In this quarterly report on Form 10Q, except where the context suggests otherwise, the terms "we," "us," "our" and "Horizon Technology Finance" refer to
Horizon Technology Finance Corporationand 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 10Q.
This quarterly report on Form 10Q, 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 10Q involve risks and uncertainties, including statements as to:
? our future operating results, including the performance of our existing debt
investments, warrants and other investments;
? the introduction, withdrawal, success and timing of business initiatives and
? general economic and political trends and other external factors, including
continuing supply chain disruptions, increased inflation and a general slowdown in economic activity; ? 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, including
our and their ability to achieve our respective objectives as a result of the
? turmoil in
prices and its impact on the industries in which we invest;
? the impact, extent and timing of technological changes and the adequacy of
intellectual property protection; ? our regulatory structure and tax status; ? changes in the general interest rate environment;
? our ability to qualify and maintain qualification as a RIC and as a BDC;
? the adequacy of our cash resources and working capital; ? any losses or operations disruptions caused by us, our Advisor or our
portfolio companies holding cash balances at financial institutions that
exceed federally insured limits or by disruptions in the financial services
industry; ? 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; 44
Table of Contents ? the ability of our portfolio companies to achieve their objective;
? the impact of legislative and regulatory actions and reforms and regulatory
supervisory or enforcement actions of government agencies relating to us or
our Advisor; ? our contractual arrangements and relationships with third parties; ? our ability to access capital and any future financings by us; ? our use of financial leverage; ? the ability of our Advisor to attract and retain highly talented professionals;
? the impact of changes to tax legislation and, generally, our tax position; and
? our ability to fund unfunded commitments. We use words such as "anticipates," "believes," "expects," "intends," "seeks" and similar expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in "Risk Factors" and elsewhere in our annual report on Form 10K for the year ended
December 31, 2022, and elsewhere in this quarterly report on Form 10Q. We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, 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 10Q, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission, or the SEC, including periodic reports on Form 10Q and Form 10K and current reports on Form 8K. Overview We are a specialty finance company that lends to and invests in development-stage companies in the technology, life science, healthcare information and services and sustainability industries, which we refer to as our " Target Industries." Our investment objective is to maximize our investment portfolio's total return by generating current income from the debt investments we make and capital appreciation from the warrants we receive when making such debt investments. We are focused on making secured debt investments, which we refer to collectively as "Venture Loans," to venture capital and private equity backed companies and publicly traded companies in our Target Industries, which we refer to as "Venture Lending." Our debt investments are typically secured by first liens or first liens behind a secured revolving line of credit, or collectively "Senior Term Loans." Some of our debt investments may also be subordinated to term debt provided by third parties. As of March 31, 2023, 86.7%, or $593.6 million, of our debt investment portfolio at fair value consisted of Senior Term Loans. Venture Lending is typically characterized by (1) the making of a secured debt investment after a venture capital or equity investment in the portfolio company has been made, which investment provides a source of cash to fund the portfolio company's debt service obligations under the Venture Loan, (2) the senior priority of the Venture Loan which requires repayment of the Venture Loan prior to the equity investors realizing a return on their capital, (3) the amortization of the Venture Loan and (4) the lender's receipt of warrants or other success fees with the making of the Venture Loan. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for U.S.federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to, finance our investments through borrowings subject to a 150% asset coverage test. As defined in the 1940 Act, asset coverage of 150% means that for every $100of net assets a BDC holds, it may raise up to $200from borrowing and issuing senior securities. The amount of leverage that we may employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing. As a RIC, we generally are not subject to corporate-level income taxes on our investment company taxable income, determined without regard to any deductions for dividends paid, and our net capital gain that we distribute as dividends for U.S.federal income tax purposes to our stockholders as long as we meet certain source-of-income, distribution, asset diversification and other requirements. 45
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We were formed in
Our investment activities, and our day-to-day operations, are managed by our Advisor and supervised by our Board, of which a majority of the members are independent of us. Under the Investment Management Agreement, we have agreed to pay our Advisor a base management fee and an incentive fee for its advisory services to us. We have also entered into the Administration Agreement with our Advisor under which we have agreed to reimburse our Advisor for our allocable portion of overhead and other expenses incurred by our Advisor in performing its obligations under the Administration Agreement.
Portfolio composition and investment activity
The following table shows our portfolio by type of investment as of
March 31, 2023and December 31, 2022: March 31, 2023 December 31, 2022 Percentage of Percentage of Number of Fair Total Number of Fair Total Investments Value Portfolio Investments Value Portfolio (Dollars in thousands) Debt investments 57 $ 684,55495.7 % 60 $ 686,45895.3 % Warrants 88 25,658 3.6 90 29,712 4.1 Other investments 2 1,300 0.2 2 1,300 0.2 Equity 11 3,800 0.5 8 2,556 0.4 Total $ 715,312100.0 % $ 720,026100.0 %
The following table shows total portfolio investment activity as of and for the
three months ended
For the three months ended March 31, 2023 2022 Beginning portfolio
$ 720,026 $ 458,075New debt investments 47,008 94,485 Principal payments received on investments (6,815 ) (2,095 ) Payment-in-kind interest on investments 1,204 - Early pay-offs and principal paydowns (32,941 ) (12,050 ) Accretion of debt investment fees 1,448
New debt investment fees (300 ) (925 ) Proceeds from sale of investments (6,520 ) (21,280 ) Net (loss) gain on investments (168 )
Net unrealized depreciation on investments (7,537 ) (2,237 ) Other (93 ) - Ending portfolio
$ 715,312 $ 515,009We receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period. 46
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The following table shows our debt investments by industry sector as of
March 31, 2023 December 31, 2022 Debt Percentage of Debt Percentage of Investments at Total Investments at Total Fair Value Portfolio Fair Value Portfolio (Dollars in thousands) Life Science Biotechnology
$ 183,62526.8 % $ 189,72927.6 % Medical Device 124,124 18.1 127,839 18.6 Technology Communications 22,377 3.3 22,671 3.3 Consumer-Related 93,607 13.7 108,226 15.8 Networking 9,747 1.4 11,467 1.7 Software 141,942 20.7 117,002 17.0 Sustainability Other Sustainability 82,995 12.1 83,705 12.2 Healthcare Information and Services Diagnostics 9,815 1.4 9,804 1.4 Other Healthcare 51 0.1 2,500 0.4 Software 16,271 2.4 13,515 2.0 Total $ 684,554100.0 % $ 686,458100.0 % The largest debt investments in our portfolio may vary from period to period as new debt investments are originated and existing debt investments are repaid. Our five largest debt investments at cost and fair value represented 23% of total debt investments outstanding as of March 31, 2023and December 31, 2022. No single debt investment at cost or fair value represented more than 10% of our total debt investments as of March 31, 2023and December 31, 2022. Debt investment asset quality We use an internal credit rating system which rates each debt investment on a scale of 4 to 1, with 4 being the highest credit quality rating and 3 being the rating for a standard level of risk. A rating of 2 represents an increased level of risk and, while no loss is currently anticipated for a 2rated debt investment, there is potential for future loss of principal. A rating of 1 represents a deteriorating credit quality and a high degree of risk of loss of principal. Our internal credit rating system is not a national credit rating system. As of March 31, 2023and December 31, 2022, our debt investments had a weighted average credit rating of 3.0 and 3.1, respectively. The following table shows the classification of our debt investment portfolio by credit rating as of March 31, 2023and December 31, 2022: March 31, 2023 December 31, 2022 Debt Percentage Debt Percentage Number of Investments at of Debt Number of Investments at of Debt Investments Fair Value
Investments Investments Fair Value Investments (Dollars in thousands) Credit Rating 4 9
$ 108,48215.8 % 8 $ 93,832 13.7 % 3 38 483,615 70.6 47 557,554 81.2 2 7 87,206 12.7 2 26,822 3.9 1 3 5,251 0.9 3 8,250 1.2 Total 57 $ 684,554100.0 % 60 $ 686,458100.0 % As of March 31, 2023, there were three debt investments with an internal credit rating of 1, with an aggregate cost of $20.3 millionand an aggregate fair value of $5.3 million. As of December 31, 2022, there were three debt investments with an internal credit rating of 1, with an aggregate cost of $20.9 millionand an aggregate fair value of $8.3 million. 47
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Consolidated results of operations
As a BDC and a RIC, we are subject to certain constraints on our operations, including limitations imposed by the 1940 Act and the Code. The consolidated results of operations described below may not be indicative of the results we report in future periods.
Comparison of the three months ended
The following table shows consolidated results of operations for the three
For the three months ended March 31, 2023 2022 (In thousands) Total investment income
$ 28,037 $ 14,204Total expenses 14,842 8,375 Net investment income before excise tax 13,195 5,829 Provision for excise tax 184 100 Net investment income 13,011 5,729 Net realized (loss) gain (168 ) 30 Net unrealized depreciation on investments (7,537 ) (2,237 ) Net increase in net assets resulting from operations $ 5,306 $ 3,522Average debt investments, at fair value $ 687,602 $ 459,386Average gross assets less cash $ 737,826 $ 498,363Average borrowings outstanding $ 440,695 $ 267,376Net increase in net assets resulting from operations can vary substantially from period to period for various reasons, including, without limitation, the recognition of realized gains and losses and unrealized appreciation and depreciation on investments. As a result, quarterly comparisons of net increase in net assets resulting from operations may not be meaningful. Investment income Total investment income increased by $13.8 million, or 97.4%, to $28.0 millionfor the three months ended March 31, 2023as compared to the three months ended March 31, 2022. For the three months ended March 31, 2023, total investment income consisted primarily of $27.4 millionin interest income from investments, which included $4.3 millionin income from the accretion of origination fees and end of term payments, or ETPs, and $0.6 millionin fee income. Interest income on debt investments increased by $13.5 million, or 97.8%, to $27.4 million, for the three months ended March 31, 2023compared to the three months ended March 31, 2022. Interest income on debt investments for the three months ended March 31, 2023as compared to the three months ended March 31, 2022increased primarily due to an increase of $228.2 million, or 49.7%, in the average size of our debt investment portfolio and an increase in the prime rate which is the base rate for most of our variable rate debt investments. Fee income, which includes success fee, other fee and prepayment fee income on debt investments, increased by $0.3 million, or 81.8%, to $0.6 millionfor the three months ended March 31, 2023compared to the three months ended March 31, 2022primarily due to a higher aggregate amount of principal prepayments for the three months ended March 31, 2023.
The following table shows our dollar-weighted annualized yield for the three
For the three months ended March 31, Investment type: 2023 2022 Debt investments(1) 16.3 % 12.4 % All investments(1) 15.5 % 11.8 %
(1) We calculate the dollar-weighted annualized yield on average investment type
for any period as (1) total related investment income during the period
divided by (2) the average of the fair value of the investment type
outstanding on (a) the last day of the calendar month immediately preceding
the first day of the period and (b) the last day of each calendar month
during the period. The dollar-weighted annualized yield on average investment
type is higher than what investors will realize because it does not reflect
our expenses or any sales load paid by investors. Investment income, consisting of interest income and fees on debt investments, can fluctuate significantly upon repayment of large debt investments. Interest income from the five largest debt investments at cost and fair value in the aggregate accounted for 22% and 26% of investment income for the three months ended
March 31, 2023and 2022, respectively. 48
Table of Contents Expenses Total expenses increased by
$6.5 million, or 77.2%, to $14.8 millionfor the three months ended March 31, 2023as compared to the three months ended March 31, 2022. Total expenses for each period consisted of interest expense, base management fee, incentive and administrative fees, professional fees and general and administrative expenses. Interest expense increased by $3.7 million, or 107.9%, to $7.1 millionfor the three months ended March 31, 2023as compared to the three months ended March 31, 2022. Interest expense, which includes the amortization of debt issuance costs, increased primarily due to an increase in average borrowings of $173.3 million, or 64.8%, for the three months ended March 31, 2023as compared to the three months ended March 31, 2022and an increase in our effective cost of debt for the three months ended March 31, 2023as compared to the three months ended March 31, 2022. Base management fee expense increased by $1.0 million, or 42.6%, to $3.2 millionfor the three months ended March 31, 2023as compared to the three months ended March 31, 2022. Base management fee increased primarily due to an increase of $228.2 million, or 49.7%, in average debt investments for the three months ended March 31, 2023as compared to the three months ended March 31, 2022. Performance based incentive fee expense increased by $1.6 million, or 109.1%, to $3.0 millionfor the three months ended March 31, 2023as compared to the three months ended March 31, 2022. This increase was due to an increase of $8.8 million, or 123.5%, in Pre-Incentive Fee Net Investment Income for the three months ended March 31, 2023compared to the three months ended March 31, 2022offset by an Incentive Fee Capcalculated based on the Incentive Fee Capand Deferral Mechanism in our Investment Management Agreement of $0.2 millionfor the three months ended March 31, 2023compared to the three months ended March 31, 2022. The Incentive Fee Capand Deferral Mechanism resulted in $0.2 millionof reduced incentive fee expense and increased net investment income for the three months ended March 31, 2023. The incentive fee on Pre-Incentive Fee Net Investment Income was subject to the Incentive Fee Capfor the three months ended March 31, 2023due to the cumulative incentive fees paid exceeding 20% of cumulative pre-incentive fee net return during the applicable quarter and the 11 preceding full calendar quarters. Administrative fee expense, professional fees and general and administrative expenses were $1.5 millionand $1.3 millionfor the three months ended March 31, 2023and 2022, respectively.
Net realized gains and losses and net unrealized appreciation and depreciation
Realized gains or losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of our investments without regard to unrealized appreciation or depreciation previously recognized. Realized gains or losses on investments include investments charged off during the period, net of recoveries. The net change in unrealized appreciation or depreciation on investments primarily reflects the change in portfolio investment fair values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. During the three months ended
March 31, 2023, we realized net losses on investments totaling $0.2 millionprimarily due to the write off of warrants in three portfolio companies. During the three months ended March 31, 2022, we realized net gains on investments totaling $0.03 millionprimarily due to the realized gain from the consideration we received from the exercise and sale of two of our warrant investments. During the three months ended March 31, 2023, net unrealized depreciation on investments totaled $7.5 millionwhich was primarily due to the unrealized depreciation on five of our debt investments and the unrealized depreciation on our warrant investments. During the three months ended March 31, 2022, net unrealized depreciation on investments totaled $2.2 millionwhich was primarily due to the unrealized depreciation on three of our debt investments partially offset by the unrealized appreciation on our warrant investments. 49
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Liquidity and capital resources
March 31, 2023and December 31, 2022, we had cash and investments in money market funds of $43.5 millionand $27.7 million, respectively. Cash and investments in money market funds are available to fund new investments, reduce borrowings, pay expenses, repurchase common stock and pay distributions. In addition, as of March 31, 2023and December 31, 2022, we had $3.0 millionand $2.8 million, respectively, of restricted investments in money market funds. Restricted investments in money market funds may be used to make monthly interest and principal payments on our 2019 Asset-Backed Notes, 2022 Asset-Backed Notes, or our NYL Facility. Our primary sources of capital have been from our public and private equity offerings, use of our revolving credit facility (the "Key Facility") with KeyBank National Association("Key") and the Note Funding Agreement (the "NYL Facility", together with the Key Facility, the "Credit Facilities") with several entities owned or affiliated with New York Life Insurance Company, and issuance of our public debt offerings. In the current economic environment, such avenues for liquidity may not be available in the future, or may be available on less attractive terms. On August 2, 2021, we entered into an At-The-Market ("ATM") sales agreement (the "2021 Equity Distribution Agreement") with Goldman Sachs & Co. LLCand B. Riley FBR, Inc., (each a "Sales Agent" and, collectively, the "Sales Agents"). The 2021 Equity Distribution Agreement provides that we may offer and sell our shares from time to time through the Sales Agents up to $100.0 millionworth of our common stock, in amounts and at times to be determined by us. Sales of our common stock, if any, may be made in negotiated transactions or transactions that are deemed to be "at-the-market," as defined in Rule 415 under the Securities Act, including sales made directly on the NASDAQ or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. During the three months ended March 31, 2023, we sold 605,848 shares of common stock under the 2021 Equity Distribution Agreement. For the same period, we received total accumulated net proceeds of approximately $7.2 million, including $0.2 millionof offering expenses, from these sales. During the three months ended March 31, 2022, we sold 250,171 shares of common stock under the 2021 Equity Distribution Agreement. For the same period, we received total accumulated net proceeds of approximately $3.9 million, including $0.1 millionof offering expenses, from these sales. 50
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April 28, 2023, our Board extended a previously authorized stock repurchase program which allows us to repurchase up to $5.0 millionof our common stock at prices below our net asset value ("NAV") per share as reported in our most recent consolidated financial statements. Under the repurchase program, we may, but are not obligated to, repurchase shares of our outstanding common stock in the open market or in privately negotiated transactions from time to time. Any repurchases by us will comply with the requirements of Rule 10b18 under the Exchange Act and any applicable requirements of the 1940 Act. Unless extended by our Board, the repurchase program will terminate on the earlier of June 30, 2024or the repurchase of $5.0 millionof our common stock. During the three months ended March 31, 2023and 2022, we did not make any repurchases of our common stock. From the inception of the stock repurchase program through March 31, 2023, we repurchased 167,465 shares of our common stock at an average price of $11.22on the open market at a total cost of $1.9 million. At March 31, 2023and December 31, 2022, the outstanding principal balance under our Key Facility was $15.0 millionand $5.0 million, respectively. As of March 31, 2023and December 31, 2022, we had borrowing capacity under the Key Facility of $110.0 millionand $120.0 million, respectively. At March 31, 2023and December 31, 2022, $47.7 millionand $40.2 million, respectively, was available, subject to existing terms and advance rates. At March 31, 2023and December 31, 2022, the outstanding principal balance under the NYL Facility was $176.8 million. As of March 31, 2023and December 31, 2022, we had borrowing capacity under the NYL Facility of $23.2 million. At March 31, 2023and December 31, 2022, $21.1 millionand $23.2 million, respectively, was available, subject to existing terms and advance rates. Our operating activities provided cash of $12.7 millionfor the three months ended March 31, 2023, and our financing activities provided cash of $3.3 millionfor the same period. Our operating activities provided cash from principal payments received on our debt investments partially offset by cash used to purchase investments in portfolio companies. Our financing activities provided cash primarily from advances on our Credit Facilities and the sale of shares through our ATM for net proceeds of $7.2 million, partially offset by cash used to repay our 2019 Asset-Backed Notes and to pay distributions to our stockholders. Our operating activities used cash of $55.4 millionfor the three months ended March 31, 2022, and our financing activities provided cash of $24.1 millionfor the same period. Our operating activities used cash to purchase investments in portfolio companies partially offset by principal payments received on our debt investments. Our financing activities provided cash primarily from the completion of a follow-on public offering of 2.5 million shares of common stock for net proceeds of $34.3 million, after deducting underwriting commission and discounts and other offering expenses and advances on our Credit Facilities, partially offset by cash used to repay our Key Facility and pay distributions to our stockholders.
Our primary use of available funds is to make debt investments in portfolio
companies and for general corporate purposes. We expect to raise additional
equity and debt capital opportunistically as needed and, subject to market
conditions, to support our future growth to the extent permitted by the 1940
In order to remain subject to taxation as a RIC, we intend to distribute to our stockholders all or substantially all of our investment company taxable income. In addition, as a BDC, we are required to maintain asset coverage of at least 150%. This requirement limits the amount that we may borrow.
We believe that our current cash, cash generated from operations, and funds
available from our Credit Facilities will be sufficient to meet our working
capital and capital expenditure commitments for at least the next 12 months.
Table of Contents Current borrowings The following table shows our borrowings as of
March 31, 2023and December 31, 2022: March 31, 2023 December 31, 2022 Total Balance Unused Total Balance Unused Commitment Outstanding Commitment Commitment Outstanding Commitment (In thousands) Key Facility $ 125,000 $ 15,000 $ 110,000 $ 125,000 $ 5,000 $ 120,000NYL Facility 200,000 176,750 23,250 200,000 176,750 23,250 2019 Asset-Backed Notes 37,791 37,791 - 42,573 42,573 - 2022 Asset-Backed Notes 100,000 100,000 - 100,000 100,000 - 2027 Notes 57,500 57,500 - 57,500 57,500 - 2026 Notes 57,500 57,500 - 57,500 57,500 - Total before debt issuance costs 577,791 444,541 133,250 582,573 439,323 143,250 Unamortized debt issuance costs attributable to term borrowings - (4,896 ) - - (5,245 ) - Total borrowings outstanding, net $ 577,791 $ 439,645 $ 133,250 $ 582,573 $ 434,078 $ 143,250Credit Facilities Key Facility We entered into the Key Facility effective November 4, 2013. Through June 21, 2021, the interest rate on the Key Facility was based upon the one-month LIBOR plus a spread of 3.25%, with a LIBOR floor of 1.00%. From and after June 30, 2021, the interest rate on the Key Facility is based on the rate of interest published in The Wall Street Journalas the prime rate in the United Statesplus 0.25%, with a prime rate floor of 4.25%. The prime rate was 8.00% and 7.50% as of March 31, 2023and December 31, 2022, respectively. The interest rates in effect were 8.25% and 7.75% as of March 31, 2023and December 31, 2022, respectively. The Key Facility requires the payment of an unused line fee in an amount equal to 0.50% of any unborrowed amount available under the facility annually. The Key Facility has an accordion feature which allows for an increase in the total loan commitment to $150 million. On June 22, 2021, we amended the Key Facility, among other things, to amend the interest rate applied to the outstanding principal balance and to extend the period during which we may request advances under the Key Facility (or the "Revolving Period"), to June 22, 2024. The Key Facility is collateralized by debt investments held by Credit II and permits an advance rate of up to sixty percent (60%) of eligible debt investments held by Credit II. The Key Facility contains covenants that, among other things, require us to maintain a minimum net worth, to restrict the debt investments securing the Key Facility to certain criteria for qualified debt investments and to comply with portfolio company concentration limits as defined in the related loan agreement. After the Revolving Period, we may not request new advances, and we must repay the outstanding advances under the Key Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Key Facility, particularly the condition that the principal balance of the Key Facility not exceed sixty percent (60%) of the aggregate principal balance of our eligible debt investments to our portfolio companies. The maturity date of the Key Facility, the date on which all outstanding advances under the Key Facility are due and payable, is June 22, 2026. NYL Facility On April 21, 2020, we purchased all of the limited liability company interests of Arena in HSLFI. HFI is a wholly-owned subsidiary of HSLFI. HFI entered into the NYL Facility with the NYL Noteholders for an aggregate purchase price of up to $100.0 million, with an accordion feature of up to $200.0 millionat the mutual discretion and agreement of HSLFI and the NYL Noteholders. On June 1, 2018, HSLFI sold or contributed to HFI certain secured loans made to certain portfolio companies pursuant to the Sale and Servicing Agreement. Any notes issued by HFI are collateralized by all investments held by HFI and permit an advance rate of up to 67% of the aggregate principal amount of eligible debt investments. On February 25, 2022, we amended the NYL Facility, increasing the commitment by $100 millionto enable our wholly-owned subsidiary to issue up to $200 millionof secured notes. The amendment to the NYL Facility extends the investment period to June 2023and the maturity date to June 2028. In addition, the amendment, among other things, reduces the applicable margin used to calculate the NYL Facility's interest rate on our borrowings above $100 million. Such borrowings will be priced at the three-year USD mid-market swap rate plus 3.00%. Under the terms of the NYL Facility, we are required to maintain a reserve cash balance, which may be used to pay monthly interest and principal payments on the NYL Facility. We have segregated these funds and classified them as restricted investments in money market funds. At March 31, 2023, and December 31, 2022, there were approximately $1.3 millionand $1.0 million, respectively, of restricted investments. There were $176.8 millionin notes issued to the NYL Noteholders as of March 31, 2023and December 31, 2022at an interest rate of 5.57%. As of March 31, 2023and December 31, 2022, we had borrowing capacity under the NYL Facility of $23.2 million. At March 31, 2023and December 31, 2022, $21.1 millionand $23.2 million, respectively, was available for borrowing, subject to existing terms and advance rates. 52
Table of Contents Securitizations 2019 Asset-Backed Notes On
August 13, 2019, the 2019 Asset-Backed Notes were issued by the 20191 Trust pursuant to a note purchase agreement, dated as of August 13, 2019, by and among us and Keybanc Capital Markets Inc.as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of ours and secured by certain assets of those portfolio companies and are to be serviced by us. Interest on the 2019 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.21% per annum. The 2019 Asset-Backed Notes had a two-year reinvestment period and a stated maturity of September 15, 2027. The 2019 Asset-Backed Notes were rated A+(sf) by Morningstar Credit Ratings, LLCon August 13, 2019. There has been no change in the rating since August 13, 2019.
outstanding principal balance of
Under the terms of the 2019 Asset-Backed Notes, we are required to maintain a reserve cash balance, funded through proceeds from the sale of the 2019 Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the 2019 Asset-Backed Notes. We have segregated these funds and classified them as restricted investments in money market funds. At
March 31, 2023, and December 31, 2022, there were approximately $0.5 millionand $0.6 million, respectively, of restricted investments. 2022 Asset-Backed Notes On November 9, 2022, the 2022 Asset-Backed Notes were issued by the 20221 Trust pursuant to a note purchase agreement, dated as of November 9, 2022, by and among us and Keybanc Capital Markets Inc.as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of ours and secured by certain assets of those portfolio companies and are to be serviced by us. Interest on the 2022 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 7.56% per annum. The 2022 Asset-Backed Notes have a two-year reinvestment period and a stated maturity of November 15, 2030. The 2022 Asset-Backed Notes were rated A by Morningstar Credit Ratings, LLCon November 9, 2022. There has been no change in the rating since November 9, 2022.
outstanding principal balance of
Under the terms of the 2022 Asset-Backed Notes, we are required to maintain a reserve cash balance, funded through proceeds from the sale of the 2022 Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the 2022 Asset-Backed Notes. We have segregated these funds and classified them as restricted investments in money market funds. At
March 31, 2023, and December 31, 2022, there were approximately $1.1 millionand $1.2 million, respectively, of restricted investments. Unsecured Notes 2026 Notes On March 30, 2021, we issued and sold an aggregate principal amount of $57.5 millionof 4.875% notes due in 2026, or the 2026 Notes. The amount of 2026 Notes issued and sold included the full exercise by the underwriters of their option to purchase $7.5 millionin aggregate principal of additional notes. The 2026 Notes have a stated maturity of March 30, 2026and may be redeemed in whole or in part at our option at any time or from time to time on or after March 30, 2023at a redemption price of $25per security plus accrued and unpaid interest. The 2026 Notes bear interest at a rate of 4.875% per year, payable quarterly on March 30, June 30, September 30and December 30of each year. The 2026 Notes are our direct unsecured obligations and (i) rank equally in right of payment with our current and future unsecured indebtedness; (ii) are senior in right of payment to any of our future indebtedness that expressly provides it is subordinated to the 2026 Notes; (iii) are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, and (iv) are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. As of March 31, 2023, we were in material compliance with the terms of the 2026 Notes. The 2026 Notes are listed on the New York Stock Exchangeunder the symbol "HTFB". 2027 Notes On June 15, 2022, we issued and sold an aggregate principal amount of $50.0 millionof 6.25% notes due in 2027 and on July 11, 2022, pursuant to the underwriters' 30 day option to purchase additional notes, we sold an additional $7.5 millionof such notes, or collectively, the 2027 Notes. The 2027 Notes have a stated maturity of June 15, 2027and may be redeemed in whole or in part at our option at any time or from time to time on or after June 15, 2024at a redemption price of $25per security plus accrued and unpaid interest. The 2027 Notes bear interest at a rate of 6.25% per year, payable quarterly on March 30, June 30, September 30and December 30of each year, commencing on September 30, 2022. The 2027 Notes are our direct unsecured obligations and (i) rank equally in right of payment with our current and future unsecured indebtedness; (ii) are senior in right of payment to any of our future indebtedness that expressly provides it is subordinated to the 2027 Notes; (iii) are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, and (iv) are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries. As of March 31, 2023, we were in material compliance with the terms of the 2027 Notes. The 2027 Notes are listed on the New York Stock Exchangeunder the symbol "HTFC". 53
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March 31, 2023and December 31, 2022, other assets were $2.6 millionand $2.8 million, respectively, which is primarily comprised of debt issuance costs and prepaid expenses.
Contractual obligations and off-balance sheet arrangements
The following table shows our significant contractual payment obligations and
off-balance sheet arrangements as of
Payments due by period Less than 1 - 3 3 - 5 After 5 Total 1 year Years Years years (In thousands) Borrowings
$ 444,541 $ 35,217 $ 284,192 $ 125,132$ - Unfunded commitments 166,200 143,700 22,500 - - Incentive fee deferral 1,255 - 1,255 - - Total $ 611,996 $ 178,917 $ 307,947 $ 125,132$ - 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 March 31, 2023, we had unfunded commitments of $166.2 million. This includes no undrawn revolver commitments. These commitments are subject to the same underwriting and ongoing portfolio maintenance requirements as are the financial instruments that we hold on our balance sheet. In addition, these commitments are often subject to financial or non-financial milestones and other conditions to borrowing that must be achieved before the commitment can be drawn. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We regularly monitor our unfunded commitments and anticipated refinancings, maturities and capital raising, to ensure that we have sufficient liquidity to fund unfunded commitments. As of March 31, 2023, we reasonably believed that our assets would provide adequate financial resources to satisfy all of our unfunded commitments. In addition to the Credit Facilities, we have certain commitments pursuant to our Investment Management Agreement entered into with our Advisor. We have agreed to pay a fee for investment advisory and management services consisting of two components (1) a base management fee equal to a percentage of the value of our gross assets less cash or cash equivalents, and (2) a two-part incentive fee. We have also entered into a contract with our Advisor to serve as our administrator. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of our Advisor's overhead in performing its obligations under the agreement, including rent, fees and other expenses inclusive of our allocable portion of the compensation of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. See Note 3 to our consolidated financial statements for additional information regarding our Investment Management Agreement and our Administration Agreement. 54
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The incentive fee on Pre-Incentive Fee Net Investment Income is subject to a fee cap and deferral mechanism which is determined based upon a look-back period of up to three years and is expensed when incurred. For this purpose, the Incentive
Fee Look-back Period includes the relevant calendar quarter and the 11 preceding full calendar quarters. Each quarterly incentive fee payable on Pre-Incentive Fee Net Investment Income is subject to the Incentive Fee Capand Deferral Mechanism. The Incentive Fee Capis equal to (a) 20.00% of Cumulative Pre-Incentive Fee Net Return during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to our Advisor during the Incentive Fee Look-back Period. To the extent the Incentive Fee Capis zero or a negative value in any calendar quarter, we will not pay an incentive fee on Pre-Incentive Fee Net Investment Income to our Advisor in that quarter. To the extent that the payment of incentive fees on Pre-Incentive Fee Net Investment Income is limited by the Incentive Fee Cap, the payment of such fees will be deferred and paid in subsequent calendar quarters up to three years after their date of deferment, subject to certain limitations, which are set forth in the Investment Management Agreement. During the three months ended March 31, 2023, the Incentive Fee Capand Deferral Mechanism resulted in deferral of $0.2 millionof incentive fee which may become subject to payment up to three years after the date of deferment. As of March 31, 2023, the total amount subject to recoupment was $1.3 million. Distributions In order to qualify and be subject to tax as a RIC, we must meet certain source-of-income, asset diversification and annual distribution requirements. Generally, in order to qualify as a RIC, we must derive at least 90% of our gross income for each tax year from dividends, interest, payments with respect to certain securities, loans, gains from the sale or other disposition of stock, securities or foreign currencies, income derived from certain publicly traded partnerships, or other income derived with respect to our business of investing in stock or other securities. We must also meet certain asset diversification requirements at the end of each quarter of each tax year. Failure to meet these diversification requirements on the last day of a quarter may result in us having to dispose of certain investments quickly in order to prevent the loss of RIC status. Any such dispositions could be made at disadvantageous prices or times, and may cause us to incur substantial losses. In addition, in order to be subject to tax as a RIC and to avoid the imposition of corporate-level tax on the income and gains we distribute to our stockholders in respect of any tax year, we are required under the Code to distribute as dividends to our stockholders out of assets legally available for distribution each tax year an amount generally at least equal to 90% of the sum of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any. Additionally, in order to avoid the imposition of a U.S.federal excise tax, we are required to distribute, in respect of each calendar year, dividends to our stockholders of an amount at least equal to the sum of 98% of our calendar year net ordinary income (taking into account certain deferrals and elections); 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the one year period ending on October 31of such calendar year; and any net ordinary income and capital gain net income for preceding calendar years that were not distributed during such calendar years and on which we previously did not incur any U.S.federal income tax. If we fail to qualify as a RIC for any reason and become subject to corporate tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders. In addition, we could be required to recognize unrealized gains, incur substantial taxes and interest and make substantial distributions in order to re-qualify as a RIC. We cannot assure stockholders that they will receive any distributions. To the extent our taxable earnings in a tax year fall below the total amount of our distributions made to stockholders in respect of such tax year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S.federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should review any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary income or gains. We have adopted an "opt out" dividend reinvestment plan, or DRIP, for our common stockholders. As a result, if we declare a distribution, then stockholders' cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically "opts out" of our DRIP. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S.federal, state and local taxes, stockholders participating in our DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes. If our common stock is trading above NAV, a stockholder receiving distributions in the form of additional shares of our common stock will be treated as receiving a distribution of an amount equal to the fair market value of such shares of our common stock. We may use newly issued shares to implement the DRIP, or we may purchase shares in the open market in connection with our obligations under the DRIP. Related party transactions We have entered into the Investment Management Agreement with our Advisor. Our Advisor is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Our investment activities are managed by our Advisor and supervised by our Board, the majority of whom are independent directors. Under the Investment Management Agreement, we have agreed to pay our Advisor a base management fee as well as an incentive fee. During the three months ended March 31, 2023and 2022, our Advisor earned $6.2 millionand $3.7 million, respectively, pursuant to the Investment Management Agreement. 55
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Horizon Technology Finance Principals LLCf/k/a Horizon Technology Finance, LLC("HTF Principals"), owns more than seventy percent (70%) of our Advisor. Our Chief Executive Officer, Robert D. Pomeroy Jr. and our President, Gerald A. Michaudown one hundred percent (100%) of HTF Principals. By virtue of their ownership interest in HTF Principals, Mr. Pomeroyand Mr. Michaudcontrol our Advisor. On February 22, 2023, our Advisor, HTF Principals and Horizon Technology Finance Employees LLC("HTF Employees") entered into a Membership Interest Purchase Agreement (the "Purchase Agreement") with MCH Holdco LLC("MCH Holdco"), an affiliate of Monroe Capital LLC(" Monroe Capital"), and Monroe Capital Investment Holdings, L.P., an affiliate of Monroe Capital and the sole stockholder of MCH Holdco, pursuant to which HTF Principals and HTF Employees will sell all of their membership interests in our Advisor (which constitute one hundred percent (100%) of the membership interests of our Advisor) to MCH Holdco and our Advisor will become a direct wholly owned subsidiary of MCH Holdco and an affiliate of Monroe Capital (the "Transaction"). Subject to customary closing conditions, the Transaction is expected to close around the end of May 2023. A significant portion of the consideration payable by Monroe Capital to HTF Principals and HTF Employees pursuant to the Purchase Agreement is in the form of earnout payments contingent upon our performance in 2023, 2024, and 2025, aligning the incentives of our Advisor's current officers with our stockholders. We have also entered into the Administration Agreement with our Advisor. Under the Administration Agreement, we have agreed to reimburse our Advisor for our allocable portion of overhead and other expenses incurred by our Advisor in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. In addition, pursuant to the terms of the Administration Agreement our Advisor provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. During the three months ended March 31, 2023and 2022, our Advisor earned $0.4 millionpursuant to the Administration Agreement.
HTF Principals has granted us a non-exclusive, royalty-free license to use the
We believe that we derive substantial benefits from our relationship with our Advisor. Our Advisor may manage other investment vehicles, or Advisor Funds, with the same investment strategy as us. Our Advisor may provide us an opportunity to co-invest with the Advisor Funds. Under the 1940 Act, absent receipt of exemptive relief from the
SEC, we and our affiliates are precluded from co-investing in negotiated investments. On November 27, 2017, we were granted exemptive relief from the SECwhich permits us to co-invest with the Advisor Funds, subject to certain conditions. Critical accounting policies The discussion of our financial condition and results of operation is based upon our financial statements, which have been prepared in accordance with U.S.generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we describe our significant accounting policies in the notes to our consolidated financial statements.
We have identified the following items as critical accounting policies.
Valuation of investments Investments are recorded at fair value. Prior to
July 30, 2022, our Board determined the fair value of our investments. Pursuant to the amended SEC Rule 2a-5 of the 1940 Act, on July 29, 2022, our Board designated our Advisor as our "valuation designee." Our Board is responsible for oversight of the valuation designee. The valuation designee has established a Valuation Committee to determine in good faith the fair value of our investments, based on input of our Advisor's management and personnel and independent valuation firms which are engaged at the direction of the Valuation Committee to assist in the valuation of certain portfolio investments lacking a readily available market quotation at least once during a trailing twelve-month period. The Valuation Committee determines fair values pursuant to a valuation policy approved by our Board and pursuant to a consistently applied valuation process. This valuation process is conducted at the end of each fiscal quarter, with at least 25% (based on fair value) of our valuation of portfolio companies lacking readily available market quotations subject to review by an independent valuation firm. We apply fair value to substantially all of our investments in accordance with Topic 820, Fair Value Measurement, of the Financial Accounting Standards Board's, or FASB's, Accounting Standards Codification as amended, or ASC, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. We have categorized our investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, our own assumptions are set to reflect those that we believe market participants would use in pricing the financial instrument at the measurement date. 56
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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
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. Income recognition Interest on debt investments is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined using a method that results in a level rate of return on principal amounts outstanding. Generally, when a debt investment becomes 90 days or more past due, or if we otherwise do not expect to receive interest and principal repayments, the debt investment is placed on non-accrual status and the recognition of interest income may be discontinued. Interest payments received on non-accrual debt investments may be recognized as income, on a cash basis, or applied to principal depending upon management's judgment at the time the debt investment is placed on non-accrual status. For the three months ended
March 31, 2023and 2022, we did not recognize any interest income from debt investments on non-accrual status. We receive a variety of fees from borrowers in the ordinary course of conducting our business, including advisory fees, commitment fees, amendment fees, non-utilization fees, success fees and prepayment fees. In a limited number of cases, we may also receive a non-refundable deposit earned upon the termination of a transaction. Debt investment origination fees, net of certain direct origination costs, are deferred, and along with unearned income, are amortized as a level yield adjustment over the respective term of the debt investment. All other income is recorded into income when earned. Fees for counterparty debt investment commitments with multiple debt investments are allocated to each debt investment based upon each debt investment's relative fair value. When a debt investment is placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the debt investment is returned to accrual status. Certain debt investment agreements also require the borrower to make an ETP that is accrued into income over the life of the debt investment to the extent such amounts are expected to be collected. We will generally cease accruing the income if there is insufficient value to support the accrual or if we do not expect the borrower to be able to pay all principal and interest due. In connection with substantially all lending arrangements, we receive warrants to purchase shares of stock from the borrower. We record the warrants as assets at estimated fair value on the grant date using the Black-Scholes valuation model. We consider the warrants as loan fees and record them as unearned income on the grant date. The unearned income is recognized as interest income over the contractual life of the related debt investment in accordance with our income recognition policy. Subsequent to origination, the warrants are also measured at fair value using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss on investments. Gains and losses from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains and losses on investments. 57
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Realized gains or losses on the sale of investments, or upon the determination that an investment balance, or portion thereof, is not recoverable, are calculated using the specific identification method. We measure realized gains or losses by calculating the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment. Net change in unrealized appreciation or depreciation reflects the change in the fair values of our portfolio investments during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized. Income taxes We have elected to be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC and to avoid the imposition of corporate-level
U.S.federal income tax on the amounts we distribute to our stockholders, among other things, we are required to meet certain source of income and asset diversification requirements, and we must timely distribute dividends to our stockholders out of assets legally available for distribution each tax year of an amount generally equal to at least 90% of our investment company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid. We, among other things, have made and intend to continue to make the requisite distributions to our stockholders, which will generally relieve us from incurring any material liability for U.S.federal income taxes. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and incur a 4% excise tax on such income, as required. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year distributions, we will accrue excise tax, if any, on estimated excess taxable income as taxable income is earned. We evaluate tax positions taken in the course of preparing our tax returns to determine whether the tax positions are "more-likely-than-not" to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes, as modified by ASC Topic 946, Financial Services - Investment Companies. Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, are recorded as a tax expense in the current year. It is our policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. We had no material uncertain tax positions at March 31, 2023and December 31, 2022. Recent developments
Distribution Agreement. For the same period, we received total accumulated net
proceeds of approximately
expenses, from these sales.
IMV Inc. ("IMV") (NASDAQ: IMV; TSX: IMV), announced on
May 1, 2023that the Nova Scotia Supreme Courthas issued an initial order (the "Initial Order") granting IMV and its subsidiaries protection under the Companies' Creditors Arrangement Act (R.S.C., 1985, c. C-36) and IMV will seek the recognition of the Initial Order in the United Statesby filing a petition commencing proceedings under the Chapter 15 of the United States Bankruptcy Code. 58
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Recently issued accounting pronouncement
June 2022, the FASB issued Accounting Standards Update No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, or ASU 2022-03. ASU 2022-03 clarifies the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of the security. The amendments in ASU 2022-03 are effective for public companies for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. We are currently assessing the impact of ASU 2022-03 on our consolidated financial statements.
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