Horizon Technology Finance(HRZN) - 2025 Q2 - Quarterly Report

markdown [PART I: FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) [Item 1. Consolidated Financial Statements](index=4&type=section&id=Item%201%2E%20Consolidated%20Financial%20Statements) This section presents the unaudited consolidated financial statements for Horizon Technology Finance Corporation, detailing financial position, operational results, cash flows, and investment schedules for the periods ended June 30, 2025, showing overall decreases in assets and net asset value [Consolidated Statements of Assets and Liabilities](index=4&type=section&id=Consolidated%20Statements%20of%20Assets%20and%20Liabilities) As of June 30, 2025, total assets decreased to **$726.8 million** from **$821.8 million** at December 31, 2024, primarily due to reduced fair value of investments, leading to a decline in total net assets to **$283.8 million** and net asset value per common share to **$6.75** Consolidated Assets and Liabilities (in thousands) | Financial Metric | June 30, 2025 (Unaudited) | December 31, 2024 | | :--- | :--- | :--- | | **Total Investments at Fair Value** | $622,653 | $697,891 | | **Total Assets** | $726,797 | $821,833 | | **Total Liabilities** | $443,002 | $485,650 | | **Total Net Assets** | $283,795 | $336,183 | | **Net Asset Value Per Common Share** | $6.75 | $8.43 | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) For the three months ended June 30, 2025, total investment income decreased to **$24.5 million**, with net investment income declining to **$11.4 million**, and a net decrease in net assets from operations of **$20.8 million** due to significant net realized and unrealized losses Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | **Total Investment Income** | $24,520 | $25,678 | $49,036 | $51,807 | | **Total Expenses** | $12,698 | $12,407 | $26,117 | $25,551 | | **Net Investment Income** | $11,449 | $12,914 | $22,169 | $25,520 | | **Net Realized and Unrealized Loss** | $(32,226) | $(22,047) | $(64,382) | $(25,999) | | **Net Decrease in Net Assets from Operations** | $(20,777) | $(9,133) | $(42,213) | $(479) | | **Net Investment Income Per Share - Basic** | $0.28 | $0.36 | $0.54 | $0.74 | | **Net Decrease in Net Assets Per Share - Basic** | $(0.50) | $(0.26) | $(1.04) | $(0.01) | [Consolidated Statements of Changes in Net Assets](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Net%20Assets) The company's net assets decreased from **$336.2 million** at year-end 2024 to **$283.8 million** as of June 30, 2025, primarily due to a net decrease from operations and distributions declared, partially offset by common stock issuances - Net assets decreased by **$52.4 million** in the first six months of 2025, from **$336.2 million** to **$283.8 million**[13](index=13&type=chunk) - Key activities affecting net assets in the first six months of 2025 include a **$42.2 million** net decrease from operations, **$27.4 million** in distributions declared, and **$17.2 million** raised from stock issuances (including for debt extinguishment and dividend reinvestment)[13](index=13&type=chunk)[14](index=14&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2025, net cash provided by operating activities was **$36.4 million**, a decrease from the prior year, while net cash used in financing activities was **$56.1 million**, resulting in a net decrease in cash of **$19.7 million** Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2025 | 2024 | | :--- | :--- | :--- | | **Net Cash Provided by Operating Activities** | $36,417 | $58,330 | | **Net Cash Used in Financing Activities** | $(56,134) | $(17,178) | | **Net (Decrease) Increase in Cash** | $(19,717) | $41,152 | | **Cash, Cash Equivalents and Restricted Cash, End of Period** | $81,151 | $116,874 | - Non-cash financing activities for the six months ended June 30, 2025, included the conversion of **$12.5 million** of debt into common stock[16](index=16&type=chunk) [Consolidated Schedules of Investments](index=9&type=section&id=Consolidated%20Schedules%20of%20Investments) As of June 30, 2025, the total investment portfolio fair value was **$622.7 million**, primarily composed of debt investments, with concentrations in Life Science, Technology, and Healthcare Information & Services sectors, detailing each investment's cost, fair value, interest rate, and maturity Total Portfolio Investment Assets (in thousands) | Date | Cost | Fair Value | | :--- | :--- | :--- | | **June 30, 2025** | $745,848 | $622,653 | | **December 31, 2024** | $766,774 | $697,891 | Portfolio Composition by Fair Value as of June 30, 2025 (in thousands) | Investment Type | Fair Value | % of Net Assets | | :--- | :--- | :--- | | **Non-Affiliate Debt Investments** | $578,370 | 203.8% | | **Non-Affiliate Warrant Investments** | $21,629 | 7.6% | | **Non-Affiliate Equity** | $5,492 | 1.9% | | **Non-Controlled Affiliate Investments** | $6,707 | 2.4% | | **Controlled Affiliate Investments** | $10,455 | 3.7% | | **Total Portfolio** | **$622,653** | **219.4%** | [Notes to the Consolidated Financial Statements](index=35&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) This section details accounting policies and financial data, covering organization, related party transactions, investment and borrowing breakdowns, fair value measurement, and significant subsequent events [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=56&type=section&id=Item%202%2E%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and operational results, highlighting decreased investment income, portfolio changes, liquidity, and key subsequent events including a merger agreement - The company's investment objective is to maximize total return by generating current income from debt investments and capital appreciation from warrants in development-stage companies within its Target Industries (technology, life science, healthcare information and services, and sustainability)[237](index=237&type=chunk) - As of June 30, 2025, **93.9%** of the debt investment portfolio at fair value consisted of Senior Term Loans[237](index=237&type=chunk) - The company has elected to be regulated as a Business Development Company (BDC) and treated as a Regulated Investment Company (RIC) for tax purposes, allowing it to avoid corporate-level income tax by distributing at least **90%** of its taxable income[238](index=238&type=chunk)[336](index=336&type=chunk) [Portfolio Composition and Investment Activity](index=58&type=section&id=Portfolio%20Composition%20and%20Investment%20Activity) As of June 30, 2025, the total portfolio fair value was **$622.7 million**, with debt investments comprising **93.0%**, and the portfolio's weighted average credit rating slightly decreased from 3.1 to 3.0 Portfolio Composition by Fair Value (in thousands) | Investment Type | June 30, 2025 | % of Total | Dec 31, 2024 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Debt investments | $579,171 | 93.0% | $638,779 | 91.5% | | Warrants | $21,629 | 3.5% | $18,277 | 2.6% | | Other investments | $8,451 | 1.4% | $14,637 | 2.1% | | Equity | $13,402 | 2.1% | $26,198 | 3.8% | | **Total** | **$622,653** | **100.0%** | **$697,891** | **100.0%** | Debt Investment Credit Rating by Fair Value (in thousands) | Credit Rating | June 30, 2025 | % of Debt Portfolio | Dec 31, 2024 | % of Debt Portfolio | | :--- | :--- | :--- | :--- | :--- | | 4 (Highest Quality) | $70,411 | 12.2% | $159,944 | 25.1% | | 3 (Standard Risk) | $467,726 | 80.8% | $419,621 | 65.7% | | 2 (Increased Risk) | $14,125 | 2.4% | $48,760 | 7.6% | | 1 (Highest Risk) | $26,909 | 4.6% | $10,454 | 1.6% | | **Total** | **$579,171** | **100.0%** | **$638,779** | **100.0%** | [Consolidated Results of Operations](index=60&type=section&id=Consolidated%20Results%20of%20Operations) For Q2 2025, total investment income fell **4.5%** YoY to **$24.5 million**, and net investment income decreased to **$11.4 million**, resulting in a net decrease in net assets of **$20.8 million** for the quarter due to realized and unrealized losses - For Q2 2025, total investment income decreased by **$1.2 million** YoY, primarily due to a decrease in the Prime Rate, which is the base rate for most of the company's variable rate debt investments[251](index=251&type=chunk)[252](index=252&type=chunk) - Interest expense for Q2 2025 increased by **$0.3 million** YoY to **$8.2 million**, mainly due to a higher effective cost of debt, partially offset by a slight decrease in average borrowings[259](index=259&type=chunk) - The Incentive Fee Cap and Deferral Mechanism reduced the performance-based incentive fee expense by **$2.3 million** in Q2 2025 and **$4.4 million** in the first six months of 2025[261](index=261&type=chunk)[278](index=278&type=chunk) - For Q2 2025, the company realized a net loss of **$9.3 million**, primarily from the settlement of two debt investments, and recorded net unrealized depreciation of **$22.2 million**, driven by markdowns on seven debt investments[264](index=264&type=chunk)[265](index=265&type=chunk) [Liquidity and Capital Resources](index=64&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2025, the company had **$77.9 million** in cash and money market funds, with total borrowings outstanding of **$425.1 million**, and believes its current liquidity is sufficient to meet commitments for at least the next 12 months - As of June 30, 2025, the company had **$77.9 million** in cash and investments in money market funds, down from **$97.5 million** at year-end 2024[283](index=283&type=chunk) Borrowings Outstanding (in thousands) | Facility/Note | June 30, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Key Facility | $— | $— | | NYL Facility | $181,000 | $181,000 | | Nuveen Facility | $90,000 | $75,000 | | 2022 Asset-Backed Notes | $34,169 | $81,078 | | 2027 Notes | $57,500 | $57,500 | | 2026 Notes | $57,500 | $57,500 | | 2031 Convertible Notes | $7,500 | $20,000 | | **Total Borrowings (Net)** | **$425,138** | **$467,904** | - During the six months ended June 30, 2025, the company sold **404,305 shares** under its ATM program, raising net proceeds of approximately **$3.6 million**[286](index=286&type=chunk) - As of June 30, 2025, the company had unfunded commitments to extend credit totaling **$149.0 million**[210](index=210&type=chunk)[330](index=330&type=chunk) [Recent Developments](index=71&type=section&id=Recent%20Developments) Subsequent to quarter-end, the company engaged in significant activities including warrant exercises, convertible note conversions, principal prepayments, an increased stock repurchase authorization, and a merger agreement with Monroe Capital Corporation - **Merger Agreement:** On August 7, 2025, the company entered into a merger agreement with Monroe Capital Corporation (MRCC), where MRCC will merge into the company, subject to shareholder approvals and other conditions[230](index=230&type=chunk)[366](index=366&type=chunk) - **Portfolio Activity:** Received prepayments totaling **$30.2 million** from Noodle Partners, Pivot Bio, and Native Microbials in July 2025[225](index=225&type=chunk)[226](index=226&type=chunk)[227](index=227&type=chunk) - **Capital Activity:** Converted **$3.75 million** of 2031 Convertible Notes into **496,256 shares** of common stock on July 10, 2025[224](index=224&type=chunk)[360](index=360&type=chunk) - **Stock Repurchase Program:** On August 5, 2025, the Board increased the stock repurchase authorization from **$5 million** to **$10 million**[228](index=228&type=chunk)[364](index=364&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=73&type=section&id=Item%203%2E%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is primarily exposed to interest rate risk, with **99%** of its debt investments having floating rates, and a sensitivity analysis indicates a **$4.1 million** annual increase in net assets for a 100 basis point rate increase, while also acknowledging risks from inflation, market volatility, and supply chain disruptions - As of June 30, 2025, **99%** of the company's debt investments bore interest at floating rates, making its income sensitive to changes in interest rates[367](index=367&type=chunk) Annual Impact of Interest Rate Changes on Net Assets (in thousands) | Change in Basis Points | Change in Net Assets (1) | | :--- | :--- | | Up 300 basis points | $15,941 | | Up 100 basis points | $4,145 | | Down 100 basis points | $(1,709) | | Down 300 basis points | $(3,726) | (1) Excludes the impact of incentive fees - The company acknowledges risks from inflation, market volatility, and supply chain issues, which could affect the profit margins of its portfolio companies[373](index=373&type=chunk) [Item 4. Controls and Procedures](index=74&type=section&id=Item%204%2E%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting during the quarter - As of June 30, 2025, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[374](index=374&type=chunk) - No material changes were made to the company's internal control over financial reporting during the quarter ended June 30, 2025[375](index=375&type=chunk) [PART II: OTHER INFORMATION](index=74&type=section&id=PART%20II%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=74&type=section&id=Item%201%2E%20Legal%20Proceedings) The company is not currently subject to any material legal proceedings, nor is it aware of any material legal proceedings being threatened against it - The company reports no current material legal proceedings against it[376](index=376&type=chunk) [Item 1A. Risk Factors](index=74&type=section&id=Item%201A%2E%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to the risk factors disclosed in the 2024 Form 10-K have occurred during the six months ended June 30, 2025[377](index=377&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=75&type=section&id=Item%202%2E%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports that there were no unregistered sales of equity securities during the period - None[378](index=378&type=chunk) [Item 3. Defaults Upon Senior Securities](index=75&type=section&id=Item%203%2E%20Defaults%20Upon%20Senior%20Securities) This section reports that there were no defaults upon senior securities during the period - None[379](index=379&type=chunk) [Item 5. Other Information](index=75&type=section&id=Item%205%2E%20Other%20Information) During the fiscal quarter ended June 30, 2025, none of the company's directors or executive officers adopted or terminated any Rule 10b5-1 trading plans or any non-Rule 10b5-1 trading arrangements - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans during the quarter ended June 30, 2025[380](index=380&type=chunk) [Item 6. Exhibits](index=75&type=section&id=Item%206%2E%20Exhibits) This section provides an index of the exhibits filed with the Form 10-Q, including amendments to credit agreements, certifications by the CEO and CFO, and XBRL data files