address problems being experienced by the markets and by businesses and the economy in general which will not necessarily adequately address the problems facing the loan market and middle market businesses. This outbreak is having, and any future outbreaks could have, an adverse impact on our portfolio companies and us and on the markets and the economy in general, and that impact could be material.

Further, from an operational perspective, the Advisor’s investment professionals are currently working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. In addition, we are highly dependent on third party services providers for certain communication and information systems. As a result, we rely upon the successful implementation and execution of the business continuity planning of such providers in the current environment. If one or more of these third parties to whom we outsource certain critical business activities experience operational failures as a result of the impacts from the spread of COVID-19, or claim that they cannot perform due to a force majeure, it may have a material adverse effect on our business, financial condition, results of operations, liquidity and cash flows.

We are currently operating in a period of capital markets disruption and economic uncertainty.

The U.S. capital markets have experienced extreme volatility and disruption following the spread of COVID-19 in the United States. Some economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a world-wide economic downturn. Disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity would be expected to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also would be expected to increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity investments.

Terrorist attacks, acts of war, natural disasters, disease outbreaks or pandemics may impact our portfolio companies and harm our business, operating results and financial condition.

Terrorist acts, acts of war, natural disasters, disease outbreaks, pandemics, or other similar events may disrupt our operations, as well as the operations of our portfolio companies. Such acts have created, and continue to create, economic and political uncertainties and have contributed to recent global economic instability. Future terrorist activities, military or security operations, natural disasters, disease outbreaks, pandemics, or other similar events could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact our portfolio companies and, in turn, could have a material adverse impact on our business, operating results, and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds.

None.

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Item 3: Defaults Upon Senior Securities.

None.

Item 4: Mine Safety Disclosures.

Not applicable

Item 5: Other Information.

None.

Item 6: Exhibits.

EXHIBIT INDEX

Exhibit No.		Description
31.1*		Certifications by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
31.2*		Certifications by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
32.1*		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
32.2*		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended

*	Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

	HORIZON TECHNOLOGY FINANCE CORPORATION

Date: July 28, 2020	By:	/s/ Robert D. Pomeroy, Jr.
	Name:	Robert D. Pomeroy, Jr.
	Title:	Chief Executive Officer and Chairman of the Board

Date: July 28, 2020	By:	/s/ Daniel R. Trolio
	Name:	Daniel R. Trolio
	Title:	Chief Financial Officer

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Horizon Technology Finance (HRZN) 10-Q2020 Q2 Quarterly report

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