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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-25 · 272 added, 282 removed, 124 unchanged (82% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Plan to Focus on Core Specialty Finance Business

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.

The following discussion and analysis should be read in conjunction with

our financial statements and the related notes included elsewhere in this Annual Report.

Statements below regarding future events or performance

are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Our actual results

could be quite different from those expressed or implied by the forward-looking statements.

Factors that could affect results are discussed

more fully under the sections entitled “Risk Factors,” and ”Special Note Regarding Forward-Looking Statements”

as revised and supplemented by those risks described from time to time in other reports which we file with the SEC.

Although forward-looking

statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable.

Readers are cautioned not to place undue reliance on the forward-looking statements.

We undertake no duty to update any forward-looking

statements made herein after the date of this Annual Report.

Environmental,

Social and Governance

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.

the ESG issues we support within the Company, we are committed to recruiting, motivating and developing a diversity of talent.

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.

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.

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 management and Board 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.

the ESG issues we support within our 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.

nature of our business supports environmental sustainability by being mindful of products we and our business 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.

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.

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.

Receivables Portfolio Overview

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):

table below provides an overview of our outstanding transactions as of, and for the year ended, December 31, 2022 (in thousands,

except rate, share and per share data):

Royalty Purchases

Investment as

Oncology treatment

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Oncology diagnosis

Coflex®/Kybella®/Zalviso®

Coflex®/Kybella®

Spinal stenosis/submental fullness

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Opioid overdose treatment

Japanese women’s health/cystic fibrosis

Ostomy Products Royalty

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Women’s health

Acer Therapeutics, Inc.

Acerus Pharmaceuticals Corporation

Aziyo Biologics, Inc.

B&D Dental Corporation

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Biotricity, Inc.

CeloNova BioSciences, Inc.

DxTerity Diagnostics, Inc.

Epica International, Inc.

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Flowonix Medical, Inc.

Harrow Health, Inc.

Keystone Dental Group

Misonix, Inc.

10.0% - 12.3%

MedMinder Systems, Inc.

MolecuLight, Inc.

Sincerus Pharmaceuticals, Inc.

Tenex Health, Inc.

Trio Healthcare Ltd.

as of 12/31/21

Investment as

Tissue Regeneration Therapeutics, Inc.

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Marketable Investments

in Fair Value

Investment as

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(“Bioventus”) Common Stock

Harrow Health, Inc.

(“Harrow”) Common Stock

Epica International, Inc.

Misonix Common Stock

Sincerus Pharmaceuticals, Inc.

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Investment as

Acer Therapeutics, Inc.

Acerus Pharmaceuticals Corporation

B&D Dental Corporation

Aziyo Biologics

BIOLASE, Inc.

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Harrow Health, Inc.

Income Recognized

MedMinder Systems, Inc.

MolecuLight, Inc.

Total finance receivables

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Total assets/revenues

Finance receivable was paid off during 2022.

US royalty was paid off during the year ended December 31, 2021.

SWK continues to receive insignificant royalties on international

Investment considered impaired.

Investment on nonaccrual.

Loan/royalty was paid off during 2021.

Loan was paid off in the first quarter of 2022.

to Part II, Item 8, Financial Statements and Supplementary Data, Note 13 of the notes to the consolidated financial statements for further

Maturity date and interest rate were amended during the fourth

quarter 2021.

Loan was paid off in the first quarter of 2022.

On October 29, 2021, Misonix was acquired by Bioventus.

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

Flowonix is evaluating strategic alternatives for the business.

A provision for credit losses was recognized during the fourth quarter of 2022.

Marketable investment was sold during the fourth quarter of 2022.

Please see part II, item 8, footnote 5 of the notes to the

consolidated financial statements for further information.

Finance receivable was paid off during the year ended December 31, 2021.

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.

Accounting Policies and Estimates

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

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 .

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 (“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 .

for Loan Losses

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

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.

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.

process of determining the level of the allowance for loan losses requires a high degree of judgment.

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could reach different reasonable conclusions.

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

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, discount or premium at the date of origination or 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.

Receivables Segment

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.

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

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Development Segment

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

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.

terms of these arrangements typically include payment to us of one or more of the following:

non-refundable, upfront license fees;

reimbursement of certain costs;

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development, regulatory and commercial milestone payments;

and royalties

on net sales of licensed products.

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:

royalties on net sales of licensed products.

determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, we

perform 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

(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;

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;

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.

received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s consolidated balance

Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current

deferred revenue.

selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv)

and d) the contract term and pattern of satisfaction of the performance obligations under step (v) above.

Management 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.

received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in our consolidated balance sheets.

Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current deferred

Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified

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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.

accounts and finance receivables, accounts payable, and accrued expenses.

We believe the carrying amount of cash and cash equivalents,

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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.

Company will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative

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.

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.

refer to Note 12 of the notes to the consolidated financial statements in Part II, Item 8, Financial

Statements and Supplementary Data .

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.

refer to Note 12 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary

Accounting Pronouncements

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 .

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 .

of Operations

section of this Annual Report generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report can be found in “Management’s

Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual

Report on Form 10-K for the year ended December 31, 2021.

of the Years Ended December 31, 2022 and 2021

following table summarizes the results of our operations for the years ended December 31, 2022 and 2021:

(in millions)

the Year Ended

Provision for credit losses and impairment expense

For the Year Ended

Provision for credit losses

Interest expense

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General and administrative expense

Other income (expense), net

Income tax expense (benefit)

Consolidated net income

Other (expense) income, net

Income tax (benefit) expense

generated revenues of $41.5 million and $56.2 million for the years ended December 31, 2022 and 2021, 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

The increase in Pharmaceutical Development segment revenue included milestone revenue related to Enteris’ license agreement

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.

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.

The $14.7 million

decrease in revenue for the year ended December 31, 2022, consisted of a $10.9 million decrease in Pharmaceutical Development segment

revenue and a $3.8 million decrease in Finance Receivables segment revenue.

The decrease in Pharmaceutical Development segment revenue

included $5.0 million of milestone revenue related to Enteris’ non-exclusive commercial license agreement (the “ License Agreement”)

with Cara Therapeutics, Inc.

(“Cara”) received during the year ended December 31, 2022, compared to $15.0 million of milestone

revenue for the same period of 2021.

The $3.8 million decrease in Finance Receivables segment revenue was primarily due to a $5.6

million net decrease in royalty revenue which was the result of the achievement of return premiums that caused a step down in

royalty rates, which was partially offset by a net increase of $1.8 million in interest and fees earned on finance receivables.

for Credit Losses and Impairment Expense

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.

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.

recognized provision for credit loss expense of $3.5 million on our cost method investment during the year ended December 31, 2022 (please

refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 3 of the notes to the consolidated financial statements

for further information on provision for credit losses).

We did not recognize any credit loss provision or impairment expense for the

year ended December 31, 2021.

expense consists of interest accrued on our revolving line of credit, unused line of credit and maintenance fees, as well as amortization

of debt issuance costs.

Interest expense decreased to $0.3 million for the year ended December 31, 2022 from $0.4 million for

the year ended December 31, 2021.

This slight decrease in interest expense was due to a lower average outstanding balance on our

credit facility during the year ended December 31, 2022 when compared to the year ended December 31, 2021.

Pharmaceutical

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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

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.

manufacturing, research and development expense decreased from $7.3 million for the year ended December 31, 2021 to $7.0 million

for the year ended December 31, 2022.

The $0.3 million decrease was primarily due to a decrease in expenses related to internal

pipeline programs.

in Fair Value of Contingent Consideration

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.

recognized a $5.2 million loss in change in fair value of acquisition-related contingent consideration during the year ended December

31, 2022 and recognized a $0.3 million gain in 2021.

The contingent consideration is the earnout related to the 2019 acquisition

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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.

excluding South Korea and Japan (please refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 7 of the notes

to the consolidated financial statements for further information on contingent consideration).

The carrying amount of the liability may

fluctuate significantly, and actual amounts paid may be materially different from the estimated value of the liability.

and Amortization

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in amortization expense related to the intangible assets of Enteris.

Amortization expense is aligned with the expected future cash flows

of the intangible assets.

Amortization expense is aligned with the expected future

cash flows of the intangible assets.

and Administrative

and administrative expenses consist primarily of compensation;

stock-based compensation and related costs for management, staff and Board;

and administrative expenses consist primarily of compensation, including stock-based compensation and related costs for management, staff

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.

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.

Income (Expense), Net

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

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.

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.

Tax Expense (Benefit)

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.

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.

General and administrative expenses decreased to $13.0 million

for the year ended December 31, 2022 from $13.6 million for the year ended December 31, 2021.

The $0.6 million decrease

was primarily due to a $1.4 million decrease in corporate strategic planning and related special committee board fees, as well as a $0.7

million decrease in stock-based compensation expense related to the forfeiture of stock-options held by former employees and

board members upon their departure in 2022.

The decrease was partially offset by a $1.3 million increase in audit and legal fees related

to amending the Company’s Articles of Incorporation and Bylaws and other corporate governance, financing and strategic matters.

(Expense) Income, Net

expense, net for the year ended December 31, 2022 reflected a net fair market value gain of $0.4 million on the change in fair value

of our warrant assets and a net fair market value loss $0.5 million on the change in fair value of our Bioventus and Harrow common stock.

During the year ended December 31, 2022, we exercised our right to purchase Harrow common stock.

Upon exercise, we received 306,347 shares

of Harrow common stock with a fair value of $3.7 million, or $11.97 per share.

During the year ended December 31, 2022, we sold our shares

of Harrow and Bioventus common stock and received proceeds of $3.7 million and $0.5 million, respectively.

Other expense, net for the

year ended December 31, 2022 reflected a realized loss of $0.2 million on the sale of our Bioventus and Harrow common stock.

Other (expense) income, net for the year ended December 31, 2022 also includes a $0.2 million loss from the remeasurement of foreign currency transactions into our functional currency, net of changes in fair value of the foreign currency forward contract.

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.

Tax (Benefit) Expense

the year ended December 31, 2022 and 2021, we recognized income tax benefit of $4.0 million and income tax expense of $7.1 million,

respectively.

The $11.1 million decrease in income tax expense is a result of lower taxable income for the year ended December

31, 2022 when compared to the same period of the prior year.

of December 31, 2022 and 2021, our cumulative gross deferred tax assets were $33.1 million and $38.9 million, respectively.

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.

The valuation

allowance against deferred tax assets was $6.7 million and $16.3 million as of December 31, 2022 and 2021, respectively.

As of December 31, 2022, we believe it is more likely than not that we will realize approximately $24.5 million of benefit from

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.

of December 31, 2022, we had NOLs for federal income tax purposes of $124.5 million.

The federal NOL carryforwards, if not offset against

future income, will expire by 2037.

Approximately $4.0 million of the $124.5 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

federal research credit carryforwards of $2.9 million.

The federal research credits begin to expire in 2023 and will

fully expire by 2042.

and Capital Resources

1 unchanged sentence

December 31, 2021.

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.

The primary driver of the $36.7 million decrease in our cash balance was $95.1 million of investment funding, net

of deferred fees and origination expenses and including $2.8 million of collateral on forward currency exchange contract;

$21.7 million for payments of accounts payable, payroll and benefits expense, including

$2.8 million for Enteris’ internal pipeline projects and capital expenditures;

$6.0 million of repayments our credit facility;

and $1.1 million to repurchase shares of our common stock on the open market.

The decrease was partially offset by $75.9 million of interest,

fees, principal and royalty payments received on our finance receivables and a net $3.4 million of payments generated by our Pharmaceutical

Development segment (the net $3.4 million includes $5.0 million of payments related to the completion of milestones under the License

Agreement less $2.5 million paid to the seller of Enteris, pursuant to the provisions of the merger agreement related to such sale).

entered into a $20.0 million revolving credit facility in June 2018.

The credit facility was amended on November 16, 2022 to extend

the termination date to September 30, 2025 and increase the borrowing size under the credit facility to $35.0 million.

As of December

31, 2022, approximately $32.6 million was available for borrowing under the credit facility.

We are continuing to explore other

options with respect to a new credit facility.

Driver of Cash Flow

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.

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:

Primarily owning or financing through debt investments, royalties generated by the sales of life

science products and related intellectual property;

Receiving interest and other income by advancing capital in the form of secured debt to companies

in the life science sector;

Pharmaceutical development, manufacturing, and licensing activities utilizing the Peptelligence®

To a lesser extent, realizing capital appreciation from equity-related investments in the life

science sector.

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.

Primarily owning or financing

through debt investments, royalties generated by the sales of life science products and related intellectual property;

Receiving interest and other income by

advancing capital in the form of secured debt to companies in the life science sector;

Pharmaceutical development, manufacturing,

and licensing activities utilizing the Peptelligence® platform;

To a lesser extent, realizing capital appreciation

from equity-related investments in the life science sector.

of December 31, 2022, our finance receivables portfolio contains $236.6 million of finance receivables and $0.1 million of marketable

We expect these assets to generate positive cash flows in 2023.

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.

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, such as SOFR, the Secured Overnight Financing 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

continue to evaluate multiple attractive opportunities that, if consummated, we believe would similarly generate additional income.

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.

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.

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.

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.

Sheet Arrangements

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

Such transactions are used primarily to manage partner companies’ requests for funding and take the form of loan commitments

and lines of credit.

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.

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.

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.

of December 31, 2022, we had $11.9 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.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis