SWK Holdings Corp 10-Q

ITEM 1. FINANCIAL STATEMENTS SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value and share data) March 31, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 41,399 $ 42,863 Interest and accounts receivable, net 1,979 1,803 Marketable investments 1,006 1,034 Other current assets 1,576 1,727 Total current assets 45,960 47,427 Finance receivables, net 188,278 181,553 Marketable investments 106 119 Cost method investment 3,491 3,491 Deferred tax asset, net 19,460 20,539 Warrant assets 2,878 3,419 Intangible assets, net 9,467 9,964 Goodwill 8,404 8,404 Property and equipment, net 5,991 5,779 Other non-current assets 1,915 1,970 Total assets $ 285,950 $ 282,665 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 4,863 $ 5,087 Revolving credit facility — 8 Total current liabilities 4,863 5,095 Contingent consideration payable 8,530 8,530 Other non-current liabilities 1,758 1,804 Total liabilities 15,151 15,429 Commitments and contingencies (Note 6) Stockholders’ equity: Preferred stock, $ 0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively — — Common stock, $ 0.001 par value; 250,000,000 shares authorized; 12,834,813 and 12,836,133 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively 13 13 Additional paid-in capital 4,431,804 4,431,719 Accumulated deficit ( 4,161,018 ) ( 4,164,496 ) Total stockholders’ equity 270,799 267,236 Total liabilities and stockholders’ equity $ 285,950 $ 282,665 See accompanying notes to the unaudited condensed consolidated financial statements. 1 SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Three Months Ended March 31, 2022 2021 Revenues: Finance receivable interest income, including fees $ 10,415 $ 8,679 Pharmaceutical development 236 198 Other 480 496 Total revenues 11,131 9,373 Costs and expenses: Interest expense 80 145 Pharmaceutical manufacturing, research and development expense 1,901 1,548 Depreciation and amortization expense 704 1,682 General and administrative 3,160 2,885 Income from operations 5,286 3,113 Other (expense) income, net Unrealized net (loss) gain on derivatives ( 693 ) 283 Unrealized net (loss) gain on equity securities ( 28 ) 932 Income before income tax expense 4,565 4,328 Income tax expense 1,087 939 Net income $ 3,478 $ 3,389 Net income per share Basic $ 0.27 $ 0.26 Diluted $ 0.27 $ 0.26 Weighted Average Shares Basic 12,830 12,793 Diluted 12,888 12,810 See accompanying notes to the unaudited condensed consolidated financial statements. 2 SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Three Months Ended March 31, 2022 Common Stock Additional Paid- Accumulated Total Stockholders’ Shares Amount In Capital Deficit Equity Balances at December 31, 2021 12,836,133 13 $ 4,431,719 $ ( 4,164,496 ) $ 267,236 Stock-based compensation — — 85 — 85 Issuance of common stock upon vesting of restricted stock 5,495 — — — — Forfeiture of unvested restricted stock ( 6,815 ) — — — — Net income — — — 3,478 3,478 Balances at March 31, 2022 12,834,813 $ 13 $ 4,431,804 $ ( 4,161,018 ) $ 270,799 Three Months Ended March 31, 2021 Common Stock Additional Paid- Accumulated Total Stockholders’ Shares Amount In Capital Deficit Equity Balances at December 31, 2020 12,792,586 $ 13 $ 4,430,924 $ ( 4,190,425 ) $ 240,512 Stock-based compensation — — 177 — 177 Issuance of common stock upon vesting of restricted stock 3,021 — — — — Net income — — — 3,389 3,389 Balances at March 31, 2021 12,795,607 $ 13 $ 4,431,101 $ ( 4,187,036 ) $ 244,078 See accompanying notes to the unaudited condensed consolidated financial statements. 3 SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Three Months Ended March 31, 2022 2021 Cash flows from operating activities: Net income $ 3,478 $ 3,389 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of debt issuance costs 14 46 Deferred income taxes 1,079 918 Change in fair value of warrants 693 ( 283 ) Change in fair value of equity securities 28 ( 699 ) Loan discount amortization and fee accretion ( 421 ) ( 628 ) Interest income paid-in-kind ( 734 ) ( 13 ) Stock-based compensation 85 177 Depreciation and amortization expense 704 1,682 Changes in operating assets and liabilities: Interest and accounts receivable ( 176 ) ( 260 ) Other assets ( 225 ) ( 308 ) Accounts payable and other liabilities ( 270 ) 350 Net cash provided by operating activities 4,255 4,371 Cash flows from investing activities: Investment in equity securities — ( 233 ) Investment in finance receivables ( 22,700 ) ( 7,100 ) Repayment of finance receivables 16,978 2,304 Corporate debt securities principal payments 13 18 Purchases of property and equipment ( 58 ) ( 321 ) Other 56 163 Net cash used in investing activities ( 5,711 ) ( 5,169 ) Cash flows from financing activities: Net payments on credit facility ( 8 ) ( 600 ) Net cash used in financing activities ( 8 ) ( 600 ) Net decrease in cash and cash equivalents ( 1,464 ) ( 1,398 ) Cash and cash equivalents at beginning of period 42,863 3,008 Cash and cash equivalents at end of period $ 41,399 $ 1,610 See accompanying notes to the unaudited condensed consolidated financial statements. 4 SWK HOLDINGS CORPORATION NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. SWK Holdings Corporation and Summary of Significant Accounting Policies Nature of Operations SWK Holdings Corporation (the “Company”) was incorporated in July 1996 in California and reincorporated in Delaware in September 1999. In July 2012, the Company commenced its strategy of building a specialty finance and asset management business. In August 2019, the Company commenced a complementary strategy of building a pharmaceutical development, manufacturing and intellectual property licensing business. The Company’s operations comprise two reportable segments: “Finance Receivables” and “Pharmaceutical Development.” The Company allocates capital to each segment in order to generate income through the sales of life science products by third parties. The Company is headquartered in Dallas, Texas, and as of March 31, 2022, the Company had 35 full-time employees. The Company has net operating loss carryforwards (“NOLs”) and believes that the ability to utilize these NOLs is an important and substantial asset. However, at this time, under current law, the Company does not anticipate that the Finance Receivables and/or Pharmaceutical Development segments will generate sufficient income to permit the Company to utilize all of its NOLs prior to their respective expiration dates. As such, it is possible that the Company might pursue additional strategies that it believes might result in the ability to utilize more of the NOLs. As of May 4, 2022, the Company and its partners have executed transactions with 45 different parties under its specialty finance strategy, funding an aggregate of $643.2 million in various financial products across the life science sector. The Company’s portfolio includes senior and subordinated debt backed by royalties and synthetic royalties paid by companies in the life science sector, and purchased royalties generated by sales of life science products and related intellectual property. On August 26, 2019, the Company commenced its Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”). Enteris is a clinical stage biopharmaceutical company offering innovative formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence® platform. Since its founding in 2013, Enteris has advanced multiple internal and external programs leveraging Peptelligence®, which enables the oral delivery of molecules that are typically injected, including peptides and BCS Class II, III, and IV small molecules, in an enteric-coated tablet formulation. Peptelligence® utilizes a unique multifaceted approach to increase the solubility and absorption of peptides and small molecules, addressing the complex challenges regarding solubility and permeability of therapeutics with low oral bioavailability. Peptelligence® is protected by an extensive patent estate that extends until 2036. Basis of Presentation and Principles of Consolidation The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of all subsidiaries and affiliates in which the Company holds a controlling financial interest as of the financial statement date. Normally a controlling financial interest reflects ownership of a majority of the voting interests. The Company consolidates a variable interest entity (“VIE”) when it possesses both the power to direct the activities of the VIE that most significantly impact its economic performance and the Company is either obligated to absorb the losses that could potentially be significant to the VIE or the Company holds the right to receive benefits from the VIE that could potentially be significant to the VIE, after elimination of intercompany accounts and transactions. The Company owns interests in various partnerships and limited liability companies, or LLCs. The Company consolidates its investments in these partnerships or LLCs where the Company, as the general partner or managing member, exercises effective control, even though the Company’s ownership may be less than 50 percent, the related governing agreements provide the Company with broad powers, and the other parties do not participate in the management of the entities and do not effectively have the ability to remove the Company. The Company has reviewed each of the underlying agreements to determine if it has effective control. If circumstances change and it is determined this control does not exist, any such investment would be recorded using the equity method of accounting. Although this would change individual line items within the Company’s consolidated financial statements, it would have no effect on its operations and/or total stockholders’ equity attributable to the Company. 5 Unaudited Interim Financial Information The unaudited condensed consolidated financial statements have been prepared by the Company and reflect all normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the interim financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 2022. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 25, 2022. Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition; stock-based compensation; valuation of accounts receivable; impairment of finance receivables; long-lived assets; property and equipment; intangible assets; goodwill; valuation of warrants and other investments; contingent consideration; income taxes; and contingencies and litigation, among others. Some of these judgments can be subjective and complex, and consequently, actual results may differ from these estimates. The Company’s estimates often are based on complex judgments, probabilities and assumptions that it believes to be reasonable but that are inherently uncertain and unpredictable. For any given individual estimate or assumption made by the Company, there may also be other estimates or assumptions that are reasonable. The Company regularly evaluates its estimates and assumptions using historical experience and other factors, including the economic environment. As future events and their effects cannot be determined with precision, the Company’s estimates and assumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause changes to those estimates and assumptions. Market conditions, such as illiquid credit markets, health crises such as the COVID-19 global pandemic, volatile equity markets, and economic downturns, can increase the uncertainty already inherent in the Company’s estimates and assumptions. The Company adjusts its estimates and assumptions when facts and circumstances indicate the need for change. Those changes generally will be reflected in our consolidated financial statements on a prospective basis unless they are required to be treated retrospectively under the relevant accounting standard. It is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. Segment Information The Company earns revenues from its two U.S.-based business segments: its specialty finance and asset management business offering customized financing solutions to a broad range of life-sciences companies, and its business offering oral therapeutic formulation solutions built around Enteris’ pharmaceutical Peptelligence® platform, which enables the oral delivery of molecules that are typically injected, including peptides and BCS Class II, III, and IV small molecules in an enteric-coated tablet formulation. Revenue Recognition 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. Deferred revenue includes amounts that have been billed per the contractual terms but have not been recognized as revenue. The Company classifies as current the portion of deferred revenue that is expected to be recognized within one year from the balance sheet date and is included in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets. Research and Development Research and development expenses include the costs associated with internal research and development and research and development conducted for the Company by third parties. These costs primarily consist of salaries, pre-clinical and clinical trials, outside consultants, and supplies. All research and development costs discussed above are expensed as incurred. Third-party expenses reimbursed under research and development contracts, which are not refundable, are recorded as a reduction to pharmaceutical manufacturing research and development expense in the consolidated statements of income. 6 Recent Accounting Pronouncements In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which updates the requirements for accounting for credit losses under ASC 326, eliminates the accounting guidance on troubled debt restructurings for creditors, and enhances creditors’ disclosure requirements related to loan refinancings and restructurings for borrowers experiencing financial difficulty. The ASU also amends the guidance on vintage disclosures to require disclosure of gross write-offs by year of origination. The amendments are effective in periods beginning after December 15, 2022 using either a prospective or modified retrospective transition. Early adoption of certain or all of the amendments is permitted. The Company is currently evaluating the provisions of the amendments and the impact on its future consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include: (i) contract modifications, (ii) hedging relationships, and (iii) sales or transfers of debt securities classified as held-to-maturity. ASU 2020-04 is effective from March 12, 2020 through December 31, 2022. An entity may elect to adopt the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. An entity may elect to apply the amendments in ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The one-time election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity may be made at any time after March 12, 2020 but no later than December 31, 2022. The Company has identified existing loans that reference LIBOR and is in the process of evaluating alternatives in each situation. The Company expects that it will elect to apply some of the expedients and exceptions provided in ASU 2020-04 and does not believe the adoption of this standard will have a material impact on the Company’s consolidated financial statements. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This standard adds an impairment model, known as the current expected credit loss (“CECL”) model, that is based on expected losses rather than incurred losses. Under this guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of losses. This ASU describes the impairment allowance as a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be measured in a manner similar to current GAAP; however, the amendments in this update require that credit losses be presented as an allowance rather than as a write-down, which will allow an entity the ability to record reversals of credit losses in current period net income. On November 15, 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which finalized various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies. Under ASU 2019-10, the effective date for implementation of CECL for smaller reporting companies was extended to fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently evaluating the new guidance but believes it is likely to incur more upfront losses on its portfolio under the new CECL model. 7 Note 2. Net Income per Share Basic net income per share is computed using the weighted-average number of outstanding shares of common stock. Diluted net income per share is computed using the weighted-average number of outstanding shares of common stock, and when dilutive, shares of common stock issuable upon exercise of options and warrants deemed outstanding using the treasury stock method. The following table shows the computation of basic and diluted net income per share for the following periods (in thousands, except per share amounts): Schedule of Basic and Diluted Earning per Share Three Months Ended March 31, 2022 2021 Numerator: Net income $ 3,478 $ 3,389 Denominator: Weighted-average shares outstanding 12,830 12,793 Effect of dilutive securities 58 17 Weighted-average diluted shares 12,888 12,810 Basic net income per share $ 0.27 $ 0.26 Diluted net income per share $ 0.27 $ 0.26 For the three months ended March 31, 2022 and 2021, outstanding options to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 300,000 and 411,000 , respectively, have been excluded from the calculation of diluted net income per share as such securities were anti-dilutive. 8 Note 3. Finance Receivables, Net Finance receivables are reported at their determined principal balances net of any unearned income, cumulative charge-offs and unamortized deferred fees and costs. Unearned income and deferred fees and costs are amortized to interest income based on all cash flows expected using the effective interest method. As of March 31, 2022 and December 31, 2021, the Company had a credit loss allowance of $8.4 million. Of the total $8.4 million, $1.2 million and $0.6 million are associated with the Company’s Cambia® and Besivance® royalties, respectively. The remaining $6.6 million is related to the ABT Molecular Imaging, Inc., now known as Best ABT, Inc. (“Best”), second lien term loan that was recognized in order to reflect the Best royalty at its estimated fair value. The carrying values of finance receivables are as follows (in thousands): Schedule of carrying value of finance receivables March 31, 2022 December 31, 2021 Term loans $ 145,187 $ 136,312 Royalty purchases 51,459 53,629 Total before allowance for credit losses 196,646 189,941 Allowance for credit losses ( 8,368 ) ( 8,388 ) Total carrying value $ 188,278 $ 181,553 The following table presents nonaccrual and performing finance receivables by portfolio segment, net of credit loss allowance (in thousands): Schedule of analysis of nonaccrual and performing loans by portfolio segment March 31, 2022 December 31, 2021 Nonaccrual Performing Total Nonaccrual Performing Total Term loans $ 9,789 $ 135,398 $ 145,187 $ 18,288 $ 118,024 $ 136,312 Royalty purchases, net of credit loss allowance 3,217 39,874 43,091 3,362 41,879 45,241 Total carrying value $ 13,006 $ 175,272 $ 188,278 $ 21,650 $ 159,903 $ 181,553 As of March 31, 2022, the Company had two finance receivables in nonaccrual status: (1) the term loan to Flowonix Medical, Inc. (“Flowonix”), with a net carrying value of $9.8 million and (2) the Best royalty, with a net carrying value of $3.2 million. Although in nonaccrual status, the Flowonix term loan was not considered impaired as of March 31, 2022 and December 31, 2021. The Company collected $0.5 million on its nonaccrual finance receivables during the three months ended March 31, 2022. Note 4. Marketable Investments Investments in available-for-sale corporate debt securities and equity securities as of March 31, 2022 and December 31, 2021 consist of the following (in thousands): Schedule of marketable investments March 31, 2022 December 31, 2021 Corporate debt securities $ 106 $ 119 Equity securities 1,006 1,034 Total marketable investments $ 1,112 $ 1,153 The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale corporate debt securities as of March 31, 2022 and December 31, 2021, are as follows (in thousands): Schedule of available-for-sale securities reconciliation Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Fair Value March 31, 2022 $ 106 $ — $ — $ 106 December 31, 2021 $ 119 $ — $ — $ 119 9 The following table presents unrealized net income (loss) on equity securities during the three months ended March 31, 2022 and 2021 (in thousands): Schedule of Proceeds from sales, gross unrealized gains and gross unrealized losses for available-for-sale securities Three Months Ended March 31, 2022 2021 Unrealized net (loss) gain on equity securities reflected in the unaudited condensed consolidated statements of income $ ( 28 ) $ 932 Note 5. Intangible Assets The following table summarizes the gross book value, accumulated amortization and net book value balances of intangible assets as of March 31, 2022 and December 31, 2021 (in thousands): Schedule of Intangible Assets March 31, 2022 December 31, 2021 Gross Book Value Accumulated Amortization Net Book Value Gross Book Value Accumulated Amortization Net Book Value Licensing Agreement (1) $ 29,400 $ 20,266 $ 9,134 $ 29,400 $ 19,780 $ 9,620 Trade names and trademarks 210 55 155 210 50 160 Customer relationships 240 62 178 240 56 184 Total intangible assets $ 29,850 $ 20,383 $ 9,467 $ 29,850 $ 19,886 $ 9,964 (1) Prior to the acquisition, Enteris entered into a non-exclusive commercial license agreement (the “License Agreement”) with Cara Therapeutics, Inc. (“Cara”), for oral formulation rights to Enteris’ Peptelligence® technology to develop and commercialize Oral KORSUVA TM in any indication worldwide, excluding South Korea and Japan. Cara is obligated to pay Enteris certain development, regulatory and tiered commercial milestone payments, as well as low single-digit royalties based on net sales in the licensed territory. Amortization expense related to intangible assets was $0.5 million and $1.6 million for the three months ended March 31, 2022 and 2021, respectively. The estimated future amortization expense related to intangible assets as of March 31, 2022 is as follows (in thousands): Schedule of Intangible Asset Amortization Expense Fiscal Year Amount Remainder of 2022 $ 1,277 2023 1,703 2024 1,546 2025 1,076 2026 1,076 Thereafter 2,789 Total $ 9,467 10 Note 6. Commitments and Contingencies Contingent Consideration The Company recorded contingent consideration related to the August 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement. Contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved, with changes in the estimated fair value recognized in earnings. The estimated fair value of contingent consideration as of March 31, 2022 and December 31, 2021 was $8.5 million. The Company did not recognize a change in the estimated fair value of its contingent consideration during the three months ended March 31, 2022 and 2021. Unfunded Commitments As of March 31, 2022, the Company’s unfunded commitments were as follows (in millions): Schedule of Unfunded Commitments 4Web, Inc. $ 0.5 Trio Healthcare Ltd. Loan 2.7 Ideal Implant, Inc. 2.0 Total unfunded commitments $ 5.2 Unfunded commitments are contingent upon reaching an established revenue threshold or other performance metrics on or before a specified date or period of time per the terms of the royalty purchase or credit agreements, and in the case of loan transactions, are only subject to being advanced as long as an event of default does not exist. 11 Note 7. Fair Value Measurements The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the three hierarchy levels. Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in inactive markets. Level 3 Unobservable inputs are not corroborated by market data. This category is comprised of financial and non-financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies using significant inputs that are generally less readily observable from objective sources. Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers occurred. There were no transfers between any levels during the three months ended March 31, 2022. The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying unaudited condensed consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivative financial instruments, other than investment in affiliates. Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized. Cash and cash equivalents The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values. Marketable Investments Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Finance Receivables The fair values of finance receivables are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the finance receivables. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. These receivables are classified as Level 3. Finance receivables are not measured at fair value on a recurring basis, but estimates of fair value are reflected below. Contingent Consideration The Company recorded contingent consideration related to the August 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement. The fair value measurements of contingent consideration obligations arising from business combinations are classified as Level 3 estimates under the fair value hierarchy as these items have been valued using unobservable inputs. These inputs include: (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement. 12 Marketable Investments and Derivative Securities Marketable Investments If active market prices are available, fair value measurement is based on quoted active market prices and, accordingly, these securities would be classified as Level 1. If active market prices are not available, fair value measurement is based on observable inputs other than quoted prices included within Level 1, such as prices for similar assets or broker quotes utilizing observable inputs, and accordingly these securities would be classified as Level 2. If market prices are not available and there are no observable inputs, then fair value would be estimated by using valuation models including discounted cash flow methodologies, commonly used option-pricing models and broker quotes. Such securities would be classified as Level 3, if the valuation models and broker quotes are based on inputs that are unobservable in the market. If fair value is based on broker quotes, the Company checks the validity of received prices based on comparison to prices of other similar assets and market data such as relevant bench mark indices. Available-for-sale securities are measured at fair value on a recurring basis, while securities with no readily available fair market value are not, but estimates of fair value are reflected below. Derivative Securities For exchange-traded derivatives, fair value is based on quoted market prices, and accordingly, would be classified as Level 1. For non-exchange traded derivatives, fair value is based on option pricing models and are classified as Level 3. The following table presents financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 (in thousands): Schedule of fair value assets measured on recurring basis Total Carrying Value in Consolidated Balance Sheets Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets Warrant assets $ 2,878 $ — $ — $ 2,878 Marketable investments 1,112 1,006 — 106 Financial Liabilities Contingent consideration payable $ 8,530 $ — $ — $ 8,530 The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 (in thousands): Total Carrying Value in Consolidated Balance Sheets Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets Warrant assets $ 3,419 $ — $ — $ 3,419 Marketable investments 1,153 1,034 — 119 Financial Liabilities Contingent consideration payable $ 8,530 $ — $ — $ 8,530 13 The changes in fair value of the warrant assets during the three months ended March 31, 2022 and 2021 were as follows (in thousands): Schedule of fair value assets measured on recurring basis unobservable input reconciliation March 31, 2022 March 31, 2021 Fair value – Fair value - December 31, 2021 $ 3,419 Fair value - December 31, 2020 $ 2,972 Issued 152 Issued — Canceled — Canceled — Change in fair value ( 693 ) Change in fair value 283 Fair value - March 31, 2022 $ 2,878 Fair value - March 31, 2021 $ 3,255 The Company holds warrants issued to the Company in conjunction with certain term loan investments. These warrants meet the definition of a derivative and are included in the unaudited condensed consolidated balance sheets. The fair values for warrants outstanding, which do not have a readily determinable value, are measured using the Black-Scholes option pricing model. The following ranges of assumptions were used in the models to determine fair value: Schedule of weighted average assumptions March 31, 2022 December 31, 2021 Dividend rate range — — Risk-free rate range 2.3 % to 2.5 % 0.97 % to 1.44 % Expected life (years) range 2.3 to 6.9 2.6 to 7.0 Expected volatility range 52.0 % to 142.6 % 60.2 % to 142.0 % As of March 31, 2022 and December 31, 2021, the Company had two royalties, Best and Cambia®, that were deemed to be impaired based on reductions in carrying values in prior periods. The following table presents these royalties measured at fair value on a nonrecurring basis as of March 31, 2022 and December 31, 2021 (in thousands): Schedule of fair value assets and liabilities measured on nonrecurring basis Total Carrying Value in Consolidated Balance Sheets Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2022 $ 5,051 $ — $ — $ 5,051 December 31, 2021 $ 5,612 $ — $ — $ 5,612 There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2022 and December 31, 2021. The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying unaudited condensed consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivative financial instruments measured at fair value on a recurring and non-recurring basis. Schedule of fair value by balance sheet grouping As of March 31, 2022 (in thousands): Carrying Value Fair Value Level 1 Level 2 Level 3 Financial Assets Cash and cash equivalents $ 41,399 $ 41,399 $ 41,399 $ — $ — Finance receivables 188,278 188,278 — — 188,278 Marketable investments 1,112 1,112 1,006 — 106 Warrant assets 2,878 2,878 — — 2,878 Financial Liabilities Contingent consideration payable $ 8,530 $ 8,530 $ — $ — $ 8,530 14 As of December 31, 2021 (in thousands): Carrying Value Fair Value Level 1 Level 2 Level 3 Financial Assets Cash and cash equivalents $ 42,863 $ 42,863 $ 42,863 $ — $ — Finance receivables 181,553 181,553 — — 181,553 Marketable investments 1,153 1,153 1,034 — 119 Warrant assets 3,419 3,419 — — 3,419 Financial Liabilities Contingent consideration payable $ 8,530 $ 8,530 $ — $ — $ 8,530 Note 8. Revenue Recognition The Company’s Pharmaceutical Development segment recognizes revenues received from contracts with its customers by revenue source, as the Company believes it best depicts the nature, amount, timing and uncertainty of our revenue and cash flow. The Company’s Finance Receivables segment does not have any revenues received from contracts with customers. The following table provides the contract revenue recognized by revenue source for the three months ended March 31, 2022 and 2021 (in thousands): Schedule of Revenue Recognized by Revenue Source Three Months Ended March 31, 2022 2021 Pharmaceutical Development Segment License Agreement $ 116 $ 179 Pharmaceutical Development and other 600 515 Total contract revenue $ 716 $ 694 The Company’s contract liabilities represent advance consideration received from customers and are recognized as revenue when the related performance obligation is satisfied. The Company’s contract liabilities are presented as deferred revenues and are included in accounts payable and accrued liabilities in the consolidated balance sheets (in thousands): Schedule of Company's Contract Liabilities March 31, 2022 December 31, 2021 Pharmaceutical Development Segment Deferred revenue $ 36 $ 185 Total contract liabilities $ 36 $ 185 During the three months ended March 31, 2022, the Company recognized $ 0.1 million of 2021 deferred revenue from satisfaction of performance obligations. The Company did not have any contract assets nor did it have any contract liabilities related to the License Agreement as of March 31, 2022 or December 31, 2021. 15 Note 9. Segment Information Selected financial and descriptive information is required to be provided about reportable operating segments, considering a “management approach” concept as the basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the Company for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are evident from the structure of the Company’s internal organization, focusing on financial information that the Company’s chief executive officer uses to make decisions about the Company’s operating matters. As described in Note 1, the Company has determined it has two reportable segments: Finance Receivables and Pharmaceutical Development, and each are individually managed and provide separate services. Revenues by segment represent revenues earned on the services offered within each segment. The Company does not report assets by reportable segment, as this metric is not used by the Company’s chief executive officer in assessing performance or allocating resources to the segments. The following table presents financial information for the Company’s reportable revenue by geographic region for the periods indicated (in thousands): Schedule of Reportable Revenue by Geographic Region Three Months Ended March 31, 2022 2021 United States , country of domicile $ 8,125 $ 7,652 International 3,006 1,721 Total revenue $ 11,131 $ 9,373 Segment performance is evaluated based on several factors, including income (loss) from continuing operations before income taxes. Management uses this measure of net income (loss) to evaluate segment performance because the Company believes this measure is indicative of performance trends and the overall earnings potential of each segment. The following tables present financial information for the Company’s reportable segments for the periods indicated (in thousands): Schedule of Reportable Segments Three Months Ended March 31, 2022 Finance Receivables Pharmaceutical Development and Other Holding Company and Other Consolidated Revenue $ 10,415 $ 236 $ — $ 10,651 Other revenue — 480 — 480 Interest expense 80 — — 80 Manufacturing, research and development — 1,901 — 1,901 Depreciation and amortization expense — 704 — 704 General and administrative 102 1,035 2,023 3,160 Other expense, net ( 721 ) — — ( 721 ) Income tax expense — — 1,087 1,087 Net income (loss) 9,512 ( 2,924 ) ( 3,110 ) 3,478 16 Three Months Ended March 31, 2021 Finance Receivables Pharmaceutical Development and Other Holding Company and Other Consolidated Revenue $ 8,679 $ 198 $ — $ 8,877 Other revenue — 496 — 496 Interest expense 145 — — 145 Manufacturing, research and development — 1,548 — 1,548 Depreciation and amortization expense — 1,680 2 1,682 General and administrative 184 1,106 1,595 2,885 Other income, net 1,215 — — 1,215 Income tax expense — — 939 939 Net income (loss) 9,565 ( 3,640 ) ( 2,536 ) 3,389 Included in Holding Company and Other are the expenses of the parent holding company and certain other enterprise-wide overhead costs, including public company costs and non-Enteris corporate employees, which have been included for purposes of reconciling to the consolidated amounts. 17