UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
 
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011

OR

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
FOR THE TRANSITION PERIOD FROM                      TO
 
COMMISSION FILE NUMBER: 814-00802
 
HORIZON TECHNOLOGY FINANCE CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE	 	27-2114934	
(State or other jurisdiction of incorporation or organization)	 	(I.R.S. Employer Identification No.)	
 	 	 	
312 Farmington Avenue	 	 	
Farmington, CT	 	06032	
(Address of principal executive offices)	 	(Zip Code)	
 
Registrant’s telephone number, including area code (860) 676-8654
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class	 	Name of Each Exchange on Which Registered	
Common Stock, par value $0.001 per share	 	The NASDAQ Global Market	
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o  .
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	 	Accelerated filer o	 	Non-accelerated filer þ	 	Smaller Reporting Company o	
 	 	  	 	(Do not check if a smaller reporting company)	 	 	
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  þ  .
 
As of August 10, 2011, the Registrant had 7,613,525 shares of common stock, $0.001 par value, outstanding.

 

 
 
HORIZON TECHNOLOGY FINANCE CORPORATION
 
FORM 10-Q
TABLE OF CONTENTS
 
 	 	 	Page	
 	PART I	 	 	
 	 	 	 	
Item 1.	Financial Statements	 	5	
 	 	 	 	
 	Consolidated Statements of Assets and Liabilities as of June 30, 2011 and December 31, 2010 (unaudited)	 	5	
 	Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)	 	6	
 	Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2011 and 2010 (unaudited)	 	7	
 	Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)	 	8	
 	Consolidated Schedules of Investments as of June 30, 2011 and December 31, 2010 (unaudited)	 	9	
 	Notes to the Consolidated Financial Statements (unaudited)	 	15	
 	 	 	 	
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	28	
Item 3.	Quantitative And Qualitative Disclosures About Market Risk	 	39	
Item 4.	Controls and Procedures	 	39	
 	 	 	 	
 	PART II	 	 	
 	 	 	 	
Item 1.	Legal Proceedings	 	39	
Item 1A.     	Risk Factors	 	40	
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	 	40	
Item 3.	Defaults Upon Senior Securities	 	40	
Item 4.	Removed and Reserved	 	40	
Item 5.	Other Information	 	40	
Item 6.	Exhibits	 	40	
 	Signatures	 	41	
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

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

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

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

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

 	·	the relative and absolute investment performance and operations of our Advisor;	

 	·	the impact of increased competition;	

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

 	·	the unfavorable resolution of legal proceedings;	

 	·	our business prospects and the prospects of our portfolio companies;	

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

 	·	our regulatory structure and tax status;	

 	·	the adequacy of our cash resources and working capital;	

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

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

 	·	the ability of our portfolio companies to achieve their objective;	

 	·	our ability to cause a subsidiary to become a licensed SBIC;	

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

 	·	our contractual arrangements and relationships with third parties;	

3

 

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

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

 	·	the impact of changes to tax legislation and, generally, our tax position.	
 
We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks” and similar expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2010 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 SEC, including, future reports on Form 10-Q, current reports on Form 8-K and annual reports on Form 10-K.

4

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Statements of Assets and Liabilities (Unaudited)
(In thousands, except share data)
 
 	 	June 30,	 	 	December 31,	 	
 	 	2011	 	 	2010	 	
ASSETS	 	 	 	 	 	 	
Non-affiliate investments at fair value (cost of $185,190 and $133,494, respectively) (Note 4)	 	$	186,029	 	 	$	136,810	 	
Cash and cash equivalents	 	 	19,308	 	 	 	76,793	 	
Interest receivable	 	 	2,701	 	 	 	1,938	 	
Other assets	 	 	1,100	 	 	 	664	 	
Total assets	 	$	209,138	 	 	$	216,205	 	
 	 	 	 	 	 	 	 	 	
LIABILITIES	 	 	 	 	 	 	 	 	
Borrowings (Note 6)	 	$	73,947	 	 	$	87,425	 	
Base management fee payable (Note 3)	 	 	349	 	 	 	360	 	
Incentive fee payable (Note 3)	 	 	1,611	 	 	 	414	 	
Interest rate swap liability (Note 9)	 	 	99	 	 	 	258	 	
Other accrued expenses	 	 	676	 	 	 	553	 	
Total liabilities	 	 	76,682	 	 	 	89,010	 	
 	 	 	 	 	 	 	 	 	
Net assets	 	 	 	 	 	 	 	 	
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 7,613,525 shares outstanding as of June 30, 2011 and 7,593,421 shares outstanding as of December 31, 2010	 	 	8	 	 	 	8	 	
Paid-in capital in excess of par	 	 	124,152	 	 	 	123,836	 	
Accumulated undistributed (distribution in excess of) net investment income	 	 	1,559	 	 	 	(143	)	
Net unrealized appreciation on investments	 	 	725	 	 	 	3,043	 	
Net realized gain on investments	 	 	6,012	 	 	 	451	 	
Total net assets	 	 	132,456	 	 	 	127,195	 	
Total liabilities and net assets	 	$	209,138	 	 	$	216,205	 	
 	 	 	 	 	 	 	 	 	
Net asset value per common share	 	$	17.40	 	 	$	16.75	 	
 
See Notes to Consolidated Financial Statements

5

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Statements of Operations (Unaudited)
(In thousands, except share data)
 
  	 	 	 	 	Pre-IPO Prior
to	 	 	 	 	 	Pre-IPO Prior
to	 	
 	 	Post-IPO as a	 	 	Becoming a	 	 	Post-IPO as a	 	 	Becoming a	 	
 	 	Business	 	 	Business	 	 	Business	 	 	Business	 	
 	 	Development	 	 	Development	 	 	Development	 	 	Development	 	
 	 	Company	 	 	Company	 	 	Company	 	 	Company	 	
 	 	Three Months
Ended	 	 	Three Months
Ended	 	 	Six Months
Ended	 	 	Six Months
Ended	 	
 	 	June 30, 2011	 	 	June 30, 2010	 	 	June 30, 2011	 	 	June 30, 2010	 	
Investment income	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income on non-affiliate investments	 	$	5,889	 	 	$	4,153	 	 	$	10,782	 	 	$	7,897	 	
Interest income on cash and cash equivalents	 	 	23	 	 	 	19	 	 	 	88	 	 	 	29	 	
Fee income on non-affiliate investments	 	 	58	 	 	 	98	 	 	 	560	 	 	 	137	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total investment income	 	 	5,970	 	 	 	4,270	 	 	 	11,430	 	 	 	8,063	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	 	558	 	 	 	1,090	 	 	 	1,368	 	 	 	2,093	 	
Base management fee (Note 3)	 	 	1,062	 	 	 	593	 	 	 	2,137	 	 	 	1,141	 	
Performance based incentive fee (Note 3)	 	 	1,611	 	 	 	—	 	 	 	2,140	 	 	 	—	 	
Administrative fee (Note 3)	 	 	223	 	 	 	—	 	 	 	518	 	 	 	—	 	
Professional fees	 	 	227	 	 	 	32	 	 	 	545	 	 	 	105	 	
General and administrative	 	 	309	 	 	 	46	 	 	 	514	 	 	 	103	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	 	 	3,990	 	 	 	1,761	 	 	 	7,222	 	 	 	3,442	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	 	 	1,980	 	 	 	2,509	 	 	 	4,208	 	 	 	4,621	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Credit for loan losses	 	 	—	 	 	 	116	 	 	 	—	 	 	 	419	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net realized and unrealized gain on investments	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net realized gain (loss) on investments	 	 	5,355	 	 	 	(2	)	 	 	5,561	 	 	 	(2	)	
Net unrealized depreciation on investments	 	 	(3,512	)	 	 	(364	)	 	 	(2,318	)	 	 	(162	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net realized and unrealized gain (loss) on investments	 	 	1,843	 	 	 	(366	)	 	 	3,243	 	 	 	(164	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net increase in net assets resulting from operations	 	$	3,823	 	 	$	2,259	 	 	$	7,451	 	 	$	4,876	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income per common share (1)	 	$	0.26	 	 	$	N/A	 	 	$	0.55	 	 	$	N/A	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in net assets per common share (1)	 	$	0.50	 	 	$	N/A	 	 	$	0.98	 	 	$	N/A	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding (1)	 	 	7,601,375	 	 	 	N/A	 	 	 	7,597,420	 	 	 	N/A	 	

(1)	For the three and six months ended June 30, 2010, the Company did not have common shares outstanding or an equivalent and, therefore, earnings per share and weighted average shares outstanding information for this period is not provided.	
 
See Notes to Consolidated Financial Statements

6

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Statements of Changes in Net Assets (Unaudited)
(In thousands, except share data)
 
  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Accumulated	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Undistributed	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(distribution in	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Accumulated	 	 	 	 	 	 	 	 	Paid-In	 	 	excess of)	 	 	Net Unrealized	 	 	Net	 	 	 	 	
 	 	 	 	 	Other	 	 	 	 	 	 	 	 	Capital in	 	 	Net	 	 	Appreciation	 	 	Realized	 	 	 	 	
 	 	Members’	 	 	Comprehensive	 	 	Common Stock	 	 	Excess of	 	 	Investment	 	 	on	 	 	Gain on	 	 	Total	 	
 	 	Capital	 	 	Loss	 	 	Shares	 	 	Amount	 	 	Par	 	 	Income	 	 	Investments	 	 	Investments	 	 	Net Assets	 	
Balance at December 31, 2009	 	$	60,260	 	 	$	(768	)	 	 	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	59,492	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	4,876	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,876	 	
Unrealized loss on interest rate swaps	 	 	—	 	 	 	257	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	257	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total comprehensive income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,133	 	
Balance at June 30, 2010	 	$	65,136	 	 	$	(511	)	 	 	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	64,625	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2010	 	$	—	 	 	$	—	 	 	 	7,593,421	 	 	$	8	 	 	$	123,836	 	 	$	(143	)	 	$	3,043	 	 	$	451	 	 	$	127,195	 	
Net increase in net assets from operations	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,208	 	 	 	(2,318	)	 	 	5,561	 	 	 	7,451	 	
Issuance of common stock as stock dividend	 	 	—	 	 	 	—	 	 	 	20,104	 	 	 	—	 	 	 	316	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	316	 	
Dividends declared	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(2,506	)	 	 	—	 	 	 	—	 	 	 	(2,506	)	
Balance at June 30, 2011	 	$	—	 	 	$	—	 	 	 	7,613,525	 	 	$	8	 	 	$	124,152	 	 	$	1,559	 	 	$	725	 	 	$	6,012	 	 	$	132,456	 	
 
See Notes to Consolidated Financial Statements

7

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 
 	 	Post-IPO as a
Business
Development
Company
Six Months
Ended
June 30, 2011	 	 	Pre-IPO Prior
to
becoming a
Business
Development
Company
Six Months
Ended
June 30, 2010	 	
Cash flows from operating activities:	 	 	 	 	 	 	
Net increase in net assets resulting from operations	 	$	7,451	 	 	$	4,876	 	
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:	 	 	 	 	 	 	 	 	
Credit for loan losses	 	 	—	 	 	 	(419	)	
Amortization of debt issuance costs	 	 	194	 	 	 	580	 	
Net realized (gain) loss on investments	 	 	(5,729	)	 	 	2	 	
Net change in unrealized appreciation on investments	 	 	2,318	 	 	 	162	 	
Purchase of investments	 	 	(71,156	)	 	 	(49,609	)	
Principal payments received on investments	 	 	19,700	 	 	 	20,280	 	
Proceeds from sale of investments	 	 	5,383	 	 	 	—	 	
Stock received in settlement of fee income	 	 	(482	)	 	 	—	 	
Changes in assets and liabilities:	 	 	 	 	 	 	 	 	
Increase in interest receivable	 	 	(763	)	 	 	(475	)	
Increase in unearned loan income	 	 	99	 	 	 	35	 	
Increase in other assets	 	 	(141	)	 	 	(159	)	
Increase in other accrued expenses	 	 	123	 	 	 	64	 	
(Decrease) increase in base management fee payable	 	 	(11	)	 	 	31	 	
Increase in incentive fee payable	 	 	1,197	 	 	 	—	 	
Net cash used in operating activities	 	 	(41,817	)	 	 	(24,632	)	
 	 	 	 	 	 	 	 	 	
Cash flows from financing activities:	 	 	 	 	 	 	 	 	
Net (decrease) increase in revolving borrowings	 	 	(13,478	)	 	 	27,097	 	
Dividends paid	 	 	(2,190	)	 	 	—	 	
Net cash (used in) provided by financing activities	 	 	(15,668	)	 	 	27,097	 	
Net (decrease) increase in cash and cash equivalents	 	 	(57,485	)	 	 	2,465	 	
Cash and cash equivalents:	 	 	 	 	 	 	 	 	
Beginning of period	 	 	76,793	 	 	 	9,892	 	
End of period	 	$	19,308	 	 	$	12,357	 	
 	 	 	 	 	 	 	 	 	
Cash paid for interest	 	$	1,140	 	 	$	1,483	 	
Supplemental non-cash investing and financing activities:	 	 	 	 	 	 	 	 	
Warrant investments received & recorded as unearned loan income	 	$	1,082	 	 	$	1,166	 	
Receivables resulting from sales of investments	 	$	489	 	 	$	—	 	
Decrease in interest rate swap liability	 	$	(159	)	 	$	(257	)	
 
See Notes to Consolidated Financial Statements

8

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Schedule of Investments
June 30, 2011
(In thousands)
 
 	 	 	 	Type of	 	Interest	 	 	 	Cost of	 	 	 	 	
Portfolio Company	 	Sector	 	Investment(2)	 	Rate(3)	 	Maturity	 	Investment(5)	 	 	Fair Value	 	
Debt Investments	 	 	 	 	 	 	 	 	 	 	
Debt Investments — Life Science — 45.9%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
ACT Biotech, Inc.	 	Biotechnology	 	Term Loan(1)	 	 	12.10	%	6/1/2013	 	$	904	 	 	$	904	 	
 	 	 	 	Term Loan(1)	 	 	12.01	%	6/1/2013	 	 	903	 	 	 	903	 	
 	 	 	 	Term Loan(1)	 	 	12.01	%	6/1/2013	 	 	1,362	 	 	 	1,362	 	
Ambit Biosciences, Inc.	 	Biotechnology	 	Term Loan(1)	 	 	12.25	%	10/1/2013	 	 	5,583	 	 	 	5,583	 	
Anacor Pharmaceuticals, Inc.(4)	 	Biotechnology	 	Term Loan	 	 	9.41	%	4/1/2015	 	 	3,199	 	 	 	3,199	 	
GenturaDX, Inc.	 	Biotechnology	 	Term Loan	 	 	11.25	%	4/1/2014	 	 	1,898	 	 	 	1,898	 	
N30 Pharmaceuticals, LLC,	 	Biotechnology	 	Term Loan(1)	 	 	11.25	%	9/1/2014	 	 	2,402	 	 	 	2,402	 	
Pharmasset, Inc.(4)	 	Biotechnology	 	Term Loan(1)	 	 	12.00	%	8/1/2011	 	 	128	 	 	 	128	 	
 	 	 	 	Term Loan(1)	 	 	12.00	%	1/1/2012	 	 	747	 	 	 	747	 	
 	 	 	 	Term Loan(1)	 	 	12.50	%	10/1/2012	 	 	1,787	 	 	 	1,787	 	
Revance Therapeutics, Inc.	 	Biotechnology	 	Term Loan(1)	 	 	10.50	%	12/1/2011	 	 	747	 	 	 	747	 	
 	 	 	 	Term Loan(1)	 	 	10.50	%	3/1/2013	 	 	2,786	 	 	 	2,786	 	
Supernus Pharmaceuticals, Inc.	 	Biotechnology	 	Term Loan	 	 	11.00	%	8/1/2014	 	 	2,942	 	 	 	2,942	 	
Tranzyme, Inc.	 	Biotechnology	 	Term Loan(1)	 	 	10.75	%	1/1/2014	 	 	4,975	 	 	 	4,975	 	
Xcovery Holding Company, LLC	 	Biotechnology	 	Term Loan	 	 	12.00	%	10/1/2013	 	 	1,493	 	 	 	1,493	 	
 	 	 	 	Term Loan	 	 	12.00	%	7/1/14	 	 	1,474	 	 	 	1,474	 	
Concentric Medical, Inc.	 	Medical Device	 	Term Loan(1)	 	 	12.04	%	9/1/2013	 	 	6,919	 	 	 	6,919	 	
OraMetrix, Inc.	 	Medical Device	 	Term Loan(1)	 	 	11.50	%	4/1/2014	 	 	4,915	 	 	 	4,915	 	
PixelOptics, Inc.	 	Medical Device	 	Term Loan	 	 	10.75	%	11/1/2014	 	 	9,898	 	 	 	9,898	 	
Tengion, Inc.(4)	 	Medical Device	 	Term Loan	 	 	11.75	%	1/1/2014	 	 	4,938	 	 	 	4938	 	
ViOptix, Inc.	 	Medical Device	 	Term Loan(1)	 	 	13.55	%	11/1/2011	 	 	811	 	 	 	811	 	
Total Debt Investments — Life Science	 	 	 	 	 	 	 	 	 	 	 	60,811	 	 	 	60,811	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt Investments — Technology — 37.5%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
OpenPeak, Inc.	 	Communications	 	Term Loan(1)	 	 	11.86	%	12/1/2013	 	 	6,583	 	 	 	6,136	 	
Starcite, Inc.	 	Consumer-related technologies	 	Term Loan(1)	 	 	12.05	%	9/1/2012	 	 	1,973	 	 	 	1,973	 	
Tagged, Inc.	 	Consumer-related technologies	 	Term Loan(1)	 	 	12.78	%	5/1/2012	 	 	829	 	 	 	829	 	
 	 	 	 	Term Loan(1)	 	 	11.46	%	8/1/2012	 	 	351	 	 	 	351	 	
Xtera Communications, Inc.	 	Semiconductors	 	Term Loan	 	 	11.50	%	12/1/2014	 	 	9,713	 	 	 	9,713	 	
Vette Corp.	 	Data Storage	 	Term Loan(1)	 	 	11.75	%	7/1/2014	 	 	4,919	 	 	 	4,919	 	
XIOtech, Inc.	 	Data Storage	 	Term Loan(1)	 	 	14.00	%	5/1/2012	 	 	2,007	 	 	 	2,007	 	
IntelePeer, Inc.	 	Networking	 	Term Loan(1)	 	 	12.43	%	4/1/2012	 	 	334	 	 	 	334	 	
 	 	 	 	Term Loan(1)	 	 	12.33	%	6/1/2012	 	 	413	 	 	 	413	 	
 	 	 	 	Term Loan(1)	 	 	12.33	%	10/1/2012	 	 	881	 	 	 	881	 	
Construction Software Technologies, Inc.	 	Software	 	Term Loan	 	 	11.75	%	12/1/2014	 	 	3,933	 	 	 	3,933	 	
 	 	 	 	Term Loan	 	 	11.75	%	6/1/2014	 	 	1,966	 	 	 	1,966	 	
Courion Corporation	 	Software	 	Term Loan(1)	 	 	11.45	%	9/1/2014	 	 	6,873	 	 	 	6,873	 	
Seapass Solutions, Inc.	 	Software	 	Term Loan	 	 	11.75	%	11/1/14	 	 	4,914	 	 	 	4,914	 	
StreamBase Systems, Inc.	 	Software	 	Term Loan(1)	 	 	12.51	%	11/1/2013	 	 	3,432	 	 	 	3,432	 	
 	 	 	 	Term Loan(1)	 	 	12.50	%	6/1/2014	 	 	982	 	 	 	982	 	
Total Debt Investments — Technology	 	 	 	 	 	 	 	 	 	 	 	50,103	 	 	 	49,656	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt Investments — Cleantech — 20.3%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cereplast, Inc.(4)	 	Waste Removal	 	Term Loan(1)	 	 	12.00	%	4/1/2014	 	 	2,438	 	 	 	2,438	 	
 	 	Waste Removal	 	Term Loan(1)	 	 	12.00	%	6/1/2014	 	 	2,432	 	 	 	2,432	 	
Enphase Energy, Inc.	 	Energy Efficiency	 	Term Loan(1)	 	 	12.60	%	10/1/2013	 	 	6,508	 	 	 	6,508	 	
 	 	Energy Efficiency	 	Term Loan	 	 	10.75	%	4/1/2015	 	 	1,901	 	 	 	1,901	 	
Satcon Technology Corporation(4)	 	Energy Efficiency	 	Term Loan(1)	 	 	12.58	%	1/1/2014	 	 	9,272	 	 	 	9,272	 	
Tigo Energy, Inc.	 	Energy Efficiency	 	Term Loan(1)	 	 	11.00	%	8/1/2014	 	 	3,360	 	 	 	3,360	 	
 	 	 	 	Revolver	 	 	10.75	%	1/1/2014	 	 	985	 	 	 	985	 	
 	 	 	 	 	 	(Prime + 7.50)%	 	 	 	 	 	 	 	 	 	 	
Total Debt Investments — Cleantech	 	 	 	 	 	 	 	 	 	 	 	26,896	 	 	 	26,896	 	
 
See Notes to Consolidated Financial Statements

9

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Schedule of Investments
June 30, 2011 — (Continued)
(In thousands)

  	 	 	 	Type of	 	Interest	 	 	 	Cost of	 	 	 	 	
Portfolio Company	 	Sector	 	Investment(2)	 	Rate(3)	 	Maturity	 	Investment(5)	 	 	Fair Value	 	
Debt Investments — Healthcare information and services — 32.3%	 	 	 	 	 	 	 	 	 	 	
BioScale, Inc.	 	Diagnostics	 	Term Loan(1)	 	 	12.00	%	8/1/2012	 	 	1,730	 	 	 	1,730	 	
 	 	 	 	Term Loan(1)	 	 	11.51	%	1/1/2014	 	 	4,930	 	 	 	4,930	 	
Precision Therapeutics, Inc.	 	Diagnostics	 	Term Loan	 	 	10.25	%	12/1/2014	 	 	6,946	 	 	 	6,946	 	
Radisphere National Radiology Group, Inc.	 	Diagnostics	 	Term Loan(1)	 	 	12.75	%	1/1/2014	 	 	9,894	 	 	 	9,894	 	
Aperio Technologies, Inc.	 	Other Healthcare	 	Term Loan	 	 	9.64	%	5/1/2015	 	 	4,921	 	 	 	4,921	 	
Patientkeeper, Inc.	 	Other Healthcare	 	Term Loan	 	 	10.50	%	12/1/2014	 	 	5,188	 	 	 	5,188	 	
Singulex, Inc.	 	Other Healthcare	 	Term Loan(1)	 	 	11.00	%	3/1/2014	 	 	2,961	 	 	 	2,961	 	
 	 	 	 	Term Loan(1)	 	 	11.00	%	3/1/2014	 	 	1,973	 	 	 	1,973	 	
Talyst, Inc.	 	Other Healthcare	 	Term Loan(1)	 	 	12.10	%	12/1/2013	 	 	2,104	 	 	 	2,104	 	
 	 	 	 	Term Loan(1)	 	 	12.05	%	12/1/2013	 	 	2,100	 	 	 	2,100	 	
Total Debt Investment — Healthcare information and services	 	 	 	 	 	 	 	42,747	 	 	 	42,747	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Debt Investments	 	 	 	 	 	 	 	 	 	 	 	180,557	 	 	 	180,110	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrant Investments	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrants — Life Science — 0.9%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
ACT Biotech, Inc.	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	58	 	 	 	68	 	
Ambit Biosciences, Inc.	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	143	 	 	 	99	 	
Anacor Pharmaceuticals, Inc.(4)	 	Biotechnology	 	Common Stock Warrants	 	 	—	 	—	 	 	42	 	 	 	33	 	
Anesiva, Inc.(4)	 	Biotechnology	 	Common Stock Warrants(1)	 	 	—	 	—	 	 	18	 	 	 	—	 	
GenturaDX, Inc.	 	Biotechnology	 	Preferred Stock Warrants	 	 	—	 	—	 	 	63	 	 	 	62	 	
N30 Pharmaceuticals, LLC	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	60	 	 	 	46	 	
Novalar Pharmaceuticals, Inc.	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	69	 	 	 	—	 	
Revance Therapeutics, Inc.	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	224	 	 	 	84	 	
Supernus Pharmaceuticals, Inc.	 	Biotechnology	 	Preferred Stock Warrants	 	 	—	 	—	 	 	16	 	 	 	15	 	
Tranzyme, Inc.	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	1	 	 	 	—	 	
Calypso Medical Technologies, Inc.	 	Medical Device	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	17	 	 	 	75	 	
Concentric Medical, Inc.	 	Medical Device	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	84	 	 	 	563	 	
EnteroMedics, Inc.(4)	 	Medical Device	 	Common Stock Warrants(1)	 	 	—	 	—	 	 	347	 	 	 	22	 	
OraMetrix, Inc.	 	Medical Device	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	78	 	 	 	82	 	
PixelOptics, Inc.	 	Medical Device	 	Preferred Stock Warrants	 	 	—	 	—	 	 	96	 	 	 	47	 	
Tengion, Inc.(4)	 	Medical Device	 	Common Stock Warrants	 	 	—	 	—	 	 	62	 	 	 	3	 	
ViOptix, Inc.	 	Medical Device	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	13	 	 	 	—	 	
Total Warrants — Life Science	 	 	 	 	 	 	 	 	 	 	 	1,391	 	 	 	1,199	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrants — Technology — 1.5%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
OpenPeak, Inc.	 	Communications	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	89	 	 	 	—	 	
Everyday Health, Inc.	 	Consumer-related technologies	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	69	 	 	 	117	 	
SnagAJob.com, Inc.	 	Consumer-related technologies	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	24	 	 	 	271	 	
Starcite, Inc.	 	Consumer-related technologies	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	23	 	 	 	27	 	
Tagged, Inc.	 	Consumer-related technologies	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	17	 	 	 	27	 	
 
See Notes to Consolidated Financial Statements

10

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Schedule of Investments
June 30, 2011 — (Continued)
(In thousands)
 
 	 	 	 	Type of	 	Interest	 	 	 	Cost of	 	 	 	 	
Portfolio Company	 	Sector	 	Investment(2)	 	Rate(3)	 	Maturity	 	Investment(5)	 	 	Fair Value	 	
Xtera Communications, Inc.	 	Semiconductors	 	Preferred Stock Warrants	 	 	—	 	—	 	 	206	 	 	 	206	 	
Vette Corp.	 	Data Storage	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	75	 	 	 	48	 	
XIOtech, Inc.	 	Data Storage	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	22	 	 	 	80	 	
Cartera Commerce, Inc.	 	Internet and media	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	16	 	 	 	30	 	
Grab Networks, Inc.	 	Networking	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	74	 	 	 	—	 	
IntelePeer, Inc.	 	Networking	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	40	 	 	 	528	 	
Motion Computing, Inc.	 	Networking	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	7	 	 	 	336	 	
Impinj, Inc.	 	Semi-conductor	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	7	 	 	 	—	 	
Clarabridge, Inc.	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	28	 	 	 	25	 	
Construction Software Technologies, Inc.	 	Software	 	Preferred Stock Warrants	 	 	—	 	—	 	 	45	 	 	 	45	 	
Courion Corporation	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	85	 	 	 	101	 	
DriveCam, Inc.	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	19	 	 	 	8	 	
Netuitive, Inc.	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	27	 	 	 	23	 	
Seapass Solutions, Inc.	 	Software	 	Preferred Stock Warrants	 	 	—	 	—	 	 	43	 	 	 	43	 	
StreamBase Systems, Inc.	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	66	 	 	 	68	 	
Total Warrants — Technology	 	 	 	 	 	 	 	 	 	 	 	982	 	 	 	1,983	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrants — Cleantech — 0.5%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cereplast, Inc.(4)	 	Waste Removal	 	Common Stock Warrants(1)	 	 	—	 	—	 	 	112	 	 	 	136	 	
Enphase Energy, Inc.	 	Energy Efficiency	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	175	 	 	 	137	 	
Satcon Technology Corporation(4)	 	Energy Efficiency	 	Common Stock Warrants(1)	 	 	—	 	—	 	 	285	 	 	 	299	 	
Tigo Energy, Inc.	 	Energy Efficiency	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	100	 	 	 	81	 	
Total Warrants — Cleantech	 	 	 	 	 	 	 	 	 	 	 	672	 	 	 	653	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrants — Healthcare information and services — 0.6%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BioScale, Inc.	 	Diagnostics	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	54	 	 	 	64	 	
Precision Therapeutics, Inc.	 	Diagnostics	 	Preferred Stock Warrants	 	 	—	 	—	 	 	73	 	 	 	159	 	
Radisphere National Radiology Group, Inc.	 	Diagnostics	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	167	 	 	 	379	 	
Aperio Technologies, Inc.	 	Other Healthcare	 	Preferred Stock Warrants	 	 	—	 	—	 	 	34	 	 	 	34	 	
Patientkeeper, Inc.	 	Other Healthcare	 	Preferred Stock Warrants	 	 	—	 	—	 	 	269	 	 	 	269	 	
Singulex, Inc.	 	Other Healthcare	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	39	 	 	 	31	 	
Talyst, Inc.	 	Other Healthcare	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	101	 	 	 	82	 	
Total Warrants — Healthcare information and services	 	 	 	 	 	 	 	 	 	737	 	 	 	1,018	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Warrants	 	 	 	 	 	 	 	 	 	 	 	3,782	 	 	 	4,853	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity  — 0.8%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
AFS Technologies, Inc.	 	 	 	Common Stock(1)	 	 	—	 	—	 	 	142	 	 	 	142	 	
Insmed Incorporated(4)	 	 	 	Common Stock(1)	 	 	—	 	—	 	 	227	 	 	 	398	 	
Overture Networks Inc.	 	 	 	Preferred Stock(1)	 	 	—	 	—	 	 	482	 	 	 	526	 	
Total equity	 	 	 	 	 	 	 	 	 	 	 	851	 	 	 	1,066	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total investments assets	 	 	 	 	 	 	 	 	 	 	$	185,190	 	 	$	186,029	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative Agreement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
WestLB, AG	 	Interest rate swap — pay fixed/receive floating, Notional Amount $10 million	 	 	3.58	%	10/14/2011	 	 	—	 	 	 	99	 	
Total investment liabilities	 	 	 	 	 	 	 	 	 	 	$	—	 	 	$	99	 	

(1)	Has been pledged as collateral under the Credit Facility.	

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

(3)	All interest is payable in cash due monthly in arrears, unless otherwise indicated and applies only to the Company’s debt investments. Amount is the annual interest rate on the debt investment and does not include any additional fees related to the investment, such as deferred interest, commitment fees or prepayment fees. The majority of the debt investments are at fixed rates for the term of the loan. For each debt investment, we have provided the current interest rate in effect as of June 30, 2011.	

(4)	Portfolio company is a public company.	

(5)	For debt investments, represents principal balance less unearned income.	
 
See Notes to Consolidated Financial Statements

11

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Schedule of Investments
December 31, 2010
(In thousands)
 
  	 	 	 	Type of	 	Interest	 	 	 	Cost of	 	 	 	 	
Portfolio Company	 	Sector	 	Investment(2)	 	Rate(3)	 	Maturity	 	Investment(5)	 	 	Fair Value	 	
Debt Investments	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt Investments — Life Science — 39.3%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
ACT Biotech, Inc.	 	Biotechnology	 	Term Loan(1)	 	 	12.10	%	6/1/2013	 	$	958	 	 	$	958	 	
 	 	 	 	Term Loan(1)	 	 	12.01	%	6/1/2013	 	 	957	 	 	 	957	 	
 	 	 	 	Term Loan(1)	 	 	12.01	%	6/1/2013	 	 	1,478	 	 	 	1,478	 	
Ambit Biosciences, Inc.	 	Biotechnology	 	Term Loan(1)	 	 	12.25	%	10/1/2013	 	 	5,898	 	 	 	5,898	 	
GenturaDX, Inc.	 	Biotechnology	 	Term Loan	 	 	11.25	%	4/1/2014	 	 	1,917	 	 	 	1,917	 	
Novalar Pharmaceuticals, Inc.	 	Biotechnology	 	Term Loan(1)	 	 	12.00	%	6/1/2012	 	 	3,146	 	 	 	3,146	 	
Pharmasset, Inc.(4)	 	Biotechnology	 	Term Loan(1)	 	 	12.00	%	8/1/2011	 	 	868	 	 	 	868	 	
 	 	 	 	Term Loan(1)	 	 	12.00	%	1/1/2012	 	 	1,448	 	 	 	1,448	 	
 	 	 	 	Term Loan(1)	 	 	12.50	%	10/1/2012	 	 	2,422	 	 	 	2,422	 	
Revance Therapeutics, Inc.	 	Biotechnology	 	Term Loan(1)	 	 	10.50	%	12/1/2011	 	 	1,445	 	 	 	1,445	 	
 	 	 	 	Term Loan(1)	 	 	10.50	%	3/1/2013	 	 	3,478	 	 	 	3,478	 	
Tranzyme, Inc.	 	Biotechnology	 	Term Loan(1)	 	 	10.75	%	1/1/2014	 	 	4,966	 	 	 	4,966	 	
Xcovery Holding Company, LLC	 	Biotechnology	 	Term Loan	 	 	12.00	%	10/1/2013	 	 	1,490	 	 	 	1,490	 	
Concentric Medical, Inc.	 	Medical Device	 	Term Loan(1)	 	 	12.04	%	9/1/2013	 	 	6,887	 	 	 	6,887	 	
OraMetrix, Inc.	 	Medical Device	 	Term Loan(1)	 	 	11.50	%	4/1/2014	 	 	4,887	 	 	 	4,887	 	
PixelOptics, Inc.	 	Medical Device	 	Term Loan(1)	 	 	13.00	%	1/1/2013	 	 	4,221	 	 	 	4,221	 	
Tengion, Inc.(4)	 	Medical Device	 	Term Loan(1)	 	 	12.26	%	9/1/2011	 	 	2,740	 	 	 	2,740	 	
ViOptix, Inc.	 	Medical Device	 	Term Loan(1)	 	 	13.55	%	11/1/2011	 	 	885	 	 	 	837	 	
Total Debt Investments — Life Science	 	 	 	 	 	 	 	 	 	 	 	50,091	 	 	 	50,043	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt Investments — Technology — 24.4%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Hatteras Networks, Inc.	 	Communications	 	Term Loan(1)	 	 	12.40	%	2/1/2011	 	 	1,042	 	 	 	1,042	 	
OpenPeak, Inc.	 	Communications	 	Term Loan(1)	 	 	11.86	%	12/1/2013	 	 	6,549	 	 	 	6,549	 	
Starcite, Inc.	 	Consumer-related technologies	 	Term Loan(1)	 	 	12.05	%	9/1/2012	 	 	2,679	 	 	 	2,679	 	
Tagged, Inc.	 	Consumer-related technologies	 	Term Loan(1)	 	 	12.78	%	5/1/2012	 	 	1,284	 	 	 	1,284	 	
 	 	 	 	Term Loan(1)	 	 	11.46	%	8/1/2012	 	 	498	 	 	 	498	 	
Vette Corp.	 	Data Storage	 	Term Loan(1)	 	 	11.75	%	7/1/2014	 	 	4,916	 	 	 	4,916	 	
XIOtech, Inc.	 	Data Storage	 	Term Loan(1)	 	 	14.00	%	5/1/2012	 	 	2,997	 	 	 	2,997	 	
IntelePeer, Inc.	 	Networking	 	Term Loan(1)	 	 	12.43	%	4/1/2012	 	 	515	 	 	 	515	 	
 	 	 	 	Term Loan(1)	 	 	12.33	%	6/1/2012	 	 	598	 	 	 	598	 	
 	 	 	 	Term Loan(1)	 	 	12.33	%	10/1/2012	 	 	1,171	 	 	 	1,171	 	
Clarabridge, Inc.	 	Software	 	Term Loan(1)	 	 	12.50	%	1/1/2013	 	 	1,166	 	 	 	1,166	 	
 	 	 	 	Term Loan(1)	 	 	12.50	%	6/1/2013	 	 	688	 	 	 	688	 	
 	 	 	 	Term Loan(1)	 	 	12.50	%	5/1/2014	 	 	743	 	 	 	743	 	
Courion Corporation	 	Software	 	Term Loan(1)	 	 	11.45	%	12/1/2011	 	 	1,083	 	 	 	1,083	 	
Netuitive, Inc.	 	Software	 	Term Loan(1)	 	 	12.90	%	4/1/2011	 	 	152	 	 	 	152	 	
StreamBase Systems, Inc.	 	Software	 	Term Loan(1)	 	 	12.51	%	11/1/2013	 	 	3,934	 	 	 	3,934	 	
 	 	 	 	Term Loan(1)	 	 	12.50	%	6/1/2014	 	 	977	 	 	 	977	 	
Total Debt Investments — Technology	 	 	 	 	 	 	 	 	 	 	 	30,992	 	 	 	30,992	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt Investments — Cleantech — 14.9%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cereplast, Inc.(4)	 	Waste Removal	 	Term Loan(1)	 	 	12.00	%	4/1/2014	 	 	2,363	 	 	 	2,363	 	
Enphase Energy, Inc.	 	Energy Efficiency	 	Term Loan(1)	 	 	12.60	%	10/1/2013	 	 	6,869	 	 	 	6,869	 	
Satcon Technology Corporation(4)	 	Energy Efficiency	 	Term Loan(1)	 	 	12.58	%	1/1/2014	 	 	9,701	 	 	 	9,701	 	
Total Debt Investments — Cleantech	 	 	 	 	 	 	 	 	 	 	 	18,933	 	 	 	18,933	 	
 
See Notes to Consolidated Financial Statements

12

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Schedule of Investments
December 31, 2010 — (Continued)
(In thousands)
 
  	 	 	 	Type of	 	Interest	 	 	 	Cost of	 	 	 	 	
Portfolio Company	 	Sector	 	Investment(2)	 	Rate(3)	 	Maturity	 	Investment(5)	 	 	Fair Value	 	
Debt Investments — Healthcare information and services — 23.8%	 	 	 	 	 	 	 	 	 	 	
BioScale, Inc.	 	Diagnostics	 	Term Loan(1)	 	 	12.00	%	8/1/2012	 	 	2,454	 	 	 	2,454	 	
 	 	 	 	Term Loan(1)	 	 	11.51	%	1/1/2014	 	 	4,908	 	 	 	4,908	 	
Precision Therapeutics, Inc.	 	Diagnostics	 	Term Loan(1)	 	 	13.00	%	3/1/2012	 	 	3,255	 	 	 	3,255	 	
Radisphere National Radiology Group, Inc.	 	Diagnostics	 	Term Loan(1)	 	 	12.75	%	1/1/2014	 	 	9,855	 	 	 	9,855	 	
Singulex, Inc.	 	Other Healthcare	 	Term Loan(1)	 	 	11.00	%	3/1/2014	 	 	2,949	 	 	 	2,949	 	
 	 	 	 	Term Loan(1)	 	 	11.00	%	3/1/2014	 	 	1,964	 	 	 	1,964	 	
Talyst, Inc.	 	Other Healthcare	 	Term Loan(1)	 	 	12.10	%	12/1/2013	 	 	2,443	 	 	 	2,443	 	
 	 	 	 	Term Loan(1)	 	 	12.05	%	12/1/2013	 	 	2,438	 	 	 	2,438	 	
Total Debt Investment — Healthcare information and services	 	 	 	 	 	 	 	30,266	 	 	 	30,266	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Debt Investments	 	 	 	 	 	 	 	 	 	 	 	130,282	 	 	 	130,234	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrant Investments	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrants — Life Science — 2.1%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
ACT Biotech, Inc.	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	23	 	 	 	23	 	
Ambit Biosciences, Inc.	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	143	 	 	 	147	 	
Anesiva, Inc.(4)	 	Biotechnology	 	Common Stock Warrants(1)	 	 	—	 	—	 	 	18	 	 	 	—	 	
GenturaDX, Inc.	 	Biotechnology	 	Preferred Stock Warrants	 	 	—	 	—	 	 	63	 	 	 	63	 	
Novalar Pharmaceuticals, Inc.	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	69	 	 	 	—	 	
Pharmasset, Inc.(4)	 	Biotechnology	 	Common Stock Warrants(1)	 	 	—	 	—	 	 	126	 	 	 	789	 	
Revance Therapeutics, Inc.	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	224	 	 	 	121	 	
Tranzyme, Inc.	 	Biotechnology	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	1	 	 	 	1	 	
Advanced BioHealing, Inc.	 	Medical Device	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	9	 	 	 	1,209	 	
Calypso Medical Technologies, Inc.	 	Medical Device	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	17	 	 	 	76	 	
Concentric Medical, Inc.	 	Medical Device	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	85	 	 	 	89	 	
EnteroMedics, Inc.(4)	 	Medical Device	 	Common Stock Warrants(1)	 	 	—	 	—	 	 	347	 	 	 	18	 	
OraMetrix, Inc.	 	Medical Device	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	78	 	 	 	83	 	
PixelOptics, Inc.	 	Medical Device	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	61	 	 	 	61	 	
Tengion, Inc.(4)	 	Medical Device	 	Common Stock Warrants(1)	 	 	—	 	—	 	 	15	 	 	 	—	 	
ViOptix, Inc.	 	Medical Device	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	13	 	 	 	—	 	
Total Warrants — Life Science	 	 	 	 	 	 	 	 	 	 	 	1,292	 	 	 	2,680	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrants — Technology — 1.2%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Hatteras Networks, Inc.	 	Communications	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	—	 	 	 	35	 	
OpenPeak, Inc.	 	Communications	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	89	 	 	 	92	 	
Everyday Health, Inc.	 	Consumer related technologies	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	69	 	 	 	137	 	
SnagAJob.com, Inc.	 	Consumer-related technologies	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	23	 	 	 	39	 	
Starcite, Inc.	 	Consumer-related technologies	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	24	 	 	 	28	 	
Tagged, Inc.	 	Consumer-related technologies	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	17	 	 	 	27	 	
Vette Corp.	 	Data Storage	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	75	 	 	 	49	 	
XIOtech, Inc.	 	Data Storage	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	22	 	 	 	81	 	
Cartera Commerce, Inc.	 	Internet and media	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	16	 	 	 	38	 	
Grab Networks, Inc.	 	Networking	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	74	 	 	 	—	 	
IntelePeer, Inc.	 	Networking	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	39	 	 	 	544	 	
Motion Computing, Inc.	 	Networking	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	7	 	 	 	292	 	
Impinj, Inc.	 	Semi-conductor	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	7	 	 	 	—	 	
 
See Notes to Consolidated Financial Statements

13

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Consolidated Schedule of Investments
December 31, 2010 — (Continued)
(In thousands)

  	 	 	 	Type of	 	Interest	 	 	 	Cost of	 	 	 	 	
Portfolio Company	 	Sector	 	Investment(2)	 	Rate(3)	 	Maturity	 	Investment(5)	 	 	Fair Value	 	
Clarabridge, Inc.	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	28	 	 	 	25	 	
Courion Corporation	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	7	 	 	 	17	 	
DriveCam, Inc.	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	20	 	 	 	8	 	
Netuitive, Inc.	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	27	 	 	 	22	 	
Plateau Systems, Ltd.	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	7	 	 	 	35	 	
StreamBase Systems, Inc.	 	Software	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	67	 	 	 	69	 	
Total Warrants — Technology	 	 	 	 	 	 	 	 	 	 	 	618	 	 	 	1,538	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrants — Cleantech — 1.0%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cereplast, Inc.(4)	 	Waste Removal	 	Common Stock Warrants(1)	 	 	—	 	—	 	 	112	 	 	 	112	 	
Enphase Energy, Inc.	 	Energy Efficiency	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	122	 	 	 	122	 	
Satcon Technology Corporation(4)	 	Energy Efficiency	 	Common Stock Warrants(1)	 	 	—	 	—	 	 	286	 	 	 	1,057	 	
Total Warrants — Cleantech	 	 	 	 	 	 	 	 	 	 	 	520	 	 	 	1,291	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrants — Healthcare information and services — 0.6%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BioScale, Inc.	 	Diagnostics	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	55	 	 	 	49	 	
Precision Therapeutics, Inc.	 	Diagnostics	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	52	 	 	 	139	 	
Radisphere National Radiology Group, Inc.	 	Diagnostics	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	167	 	 	 	384	 	
Singulex, Inc.	 	Other Healthcare	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	39	 	 	 	39	 	
Talyst, Inc.	 	Other Healthcare	 	Preferred Stock Warrants(1)	 	 	—	 	—	 	 	100	 	 	 	105	 	
Total Warrants — Healthcare information and services	 	 	 	 	 	 	 	 	 	413	 	 	 	716	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Warrants	 	 	 	 	 	 	 	 	 	 	 	2,843	 	 	 	6,225	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity — 0.3%	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
AFS Technologies, Inc	 	 	 	Common Stock(1)	 	 	—	 	—	 	 	142	 	 	 	142	 	
Insmed Incorporated(4)	 	 	 	Common Stock and Convertible Preferred Stock (1)	 	 	—	 	—	 	 	227	 	 	 	209	 	
Total equity	 	 	 	 	 	 	 	 	 	 	 	369	 	 	 	351	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total investments assets	 	 	 	 	 	 	 	 	 	 	$	133,494	 	 	$	136,810	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative Agreement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
WestLB, AG	 	Interest rate swap — pay fixed/receive floating, Notional Amount $10 million	 	 	3.58	%	10/14/2011	 	 	—	 	 	 	258	 	
Total investment liabilities	 	 	 	 	 	 	 	 	 	 	$	—	 	 	$	258	 	

(1)	Has been pledged as collateral under the Credit Facility.	

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

(3)	All interest is payable in cash due monthly in arrears, unless otherwise indicated and applies only to the Company’s debt investments. Amount is the annual interest rate on the debt investment and does not include any additional fees related to the investment, such as deferred interest, commitment fees or prepayment fees. The majority of the debt investments are at fixed rates for the term of the loan. For each debt investment, we have provided the current interest rate in effect as of December 31, 2010.	

(4)	Portfolio company is a public company.	

(5)	For debt investments, represents principal balance less unearned income.	
 
See Notes to Consolidated Financial Statements

14

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
Note 1. Organization
 
Horizon Technology Finance Corporation (the “Company”) was organized as a Delaware corporation on March 16, 2010 and is an externally managed, non-diversified, closed end investment company. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). In addition, for tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, the Company will not be subject to federal income tax on the portion of its taxable income and capital gains the Company distributes to the stockholders. The Company primarily makes secured loans to development-stage companies in the technology, life science, healthcare information and services and cleantech industries.
 
On October 28, 2010 the Company completed an initial public offering (“IPO”) and its common stock trades on the NASDAQ Global Market under the symbol “HRZN”. The Company was formed to continue and expand the business of Compass Horizon Funding Company LLC (“CHF”), a Delaware limited liability company, which commenced operations in March 2008 and became the Company’s wholly owned subsidiary with the completion of the IPO.
 
Horizon Credit I LLC (“Credit I”) was formed as a Delaware limited liability company on January 23, 2008, with CHF as the sole equity member. Credit I is a special purpose bankruptcy remote entity and is reported herein as a wholly owned subsidiary of the Company. CHF sold certain portfolio transactions to Credit I (“Purchased Assets”). Credit I is a separate legal entity from CHF and the Purchased Assets conveyed to Credit I are not available to creditors of the Company or any other entity other than Credit I’s lenders.
 
The Company’s investment strategy is to maximize the investment portfolio’s return by generating current income from the loans made and the capital appreciation from the warrants received when making such loans. The Company has entered into an investment management agreement (the “Investment Management Agreement”) with Horizon Technology Finance Management LLC (“HTFM” or the “Advisor”), under which the Advisor will manage the day-to-day operations of, and provide investment advisory services to, the Company.
 
On February 11, 2011, the Company formed, as wholly owned subsidiaries, Longview SBIC GP LLC and Longview SBIC LP (collectively, “Horizon SBIC”) in anticipation of receiving a license to operate a small business investment company (“SBIC”) from the Small Business Administration (“SBA”). If licensed, Longview SBIC LP may issue SBA-guaranteed debentures at long-term fixed rates. On March 1, 2011, the Company applied for exemptive relief from the Securities and Exchange Commission to permit the Company to exclude the debt of the Longview SBIC LP from the consolidated asset coverage ratio.
 
Horizon Credit II LLC (“Credit II”) was formed as a Delaware limited liability company on June 28, 2011, with the Company as the sole equity member. Credit II is a special purpose bankruptcy remote entity and is a separate legal entity from the Company. Any assets conveyed to Credit II will not be available to creditors of the Company or any other entity other than Credit II’s lenders.
 
Note 2. Basis of Presentation and Significant Accounting Policies
 
Election to become a Business Development Company and Basis of Financial Statement Presentation
 
The results of operations for the three and six months ended June 30, 2011 reflect the Company’s results as a BDC under the 1940 Act, whereas the operating results for the three and six months ended June 30, 2010 reflect the Company’s results prior to operating as a BDC under the 1940 Act. Accounting principles used in the preparation of these two periods are different and, therefore, the financial position and results of operations of these periods are not directly comparable. The primary differences in accounting principles relate to the carrying value of debt investments and classification of hedging activity — see corresponding sections below for further discussion.
 
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 or 10 of Regulation S-X. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation.

15

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
Principles of Consolidation
 
As permitted under Regulation S-X and the AICPA Audit and Accounting Guide for Investment Companies, the Company will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s subsidiaries in its consolidated financial statements.
 
Use of Estimates
 
In preparing the consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the balance sheet and income and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the valuation of loans, equity investments and warrants.
 
Fair Value
 
The Company applies fair value to substantially all of its investments in accordance with relevant GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. The Company has categorized its investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as more fully described in Note 5. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
 
The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3.
 
In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosure — Improving Disclosures about Fair Value Measurements, which amends the existing guidance related to fair value measurements and disclosures. The amendments require the following new fair value disclosures:

 	·	Separate disclosure of the significant transfers in and out of Level 1 and Level 2 fair value measurements, and a description of the reasons for the transfers.	

 	·	In the roll forward of activity for Level 3 fair value measurements (significant unobservable inputs), purchases, sales, issuances, and settlements should be presented separately (on a gross basis rather than as one net number).	
 
In addition, the amendments clarify existing disclosure requirements, as follows:

 	·	Fair value measurements and disclosures should be presented for each class of assets and liabilities within a line item in the balance sheet.	

 	·	Reporting entities should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3.	
 
The new disclosures and clarifications of existing disclosures were effective for the Company’s interim and annual reporting periods beginning after December 15, 2009, except for the disclosures included in the roll forward of activity for Level 3 fair value measurements, for which the effective date is for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
 
See Note 5 for additional information regarding fair value.

16

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
Segments
 
The Company has determined that it has a single reporting segment and operating unit structure. The Company lends to and invests in portfolio companies in various technology, life science, healthcare information and services and cleantech industries. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these loan and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment.
 
Cash and Cash Equivalents
 
Cash and cash equivalents as presented in the consolidated balance sheets and the consolidated statements of cash flows include bank checking accounts and money market funds with an original maturity of less than 90 days.
 
Investments
 
Investments are recorded at fair value. The Company’s board of directors (“Board”) determines the fair value of its portfolio investments. Prior to the Company’s election to become a BDC, debt investments were stated at current unpaid principal balances adjusted for the allowance for loan losses, unearned income and any unamortized deferred fees or costs.
 
The Company has the intent to hold its loans for the foreseeable future or until maturity or payoff.
 
Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. When a loan becomes 90 days or more past due, or if the Company otherwise does not expect to receive interest and principal repayments, the loan is placed on non-accrual status and the recognition of interest income is discontinued. Interest payments received on loans that are on non-accrual status are treated as reductions of principal until the principal is repaid. No loans were on non-accrual status as of June 30, 2011 and December 31, 2010.
 
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 and prepayment fees. In a limited number of cases, the Company may also receive a non-refundable deposit earned upon the termination of a transaction. Loan origination fees, net of certain direct origination costs, are deferred, and, along with unearned income, are amortized as a level yield adjustment over the respective term of the loan. Fees for counterparty loan commitments with multiple loans are allocated to each loan based upon each loan’s relative fair value. When a loan is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the loan is returned to accrual status.
 
Certain loan agreements also require the borrower to make an end-of-term payment that is accrued into income over the life of the loan to the extent such amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support the accrual or the Company does not expect the borrower to be able to pay all principal and interest due.
 
In connection with substantially all lending arrangements, the Company receives warrants to purchase shares of stock from the borrower. The warrants are recorded as assets at estimated fair value on the grant date using the Black-Scholes valuation model. The warrants are considered loan fees and are also recorded as unearned loan income on the grant date. The unearned income is recognized as interest income over the contractual life of the related loan in accordance with the Company’s income recognition policy. Subsequent to loan origination, the warrants are also measured at fair value using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss on investments. Gains from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gain on investments.
 
See Note 5 for additional information regarding fair value.

17

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
Allowance for Loan Losses
 
Prior to the Company’s election to become a BDC, the allowance for loan losses represented management’s estimate of probable loan losses inherent in the loan portfolio as of the balance sheet date. The estimation of the allowance was based on a variety of factors, including past loan loss experience, the current credit profile of the Company’s borrowers, adverse situations that had occurred that may affect individual borrowers’ ability to repay, the estimated value of underlying collateral and general economic conditions. The loan portfolio is comprised of large balance loans that are evaluated individually for impairment and are risk-rated based upon a borrower’s individual situation, current economic conditions, collateral and industry-specific information that management believes is relevant in determining the potential occurrence of a loss event and in measuring impairment. The allowance for loan losses was sensitive to the risk rating assigned to each of the loans and to corresponding qualitative loss factors that the Company used to estimate the allowance. Those factors were applied to the outstanding loan balances in estimating the allowance for loan losses. If necessary, based on performance factors related to specific loans, specific allowances for loan losses were established for individual impaired loans. Increases or decreases to the allowance for loan losses were charged or credited to current period earnings through the provision (credit) for loan losses. Amounts determined to be uncollectible were charged against the allowance for loan losses, while amounts recovered on previously charged-off loans increased the allowance for loan losses.
 
A loan was considered impaired when, based on current information and events, it was probable that the Company was unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment was measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan was collateral dependent.
 
Impaired loans also included loans modified in troubled debt restructurings where concessions had been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
 
Debt Issuance Costs
 
Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lender and are recognized as assets and are amortized as interest expense over the term of the related Credit Facility. The unamortized balance of debt issuance costs as of June 30, 2011 and December 31, 2010, included in other assets, was $0 and $194, respectively. The amortization expense for the six months ended June 30, 2011 and June 30, 2010 relating to debt issuance costs was $194 and $581, respectively.
 
Income Taxes
 
The Company elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes.
 
Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the six months ended June 30, 2011 no amount was recorded for U.S. federal excise tax.
 
The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. There were no material uncertain tax positions at June 30, 2011 and December 31, 2010. The 2008 and 2009 tax years remain subject to examination by U.S. federal and state tax authorities.

18

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
Prior to the Company’s election to become a BDC, the Company was a limited liability company treated as a partnership for U.S. federal income tax purposes and, as a result, all items of income and expense were passed through to, and are generally reportable on, the tax returns of the respective members of the limited liability company. Therefore, no federal or state income tax provision has been recorded for the six months ended June 30, 2010.
 
Dividends
 
Dividends and distributions to common stockholders are recorded on the declaration date. The amount to be paid out as a dividend is determined by the Board. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.
 
The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for reinvestment of cash distributions and other distributions on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board authorizes, and the Company declares, a cash dividend, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividend. The Company may use newly issued shares to implement the plan (especially if the Company’s shares are trading at a premium to net asset value), or the Company may purchase shares in the open market in connection with the obligations under the plan.
 
Interest Rate Swaps and Hedging Activities
 
The Company entered into interest rate swap agreements to manage interest rate risk. The Company does not hold or issue interest rate swap agreements or other derivative financial instruments for speculative purposes.
 
Subsequent to the Company’s election to become a BDC, the interest rate swaps are recorded at fair value with changes in fair value reflected in net unrealized appreciation or depreciation of investments during the reporting period. The Company records the accrual of periodic interest settlements of interest rate swap agreements in net unrealized appreciation or depreciation of investments and subsequently records the amount as a net realized gain or loss on investments on the interest settlement date. Cash payments received or paid for the termination of an interest rate swap agreement would be recorded as a realized gain or loss upon termination in the consolidated statements of operations.
 
Prior to the Company’s election to become a BDC, the Company recognized its interest rate swap derivatives on the balance sheet as either an asset or liability measured at fair value. Changes in the derivatives’ fair value were recognized in income unless specific hedge accounting criteria were met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the statement of operations and required the Company to formally document, designate and assess effectiveness of transactions that receive hedge accounting. Derivatives that are not hedges are adjusted to fair value through earnings. If the derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of hedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value, if any, would have been recognized as interest expense.
 
Transfers of Financial Assets
 
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.

19

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
Note 3. Related Party Transactions
 
Investment Management Agreement
 
On October 28, 2010, the Company entered into the Investment Management Agreement with the Advisor, under which the Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company. Under the terms of the Investment Management Agreement, the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.
 
The Advisor’s services under the Investment Management Agreement are not exclusive to the Company, and the Advisor is free to furnish similar services to other entities so long as its services to the Company are not impaired. The Advisor is a registered investment advisor with the SEC. The Advisor receives fees for providing services, consisting of two components, a base management fee and an incentive fee.
 
The base management fee is calculated at an annual rate of 2.00% of the Company’s gross assets, payable monthly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. The base management fee expense was $1,062 and $2,137 for the three and six months ended June 30, 2011, respectively. The accrued management fee as of June 30, 2011 and December 31, 2010 was $349 and $360, respectively.
 
The incentive fee has two parts, as follows:
 
The first part is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement (as defined below) and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. The incentive fee with respect to the pre-incentive fee net income is 20.00% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 1.75% (which is 7.00% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, the Advisor receives no incentive fee until the net investment income equals the hurdle rate of 1.75%, but then receives, as a “catch-up,” 100.00% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.1875% in any calendar quarter, the Advisor will receive 20.00% of the pre-incentive fee net investment income as if a hurdle rate did not apply.
 
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the 2.00% base management fee. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.
 
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date), and equals 20.00% of the Company’s aggregate 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 through the end of such year, less all previous amounts paid in respect of the capital gain incentive fee.

20

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
The total performance based incentive fee expense was $ 1,611 and $2,140 for the three and six months ended June 30, 2011, respectively. The incentive fee payable as of June 30, 2011 and December 31, 2010 was $1,611 and $414, respectively. The incentive fee payable as of June 30, 2011 includes $719 for part one and $892 for part two of the incentive fee, respectively.
 
Prior to the Company’s election to become a BDC, the Advisor served as the Advisor for CHF under a Management and Services Agreement which provided for management fees to be paid monthly at a rate of 2.00% per annum of the gross investment assets of CHF. Total management fee expense under this agreement was $1,141 for the six months ended June 30, 2010.
 
Administration Agreement
 
The Company entered into an administration agreement with the Advisor to provide administrative services to the Company. For providing these services, facilities and personnel, the Company will reimburse the Advisor for the Company’s allocable portion of overhead and other expenses incurred by the Advisor in performing its obligations under the administration agreement, including rent, the fees and expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief compliance officer and chief financial officer and their respective staffs. For the three and six months ended June 30, 2011, $223 and $518, respectively, was charged to operations under this agreement.
 
From time to time, the Advisor may pay amounts owed by the Company to third-party providers of goods or services. The Company will subsequently reimburse the Advisor for such amounts paid on the Company’s behalf.
 
Note 4. Investments
 
Investments, all of which are with portfolio companies in the United States, consisted of the following:
 
 	 	June 30, 2011	 	 	December 31, 2010	 	
 	 	Cost	 	 	Fair Value	 	 	Cost	 	 	Fair Value	 	
Debt	 	$	180,557	 	 	$	180,110	 	 	$	130,282	 	 	$	130,234	 	
Warrants	 	 	3,782	 	 	 	4,853	 	 	 	2,843	 	 	 	6,225	 	
Equity	 	 	851	 	 	 	1,066	 	 	 	369	 	 	 	351	 	
Total	 	$	185,190	 	 	$	186,029	 	 	$	133,494	 	 	$	136,810	 	
 
The following table shows the Company’s investments by industry sector.
 
 	 	June 30, 2011	 	 	December 31, 2010	 	
 	 	Cost	 	 	Fair Value	 	 	Cost	 	 	Fair Value	 	
Life Science	 	 	 	 	 	 	 	 	 	 	 	 	
Biotechnology	 	$	34,251	 	 	$	34,135	 	 	$	31,138	 	 	$	31,614	 	
Medical Device	 	 	28,178	 	 	 	28,273	 	 	 	20,472	 	 	 	21,317	 	
Technology	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consumer-related Technologies	 	 	3,284	 	 	 	3,596	 	 	 	4,592	 	 	 	4,692	 	
Networking	 	 	1,749	 	 	 	2,492	 	 	 	2,405	 	 	 	3,120	 	
Software	 	 	22,556	 	 	 	22,553	 	 	 	9,042	 	 	 	9,062	 	
Data Storage	 	 	7,040	 	 	 	7,085	 	 	 	8,010	 	 	 	8,042	 	
Internet and Media	 	 	—	 	 	 	—	 	 	 	16	 	 	 	38	 	
Communications	 	 	7,154	 	 	 	6,662	 	 	 	7,681	 	 	 	7,719	 	
Semiconductors	 	 	9,926	 	 	 	9,919	 	 	 	7	 	 	 	—	 	
Healthcare Information and Services	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diagnostics	 	 	23,795	 	 	 	24,102	 	 	 	20,745	 	 	 	21,044	 	
Other Healthcare Related Services and Technologies	 	 	19,689	 	 	 	19,663	 	 	 	9,934	 	 	 	9,938	 	
Cleantech	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Energy Efficiency	 	 	22,586	 	 	 	22,544	 	 	 	16,977	 	 	 	17,749	 	
Waste Recycling	 	 	4,982	 	 	 	5,005	 	 	 	2, 475	 	 	 	2,475	 	
Total	 	$	185,190	 	 	$	186,029	 	 	$	133,494	 	 	$	136,810	 	

21

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
Note 5. Fair Value
 
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.
 
Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment.
 
The Company’s fair value measurements are classified into a fair value hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The three categories within the hierarchy are as follows:

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

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

 	Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.	
 
Cash and cash equivalents 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.
 
Loans: For variable rate loans that re-price frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolio. The fair value of fixed rate loans is estimated by discounting the future cash flows using the year end rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolio. Therefore, the Company has categorized loan investments as Level 3 within the fair value hierarchy described above. These financial instruments are recorded at fair value on a recurring basis.
 
Warrants: 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.	

 	·	Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on guideline publicly traded companies within indices similar in nature to the underlying company issuing the warrant. A total of seven such indices were used. The weighted average volatility assumptions used for the warrant valuation at June 30, 2011 and December 31, 2010 was 30%.	

 	·	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. The marketability discount used for the warrant valuation at June 30, 2011 and December 31, 2010 was 20%.	

22

 

Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
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 in Note 2. 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 financial instruments are recorded at fair value on a recurring basis.
 
Borrowings: The carrying amount of borrowings under the revolving credit facility approximates its fair value due to the short duration and variable interest rate of this debt. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. These financial instruments are not recorded at fair value on a recurring basis.
 
Interest rate swap derivatives: The fair value of the Company’s interest rate swap derivative instruments is estimated as the amount the Company would pay to terminate its swaps at the balance sheet date, taking into account current interest rates and the creditworthiness of the counterparty for assets and the creditworthiness of the Company for liabilities. The Company has categorized these derivative instruments as Level 2 within the fair value hierarchy described above. These financial instruments are 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. Off-balance-sheet instruments are not recorded at fair value on a recurring basis.
 
The following tables detail the financial instruments that are carried at fair value and measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
 
 	 	June 30, 2011	 	
 	 	Total	 	 	Level 1	 	 	Level 2	 	 	Level 3	 	
Loan investments	 	$	180,110	 	 	$	—	 	 	$	—	 	 	$	180,110	 	
Equity investments	 	$	1,066	 	 	$	398	 	 	$	—	 	 	$	668	 	
Warrant investments	 	$	4,853	 	 	$	—	 	 	$	493	 	 	$	4,360	 	
Interest rate swap liability	 	$	99	 	 	$	—	 	 	$	99	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	December 31, 2010	 	
 	 	Total	 	 	Level 1	 	 	Level 2	 	 	Level 3	 	
Loan investments	 	$	130,234	 	 	$	—	 	 	$	—	 	 	$	130,234	 	
Equity investments	 	$	351	 	 	$	209	 	 	$	—	 	 	$	142	 	
Warrant investments	 	$	6,225	 	 	$	—	 	 	$	1,976	 	 	$	4,249	 	
Interest rate swap liability	 	$	258	 	 	$	—	 	 	$	258	 	 	$	—	 	

23

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
The following tables show a reconciliation of the beginning and ending balances for Level 3 assets for the three months ended June 30, 2011 and 2010:
 
 	 	Three months ended June 30, 2011	 	
 	 	Loan	 	 	Warrant	 	 	Equity	 	 	 	 	
 	 	Investments	 	 	Investments	 	 	Investments	 	 	Total	 	
Level 3 assets, beginning of period	 	$	144,666	 	 	$	5,408	 	 	$	668	 	 	$	150,742	 	
Purchase of investments	 	 	42,323	 	 	 	—	 	 	 	—	 	 	 	45,093	 	
Warrants and equity received and classified as Level 3	 	 	—	 	 	 	687	 	 	 	—	 	 	 	687	 	
Principal payments received on investments	 	 	(5,824	)	 	 	—	 	 	 	—	 	 	 	(8,594	)	
Unrealized depreciation included in earnings	 	 	(387	)	 	 	(1,719	)	 	 	—	 	 	 	(2,106	)	
Other	 	 	(668	)	 	 	(16	)	 	 	—	 	 	 	(684	)	
Level 3 assets, end of period	 	$	180,110	 	 	$	4,360	 	 	$	668	 	 	$	185,138	 	

 	 	Three months ended	 	
 	 	June 30, 2010	 	
Level 3 assets, beginning of period	 	$	2,223	 	
Warrants received and classified as Level 3	 	 	547	 	
Unrealized depreciation included in earnings	 	 	(425	)	
Other	 	 	(2	)	
Level 3 assets, end of period	 	$	2,343	 	
 
The following tables show a reconciliation of the beginning and ending balances for Level 3 assets for the six months ended June 30, 2011 and 2010:
 
 	 	Six months ended June 30, 2011	 	
 	 	Loan	 	 	Warrant	 	 	Equity	 	 	 	 	
 	 	Investments	 	 	Investments	 	 	Investments	 	 	Total	 	
Level 3 assets, beginning of period	 	$	130,234	 	 	$	4,249	 	 	$	142	 	 	$	134,625	 	
Purchase of investments	 	 	71,156	 	 	 	—	 	 	 	—	 	 	 	71,156	 	
Warrants and equity received and classified as Level 3	 	 	—	 	 	 	993	 	 	 	482	 	 	 	1,475	 	
Principal payments received on investments	 	 	(19,700	)	 	 	—	 	 	 	—	 	 	 	(19,700	)	
Unrealized (depreciation) appreciation included in earnings	 	 	(399	)	 	 	(866	)	 	 	44	 	 	 	(1,221	)	
Other	 	 	(1,181	)	 	 	(16	)	 	 	—	 	 	 	(1,197	)	
Level 3 assets, end of period	 	$	180,110	 	 	$	4,360	 	 	$	668	 	 	$	185,138	 	
 
 	 	Six months ended	 	
 	 	June 30, 2010	 	
Level 3 assets, beginning of period	 	$	2,010	 	
Warrants received and classified as Level 3	 	 	823	 	
Unrealized depreciation included in earnings	 	 	(488	)	
Other	 	 	(2	)	
Level 3 assets, end of period	 	$	2,343	 	

24

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
The total change in unrealized depreciation included in the consolidated statement of operations attributable to Level 3 investments still held at June 30, 2011 includes $399 depreciation on loans, $149 appreciation on warrants and $44 appreciation on equity investments.
 
The Company discloses fair value information about financial instruments, whether or not recognized in the statement of assets and liabilities, for which it is practicable to estimate that value. Certain financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
 
The fair value amounts have been measured as of the reporting date, and have not been reevaluated or updated for purposes of these financial statements subsequent to that date. As such, the fair values of these financial instruments subsequent to the reporting date may be different than amounts reported at year-end.
 
As of June 30, 2011 and December 31, 2010, the recorded book balances and fair values of the Company’s financial instruments were as follows:
 
 	 	June 30, 2011	 	 	December 31, 2010	 	
 	 	Recorded	 	 	 	 	 	Recorded	 	 	 	 	
 	 	Book	 	 	 	 	 	Book	 	 	 	 	
 	 	Balance	 	 	Fair Value	 	 	Balance	 	 	Fair Value	 	
Financial Assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Cash & cash equivalents	 	$	19,308	 	 	$	19,308	 	 	$	76,793	 	 	$	76,793	 	
Investments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt	 	$	180,110	 	 	$	180,110	 	 	$	130,234	 	 	$	130,234	 	
Warrants	 	$	4,853	 	 	$	4,853	 	 	$	6,225	 	 	$	6,225	 	
Equity	 	$	1,066	 	 	$	1,066	 	 	$	351	 	 	$	351	 	
Interest receivable	 	$	2,701	 	 	$	2,701	 	 	$	1,938	 	 	$	1,938	 	
Financial Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Borrowings	 	$	73,947	 	 	$	73,947	 	 	$	87,425	 	 	$	87,425	 	
Interest rate swap liability	 	$	99	 	 	$	99	 	 	$	258	 	 	$	258	 	
 
Off-balance-sheet instruments
 
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
 
Note 6. Borrowings
 
In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that the asset coverage, as defined in the 1940 Act, is at least 200% after such borrowings. As of June 30, 2011, the asset coverage for borrowed amounts was 273%.
 
The Company entered into a Revolving Credit Facility (the “Credit Facility”) with WestLB, AG, New York Branch (“WestLB”) effective March 4, 2008. The Credit Facility had a three year initial revolving term and on March 3, 2011 the revolving term ended. The balance will be amortized based on loan investment payments received through March 3, 2015. The interest rate is based upon the one-month LIBOR plus a spread of 2.50%. The rates at June 30, 2011 and December 31, 2010 were 2.69% and 2.76%, respectively, and the average rates for the six months ended June 30, 2011 and 2010 were 2.79%, and 2.72%, respectively.
 
The Credit Facility is collateralized by all loans and warrants held by Credit I and permits an advance rate of up to 75% of eligible loans held by Credit I. The Credit Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the Credit Facility to certain criteria for qualified loans, and includes portfolio company concentration limits as defined in the related loan agreement. The average amounts of borrowings were approximately $82,000 and $72,000 for the six months ended June 30, 2011 and 2010, respectively. At June 30, 2011 and December 31, 2010, the Company had borrowings outstanding of $73,947 and $87,425, respectively, on the Credit Facility.

25

 

Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
Note 7. Financial Instruments with Off-Balance-Sheet Risk
 
In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its borrowers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. 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 approximately $21,667 and $26,500 as of June 30, 2011 and December 31, 2010, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit. Commitments may also include a financial or non-financial milestone that has to be achieved before the commitment can be drawn. Commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
 
Note 8. Concentrations of Credit Risk
 
The Company’s loan portfolio consists primarily of loans to development-stage companies at various stages of development in the technology, life science, healthcare information and services and cleantech industries. Many of these companies may have relatively limited operating histories and also may experience variation in operating results. Many of these companies conduct business in regulated industries and could be affected by changes in government regulations. Most of the Company’s borrowers will need additional capital to satisfy their continuing working capital needs and other requirements, and in many instances, to service the interest and principal payments on the loans.
 
The largest loans may vary from year to year as new loans are recorded and repaid. The Company’s five largest loans represented approximately 26% and 31% of total loans outstanding as of June 30, 2011 and December 31, 2010, respectively. No single loan represents more than 10% of the total loans as of June 30, 2011 and December 31, 2010. Loan income, consisting of interest and fees, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately 24% and 18% of total loan interest and fee income for the six months ended June 30, 2011 and 2010, respectively.
 
Note 9: Interest Rate Swaps and Hedging Activities
 
On October 14, 2008, the Company entered into two interest rate swap agreements (collectively, the “Swap”) with WestLB, fixing the rate of $10 million at 3.58% and $15 million at 3.20% on the first advances of a like amount of variable rate Credit Facility borrowings. The $15 million interest rate swap expired in October 2010 and the $10 million interest rate swap will expire in October 2011. The objective of the Swap was to hedge the risk of changes in cash flows associated with the future interest payments on the first $25 million of the variable rate Credit Facility debt with a combined notional amount of $25 million.
 
During the six months ended June 30, 2011, approximately $159 of net unrealized appreciation from the Swap was recorded in the statement of operations, and approximately $169 of net realized losses from the Swap was recorded in the consolidated statement of operations.
 
Prior to the Company’s election to become a BDC, the Swap was designated as a hedging instrument and the Company applied cash flow hedge accounting. The Swap was recorded in the consolidated statement of assets and liabilities at fair value, and any related increases or decreases in the fair value were recognized within accumulated other comprehensive income.
 
Prior to the Company’s election to become a BDC, the Company assessed the effectiveness of the Swap on a quarterly basis. The Company had considered the impact of the current credit crisis in the United States in assessing the risk of counterparty default. As most of the critical terms of the hedging instruments and hedged items matched, the hedging relationship was considered to be highly effective. No ineffectiveness on the Swap was recognized during the six months ended June 30, 2010.
 
Note 10: Dividends and Distributions
 
The Company’s dividends and distributions are recorded on the record date.  The following table summarizes the Company’s dividend declaration and distribution activity during the six months ended June 30, 2011.

 	 	 	 	 	 	Amount	 	 	Cash	 	 	DRIP Shares	 	 	DRIP Share	 	
Date Declared	 	Record Date	 	Payment Date	 	Per Share	 	 	Distribution	 	 	Issued	 	 	Value	 	
5/10/11	 	5/19/11	 	5/26/11	 	$	0.33	 	 	$	2,190	 	 	 	20,104	 	 	$	316	 	

26

 
 
Horizon Technology Finance Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(In thousands, except shares and per share data)
 
Note 11: Subsequent Events
 
On July 14, 2011, the Company closed a new revolving credit facility with Wells Fargo Capital Finance, LLC (“Wells”) providing an initial commitment of $75 million. The credit facility has an accordion feature which allows for an increase in the total loan commitment to $150 million. In connection with the credit facility, the Company’s wholly owned subsidiary, Horizon Credit II, as borrower, entered into a Loan and Security Agreement (the “Loan and Security Agreement”) and, as buyer, entered into a Sale and Servicing Agreement (the “Sale and Servicing Agreement”, and together with the Loan and Security Agreement and various supporting documentation, the “Wells Facility”) whereby the Company will transfer certain loans it has originated or acquired, or will originate or acquire, from time to time, to Horizon Credit II.
 
The Wells Facility, among other things, provides for a three year revolving period followed by a three year amortization period and matures on July 14, 2017.   The Wells Facility generally bears interest based on LIBOR plus 4.00%, with a LIBOR floor of 1.00%. The Wells Facility requires the payment of an unused line fee of 0.375% annually and has a maximum advance rate of 50% against eligible loans. The Wells Facility will be secured by all of the assets of Horizon Credit II. We have made certain customary representations and warranties, and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities.
 
On August 9, 2011, the Company declared a second quarter dividend of $0.40 per share, payable on August 30, 2011 to stockholders of record on August 23, 2011.
 
Note 12: Financial Highlights
 
The financial highlights for the Company are as follows: (1)
 
 	 	Three months ended
June 30, 2011	 	 	Six months ended
June 30, 2011	 	
Per share data:	 	 	 	 	 	 	
Net asset value at beginning of period	 	$	17.23	 	 	$	16.75	 	
Dividends declared and paid	 	 	(0.33	)	 	 	(0.33	)	
Net investment income	 	 	0.26	 	 	 	0.55	 	
Realized gain on investments	 	 	0.70	 	 	 	0.73	 	
Net change in unrealized depreciation on investments	 	 	(0.46	)	 	 	(0.30	)	
Net asset value at end of period	 	$	17.40	 	 	$	17.40	 	
 	 	 	 	 	 	 	 	 	
Per share market value, end of period	 	$	15.83	 	 	$	15.83	 	
Total return based on average net asset value	 	 	11.6	%	 	 	11.5	%	
Shares outstanding at end of period	 	 	7,613,525	 	 	 	7,613,525	 	
Ratios to average net assets:	 	 	 	 	 	 	 	 	
Expenses without incentive fees	 	 	7.2	%(2)	 	 	7.8	%(2)	
Incentive fees	 	 	4.9	%(2)	 	 	3.3	%(2)	
Total expenses	 	 	12.1	%(2)	 	 	11.1	%(2)	
Net investment income without incentive fees	 	 	10.9	%(2)	 	 	9.8	%(2)	
Average net asset value	 	$	131,639	 	 	$	129,826	 	

(1)	Periods prior to becoming a public company are not presented in the financial highlights because the Company did not record assets at fair value, therefore the information would not be meaningful.	

(2)	Annualized.	

27

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
In this section, 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 . For periods prior to October 28, 2010, the consolidated financial statements and related footnotes reflect the performance of our predecessor, Compass Horizon Funding Company LLC, and its wholly owned subsidiary, Horizon Credit I LLC, both of which were formed in January 2008 and commenced operations in March 2008. Amounts are stated in thousands, except shares and per share data and where otherwise noted.
 
Overview
 
We are a specialty finance company that lends to and invests in development-stage companies in the technology, life science, healthcare information and services, and cleantech industries, which we refer to as our “Target Industries.” Our investment objective is to generate current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured loans, which we refer to as “Technology Loans,” to companies backed by established venture capital and private equity firms in our Target Industries, which we refer to as “Technology Lending.” We also selectively lend to publicly traded companies in our Target Industries.
 
We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, or the 1940 Act. As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing.
 
Compass Horizon Funding Company LLC, which we refer to as “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 shares are listed on The NASDAQ Global Market under the symbol “HRZN.”
 
Portfolio Composition and Investment Activity
 
As of June 30, 2011 and December 31, 2010, our loan portfolio consisted of 37 and 32 loans, respectively, which had an aggregate fair value of $180.1 million and $130.2 million, respectively. Our warrant portfolio had an aggregate fair value of $4.9 million and $6.2 million at June 30, 2011 and December 31, 2010, respectively.
 
The following table shows our portfolio by asset class as of June 30, 2011 and December 31, 2010.
 
 	 	June 30, 2011	 	 	December 31, 2010	 	
 	 	 	 	 	 	 	 	% of	 	 	 	 	 	 	 	 	% of	 	
 	 	# of	 	 	Fair	 	 	Total	 	 	# of	 	 	Fair	 	 	Total	 	
 	 	Investments	 	 	Value	 	 	Portfolio	 	 	Investments	 	 	Value	 	 	Portfolio	 	
 	 	($ in thousands)	 	
Secured term loans	 	 	36	 	 	$	178,482	 	 	 	96.0	%	 	 	31	 	 	$	127,949	 	 	 	93.5	%	
Equipment loans	 	 	1	 	 	 	1,628	 	 	 	0.8	%	 	 	1	 	 	 	2,285	 	 	 	1.6	%	
Total loans	 	 	37	 	 	 	180,110	 	 	 	96.8	%	 	 	32	 	 	 	130,234	 	 	 	95.1	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Warrants	 	 	48	 	 	 	4,853	 	 	 	2.6	%	 	 	43	 	 	 	6,225	 	 	 	4.6	%	
Equity	 	 	3	 	 	 	1,066	 	 	 	0.6	%	 	 	2	 	 	 	351	 	 	 	0.3	%	
Total	 	 	 	 	 	$	186,029	 	 	 	100.0	%	 	 	 	 	 	$	136,810	 	 	 	100.0	%	

28

 
 
Total portfolio investment activity for the periods ended June 30, 2011 and 2010 was as follows:
 
 	 	For the three months ended	 	 	For the six months ended	 	
 	 	June 30, 2011	 	 	June 30, 2010	 	 	June 30, 2011	 	 	June 30, 2010	 	
 	 	($ in thousands)	 	
Beginning portfolio	 	$	153,216	 	 	$	117,921	 	 	$	136,810	 	 	$	113,878	 	
New loan funding	 	 	51,000	 	 	 	47,417	 	 	 	79,833	 	 	 	60,517	 	
Less refinanced balances	 	 	(5,907	)	 	 	(9,833	)	 	 	(8,677	)	 	 	(10,908	)	
Net new loan funding	 	 	45,093	 	 	 	37,584	 	 	 	71,156	 	 	 	49,609	 	
Principal and stock payments received on investments	 	 	(6,348	)	 	 	(8,537	)	 	 	(14,107	)	 	 	(16,826	)	
Early pay-offs	 	 	(2,247	)	 	 	(3,454	)	 	 	(5,593	)	 	 	(3,454	)	
Accretion of loan fees	 	 	434	 	 	 	282	 	 	 	829	 	 	 	483	 	
New loan fees	 	 	(415	)	 	 	(422	)	 	 	(927	)	 	 	(517	)	
New equity investments	 	 	—	 	 	 	—	 	 	 	577	 	 	 	—	 	
Net depreciation on investments	 	 	(3,704	)	 	 	(366	)	 	 	(2,716	)	 	 	(165	)	
Ending portfolio	 	$	186,029	 	 	$	143,008	 	 	$	186,029	 	 	$	143,008	 	
 
We receive payments in our loan portfolio based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our loans prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period.
 
The following table shows our debt investments by industry sector as of June 30, 2011 and December 31, 2010:
 
 	 	June 30, 2011	 	 	December 31, 2010	 	
 	 	Loans at	 	 	Percentage	 	 	Loans at	 	 	Percentage	 	
 	 	Fair	 	 	of Total	 	 	Fair	 	 	of Total	 	
 	 	Value	 	 	Portfolio	 	 	Value	 	 	Portfolio	 	
 	 	($ in thousands)	 	
Life Science	 	 	 	 	 	 	 	 	 	 	 	 	
Biotechnology	 	$	33,330	 	 	 	18.5	%	 	$	30,470	 	 	 	23.4	%	
Medical Device	 	 	27,481	 	 	 	15.3	%	 	 	19,572	 	 	 	15.0	%	
Technology	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consumer-related Technologies	 	 	3,153	 	 	 	1.8	%	 	 	4,460	 	 	 	3.4	%	
Networking	 	 	1,628	 	 	 	0.9	%	 	 	2,285	 	 	 	1.8	%	
Semiconductors	 	 	9,713	 	 	 	5.4	%	 	 	—	 	 	 	0.0	%	
Software	 	 	22,100	 	 	 	12.3	%	 	 	8,745	 	 	 	6.7	%	
Data Storage	 	 	6,926	 	 	 	3.8	%	 	 	7,912	 	 	 	6.1	%	
Communications	 	 	6,136	 	 	 	3.4	%	 	 	7,591	 	 	 	5.9	%	
Cleantech	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Energy Efficiency	 	 	22,026	 	 	 	12.2	%	 	 	16,570	 	 	 	12.7	%	
Waste Recycling	 	 	4,870	 	 	 	2.7	%	 	 	2,363	 	 	 	1.8	%	
Healthcare Information and Services	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diagnostics	 	 	23,500	 	 	 	13.0	%	 	 	20,472	 	 	 	14.5	%	
Other Healthcare Related Services and Technologies	 	 	19,247	 	 	 	10.7	%	 	 	9,794	 	 	 	7.5	%	
Total	 	$	180,110	 	 	 	100.0	%	 	$	130,234	 	 	 	100.0	%	
 
The largest loans may vary from year to year as new loans are recorded and repaid. Our five largest loans represented approximately 26% and 31% of total loans outstanding as of June 30, 2011 and December 31, 2010, respectively. No single loan represented more than 10% of our total loans as of June 30, 2011 and December 31, 2010.
 
As of June 30, 2011 and December 31, 2010, interest receivable was $2.7 million and $1.9 million, respectively, which represents one month of accrued interest income on loans. The increase in the first half of 2011 was due to a larger loan portfolio relative to 2010.

29

 
 
Loan Portfolio Asset Quality
 
We use a credit rating system which rates each loan 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 or 1 represents a deteriorating credit quality and increased risk. The following table shows the classification of our loan portfolio by credit rating as of June 30, 2011 and December 31, 2010:
 
 	 	June 30, 2011	 	 	December 31, 2010	 	
 	 	Loans at	 	 	Percentage	 	 	Loans at	 	 	Percentage	 	
 	 	Fair	 	 	of Loan	 	 	Fair	 	 	of Loan	 	
 	 	Value	 	 	Portfolio	 	 	Value	 	 	Portfolio	 	
Credit Rating	 	($ in thousands)	 	
4	 	$	20,751	 	 	 	11.5	%	 	$	29,054	 	 	 	22.3	%	
3	 	 	147,237	 	 	 	81.8	%	 	$	94,200	 	 	 	72.3	%	
2	 	 	12,122	 	 	 	6.7	%	 	$	6,980	 	 	 	5.4	%	
1	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Total	 	$	180,110	 	 	 	100.0	%	 	$	130,234	 	 	 	100.0	%	
 
As of June 30, 2011 and December 31, 2010, our loan portfolio had a weighted average credit rating of 3.1 and 3.2, respectively. As of June 30, 2011 and December 31, 2010, no investments were on non-accrual status.
 
Consolidated Results of Operations for the three months ended June 30, 2011 and 2010
 
The consolidated results of operations set forth below include historical financial information of our predecessor, Compass Horizon, prior to our election to become a BDC and our election to be treated as a RIC. As a BDC and a RIC for U.S. federal income tax purposes, we are also subject to certain constraints on our operations, including limitations imposed by the 1940 Act and the Code. Also, the management fee that we pay to our Advisor under the Investment Management Agreement is determined by reference to a formula that differs materially from the management fee paid by Compass Horizon in prior periods. For these and other reasons, the results of operations described below may not be indicative of the results we report in future periods.
 
Consolidated operating results for the three months ended June 30, 2011 and 2010 are as follows:
 
 	 	For the three months ended June 30,	 	
 	 	2011	 	 	2010	 	
 	 	($ in thousands)	 	
Total investment income	 	$	5,970	 	 	$	4,270	 	
Total expenses	 	 	3,990	 	 	 	1,761	 	
 	 	 	 	 	 	 	 	 	
Net investment income	 	 	1,980	 	 	 	2,509	 	
Net realized gain (loss) on investments	 	 	5,355	 	 	 	(2	)	
Net unrealized depreciation on investments	 	 	(3,512	)	 	 	(364	)	
Credit for loan losses	 	 	—	 	 	 	116	 	
Net income	 	$	3,283	 	 	$	2,259	 	
Average debt investments, at fair value	 	$	168,189	 	 	$	123,576	 	
Average borrowings outstanding	 	$	82,233	 	 	$	78,539	 	
 
Net investment income for the three months ended June 30, 2011 was $2.0 million or $0.26 per share. Excluding the impact of the capital gains incentive fee expense of $0.9 million, net investment income totaled $2.9 million or $0.38 per share.

30

 
 
Investment Income
 
Investment income increased by $1.7 million, or 39.8%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. For the three months ended June 30, 2011, total investment income consisted primarily of $5.9 million in interest income from investments, which included $0.4 million in income from the amortization of discounts and origination fees on investments. Interest income on investments and other investment income increased primarily due to the increased average size of the loan portfolio. Fee income on investments was primarily comprised of prepayment fees from one of our portfolio companies. For the three months ended June 30, 2010, total investment income consisted primarily of $4.2 million in interest income from investments, which included $0.3 million in income from the amortization of discounts and origination fees on investments.  For the three months ended June 30, 2011 and 2010, our dollar-weighted average annualized yield on average loans was approximately 14.1% and 13.8%, respectively.
 
Investment income, consisting of interest income and fees on loans, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately 26% and 20% of investment income for the three months ended June 30, 2011 and 2010, respectively.
 
Expenses
 
Total expenses increased by $2.2 million, or 126.6%, to $4.0 million for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. Total operating expenses for each period consisted principally of management fees, incentive and administrative fees and interest expense and, to a lesser degree, professional fees and general and administrative expenses. Interest expense, which includes the amortization of debt issuance costs, decreased for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 primarily due to the end of our Credit Facility’s revolving term and the scheduled amortization of the remaining balance.
 
Effective with the completion of our initial public offering in October 2010, we pay management and incentive fees under the Investment Management Agreement, which provides a higher management fee base as compared to amounts previously paid by Compass Horizon. Management fee expense for the three months ended June 30, 2011 increased by approximately $0.5 million compared to the three months ended June 30, 2010 primarily due to the higher management fee base. Incentive fees for the three months ended June 30, 2011 totaled approximately $1.6 million compared to no incentive fees for the three months ended June 30, 2010.  The incentive fees for the three months ended June 30, 2011 consisted of approximately $0.7 million and $0.9 million for part one and part two of the incentive fee, respectively. In connection with the Administration Agreement, we incurred $0.2 million of administrative expenses for the three months ended June 30, 2011. We did not pay an administrative servicing fee for the three months ended June 30, 2010.
 
Professional fees and general and administrative expenses include legal and audit fees, insurance premiums, and miscellaneous other expenses. These expenses for the three months ended June 30, 2011 increased by approximately $0.5 million compared to the three months ended June 30, 2010 primarily due to the increased cost of being a public company.
 
Net Realized Gain (Loss) and Net Unrealized Appreciation (Depreciation)
 
During the three months ended June 30, 2011, and 2010 we recognized $5.4 million in net realized gain on investments and $0.02 million in net realized loss on investments, respectively. During the same periods, we had $3.5 million and $0.4 million in unrealized depreciation on investments, respectively. Net realized gain on investments resulted from the sale of stock through the exercise of warrants in portfolio companies. For both periods, the net increase in unrealized depreciation on investments was primarily from our warrant and equity investments. Net unrealized depreciation on warrants and equity investments is the difference between the net changes in fair values of warrant and equity investments fair values from the prior determination date and the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. The increase in net unrealized depreciation on investments for the three months ended June 30, 2011 is primarily due to the reversal of previously recorded unrealized appreciation on our warrant investments that were realized in the second quarter.

31

 
 
Consolidated operating results for the six months ended June 30, 2011 and 2010
 
 	 	For the six months ended June 30,	 	
 	 	2011	 	 	2010	 	
 	 	($ in thousands)	 	
Total investment income	 	$	11,430	 	 	$	8,063	 	
Total expenses	 	 	7,222	 	 	 	3,442	 	
Net investment income	 	 	4,208	 	 	 	4,621	 	
Net realized gain (loss) on investments	 	 	5,561	 	 	 	(2	)	
Net unrealized depreciation on investments	 	 	(2,318	)	 	 	(162	)	
Credit for loan losses	 	 	—	 	 	 	419	 	
Net income	 	$	7,451	 	 	$	4,876	 	
Average debt investments, at fair value	 	$	155,182	 	 	$	117,631	 	
Average borrowings outstanding	 	$	82,360	 	 	$	72,379	 	
 
Net investment income for the six months ended June 30, 2011 was $4.2 million or $0.55 per share. Excluding the impact of the capital gains incentive fee expense of $0.9 million, net investment income totaled $5.1 million or $0.67 per share.
 
Investment Income
 
Investment income increased by $3.4 million, or 41.8%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. For the six months ended June 30, 2011, total investment income consisted primarily of $10.8 million in interest income from investments, which included $0.8 million in income from the amortization of discounts and origination fees on investments. Interest income on investments and other investment income increased primarily due to the increased average size of the loan portfolio. Fee income on investments was primarily comprised of a one-time success fee received upon the completion of an acquisition of one of our portfolio companies. For the six months ended June 30, 2010, total investment income consisted primarily of $7.9 million in interest income from investments, which included $0.5 million in income from the amortization of discounts and origination fees on investments. For the six months ended June 30, 2011 and 2010, our dollar-weighted average annualized yield on average loans was approximately 14.6% and 13.7%, respectively.
 
Investment income, consisting of interest income and fees on loans, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately 24% and 18% of investment income for the six months ended June 30, 2011 and 2010, respectively.
 
Expenses
 
Total expenses increased by $3.8 million, or 109.8%, to $7.2 million for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. Total operating expenses for each period consisted principally of management fees, incentive and administrative fees and interest expense and, to a lesser degree, professional fees and general and administrative expenses. Interest expense, which includes the amortization of debt issuance costs, decreased for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 primarily due to the termination of our Credit Facility’s revolving term and the amortization of the remaining balance.
 
Effective with the completion of our initial public offering in October 2010, we pay management and incentive fees under the Investment Management Agreement, which provides a higher management fee base as compared to amounts previously paid by Compass Horizon. Management fee expense for the six months ended June 30, 2011 increased by approximately $1.0 million compared to the six months ended June 30, 2010 primarily due to the higher management fee base. Incentive fees for the six months ended June 30, 2011 totaled approximately $2.1 million compared to no incentives fees for the six months ended June 30, 2010. The incentive fees for the six months ended June 30, 2011 consisted of approximately $1.2 million and $0.9 million for part one and part two of the incentive fee, respectively. In connection with the Administration Agreement, we incurred $0.5 million of administrative expenses for the six months ended June 30, 2011. We did not pay an administrative servicing fee for the six months ended June 30, 2010.
 
Professional fees and general and administrative expenses include legal and audit fees, insurance premiums, and miscellaneous other expenses. These expenses for the six months ended June 30, 2011 increased by approximately $0.9 million compared to the six months ended June 30, 2010 primarily due to the increased cost of being a public company.

32

 
 
Net Realized Gain (Loss) and Net Unrealized Appreciation (Depreciation)
 
During the six months ended June 30, 2011 and 2010, we had $5.6 million in net realized gain on investments and $0.02 million in realized loss on investments, respectively. During the same periods, we had $2.3 million and $0.2 million in unrealized depreciation on investments, respectively. Net realized gain on investments resulted from the sale of stock through the exercise of warrants in portfolio companies. For both periods, the net increase in unrealized depreciation on investments was primarily from our warrant and equity investments. Net unrealized depreciation on warrants and equity investments is the difference between the net changes in warrant and equity investments fair values from the prior determination date and the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. The increase in net unrealized depreciation on investments for the six months ended June 30, 2011 is primarily due to the reversal of previously recorded unrealized appreciation on our warrant investments that were realized in the period offset by a net increase in the fair value of our investments.
 
Credit for Loan Losses
 
For the three and six months ended June 30, 2010, the credit for loan losses was $116 and $419 respectively. The loan portfolio had a weighted average credit rating of 3.1 as of June 30, 2010. See “Loan Portfolio Asset Quality.” As of the date of our election to be treated as a BDC on October 28, 2010, we no longer record a credit or provision for loan losses. We record each individual loan and investment on a quarterly basis at fair value. Changes in fair value are recorded through our statement of operations.
 
Liquidity and Capital Resources
 
As of June 30, 2011 and December 31, 2010, we had cash and cash equivalents of $19.3 million and $76.8 million, respectively. Cash and cash equivalents are available to fund new investments, reduce borrowings under the Credit Facility, pay operating expenses and pay dividends. To date, our primary sources of capital have been from our IPO, use of our Credit Facility and from the private placement for $50 million of equity capital completed on March 4, 2008.
 
The Credit Facility had a three year initial revolving term and on March 3, 2011 the revolving term ended. The balance as of June 30, 2011 of $73,947 will be amortized based on loan investment payments received through March 3, 2015.
 
Our operating activities used cash of $41.8 million for the six months ended June 30, 2011 and our financing activities provided net cash proceeds of $15.7 million for the same period. Our operating activities used cash primarily for investing in portfolio companies. Such cash was provided primarily from proceeds from our initial public offering and draws under the Credit Facility.
 
Our operating activities used cash of $24.6 million for the six months ended June 30, 2010 and our financing activities provided net cash proceeds of $27.1 million for the same period. Our operating activities used cash primarily for investing in portfolio companies that was provided primarily from our availability on our Credit Facility.
 
Our primary use of available funds will be investments in portfolio companies and cash distributions to holders of our common stock. After we have used our current capital resources, including the net proceeds from our initial public offering, we expect to opportunistically raise additional capital as needed, and subject to market conditions, to support our future growth through future equity offerings, issuances of senior securities and/or future borrowings, to the extent permitted by the 1940 Act.
 
In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders all or substantially all of our income except for certain net capital gains. In addition, as a BDC, we generally will be required to meet a coverage ratio of 200%. This requirement will limit the amount that we may borrow.
 
Current Borrowings
 
We, through our wholly owned subsidiary, Credit I, entered into the Credit Facility. Per this agreement, base rate borrowings bear interest at one-month LIBOR plus 2.50%. The rates were 2.69% and 2.76% as of June 30, 2011 and December 31, 2010, respectively.
 
We were able to request advances under the Credit Facility through March 4, 2011. We may not request new advances and we must repay the outstanding advances under the Credit Facility as of such date and at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Credit Facility, particularly the condition that the principal balance of the Credit Facility does not exceed seventy-five percent (75%) of the aggregate principal balance of our eligible loans to our portfolio companies. All outstanding advances under the Credit Facility are due and payable on March 4, 2015.

33

 
 
The Credit Facility is collateralized by loans held by Credit I and permitted an advance rate of up to 75% of eligible loans. The Credit Facility contains certain customary affirmative and negative covenants, including covenants that restrict certain of our subsidiaries’ ability to make loans to, or investments in, third parties, pay dividends and distributions, incur additional indebtedness and engage in mergers or consolidations. The Credit Facility also restricts certain of our subsidiaries’ and our Advisor’s ability to create liens on the collateral securing the Credit Facility, permit additional negative pledges on such collateral and change the business currently conducted by them. The Credit Facility contains events of default, including upon the occurrence of a change of control, and contains certain financial covenants that among other things, require Compass Horizon to maintain a minimum net worth, for the year 2010 and after, equal to the minimum net worth amount for 2009 plus 50% of Compass Horizon’s cumulative positive net income for the year 2010 on and after December 31, 2010, and require our Advisor to maintain a minimum net worth, for the year 2010 and after, equal to the greater of (i) $1 million or (ii) the 2009 minimum net worth amount plus 50% of the cumulative positive net income for each fiscal year. The Credit Facility also includes borrower concentration limits which include limitations on the amount of loans to companies in particular industries sectors and also restrict certain terms of the loans.
 
Future Borrowings
 
Wells Facility
 
On July 14, 2011, the Company closed a new revolving credit facility with Wells providing an initial commitment of $75 million. The credit facility has an accordion feature which allows for an increase in the total loan commitment to $150 million. In connection with the credit facility, Horizon Credit II, as borrower, entered into a Loan and Security Agreement and, as buyer, entered into a Sale and Servicing Agreement whereby the Company will transfer certain loans it has originated or acquired, or will originate or acquire, from time to time, to Horizon Credit II.
 
The Wells Facility, among other things, provides for a three year revolving period followed by a three year amortization period and matures on July 14, 2017.   The Wells Facility generally bears interest based on LIBOR plus 4.00%, with a LIBOR floor of 1.00%. The Wells Facility requires the payment of an unused line fee of 0.375% annually and has a maximum advance rate of 50% against eligible loans. The Wells Facility will be secured by all of the assets of Horizon Credit II. We have made certain customary representations and warranties, and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities.
 
SBA Debenture Program
 
We are currently seeking qualification as a small business investment company (“SBIC”) for Longview SBIC LP (“Longview SBIC”), a subsidiary, which will be licensed, leveraged and regulated by the U. S. Small Business Administration (“SBA”). The Company, on behalf of Longview SBIC, submitted an application to the SBA on December 6, 2010 for a license to operate as an SBIC (the “SBIC Application”) and the SBA accepted the SBIC Application for processing on December 21, 2010. On April 21, 2011, the SBA advised us that it required additional information in order to process the SBIC Application and provided the Company up to ninety days to provide the information. The Company submitted additional material in response to the SBA’s request in July.  The application remains in suspension pending the outcome of the SBA’s review.  We cannot be certain that the license to operate as an SBIC will be granted, and the failure to receive the license and SBA leverage could have a materially adverse impact on our business, results of operations and financial results.
 
If we receive approval to license an SBIC, we will have the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the Small Business Investment Act and the SBA rules applicable to SBICs, an SBIC can have outstanding at any time debentures guaranteed by the SBA generally in an amount up to twice its regulatory capital, which generally is the amount raised from private investors. The maximum statutory limit on the dollar amount of outstanding debentures guaranteed by the SBA issued by a single SBIC or group of SBICs under common control as of June 30, 2011, was $150 million (which amount is subject to increase on an annual basis based on cost of living index increases).
 
Interest Rate Swaps and Hedging Activities
 
In 2008, we entered into two interest rate swap agreements with WestLB, fixing the rate of $10 million at 3.58% and $15 million at 3.2% on the first advances of a like amount of variable rate Credit Facility borrowings. As of June 30, 2011, only the $10 million interest rate swap was still outstanding and expires in October 2011.

34

 
 
Contractual Obligations and Off-Balance Sheet Arrangements
 
A summary of our significant contractual payment obligations as of June 30, 2011 is as follows:
 
 	 	Payments due by period	 	
 	 	(in thousands)	 	
Contractual Obligations	 	Total	 	 	Less than 1
year	 	 	1 - 3 years	 	 	3 - 5 years	 	 	After 5
years	 	
Borrowings	 	$	73,947	 	 	$	30,903	 	 	$	43,044	 	 	$	—	 	 	$	—	 	
Unfunded commitments	 	 	21,667	 	 	 	16,167	 	 	 	5,500	 	 	 	—	 	 	 	—	 	
Total contractual obligations	 	$	95,614	 	 	$	47,070	 	 	$	48,544	 	 	$	—	 	 	$	—	 	
 
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, 2011, we had unfunded commitments of approximately $21.7 million. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
 
In addition to the Credit 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 — a base management fee and an incentive fee. Payments under the Investment Management Agreement are equal to (1) a base management fee equal to a percentage of the value of our average gross assets 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 obligation under the agreement, including rent, fees, and other expenses inclusive of our allocable portion of the compensation of our chief financial officer and any administrative staff. 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 as a RIC and to avoid corporate level tax on the income we distribute to our stockholders, we are required under the Code to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our net stockholders on an annual basis. Additionally, we must distribute at least 98% of our ordinary income and 98% (or, for our taxable years beginning in 2011, 98.2%) of our capital gain net income on an annual basis and any net ordinary income and net capital gains for preceding years that were not distributed during such years and on which we previously paid no U.S. federal income tax to avoid a U.S. federal excise tax. We intend to distribute quarterly dividends to our stockholders as determined by our Board.
 
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including the possible loss of our qualification as a RIC. We cannot assure stockholders that they will receive any distributions.
 
To the extent our taxable earnings fall below the total amount of our distributions for that fiscal 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 read any written disclosure accompanying a dividend 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 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 dividend reinvestment plan. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our dividend reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.

35

 
 
Critical Accounting Policies
 
The discussion of our financial condition and results of operation is based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.” The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we describe our significant accounting policies in the notes to our consolidated financial statements.
 
We have identified the following items as critical accounting policies.
 
Valuation of Investments
 
Investments are recorded at fair value. Our Board determines the fair value of our portfolio investments. Prior to our election to become a BDC, loan investments were stated at current unpaid principal balances adjusted for the allowance for loan losses, unearned income and any unamortized deferred fees or costs.
 
We apply fair value to substantially all of our investments in accordance with relevant GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. We have categorized our investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
 
The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. The three categories within the hierarchy are as follows:

 	Level 1	Quoted prices in active markets for identical assets and liabilities.	
 
 	Level 2	Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active and model-based valuation techniques for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.	
 
 	Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.	
 
See Note 5 Fair Value to the Consolidated Financial Statements for further information regarding fair value.
 
Income Recognition
 
Interest on loan 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. When a loan becomes 90 days or more past due, or if we otherwise do not expect to receive interest and principal repayments, the loan is placed on non-accrual status and the recognition of interest income is discontinued. Interest payments received on loans that are on non-accrual status are treated as reductions of principal until the principal is repaid. No loans were on non-accrual status as of June 30, 2011 and December 31, 2010.
 
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 and prepayment fees. In a limited number of cases, we may also receive a non-refundable deposit earned upon the termination of a transaction. Loan origination fees, net of certain direct origination costs, are deferred, and along with unearned income, are amortized as a level yield adjustment over the respective term of the loan. Fees for counterparty loan commitments with multiple loans are allocated to each loan based upon each loan’s relative fair value. When a loan is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the loan is returned to accrual status.
 
Certain loan agreements also require the borrower to make an end-of-term payment that is accrued into income over the life of the loan 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. The warrants are recorded as assets at estimated fair value on the grant date using the Black-Scholes valuation model. The warrants are considered loan fees and are also recorded as unearned loan income on the grant date. The unearned income is recognized as interest income over the contractual life of the related loan in accordance with our income recognition policy. Subsequent to loan origination, the warrants are also measured at fair value using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss on warrants. Gains from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains on warrants.

36

 
 
Allowance for Loan Losses
 
Prior to our election to become a BDC, the allowance for loan losses represented management’s estimate of probable loan losses inherent in the loan portfolio as of the balance sheet date. The estimation of the allowance was based on a variety of factors, including past loan loss experience, the current credit profile of our borrowers, adverse situations that had occurred that may affect individual borrowers’ ability to repay, the estimated value of underlying collateral and general economic conditions. The loan portfolio is comprised of large balance loans that are evaluated individually for impairment and are risk-rated based upon a borrower’s individual situation, current economic conditions, collateral and industry-specific information that management believes is relevant in determining the potential occurrence of a loss event and in measuring impairment. The allowance for loan losses was sensitive to the risk rating assigned to each of the loans and to corresponding qualitative loss factors that we used to estimate the allowance. Those factors were applied to the outstanding loan balances in estimating the allowance for loan losses. If necessary, based on performance factors related to specific loans, specific allowances for loan losses were established for individual impaired loans. Increases or decreases to the allowance for loan losses were charged or credited to current period earnings through the provision (credit) for loan losses. Amounts determined to be uncollectible were charged against the allowance for loan losses, while amounts recovered on previously charged-off loans increased the allowance for loan losses.
 
A loan was considered impaired when, based on current information and events, it was probable that we were unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment was measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan was collateral dependent.
 
Impaired loans also included loans modified in troubled debt restructurings where concessions had been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
 
Income taxes
 
We have elected to be treated as a RIC under subchapter M of the Code and to operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, we are required to meet certain source of income and asset diversification requirements and we must timely distribute to our stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. We, among other things, have made and intend to continue to make the requisite distributions to our stockholders, which will generally relieve us from 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 dividend distributions into the next tax year and pay 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 dividend distributions, we will accrue excise tax, if any, on estimated excess taxable income as taxable income is earned. For the six months ended June 30, 2011 no amount was recorded for U.S. federal excise tax.
 
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. 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 our policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. There were no material uncertain tax positions at June 30, 2011 and December 31, 2010.
 
Prior to our election to become a BDC, we were a limited liability company treated as a partnership for U.S. federal income tax purposes and, as a result, all items of income and expense were passed through to, and are generally reportable on, the tax returns of the respective members of the limited liability company. Therefore, no federal or state income tax provision has been recorded for the six months ended June 30, 2010.

37

 
 
Recently Issued Accounting Standards
 
In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosure — Improving Disclosures about Fair Value Measurements, which amends the existing guidance related to fair value measurements and disclosures. The amendments require the following new fair value disclosures:

 	·	Separate disclosure of the significant transfers in and out of Level 1 and Level 2 fair value measurements, and a description of the reasons for the transfers.	

 	·	In the roll forward of activity for Level 3 fair value measurements (significant unobservable inputs), purchases, sales, issuances and settlements should be presented separately (on a gross basis rather than as one net number).	

In addition, the amendments clarify existing disclosure requirements, as follows:

 	·	Fair value measurements and disclosures should be presented for each class of assets and liabilities within a line item in the balance sheet.	

 	·	Reporting entities should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3.	
 
The new disclosures and clarifications of existing disclosures were effective for our interim and annual reporting periods during the year ended December 31, 2010, except for the disclosures included in the roll forward of activity for Level 3 fair value measurements,  which became effective beginning in the first quarter of 2011.

38

 

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 loans within our portfolio were all at fixed rates and we expect that our loans in the future will also have primarily fixed interest rates. The initial commitments to lend to our portfolio companies are usually based on a floating LIBOR index and typically have interest rates that are fixed at the time of the loan funding and remain fixed for the term of the loan.
 
Assuming that the balance sheet as of June 30, 2011 was to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% change in interest rates may affect net income by more than 1% over a one-year horizon. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement above.
 
Our Credit Facility has a floating interest rate provision based on a LIBOR index which resets daily, and we expect that, other than any SBIC debenture program debt, 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 swaps, futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.
 
Because we currently fund, and will 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 would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by floating rate assets in our investment portfolio.
 
Item 4: Controls and Procedures.
 
(a) Evaluation of Disclosure Controls and Procedures
 
As of June 30, 2011, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our management, including the 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) of the Exchange Act) during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Part II — Other Information
 
Item 1: Legal Proceedings.
 
Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, we are currently not a party to any pending material legal proceedings.

39

 
 
Item 1A: Risk Factors.
 
In addition to other information set forth in this report, you should carefully consider the “Risk Factors” discussed in our Annual Report on Form 10-K for the year ended December 31, 2010, 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, 2011 to the risk factors discussed in “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2010.
 
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.
 
Item 3: Defaults Upon Senior Securities.
 
None.
 
Item 4: Removed and Reserved.
 
Item 5: Other Information.
 
None.
 
Item 6: Exhibits.
 
EXHIBIT INDEX
 
Number	 	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*	
 	 	 	
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*	
 	 	 	
32.1	 	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*	
 	 	 	
32.2	 	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*	

*      - Filed herewith

40

 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, 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: August 10, 2011	By:	/s/ Robert D. Pomeroy, Jr.	
 	 	Name:	Robert D. Pomeroy, Jr.	
 	 	Title:	Chief Executive Officer and
Chairman of the Board	
 	 	 	
Date: August 10, 2011	By:	/s/ Christopher M. Mathieu	
 	 	Name:	Christopher M. Mathieu	
 	 	Title:	Chief Financial Officer and Treasurer	

41

 

Exhibit 31.1
 
Certification of Chief Executive Officer
of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
 
I, Robert D. Pomeroy, Jr., as Chairman of the Board and Chief Executive Officer of Horizon Technology Finance Corporation and Subsidiaries, certify that:
 
1) I have reviewed this quarterly report on Form10-Q of Horizon Technology Finance Corporation and Subsidiaries;
 
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4) The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15 (e)) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) [omitted]
 
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5) The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board (or persons performing the equivalent functions):
 
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: August 10, 2011
 
By:	/s/ Robert D. Pomeroy, Jr.	 	
 	Name:	Robert D. Pomeroy, Jr.	 	
 	Title:	Chief Executive Officer and Chairman of
the Board	 	

 

 

Exhibit 31.2
 
Certification of Chief Financial Officer
of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
 
I, Christopher M. Mathieu, Chief Financial Officer of Horizon Technology Finance Corporation and Subsidiaries, certify that:
 
1) I have reviewed this quarterly report on Form10-Q of Horizon Technology Finance Corporation and Subsidiaries;
 
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4) The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15 (e)) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) [omitted]
 
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5) The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board (or persons performing the equivalent functions):
 
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: August 10, 2011
 
By:	/s/ Christopher M. Mathieu	 	
 	Name:	Christopher M. Mathieu	 	
 	Title:	Chief Financial Officer and Treasurer	 	

 

 

Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Horizon Technology Finance Corporation and Subsidiaries, (the “Company”) for the quarterly period ended June 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert D. Pomeroy, Jr., as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

 	(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	

 	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.	
 
Date: August 10, 2011	/s/ Robert D. Pomeroy, Jr.	
 	Robert D. Pomeroy, Jr.	
 	Chief Executive Officer	

 

 

Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Horizon Technology Finance Corporation and Subsidiaries, (the “Company”) for the quarterly period ended June 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher M. Mathieu, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

 	(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	

 	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.	
 
Date: August 10, 2011	/s/ Christopher M. Mathieu	
 	Christopher M. Mathieu	
 	Chief Financial Officer