Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our financial statements and the related notes 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
As
overseers of risk and stewards of long-term enterprise value, our management and Board play a vital role in assessing, identifying
and understanding the potential impact and related risks of environmental, social and governance (“ESG”) issues on
the organization’s operating model. Our 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.
Among
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.
The
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.
Overview
We
have organized our operations into two segments: Finance Receivables and Pharmaceutical Development. These segments reflect the
way we evaluate our business performance and manage our operations. Please refer to Part I, Item 1, Business and Part II,
Item 8, Financial Statements , Notes 1 and 11 of the notes to the consolidated financial statements for further information
regarding segment information.
25
Finance
Receivables Portfolio Overview
The
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
Licensed
Technology
Footnote
Funded
Amount
GAAP
Balance
Revenue
(Loss)
Recognized
Active
Investment
as of
12/31/22
Beleodaq®
Oncology treatment
(1)
$ 7,600
$ —
$ 799
No
Besivance®
Ophthalmic antibiotic
(2)
6,000
—
24
Yes
Best ABT, Inc.
Oncology diagnosis
(3), (4)
5,784
2,947
—
Yes
Coflex®/Kybella®
Spinal stenosis/submental fullness
4,350
3,902
503
Yes
Cambia®
NSAID migraine treatment
(3)
8,500
598
(264 )
Yes
Forfivo XL®
Depressive disorder treatment
6,000
1,401
1,074
Yes
Ideal Implant, Inc.
Aesthetics
(4)
3,000
3,789
402
Yes
Iluvien®
Diabetic macular edema
16,501
15,543
2,211
Yes
Narcan®
Opioid overdose treatment
(1)
17,500
—
3,921
No
Duo Royalty
Japanese women’s health/cystic fibrosis
15,488
16,028
—
Yes
Ostomy Products Royalty
Ostomy products
(1)
3,900
—
1,927
No
Veru, Inc.
Women’s health
10,000
3,511
687
Yes
Term Loans
Type
Footnote
Maturity
Date
Principal
GAAP
Balance
Rate
Revenue
(Loss)
Recognized
Active
Investment
as of
12/31/22
4Web, Inc.
First lien
12/31/24
$ 31,022
$ 31,495
16.0 %
$ 4,542
Yes
AOTI, Inc.
First lien
03/21/27
12,000
12,022
11.0 %
1,318
Yes
Acer Therapeutics, Inc.
First lien
03/04/24
6,942
7,322
12.0 %
1,476
Yes
Acerus Pharmaceuticals Corporation
First lien
(1)
10/11/23
—
—
12.0 %
538
No
Aziyo Biologics, Inc.
First lien
08/10/27
25,000
24,566
11.5 %
1,219
Yes
B&D Dental Corporation
First lien
(1)
12/10/18
—
—
14.0 %
2,401
No
BIOLASE, Inc.
First lien
05/31/25
13,300
13,836
10.5 %
1,931
Yes
Biotricity, Inc.
First lien
12/21/26
12,364
12,291
11.5 %
1,639
Yes
Epica International, Inc.
First lien
07/23/24
12,000
12,452
9.5 %
1,506
Yes
eTon Pharmaceuticals, Inc.
First lien
11/13/24
6,615
6,707
10.0 %
915
Yes
Exeevo, Inc.
First lien
07/01/27
5,000
4,975
12.0 %
402
Yes
Flowonix Medical, Inc.
First lien
(4), (5)
12/23/25
11,942
11,304
14.0 %
—
Yes
Keystone Dental Group
First lien
(1)
08/01/23
—
—
11.5 %
888
No
MedMinder Systems, Inc.
First lien
08/18/27
20,000
19,902
10.3 %
954
Yes
MolecuLight, Inc.
First lien
12/29/26
10,000
10,059
12.5 %
1,482
Yes
Sincerus Pharmaceuticals, Inc.
First lien
05/15/27
13,497
13,516
10.4 %
1,914
Yes
Trio Healthcare Ltd.
First lien
07/01/26
8,428
8,389
12.5 %
1,052
Yes
26
Cost Method
Investment
Licensed
Technology
Footnote
Maturity
Date
Principal
GAAP
Balance
Rate
Revenue
(Loss)
Recognized
Active
Investment as
of 12/31/22
Tissue Regeneration Therapeutics, Inc. (“TRT”)
Umbilical cord banking
(6)
N/A
$ —
$ —
N/A
—
Yes
Marketable Investments
Number of
Shares
Footnote
Funded
Amount
GAAP
Balance
Change in
Fair Value
Active
Investment as
of 12/31/22
Secured Royalty Financing (Marketable Investment)
N/A
(4)
$ 3,000
$ 76
$ —
Yes
Bioventus, Inc. (“Bioventus”) Common Stock
—
(7)
N/A
—
(534 )
No
Harrow Health, Inc. (“Harrow”) Common Stock
—
(7)
N/A
—
6
No
Epica International, Inc.
25,000
N/A
—
—
Yes
Sincerus Pharmaceuticals, Inc.
26,575
N/A
—
—
Yes
Warrants to Purchase Stock
Number of
Shares
Footnote
Exercise
Price per
Share
GAAP
Balance
Change in
Fair Value
Active
Investment as
of 12/31/22
4Web, Inc.
TBD
$ —
$ —
$ —
Yes
AOTI, Inc.
92,490
—
—
—
Yes
Acer Therapeutics, Inc.
150,000
2.46
297
70
Yes
Acer Therapeutics, Inc.
100,000
1.51
210
118
Yes
Acerus Pharmaceuticals Corporation
7,764,004
(1)
0.053 CAD
5
(97 )
Yes
Aziyo Biologics
157,895
6.65
517
(263 )
Yes
Aziyo Biologics
30,075
6.65
99
16
Yes
BIOLASE, Inc.
22,039
0.39
5
(178 )
Yes
Biotricity, Inc.
57,536
6.26
9
(165 )
Yes
CeloNova BioSciences, Inc.
TBD
(8)
—
—
—
Yes
DxTerity Diagnostics, Inc.
2,019,231
(8)
—
—
—
Yes
Epica International, Inc.
TBD
—
—
—
Yes
eTon Pharmaceuticals, Inc.
51,238
5.86
41
(54 )
Yes
eTon Pharmaceuticals, Inc.
18,141
6.62
15
(19 )
Yes
Exeevo, Inc.
930
—
—
—
Yes
EyePoint Pharmaceuticals, Inc.
40,910
11.00
20
(257 )
Yes
EyePoint Pharmaceuticals, Inc.
7,773
19.30
2
(39 )
Yes
Flowonix Medical, Inc.
155,561
(4), (5)
—
—
—
Yes
Harrow Health, Inc.
—
(7)
—
—
1,285
No
MedMinder Systems, Inc.
72,324
—
—
—
Yes
MolecuLight, Inc.
TBD
—
—
—
Yes
Assets
Revenue
Recognized
Total finance receivables
$ 236,555
$ 35,461
Total marketable investments
76
—
Cost method investment
—
—
Fair value of warrant assets
1,220
—
Total assets/revenues
$ 237,851
$ 35,461
27
(1)
Finance receivable was paid off during 2022.
(2)
US royalty was paid off during the year ended December 31, 2021. SWK continues to receive insignificant royalties on international
sales.
(3)
Investment considered impaired.
(4)
Investment on nonaccrual.
(5)
Flowonix is evaluating strategic alternatives for the business.
(6)
A provision for credit losses was recognized during the fourth quarter of 2022.
(7)
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.
(8)
Finance receivable was paid off during the year ended December 31, 2021.
Unless
otherwise specified, our senior secured debt assets generally are repaid by a revenue interest that is charged on a company’s
quarterly net sales and royalties.
28
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation
of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, stock-based compensation, impairment of finance receivables and long-lived assets, impairment
of goodwill and identifiable intangible assets, valuation of warrants and investments, contingent consideration, income taxes
and contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. The accounting estimates and assumptions discussed in this section are those that we
consider to be the most critical to an understanding of our consolidated financial statements because they inherently involve
significant judgments and uncertainties. For a discussion of our significant accounting policies, refer to Note 1 of the notes
to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data .
Allowance
for Loan Losses
The
allowance for loan losses is reviewed for adequacy based on portfolio collateral values and credit quality indicators, including
non-performing assets, evaluation of portfolio diversification and concentration as well as economic conditions to determine the
need for a qualitative adjustment. We review our finance receivables periodically to determine the probability of loss, and record
charge-offs after considering such factors as delinquencies, the financial condition of obligors, the value of underlying collateral,
as well as third party credit enhancements such as guarantees.
The
process of determining the level of the allowance for loan losses requires a high degree of judgment. Others given the same information
could reach different reasonable conclusions.
Finance
Receivables
Finance
receivables are measured based upon the difference between the recorded investment in each receivable and either the present value
of the expected future cash flows discounted at each receivable’s effective interest rate (the receivable’s contractual
interest rate adjusted for any deferred fees, costs, 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.
Revenue
Recognition
Finance
Receivables Segment
Our
Finance Receivables segment records interest income on an accrual basis based on the effective interest rate method to the extent
that we expect to collect such amounts. Incentive fees, if any, are recognized when earned at the end of the relevant performance
period, pursuant to the underlying contract. Other administrative service revenues are recognized when contractual obligations
are fulfilled or as services are provided.
Pharmaceutical
Development Segment
Our
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 us 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.
29
In
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 obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
As part of the accounting for these arrangements, the Company must use its judgment to determine: (a) the number of performance
obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; (c) the stand-alone
selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv)
above; and d) the contract term and pattern of satisfaction of the performance obligations under step (v) above. 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.
Amounts
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
revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified
as deferred revenue, net of current portion.
Fair
Value of Financial Instruments
The
fair value of our financial instruments reflects the amounts that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date (exit price).
Our
financial instruments not required to be adjusted to fair value on a recurring basis consist principally of cash and restricted cash,
accounts and finance receivables, accounts payable, and accrued expenses. We believe the carrying amount of cash and cash equivalents,
accounts and finance receivable, accounts payable and accrued expenses approximate fair value due to their relatively short maturities.
Income
Taxes
The
recognition of certain net deferred tax assets of our reporting entities are dependent upon, but not limited to, the future profitability
of the reporting entity, when the underlying temporary differences will reverse, and tax planning strategies. Further, management’s
judgment regarding the use of estimates and projections is required in assessing our ability to realize the deferred tax assets
relating to NOL carryforwards, as most of these assets are subject to limited carryforward periods.
We
will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative
evidence that may exist at each reporting date. Any adjustments to the deferred tax asset valuation allowance is recorded in the
statement of operations in the period it is determined an adjustment is required.
Please
refer to Note 12 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary
Data .
Recent
Accounting Pronouncements
For
a discussion of recent accounting pronouncements, refer to Note 1 of the notes to the consolidated financial statements in Part
II, Item 8, Financial Statements and Supplementary Data .
30
Results
of Operations
This
section of this Annual Report generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussion
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.
Comparison
of the Years Ended December 31, 2022 and 2021
The
following table summarizes the results of our operations for the years ended December 31, 2022 and 2021:
(in millions)
For the Year Ended
December 31,
2022
2021
Change
Revenues
$ 41.5
$ 56.2
$ (14.7 )
Provision for credit losses
3.5
—
3.5
Interest expense
0.3
0.4
(0.1 )
Pharmaceutical manufacturing, research and development expense
7.0
7.3
(0.3 )
Change in fair value of acquisition-related contingent consideration
5.2
(0.3 )
5.5
Depreciation and amortization expense
2.6
4.1
(1.5 )
General and administrative expense
13.0
13.6
(0.6 )
Other (expense) income, net
(0.3 )
2.0
(2.3 )
Income tax (benefit) expense
(4.0 )
7.1
(11.1 )
Net income
13.5
25.9
(12.4 )
Revenues
We
generated revenues of $41.5 million and $56.2 million for the years ended December 31, 2022 and 2021, respectively. 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.
Provision
for Credit Losses and Impairment Expense
We
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.
31
Interest
Expense
Interest
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
Manufacturing, Research and Development Expense
Pharmaceutical
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.
Change
in Fair Value of Contingent Consideration
We
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
of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement with Cara for oral formulation
rights to Enteris’ Peptelligence® technology to develop and commercialize Oral KORSUVA™ in any indication worldwide,
excluding South Korea and Japan (please refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 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.
Depreciation
and Amortization
The
$1.5 million decrease in depreciation and amortization expense for the year ended December 31, 2022 primarily consists of a decrease
in amortization expense related to the intangible assets of Enteris. Amortization expense is aligned with the expected future
cash flows of the intangible assets.
General
and Administrative
General
and administrative expenses consist primarily of compensation, including stock-based compensation and related costs for management, staff
and Board; legal and audit expenses; and corporate governance expenses. 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.
Other
(Expense) Income, Net
Other
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.
32
Other
income, net for the year ended December 31, 2021 reflected a net fair market value gain of $0.3 million on the change in fair
value of our warrant assets and a net fair market value gain of $1.8 million on the change in fair value of our Misonix and Bioventus
common stock. During the year ended December 31, 2021, we tendered our Misonix common stock and received $1.9 million in cash
and 71,361 shares of Bioventus common stock and recognized a $0.1 million loss on the tender of the Misonix common stock.
Income
Tax (Benefit) Expense
During
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.
As
of December 31, 2022 and 2021, our cumulative gross deferred tax assets were $33.1 million and $38.9 million, respectively. Based
on historical and expected future operating performance, we concluded that it was more likely than not that we will not be able to realize
the full benefit of the U.S. federal and state deferred tax assets in the future. The valuation
allowance against deferred tax assets was $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
the U.S. federal and state deferred tax assets in the future.
As
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 $2.9 million. The federal research credits begin to expire in 2023 and will
fully expire by 2042.
Liquidity
and Capital Resources
As
of December 31, 2022, we had $6.2 million in cash and cash equivalents, compared to $42.9 million in cash and cash equivalents as of
December 31, 2021. 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).
We
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.
Primary
Driver of Cash Flow
Our
ability to generate cash in the future depends primarily upon our success in implementing our Finance Receivable segment business
model of generating income by providing capital to a broad range of life science companies, institutions and inventors, as well
as the success of our Pharmaceutical Development segment. We generate income primarily from four sources:
1.
Primarily owning or financing
through debt investments, royalties generated by the sales of life science products and related intellectual property;
2.
Receiving interest and other income by
advancing capital in the form of secured debt to companies in the life science sector;
3 .
Pharmaceutical development, manufacturing,
and licensing activities utilizing the Peptelligence® platform; and
4 .
To a lesser extent, realizing capital appreciation
from equity-related investments in the life science sector.
33
As
of December 31, 2022, our finance receivables portfolio contains $236.6 million of finance receivables and $0.1 million of marketable
investments. 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, 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
future.
We
continue to evaluate multiple attractive opportunities that, if consummated, we believe would similarly generate additional income.
Since the timing of any investment is difficult to predict, our Finance Receivables segment may not be able to generate positive
cash flow above what our existing assets are expected to produce in 2022. We do not assume any near-term repayments from borrowers,
and as a result, no assurances can be given that actual results would not differ materially from the statement above.
Off-Balance
Sheet Arrangements
In
the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded
in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and
liquidity risk. Such transactions are used primarily to manage partner companies’ requests for funding and take the form
of loan commitments and lines of credit.
The
contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be
fully drawn upon, the partner company defaults, and the value of any existing collateral becomes worthless. We use the same credit
policies in making commitments and conditional obligations as we do for on-balance sheet instruments.
As
of December 31, 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.
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