Executive Summary / Key Takeaways

• Horizon Technology Finance is undergoing a transformative merger with Monroe Capital Corporation (MRCC), expected to close in early 2026, which will significantly boost its capital base by an estimated $165 million in incremental equity and enhance its scale to approximately $446 million in combined net asset value.
• The merger is a strategic pivot to originate larger venture loans to top early-stage, late-stage, and public small-cap companies, leveraging Monroe Capital's support and new origination talent, aiming for EPS neutrality in the first year post-merger with potential for further accretion.
• HRZN maintains a high-yielding debt portfolio, achieving 18.6% in Q3 2025, significantly above its historical average, driven by its specialized venture lending model, including fee income from prepayments and Payment-in-Kind (PIK) interest.
• Despite a challenging macro environment marked by tariff uncertainty and valuation pressures, particularly in life sciences, HRZN has demonstrated resilience through successful outcomes with stressed assets and a robust pipeline of $1.4 billion in opportunities.
• The company's strong liquidity and conservative debt structure, with nearly 60% of floating-rate debt investments at their interest rate floors, position it to manage interest rate fluctuations and fund future growth, targeting a net leverage ratio of 1.2x to 1.3x.

Setting the Stage: A Specialty Lender's Evolution in Dynamic Markets

Horizon Technology Finance Corporation (HRZN) operates as a specialty finance company, carving out a niche in the business development company (BDC) landscape by focusing on secured debt investments, or "Venture Loans." Established in March 2010 and publicly listed in October 2010, HRZN's core mission has consistently been to maximize total return for shareholders by generating current income from these debt investments and capital appreciation from warrants received. The company targets development-stage companies across high-growth sectors: technology, life science, healthcare information and services, and sustainability. This specialized focus positions HRZN as a critical capital provider in an ecosystem often characterized by rapid innovation and significant funding needs.

HRZN's strategic approach to venture lending is characterized by several key elements. It typically provides secured debt, often in the form of first liens or first liens behind secured revolving lines of credit, to companies backed by venture capital or private equity. This structure prioritizes repayment of the Venture Loan ahead of equity investors. The loans are generally amortized, and HRZN often receives warrants or other success fees, providing an equity upside potential. This model is particularly vital for early-stage companies seeking to extend their liquidity runways, especially when traditional equity financing options are constrained.

The broader industry landscape for venture capital and debt has been dynamic. After a period of significant stress in 2023 and early 2024, marked by tightened capital availability, a muted IPO and M&A market, and pressure on portfolio company valuations, the venture capital market showed signs of warming up in Q3 2025. Approximately $81 billion was invested in VC-backed companies in Q3 2025, largely driven by significant investments in artificial intelligence (AI). Exit markets also saw an uptick, with about $75 billion in exit value, primarily from tech IPOs, indicating a renewed investor appetite. However, the life sciences sector continues to grapple with valuation disconnects and compression, limiting its IPO potential. Geopolitical factors, including tariff-related uncertainty, have also introduced volatility, causing some transactions to stall despite nearing completion.

The Technological Edge: HRZN's Differentiated Lending Model

As a financial services company, HRZN's "technological differentiation" lies not in developing proprietary hardware or software, but in its sophisticated approach to financing technology-driven companies and its specialized financial products. This constitutes its core "technology" in the venture lending space.

HRZN's specialized lending model is finely tuned to the unique needs and risk profiles of development-stage technology and life science companies. Its venture loans, which combine secured debt with warrants or end-of-term payments (ETPs), are designed to provide crucial capital while allowing HRZN to participate in the potential upside of successful ventures. This model offers tangible benefits: for borrowers, it provides non-dilutive capital compared to equity raises, extending their operational runway; for HRZN, the secured nature of the debt mitigates risk, while warrants offer a valuable equity kicker.

The company's underwriting and sector expertise in complex, rapidly evolving tech and life science sectors is a significant differentiator. HRZN's ability to assess the viability of cutting-edge technologies, evaluate the strength of venture capital sponsors, and structure appropriate financing solutions is a critical competitive advantage. This expertise allows HRZN to identify promising ventures in areas like AI and defense technology, as well as biotech drug development, where the cost of development is decreasing due to technological advancements.

Furthermore, HRZN's flexible financing solutions, including floating interest rates with floors, PIK interest, and ETPs, provide both stability and upside. The floating-rate nature of nearly 100% of its debt investments allows HRZN to benefit from rising interest rates, while interest rate floors (with almost 60% of debt investments at their floors as of September 30, 2025) mitigate the impact of decreasing rates. PIK interest allows companies to defer cash interest payments, preserving liquidity, while ETPs provide a fixed, contractual payment at maturity. These features are crucial in supporting portfolio companies through their development cycles and optimizing HRZN's returns.

The company actively integrates broad industry trends into its investment strategy. For instance, the surge in AI-driven data center demand creates opportunities for HRZN's cleantech investments, particularly in sustainable energy solutions. In life sciences, the impending patent cliff for an estimated $50 billion of drugs by 2030 for big pharma companies is expected to drive significant M&A activity for new drug candidates from biotech companies, a trend HRZN is well-positioned to capitalize on.

Competitive Positioning: A Niche Leader Expanding its Reach

HRZN operates in a competitive landscape populated by other BDCs and alternative lenders. Its primary direct competitors include Hercules Capital (HTGC), TriplePoint Venture Growth BDC Corp (TPVG), Main Street Capital Corporation (MAIN), and Ares Capital Corporation (ARCC).

HRZN's niche specialization in venture lending for tech, life science, and cleantech companies provides a distinct competitive advantage. While HTGC and TPVG also focus on venture debt in tech and life sciences, HRZN's explicit emphasis on cleantech, particularly in areas influenced by AI-driven data center growth, offers a qualitative edge in a growing, specialized market. HRZN's strategy prioritizes secured debt and conservative lending practices, which may lead to greater stability and potentially better operational execution compared to TPVG's more growth-focused approach. This focus on risk mitigation, coupled with its specialized network, can translate into stronger customer loyalty and potentially superior margins through targeted investments.

Against larger, more diversified BDCs like MAIN and ARCC, HRZN's offerings are more specialized, allowing it to provide tailored solutions to early-stage, high-growth companies. While MAIN and ARCC benefit from broader diversification and scale, HRZN's deeper sector expertise and agility in innovative markets are key strengths. However, HRZN's smaller scale and more concentrated portfolio can also be a vulnerability, making it more susceptible to sector-specific downturns compared to its larger, more diversified peers. The ongoing spread compression in the market, particularly in the "flight to quality," is a competitive pressure that HRZN manages by focusing on high-quality opportunities and optimizing its lending structures.

The upcoming merger with MRCC is a game-changer for HRZN's competitive standing. This strategic move is designed to establish HRZN as a leading, well-capitalized venture debt and growth capital provider with enhanced scale and specialization. The increased capital base will allow HRZN to hold larger positions and pursue "substantially larger" deals, directly addressing a previous limitation. The support from Monroe Capital and the addition of new originators are expected to deepen its origination channels and strengthen its credit governance, enabling it to compete more effectively for high-quality opportunities and accelerate its growth trajectory.

Financial Performance and Operational Momentum

HRZN's financial performance in recent periods reflects both the challenges of the macro environment and the strategic initiatives undertaken. For the three months ended September 30, 2025, total investment income increased by $1.8 million, or 7.1%, to $26.3 million. This growth was primarily driven by a $1.1 million (4.8%) increase in interest income from debt investments, largely due to the recognition of previously unrecorded interest income from the settlement of two non-accrual debt investments. Fee income also saw a significant boost, rising by $0.6 million (46.7%) to $2 million, mainly from higher aggregate principal prepayments. Payment-in-Kind (PIK) interest income increased by $0.3 million (75%) to $0.7 million, reflecting an increase in earning assets with PIK features.

The company's debt portfolio yield stood at an impressive 18.6% for Q3 2025, significantly above its historical normalized average of 14.5% to 15%. The onboarding debt investment yield remained consistent at 12.2%. Total expenses decreased by $0.4 million (3.2%) to $12 million in Q3 2025, primarily due to lower average borrowings and base management fees. Notably, no performance-based incentive fees were received in Q3 2025 due to the deferral mechanism.

Despite these positive income trends, HRZN experienced net realized losses on investments totaling $22.5 million in Q3 2025, primarily from the settlement of equity and other investments and the realization of warrant investments. Realized losses on extinguishment of debt amounted to $0.4 million from 2031 Convertible Notes conversions and $0.9 million from the redemption of 2022 Asset-Backed Notes. However, net unrealized appreciation on investments provided a substantial offset, totaling $40.5 million in Q3 2025, driven by appreciation in debt and equity investments and the reversal of prior depreciation.

For the nine months ended September 30, 2025, total investment income decreased slightly by $1 million (1.3%) to $75.4 million, mainly due to lower interest income on debt investments, partially offset by a significant 88% increase in fee income. Net realized losses for the nine-month period were $31.8 million, and net unrealized depreciation was $13.8 million, reflecting the challenging market for some portfolio companies.

HRZN's net asset value (NAV) per share saw a 5% increase to $7.12 in Q3 2025, a positive development attributed to the accretive acquisition of a venture debt portfolio and favorable outcomes with two challenged portfolio companies (Soli and Hound Labs). This demonstrates HRZN's ability to optimize returns even from stressed investments. However, the NAV had experienced reductions in prior quarters, notably an $0.86 reduction in Q1 2025, primarily due to fair value adjustments related to stressed assets like InBrace and Standvast, whose fair values were reduced to zero amidst macro volatility and tariff uncertainty. The increase in investments with internal credit ratings of 1 or 2 was primarily due to increased risk of principal loss from portfolio companies' low cash positions and a difficult equity fundraising market.

Liquidity, Capital Structure, and Future Funding

HRZN maintains a robust liquidity position, essential for funding new investments and managing its debt obligations. As of September 30, 2025, the company commanded $128.5 million in cash and money market funds, supplemented by $2.4 million in restricted investments. Its available liquidity, including funds from credit facilities, totaled $151 million, providing a potential new investment capacity of $460 million.

The company's capital structure is diversified, utilizing public equity offerings, revolving credit facilities, and public/private debt securities. In Q3 2025, HRZN accretively raised $10.6 million in net proceeds by selling 1.57 million common shares through its At-The-Market (ATM) program. It also successfully raised $40 million through the issuance of 5.5% unsecured convertible notes due 2030, using the proceeds to retire higher-interest asset-backed notes (7.5%). This demonstrates opportunistic access to capital markets and proactive debt management.

HRZN's debt facilities include the Key Facility (no outstanding principal, $42 million available), the NYL Facility ($181 million outstanding, $8.9 million available, investment period extended to June 2027), and the Nuveen Facility ($90 million outstanding, $0.6 million available, commitment increased to $200 million, investment period extended to June 2028). The 2031 Convertible Notes had an aggregate outstanding principal balance of $2.8 million, while the 2030 Convertible Notes stood at $40 million. The company's asset coverage for borrowed amounts was 174% as of September 30, 2025, well above the 150% regulatory requirement for BDCs. Net leverage stood at 0.94:1, below its target range of 1.2x to 1.3x, indicating ample room for growth. Unfunded commitments totaled $109 million, which HRZN believes it has adequate financial resources to satisfy.

Outlook and Risks: A Path to Enhanced Value

HRZN's outlook is significantly shaped by its impending merger with MRCC, now expected in early 2026 due to the federal government shutdown. This merger is anticipated to be a transformative event, injecting an estimated $165 million in incremental equity capital and bringing the combined entity's estimated NAV to approximately $446 million. Management expects this increased scale to reduce per-share operating expenses, provide access to lower-cost financing, and enable HRZN to originate larger venture loans to both private and public small-cap companies. The goal is for the capital deployment to be "neutral" to earnings per share in the first year post-merger, with aspirations for greater accretion. The company also projects approximately $2.5 million in annual G&A expense savings from the consolidation.

Management is optimistic about portfolio growth, with a robust pipeline of $1.4 billion in opportunities. In October 2025 alone, HRZN funded a $10 million venture loan and was awarded $50 million in new commitments, much of which is expected to fund in Q4. The company expects originations to exceed prepayments going forward, aiming to return net leverage to its target of 1.2x to 1.3x over the next one to two quarters. The Board has declared monthly distributions of $0.11 per share through March 2026, supported by undistributed spillover income ($0.93 per share as of September 30, 2025). The advisor has also agreed to waive a portion of its quarterly income incentive fees if net investment income falls below declared distributions in 2025, underscoring alignment with shareholder interests.

Despite this positive outlook, several risks warrant careful consideration. The macro environment, including persistent inflationary pressures, foreign currency exchange volatility, and the impact of tariffs, continues to pose challenges to portfolio companies' profit margins and exit opportunities. The life sciences sector, in particular, faces ongoing valuation disconnects and regulatory uncertainties, which could impact investment performance. The success of the MRCC merger is contingent on various closing conditions, and any termination could result in substantial unrecovered expenses and a decline in HRZN's stock price. Furthermore, the market price of HRZN's common stock post-merger will be influenced by factors different from its pre-merger dynamics, and there is no guarantee that the combined entity will replicate historical performance. While HRZN's focus on floating-rate debt with floors mitigates interest rate risk, a significant and sustained decline in rates could still impact net investment income.

Conclusion

Horizon Technology Finance stands at a pivotal juncture, poised for a significant transformation through its merger with Monroe Capital Corporation. This strategic move is designed to amplify HRZN's scale, enhance its capital base, and expand its capacity to originate larger, high-quality venture loans across technology, life science, and sustainability sectors. By leveraging its specialized lending model, deep sector expertise, and flexible financing solutions, HRZN aims to solidify its position as a leading venture debt provider.

While the company has demonstrated resilience in navigating a challenging macro environment, marked by market volatility and pressures on portfolio valuations, its proactive management of stressed assets and a robust pipeline underscore its operational effectiveness. The anticipated synergies and capital infusion from the merger are expected to drive accretive net investment income and reduce operating expenses, ultimately creating enhanced long-term value for shareholders. Despite inherent risks associated with market conditions and the integration of the merger, HRZN's strategic vision, coupled with its commitment to high-yield venture debt and disciplined capital deployment, positions it for a compelling growth trajectory in the evolving landscape of specialized finance.