SWK Holdings Corp 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our financial statements and the related notes. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in the Risk Factors, Special Note Regarding Forward-Looking Statements and Business sections in this report. We use words such as “anticipate,” “believe,” “estimate,” “expects,” “intend,” “plan,” “will” and variations of these words and similar expressions to identify forward-looking statements. Strategic Plan to Focus on Core Specialty Finance Business On May 17, 2021, we announced that our Board of Directors (“Board”) formed a Strategic Review Committee (“SRC”) to identify, review and explore strategic alternatives with a view to enhancing stockholder value. With its advisors, the SRC completed a comprehensive review of strategic alternatives for each segment of the Company. On November 1, 2021, we announced that the Board approved a streamlined go-forward business plan and has begun implementing several new measures in light of our current governance structure. The goal of these measures is to improve our strategic focus, growth profile, and capital allocation. The Board believes these measures will allow us to generate long-term value for stockholders. Environmental, Social and Governance As overseers of risk and stewards of long-term enterprise value, our management and Board play a vital role in assessing, identifying and understanding the potential impact and related risks of environmental, social and governance (“ESG”) issues on the organization’s operating model. Our Board and management are committed to identifying those ESG issues most likely to impact business operations and growth by focusing our investment strategy around supporting innovative, growth-oriented companies in the life sciences industry that maximize both social and investment value. Among the ESG issues we support within the Company, we are committed to recruiting, motivating and developing a diversity of talent. We promote and foster a company culture where every voice is welcome, heard and respected, regardless of age, gender, race, religion, sexual orientation, physical conditions, cultural background or country of origin. The nature of our business supports environmental sustainability by being mindful of products we and our partners use in our businesses. We promote recycling to reduce landfill, and we offer our employees a hybrid work model, which allows employees the flexibility to work remotely, thereby reducing the carbon output from commuting in cars or buses. Overview We have organized our operations into two segments: Finance Receivables and Pharmaceutical Development. These segments reflect the way we evaluate our business performance and manage our operations. Please refer to Part I, Item 1, Business and Part II, Item 8, Financial Statements , Notes 1 and 11 of the notes to the consolidated financial statements for further information regarding segment information. 21 Finance Receivables Portfolio Overview The table below provides an overview of our outstanding transactions as of, and for the year ended, December 31, 2021 (in thousands, except rate, share and per share data): Royalty Purchases Licensed Technology Footnote Funded Amount GAAP Balance 2021 Income (Loss) Recognized Active Investment as of 12/31/21 Beleodaq® Oncology treatment $ 7,600 $ 4,859 $ 1,561 Yes Besivance® Ophthalmic antibiotic (3) 6,000 — (16 ) Yes Best ABT, Inc. Oncology diagnosis (1), (2) 5,784 3,362 — Yes Coflex®/Kybella®/Zalviso® Spinal stenosis/submental fullness 4,350 4,150 595 Yes Cambia® NSAID migraine treatment (1) 8,500 2,250 (107 ) Yes Forfivo XL® Depressive disorder treatment 6,000 1,462 1,334 Yes Ideal Implant, Inc. Aesthetics 3,000 3,156 337 Yes Iluvien® Diabetic macular edema 16,501 16,137 2,373 Yes Narcan® Opioid overdose treatment 17,500 529 3,975 Yes Ostomy Products Royalty Ostomy products 3,900 4,543 551 Yes Veru, Inc. Women’s health 10,000 4,793 6,323 Yes Term Loans Type Footnote Maturity Date Principal GAAP Balance Rate 2021 Income (Loss) Recognized Active Investment as of 12/31/21 4Web, Inc. First lien 06/03/23 $ 25,698 $ 27,265 12.3 % $ 3,655 Yes Acerus Pharmaceuticals Corporation First lien (6) 10/11/23 5,950 6,001 12.0 % 1,242 Yes B&D Dental Corporation First lien (2), (4) 12/10/18 8,365 8,334 14.0 % — Yes BIOLASE, Inc. First lien (5) 05/31/25 14,300 14,469 10.3 % 2,098 Yes Biotricity, Inc. First lien 12/26/26 12,000 11,738 11.5 % 42 Yes CeloNova BioSciences, Inc. First lien (3) 12/30/21 — — 10.5 % 395 No DxTerity Diagnostics, Inc. First lien (3) 10/31/21 — — 13.3 % 3,058 No Epica International, Inc. First lien (5) 07/23/24 12,000 12,152 9.5 % 1,564 Yes eTon Pharmaceuticals, Inc. First lien 11/13/24 7,000 6,907 12.0 % 1,021 Yes Flowonix Medical, Inc. First lien (2) 12/23/25 10,593 9,954 14.0 % 962 Yes Harrow Health, Inc. First lien (3) 07/19/23 — — 9.0% - 12.0% 1,112 No Keystone Dental Group First lien 11/14/22 15,000 15,487 11.5 % 1,873 Yes Misonix, Inc. (“Misonix”) First lien (3), (7) 06/30/24 — — 10.0% - 12.3% 3,530 No MolecuLight, Inc. First lien 12/29/26 8,000 7,900 12.5 % 6 Yes Sincerus Pharmaceuticals, Inc. First lien 03/19/26 11,000 11,051 13.0 % 1,069 Yes Tenex Health, Inc. First lien (3) 06/30/21 — — 13.0 % 349 No Thermedx LLC Sub note (3) 05/20/29 — — 12.0 % 43 No Trio Healthcare Ltd. First lien 07/01/26 5,100 5,054 12.5 % 365 Yes 22 Cost Method Investment Licensed Technology Footnote Maturity Date Principal GAAP Balance Rate 2021 Income (Loss) Recognized Active Investment as of 12/31/21 Tissue Regeneration Therapeutics, Inc. (“TRT”) Umbilical cord banking (2) N/A $ 3,491 $ 3,491 N/A — Yes Marketable Investments Number of Shares Footnote Funded Amount GAAP Balance 2021 Change in Fair Value Active Investment as of 12/31/21 Secured Royalty Financing (Marketable Investment) N/A (2) $ 3,000 $ 119 $ — Yes Bioventus, Inc. (“Bioventus”) Common Stock 71,361 (7) N/A 1,034 147 Yes Epica International, Inc. 25,000 N/A — — Yes Misonix Common Stock — (7) N/A — 1,692 No Sincerus Pharmaceuticals, Inc. 26,575 N/A — — Yes Warrants to Purchase Stock Number of Shares Footnote Exercise Price per Share GAAP Balance 2021 Change in Fair Value Active Investment as of 12/31/21 4Web, Inc. TBD TBD $ — $ — Yes Acerus Pharmaceuticals Corporation 7,764,004 (6) 0.053 CAD 101 (113 ) Yes B&D Dental Corporation 225 (2), (4) 0.01 — — Yes BIOLASE, Inc. 550,977 0.39 183 (45 ) Yes Biotricity, Inc. 57,536 6.26 177 1 Yes CeloNova BioSciences, Inc. TBD (3) 0.01 — — Yes DxTerity Diagnostics, Inc. 2,019,231 (3) 2.08 — — Yes Epica International, Inc. TBD TBD — — Yes eTon Pharmaceuticals, Inc. 51,239 5.86 94 (206 ) Yes eTon Pharmaceuticals, Inc. 18,141 6.62 34 (73 ) Yes EyePoint Pharmaceuticals, Inc. 40,910 11.00 277 151 Yes EyePoint Pharmaceuticals, Inc. 7,773 19.30 42 23 Yes Flowonix Medical, Inc. 155,561 (2) 3.86 — — Yes Harrow Health, Inc. 373,847 (3) 2.08 2,511 534 Yes Assets Income Recognized Total finance receivables $ 181,553 $ 39,310 Total marketable investments 1,153 — Cost method investment 3,491 — Fair value of warrant assets 3,419 — Total assets/revenues $ 189,616 $ 39,310 (1) Investment considered impaired. (2) Investment on nonaccrual. (3) Loan/royalty was paid off during 2021. (4) Loan was paid off in the first quarter of 2022. Please refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 13 of the notes to the consolidated financial statements for further information. (5) Maturity date and interest rate were amended during the fourth quarter 2021. (6) Loan was paid off in the first quarter of 2022. (7) On October 29, 2021, Misonix was acquired by Bioventus. Upon closing of the transaction, the Misonix term loan was paid off. We also tendered our Misonix common stock and received $1,875 in cash and 71,361 shares of Bioventus common stock. We recognized a nominal loss on the tender of the Misonix common stock. Unless otherwise specified, our senior secured debt assets generally are repaid by a revenue interest that is charged on a company’s quarterly net sales and royalties. 23 Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, stock-based compensation, impairment of finance receivables and long-lived assets, impairment of goodwill and identifiable intangible assets, valuation of warrants and investments, contingent consideration, income taxes and contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our consolidated financial statements because they inherently involve significant judgments and uncertainties. For a discussion of our significant accounting policies, refer to Note 1 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data . Allowance for Loan Losses The allowance for loan losses is reviewed for adequacy based on portfolio collateral values and credit quality indicators, including non-performing assets, evaluation of portfolio diversification and concentration as well as economic conditions to determine the need for a qualitative adjustment. We review our finance receivables periodically to determine the probability of loss, and record charge-offs after considering such factors as delinquencies, the financial condition of obligors, the value of underlying collateral, as well as third party credit enhancements such as guarantees. The process of determining the level of the allowance for loan losses requires a high degree of judgment. Others given the same information could reach different reasonable conclusions. Finance Receivables Finance receivables are measured based upon the difference between the recorded investment in each receivable and either the present value of the expected future cash flows discounted at each receivable’s effective interest rate (the receivable’s contractual interest rate adjusted for any deferred fees, costs or discount / premium at the date of origination/acquisition) or if a receivable is collateral dependent, the collateral’s fair value. When impairment is determined to be probable, the measurement will be based on the fair value of the collateral. The determination of impairment involves management’s judgment and the use of market and third party estimates regarding collateral values. Valuations of impaired receivables and corresponding impairment affect the level of the reserve for credit losses. Revenue Recognition Finance Receivables Segment The Company’s Finance Receivables segment records interest income on an accrual basis based on the effective interest rate method to the extent that we expect to collect such amounts. Incentive fees, if any, are recognized when earned at the end of the relevant performance period, pursuant to the underlying contract. Other administrative service revenues are recognized when contractual obligations are fulfilled or as services are provided. Pharmaceutical Development Segment The Company’s Pharmaceutical Development segment enters into collaboration and licensing agreements with strategic partners, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products. 24 In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must use its judgment to determine: (a) the number of performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; (c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above; and d) the contract term and pattern of satisfaction of the performance obligations under step (v) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. Fair Value of Financial Instruments The fair value of our financial instruments reflects the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Our financial instruments not required to be adjusted to fair value on a recurring basis consist principally of cash and restricted cash, accounts and finance receivable, accounts payable, and accrued expenses. We believe the carrying amount of cash and cash equivalents, accounts and finance receivable, accounts payable and accrued expenses approximate fair value due to their relatively short maturities. Income Taxes The recognition of certain net deferred tax assets of our reporting entities are dependent upon, but not limited to, the future profitability of the reporting entity, when the underlying temporary differences will reverse, and tax planning strategies. Further, management’s judgment regarding the use of estimates and projections is required in assessing our ability to realize the deferred tax assets relating to NOL carryforwards, as most of these assets are subject to limited carryforward periods. The Company will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist at each reporting date. Any adjustments to the deferred tax asset valuation allowance is recorded in the statement of operations in the period it is determined an adjustment is required. Please refer to Note 12 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data . Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, refer to Note 1 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data . 25 Comparison of the Years Ended December 31, 2021 and 2020 (in millions) For the Year Ended December 31, 2021 2020 Change Revenues $ 56.2 $ 36.7 $ 19.5 Provision for credit losses and impairment expense — 0.2 (0.2 ) Interest expense 0.4 0.5 (0.1 ) Pharmaceutical manufacturing, research and development expense 7.3 4.3 3.0 Change in fair value of acquisition-related contingent consideration (0.3 ) 4.4 (4.7 ) Depreciation and amortization expense 4.1 12.1 (8.0 ) General and administrative expense 13.6 10.5 3.1 Other income (expense), net 2.0 (1.1 ) 3.1 Income tax expense (benefit) 7.1 (1.5 ) 8.6 Consolidated net income 25.9 5.2 20.7 Revenues We generated revenues of $56.2 million and $36.7 million for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2021, revenues consisted primarily of $39.3 million of interest, fees and royalties earned on our finance receivables and $16.8 million received from our Pharmaceutical Development segment. The $19.5 million increase consisted primarily of a $8.6 million increase in interest and fees earned on our finance receivables and a $10.9 million increase in revenues from our Pharmaceutical Development segment. The increase in Pharmaceutical Development segment revenue included milestone revenue related to Enteris’ license agreement with Cara. The $8.6 million increase in revenue attributable to our Finance Receivables segment was the result of a $5.7 million net increase in royalty income and a $4.9 million increase in fees and interest earned on our finance receivables due to funding new and existing loans, as well as accelerated fees and interest earned on two loans that were paid off in the fourth quarter of 2021. The increase in revenue was partially offset by a $2.0 million decrease in interest and fees earned on finance receivables that were paid off or paid down since the first quarter of 2020. Provision for Credit Losses and Impairment Expense We did not recognize any credit loss provision or impairment expense for the year ended December 31, 2021. We recognized impairment expense of $0.2 million on our debt securities during the year ended December 31, 2020. Interest Expense Interest expense consists of interest accrued on our revolving line of credit, unused line of credit and maintenance fees, as well as a quarterly minimum fee, and amortization of debt issuance costs. Interest expense decreased to $0.4 million for the year ended December 31, 2021 from $0.5 million for the year ended December 31, 2020. As of December 31, 2021, the revolving credit facility balance was approximately $8,000, compared to $11.8 million as of December 31, 2020, which resulted in a lower average outstanding balance on our credit facility interest expense for the year ended December 31, 2021 when compared to the year ended December 31, 2020. Pharmaceutical Manufacturing, Research and Development Expense Pharmaceutical manufacturing, research and development expense increased from $4.3 million for the year ended December 31, 2020 to $7.3 million for the year ended December 31, 2021. The $3.0 million increase was primarily due to an increase in expenses related to internal pipeline programs. This included successfully conducting a Phase 1 clinical trial and initiating a Phase 2 clinical trial for an optimized formulation of leuprolide, the purchase of a drug active for the manufacture of clinical trials material for the clinical trials and the development of a new product for a central nervous indication. The increase also included the purchase of a specialty excipient to manufacture clinical trial materials for Cara. Change in Fair Value of Contingent Consideration We recognized a $0.3 million gain and a $4.4 million loss in change in fair value of acquisition-related contingent consideration during the years ended December 31, 2021 and 2020, respectively. The contingent consideration is the earnout related to the 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement with Cara for oral formulation rights to Enteris’ Peptelligence® technology to develop and commercialize Oral KORSUVA™ in any indication worldwide, excluding South Korea and Japan (please refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 2 of the notes to the consolidated financial statements for further information on contingent consideration). The contingent consideration was remeasured to fair value throughout 2021. The carrying amount of the liability may fluctuate significantly, and actual amounts paid may be materially different from the estimated value of the liability. 26 Depreciation and Amortization The $8.0 million decrease in depreciation and amortization expense for the year ended December 31, 2021 primarily consists of a decrease in amortization expense related to the intangible assets of Enteris. Amortization expense is aligned with the expected future cash flows of the intangible assets. General and Administrative General and administrative expenses consist primarily of compensation; stock-based compensation and related costs for management, staff and Board; legal and audit expenses; and corporate governance expenses. General and administrative expenses increased to $13.6 million for the year ended December 31, 2021 from $10.5 million for the year ended December 31, 2020. The $3.1 million increase was primarily due to a $1.9 million increase in expenses incurred in connection with the SRC’s efforts to identify, review and explore strategic alternatives for the Company; such expenses primarily consist of legal and financial consulting fees, as well as Board compensation. The increase also included a $0.8 million increase in salaries, benefits and stock-based compensation expense, as well as a $0.4 million increase in overall office, insurance and rent expense. The increase was partially offset by a $0.1 million decrease in other professional fees. Other Income (Expense), Net Other income, net for the year ended December 31, 2021 reflected a net fair market value gain of $0.3 million on the change in fair value of our warrant assets and a net fair market value gain of $1.8 million on the change in fair value of our Misonix and Bioventus common stock. During the year ended December 31, 2021, we tendered our Misonix common stock and received $1.9 million in cash and 71,361 shares of Bioventus common stock and recognized a $0.1 million loss on the tender of the Misonix common stock. Other expense, net for the year ended December 31, 2020 reflected a net fair market value loss of $0.6 million on the change in fair value of our warrant derivatives and a net fair market value loss of $0.6 million on the change in fair value of our Misonix common stock. Income Tax Expense (Benefit) During the year ended December 31, 2021 and 2020, we recognized income tax expense of $7.1 million and income tax benefit of $1.5 million, respectively. The $8.6 million increase in income tax expense is a result of higher taxable income for the year ended December 31, 2021 when compared to the same period of the prior year. As of December 31, 2021 and 2020, our cumulative gross deferred tax asset was $38.9 million and $67.8 million, respectively. Based on historical and expected future operating performance, we concluded that it was more likely than not that we will not be able to realize the full benefit of the U.S. federal and state deferred tax assets in the future. The valuation allowance against deferred tax assets was $16.3 million and $37.5 million as of December 31, 2021 and 2020, respectively. At December 31, 2021, we believe it is more likely than not that we will realize approximately $20.5 million of benefit from the U.S. federal and state deferred tax assets in the future. As of December 31, 2021, we had NOLs for federal income tax purposes of $154.1 million. The federal NOL carryforwards, if not offset against future income, will expire by 2037. Approximately $4.0 million of the $154.1 million can be carried forward indefinitely. We also had federal research credit carryforwards of $3.1 million. The federal research credits will expire by 2040, with the majority of such credits expiring by 2029. Liquidity and Capital Resources As of December 31, 2021, we had $42.9 million in cash and cash equivalents, compared to $3.0 million in cash and cash equivalents as of December 31, 2020. The primary driver of the $39.9 million increase in our cash balance was $106.7 million of interest, fees, principal and royalty payments received on our finance receivables and a net $8.6 million of payments generated by our Pharmaceutical Development segment (the net $8.6 million includes $15.0 million of payments related to the completion of milestones under the License Agreement less $8.1 million paid to the seller of Enteris, pursuant to the provisions of the merger agreement). The increase was partially offset by $41.6 million of investment funding, net of deferred fees and origination expenses; $22.1 million of accounts payable, payroll and benefits expense, including $5.4 million for Enteris’ internal pipeline projects and capital expenditures; and $11.8 million of repayments on our credit facility. 27 Primary Driver of Cash Flow Our ability to generate cash in the future depends primarily upon our success in implementing our Finance Receivable segment business model of generating income by providing capital to a broad range of life science companies, institutions and inventors, as well as the success of our Pharmaceutical Development segment. We generate income primarily from four sources: 1. Primarily owning or financing through debt investments, royalties generated by the sales of life science products and related intellectual property; 2. Receiving interest and other income by advancing capital in the form of secured debt to companies in the life science sector; 3. Pharmaceutical development, manufacturing, and licensing activities utilizing the Peptelligence® platform; and 4. To a lesser extent, realizing capital appreciation from equity-related investments in the life science sector. As of December 31, 2021, our finance receivables portfolio contains $181.6 million of finance receivables, $1.2 million of marketable investments and $3.5 million of cost method investment. We expect these assets to generate positive cash flows in 2022. However, we continuously monitor the short and long-term financial position of our finance receivables portfolio. In addition, the majority of our finance receivables portfolio are debt instruments that carry floating interest rates with a LIBOR-based interest rate floor. Changes in interest rates, including the levels of LIBOR rates or the replacement of LIBOR with another reference rate, may affect the interest income for debt instruments with floating rates. We believe we are well positioned to benefit should market interest rates rise in the future. We continue to evaluate multiple attractive opportunities that, if consummated, we believe would similarly generate additional income. Since the timing of any investment is difficult to predict, our Finance Receivables segment may not be able to generate positive cash flow above what our existing assets are expected to produce in 2022. We do not assume any near-term repayments from borrowers, and as a result, no assurances can be given that actual results would not differ materially from the statement above. We expect the Pharmaceutical Development segment to generate positive cash flow above its expenses from proceeds received under its license agreements and customer relationships; however, the timing of the receipt of payments under the license agreements is uncertain and dependent upon the success of our technology licensees’ pharmaceutical development candidates. Also, the COVID-19 pandemic has resulted in disruption and delays to pharmaceutical clinical trials in general and may impact the expected timing of our technology licensees’ ability to achieve milestones upon which we receive income pursuant to our license agreements. We entered into a $20.0 million revolving credit facility in June 2018. The credit facility was amended on September 27, 2021 to extend the termination date to September 30, 2022 and to increase the credit facility commitment to $22.0 million. We continue to explore other options with respect to a new credit facility. As of December 31, 2021, approximately $22.0 million was available for borrowing under the credit facility. Off-Balance Sheet Arrangements In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage partner companies’ requests for funding and take the form of loan commitments and lines of credit. The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the partner company defaults, and the value of any existing collateral becomes worthless. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. As of December 31, 2021, we had $7.2 million of unfunded commitments. Please refer to Part II, Item 8, Financial Statements , Note 7 of the notes to the consolidated financial statements for further information regarding the Company’s commitments and contingencies. 28