SWK Holdings Corp 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SWK HOLDINGS CORPORATION INDEX TO FINANCIAL STATEMENTS Contents Page Report of Independent Registered Public Accounting Firm (PCAOB ID #207) 37 Financial Statements Consolidated Balance Sheets 39 Consolidated Statements of Income 40 Consolidated Statements of Stockholders’ Equity 41 Consolidated Statements of Cash Flows 42 Notes to the Consolidated Financial Statements 43 36 Report Of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of SWK Holdings Corporation Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of SWK Holdings Corporation and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of Finance Receivables As described in Note 3 to the consolidated financial statements, the Company’s consolidated finance receivables balance was $236.6 million as of December 31, 2022, which is net of the allowance for credit losses of $11.8 million. The Company generated $35.5 million of finance receivable interest income, including fees during the year ended December 31, 2022. The Company’s finance receivables are stated at amortized cost, net of unamortized origination fees, if any. Interest income on the finance receivables is recorded on an accrual basis based on the effective interest rate method to the extent that the Company expects to collect such amounts. The Company evaluates the collectability of both interest and principal for each finance receivable to determine whether it is impaired. A finance receivable is considered to be impaired when, based on current information and events, the Company determines it is probable that it will be unable to collect amounts due according to existing contractual terms. When a loan is considered to be impaired, the amount of loss is calculated by comparing the carrying value of the finance receivable to the value determined by discounting the expected future cash flows. If actual cash flows were to be substantially lower than estimated, there could be a significant adverse impact on the carrying value of the finance receivables and results of operations. 37 The principal considerations for our determination that performing procedures relating to valuation of the finance receivables is a critical audit matter are its overall impact on the consolidated financial statements, including the realization of the Company’s deferred tax assets, and the significant amount of judgement by management in developing the assumptions of the expected future cash flows, which in turn led to significant auditor judgement, subjectivity, and effort in performing audit procedures and evaluating audit evidence relating to the expected future cash flows. Additionally, for certain finance receivables, there may be limited historical data with which to evaluate the expected future cash flows. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, evaluating management’s process and valuation method for developing the estimate of expected cash flows of its finance receivables and potential credit losses, testing the completeness and accuracy of the underlying data used in the estimate, and evaluating management’s assumptions used to estimate future cash flows. Evaluating management’s assumptions used to estimate future cash flows for reasonableness involved considering historical cash flows from the Company’s finance receivable portfolio, comparing prior period estimates to actual results of the same period, publicly available information which supports or is to the contrary of the estimated future cash flows and determining whether the estimated cash flows used were consistent with evidence obtained in other areas of the audit. /s/ BPM LLP PCAOB Number: 207 We have served as the Company’s auditor since 2006. San Francisco, California March 31, 2023 38 SWK HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) Year Ended December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 6,156 $ 42,863 Interest and accounts receivable, net 3,094 1,803 Marketable investments — 1,034 Other current assets 1,114 1,727 Total current assets 10,364 47,427 Finance receivables, net 236,555 181,553 Collateral on foreign currency forward contract 2,750 — Marketable investments 76 119 Cost method investment — 3,491 Deferred tax assets, net 24,480 20,539 Warrant assets 1,220 3,419 Intangible assets, net 8,190 9,964 Goodwill 8,404 8,404 Property and equipment, net 5,840 5,779 Other non-current assets 1,742 1,970 Total assets $ 299,621 $ 282,665 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 3,902 $ 5,087 Revolving credit facility 2,445 8 Total current liabilities 6,347 5,095 Contingent consideration payable 11,200 8,530 Other non-current liabilities 2,145 1,804 Total liabilities 19,692 15,429 Commitments and contingencies (Note 7) Stockholders’ equity: Preferred Stock, $ 0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding — — Common stock, $ 0.001 par value; 250,000,000 shares authorized; 12,843,157 and 12,836,133 shares issued and outstanding at December 31, 2022 and 2021, respectively 12 13 Additional paid-in capital 4,430,922 4,431,719 Accumulated deficit ( 4,151,005 ) ( 4,164,496 ) Total stockholders’ equity 279,929 267,236 Total liabilities and stockholders’ equity $ 299,621 $ 282,665 See accompanying notes to the consolidated financial statements. 39 S WK HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Year Ended December 31, 2022 2021 Revenues Finance receivable interest income, including fees $ 35,461 $ 39,310 Pharmaceutical development 5,485 16,122 Other 538 723 Total revenues 41,484 56,155 Costs and expenses: Provision for credit losses 3,491 — Interest expense 340 374 Pharmaceutical manufacturing, research and development expense 6,952 7,347 General and administrative 12,964 13,620 Change in fair value of acquisition-related contingent consideration 5,170 ( 287 ) Depreciation and amortization expense 2,599 4,061 Income from operations 9,968 31,040 Other income (expense), net Unrealized net gain on warrants 417 272 Unrealized net (loss) gain on equity securities ( 528 ) 1,839 Realized loss on sale of investments ( 151 ) ( 140 ) Foreign currency transaction loss ( 215 ) — Income before income tax (benefit) expense 9,491 33,011 Income tax (benefit) expense ( 4,000 ) 7,082 Net income $ 13,491 $ 25,929 Net income per share Basic $ 1.05 $ 2.03 Diluted $ 1.05 $ 2.02 Weighted average shares outstanding Basic 12,835 12,796 Diluted 12,880 12,834 See accompanying notes to the consolidated financial statements. 40 SWK HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except share data) Total Common Stock Additional Accumulated Stockholders’ Shares Amount Paid-In Capital Deficit Equity Balances at December 31, 2020 12,792,586 $ 13 $ 4,430,924 $ ( 4,190,425 ) $ 240,512 Stock-based compensation — — 1,163 — 1,163 Issuance of common stock upon vesting of restricted stock 18,978 — — — — Net settlement for employee taxes on restricted stock and options — — ( 368 ) — ( 368 ) Stock options exercised, net 24,569 — — — — Net income — — — 25,929 25,929 Balances at December 31, 2021 12,836,133 13 4,431,719 ( 4,164,496 ) 267,236 Stock-based compensation — — 500 — 500 Issuance of common stock upon vesting of restricted stock 54,666 — — — — Forfeiture of unvested restricted stock ( 6,815 ) — — — — Net settlement for employee taxes on restricted stock and options — — ( 160 ) — ( 160 ) Stock options exercised, net 23,074 — — — — Repurchases of common stock in open market ( 63,901 ) ( 1 ) ( 1,137 ) — ( 1,138 ) Net income — — — 13,491 13,491 Balances at December 31, 2022 12,843,157 $ 12 $ 4,430,922 $ ( 4,151,005 ) $ 279,929 See accompanying notes to the consolidated financial statements. 41 SWK HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 2021 Cash flows from operating activities: Net income $ 13,491 $ 25,929 Adjustments to reconcile net income to net cash provided by operating activities Provision for credit losses 3,491 — Amortization of debt issuance costs 69 49 Right-of-use asset amortization 229 250 Deferred income taxes ( 3,941 ) 6,952 Change in fair value of warrants ( 417 ) ( 272 ) Change in fair value of equity securities 528 ( 1,839 ) Foreign currency transaction loss 754 — Loss on sale of marketable securities 151 140 Change in fair value of acquisition-related contingent consideration 5,170 ( 287 ) Loan discount and fee accretion ( 2,204 ) ( 1,130 ) Interest paid-in-kind ( 5,995 ) ( 950 ) Stock-based compensation 500 1,163 Depreciation and amortization 2,599 4,061 Changes in operating assets and liabilities: Interest and accounts receivable ( 1,291 ) 108 Derivative assets and liabilities, net ( 539 ) — Collateral on forward currency exchange contract (2,750 ) — Other assets ( 44 ) ( 1,788 ) Accounts payable and other liabilities ( 1,599 ) 2,159 Net cash provided by operating activities 8,202 34,295 Cash flows from investing activities: Proceeds from sale of marketable investments 4,151 — Cash received from settlement of warrants and equity securities — 1,875 Investment in finance receivables ( 93,118 ) ( 42,350 ) Repayment of finance receivables 45,673 67,192 Corporate debt securities principal payments 43 122 Purchases of property and equipment ( 297 ) ( 1,078 ) Net cash (used in) provided by investing activities ( 43,548 ) 25,761 Cash flows from financing activities: Net settlement for employee taxes on restricted stock and options ( 160 ) ( 368 ) Repurchases of common stock, including fees and expenses ( 1,138 ) — Net proceeds from (payments on) credit facility 2,437 ( 11,750 ) Payment of acquisition-related contingent consideration ( 2,500 ) ( 8,083 ) Net cash used in financing activities ( 1,361 ) ( 20,201 ) Net (decrease) increase in cash and cash equivalents ( 36,707 ) 39,855 Cash and cash equivalents at beginning of period 42,863 3,008 Cash and cash equivalents at end of period $ 6,156 $ 42,863 Supplemental noncash flow activity: Warrants received in connection with finance receivables $ 1,180 $ 175 Cash paid for interest $ 268 $ 110 Fair value of common stock received in connection with payoff of term loan $ — $ 887 Fair value of common stock received upon exercise of warrant $ 3,667 $ — See accompanying notes to the consolidated financial statements. 42 SWK HOLDINGS CORPORATION NOTES TO THE 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. 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 March 17, 2023, the Company and its partners have executed transactions with 50 different parties under its specialty finance strategy, funding an aggregate $725.2 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. During 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. 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. 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. 43 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. Goodwill and Intangible Assets The Company’s methodology for allocating the purchase price of an acquisition is based on established valuation techniques that reflect the consideration of a number of factors, including a valuation performed by a third-party appraiser. Goodwill is measured as the excess of the cost of an acquired business over the fair value assigned to identifiable assets acquired and liabilities assumed. Goodwill is considered impaired when the estimated fair value of the reporting unit that was allocated the goodwill is less than its carrying value. If the estimated fair value of such reporting unit is less than its carrying value, goodwill impairment is recognized based on that difference, not to exceed the carrying amount of goodwill. A reporting unit is an operating segment or a component of an operating segment provided that the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component. Goodwill arising from the Enteris acquisition has been allocated to the Pharmaceutical Development segment. Finite-lived intangible assets are amortized over their estimated useful life, which is the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the Company. Goodwill and indefinite-lived intangible assets are not amortized, but instead, are subject to annual impairment testing. We review goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter and continually assess whether a triggering event has occurred to determine whether the carrying value exceeds the implied fair value. For the years ended December 31, 2022, and 2021, the Company determined there were no indicators of impairment relating to identifiable finite-lived intangible assets. The identification and measurement of goodwill impairment involves the estimation of the fair value of the reporting unit. We have the option to assess impairment through a qualitative assessment, which includes factors such as general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which a reporting unit operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. When a potential impairment is indicated, we perform quantitative testing by comparing the estimated fair value of the reporting unit to the carrying value of the reported net assets. Under our quantitative testing, fair value is generally based on the income approach using a calculation of discounted cash flows, based on the most recent financial projections for the reporting unit. The revenue growth rates included in the financial projections are our best estimates based on current and forecasted market conditions, and the profit margin assumptions are projected by the reporting unit based on current cost structure and, when applicable, anticipated net cost reductions. 44 Based on the Company’s 2022 goodwill impairment testing, no goodwill impairment was indicated as of December 31, 2022. Inventory Inventories are stated at the lower of cost or net realizable value, valued at specifically identified cost which approximates the first-in, first-out method. The components of inventory include raw materials of $ 0.6 million as of both December 31, 2022 and 2021 and are reflected in current assets in the consolidated balance sheets. Property and Equipment, Net Property and equipment are recorded at cost less accumulated depreciation and amortization. Expenditures for major additions and improvements are capitalized, while minor replacements, maintenance, and repairs are charged to expense as incurred. In addition, we capitalize interest on borrowings during the active construction period of capital projects. Capitalized interest is added to the cost of the assets and depreciated over the estimated useful lives of the assets. Leased property meeting certain criteria is capitalized and the present value of the related lease payments is recorded as a liability and included in current liabilities. Depreciation is recorded over the estimated useful lives of the assets involved using the straight-line method. Leasehold improvements and capitalized lease assets are amortized to depreciation expense over the estimated useful life of the asset or the respective lease term used in determining lease classification, whichever is shorter. The range of estimated useful lives is as follows: Schedule of Useful Life of Property and Equipment, Net Asset Estimated Useful Life Leasehold improvements Lesser of lease term or useful life Furniture, fixtures and equipment 3 to 15 years Deferred Revenue and Deferred Costs 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. Deferred revenue was $33,000 and $0.2 million as of December 31, 2022 and 2021, respectively, and is included in accounts payable and accrued liabilities in the 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. Finance Receivables The Company extends credit to customers through a variety of financing arrangements, including revenue interest term loans. The amounts outstanding on loans are referred to as finance receivables and are included in finance receivables in the consolidated balance sheets. It is the Company’s expectation that the loans originated will be held for the foreseeable future or until maturity. In certain situations, for example to manage concentrations and/or credit risk, some or all of certain exposures may be sold. Loans for which the Company has the intent and ability to hold for the foreseeable future or until maturity are classified as held for investment (“HFI”). If the Company no longer has the intent or ability to hold loans for the foreseeable future, then the loans are transferred to held for sale (“HFS”). Loans entered into with the intent to resell are classified as HFS. 45 If it is determined that a loan should be transferred from HFI to HFS, then the balance is transferred at the lower of cost or fair value. At the time of transfer, a write-down of the loan is recorded as an impairment when the carrying amount exceeds fair value and the difference relates to credit quality. Otherwise the write-down is recorded as a reduction in finance receivable interest income, and any loan loss reserve is reversed. Once classified as HFS, the amount by which the carrying value exceeds fair value is recorded as a valuation allowance and is reflected as a reduction to finance receivable interest income. If it is determined that a loan should be transferred from HFS to HFI, the loan is transferred at the lower of cost or fair value on the transfer date, which coincides with the date of change in management’s intent. The difference between the carrying value of the loan and the fair value, if lower, is reflected as a loan discount at the transfer date, which reduces its carrying value. Subsequent to the transfer, the discount is accreted into earnings as an increase to finance revenue interest income over the life of the loan using the effective interest method. The Company accounts for its finance receivables at amortized cost, net of unamortized origination fees, if any. Related fees and costs are recorded net of any amounts reimbursed, and interest is accreted or accrued to interest revenue using the effective interest method. When and if supplemental payments are received from these long-term receivables, an adjustment to the estimated effective interest rate is affected prospectively. The Company evaluates the collectibility of both interest and principal for each loan to determine whether it is impaired. A loan is considered to be impaired when, based on current information and events, the Company determines it is probable that it will be unable to collect amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of loss is calculated by comparing the carrying value of the financial asset to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the estimated fair value of the underlying collateral, less costs to sell, if the loan is collateralized and the Company expects repayment to be provided solely by the collateral. Impairment assessments require significant judgments and are based on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral. Allowance for Credit Losses on Finance Receivables The allowance for credit losses is intended to provide for credit losses inherent in the finance receivables portfolio and is periodically reviewed for adequacy considering credit quality indicators, including expected and historical losses and levels of and trends in past due loans, non-performing assets and impaired loans, collateral values and economic conditions. The allowance for credit losses is determined based on specific allowances for loans that are impaired, based upon the value of underlying collateral or projected cash flows. Changes to the allowance for credit losses are recorded in the provision for loan credit losses in the consolidated statements of income. Marketable Investments The Company’s marketable investment portfolio includes debt securities as of December 31, 2022. The debt security is classified as an available-for-sale security, which is reported at fair value with unrealized gains or losses recorded in statements of other comprehensive income, net of applicable income taxes. In any case where fair value might fall below amortized cost, the Company would consider whether that security is other-than temporarily impaired using all available information about the collectibility of the security. The Company would not consider that an other-than temporary impairment for a debt security has occurred if (1) the Company does not intend to sell the debt security, (2) it is not more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis and (3) the present value of estimated cash flows will fully cover the amortized cost of the security. The Company would consider that an other-than-temporary impairment has occurred if any of the above mentioned three conditions are not met. For a debt security for which an other-than-temporary impairment is considered to have occurred, the Company would recognize the entire difference between the amortized cost and the fair value in earnings if the Company intends to sell the debt security or it is more likely than not that the Company will be able to sell the debt security before recovery of its amortized cost basis. If the Company does not intend to sell the debt security and it is not more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, the Company would separate the difference between the amortized cost and the fair value of the debt security into the credit loss component and the non-credit loss component. The credit loss component would be recognized in earnings and the non-credit loss component would be recognized in other comprehensive income, net of applicable income taxes. Foreign Currency Transactions The Company uses the U.S. dollar as its functional currency. Monetary assets and liabilities and transactions denominated in currencies other than an entity’s functional currency are remeasured into its functional currency using current exchange rates, whereas nonmonetary assets and liabilities are remeasured using historical exchange rates. The Company recognizes gains and losses from such remeasurements within other income (expense), net in the consolidated statements of income in the period of occurrence. 46 Other Receivables As of December 31, 2022, the Company had collateral receivable of $2.8 million with the counterparties on its foreign currency exchange contract and is recorded as collateral on foreign currency forward contract in the consolidated balance sheets. Derivatives All derivatives held by the Company are recognized in the consolidated balance sheets at fair value. Changes in fair value for derivatives that do not meet the criteria for hedge accounting, or for which the Company has not elected hedge accounting are recorded in the consolidated statements of income. If a derivative is recorded using hedge accounting, then depending on its nature, changes in its fair value will be either offset against change in the fair value of hedged assets or liabilities through the consolidated statements of income or recorded in other comprehensive income. The Company had no derivatives designated as hedges as of December 31, 2022 and 2021. The Company holds warrants issued to the Company in conjunction with term loan investments discussed in Note 3. These warrants meet the definition of a derivative and are included in warrant assets in the consolidated balance sheets. The Company also uses a foreign currency forward contract to manage the impact of fluctuations in foreign currency denominated cash flows expected to be received from one of its royalty finance receivables denominated in a foreign currency. The foreign currency forward contract discussed in Note 9 is not designated as a hedging instrument, and changes in fair value are recognized in earnings. Revenue Recognition Finance Receivables Segment The Company’s Finance Receivables segment records interest income on an accrual basis based on the effective interest rate method to the extent that it expects to collect such amounts. The Company recognizes investment management fees when clients invest in our recommended transactions as earned over the period the services are rendered. In general, the majority of investment management fees earned are charged either monthly or quarterly. Incentive fees, if any, are recognized when earned at the end of the relevant performance period, pursuant to the underlying contract. The Company did not recognize any management or incentive fees in 2022 or 2021. Other service revenues are recognized when contractual obligations are fulfilled or as services are provided. Pharmaceutical Development Segment The Company’s Pharmaceutical Development segment enters into collaboration and licensing agreements with strategic partners, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products. In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must use its judgment to determine: (a) the number of performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; (c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above; and (d) the contract term and pattern of satisfaction of the performance obligations under step (v) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. Deferred revenue as of December 31, 2022 and 2021 was $ 33,000 and $ 0.2 million , respectively, and is classified as current deferred revenue and is included in accounts payable and accrued liabilities in the consolidated balance sheets. 47 The Company evaluates collaboration agreements with respect to FASB ASC Topic 808, Collaborative Arrangements , considering the nature and contractual terms of the arrangement and the nature of its business operations to determine the classification of the transactions. When the Company is an active participant in the activity and exposed to significant risks and rewards dependent on the commercial success of the collaboration, it will record its transactions on a gross basis in the consolidated financial statements and describe the rights and obligations under the collaborative arrangement in the notes to the consolidated financial statements. Exclusive Licenses If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner; the retention of any key rights by the Company; and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining promises, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company exercises judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods. Customer Options If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, the goods and services underlying the customer options are not considered to be performance obligations at the outset of the arrangement, as they are contingent upon option exercise. The Company evaluates the customer options for material rights, or options to acquire additional goods or services for free or at a discount. If the customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised. Research and Development Services The promises under the Company’s collaboration agreements may include research and development services to be performed by the Company on behalf of the partner. Payments or reimbursements resulting from the Company’s research and development efforts are recognized as the services are performed and presented on a gross basis because the Company is the principal for such efforts. Reimbursements from and payments to the partner that are the result of a collaborative relationship with the partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction to research and development expense. Milestone Payments At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. 48 Royalties For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity date of three months or less at the date of purchase to be cash equivalents. There were no such investments at December 31, 2022 or 2021, as all of our cash was held in checking, savings and brokerage accounts. As of December 31, 2022, cash was deposited in financial institutions and consisted of immediately available fund balances. The Company maintains its cash deposits with well-known and stable financial institutions but balances may exceed stated federally insured limits. Interest and Accounts Receivable The Company records interest receivable on an accrual basis and recognizes it as earned in accordance with the contractual terms of the loan agreement, to the extent that such amounts are expected to be collected. When management does not expect that principal, interest, and other obligations due will be collected in full, the Company will generally place the loan on nonaccrual status and cease recognizing interest income on that loan until all principal and interest due has been paid or the Company believes the partner company has demonstrated the ability to repay the Company’s current and future contractual obligations. Any uncollected interest related to prior periods is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, the Company may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. The Company did not recognize any provision for interest receivable credit losses in 2022 and 2021. Accounts receivable for management fees are recorded at the aggregate unpaid amount less any allowance for doubtful accounts. The Company determines an account receivable’s delinquency status based on its contractual terms. Interest is not charged on outstanding balances. Accounts are written-off only when all methods of recovery have been exhausted. As of December 31, 2022 and 2021, the allowance for doubtful accounts was zero. Certain Risks and Concentrations Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, interest and accounts receivable, finance receivables and marketable investments. The Company invests its excess cash with major U.S. banks and financial institutions. The Company has not experienced any losses on its cash and cash equivalents. Finance Receivables Segment The Company performs ongoing credit evaluations of its partner companies and generally requires collateral. For the year ended December 31, 2022, two of our business partners accounted for 31 percent of our interest and accounts receivable. For the year ended December 31, 2021, five of our business partners accounted for 63 percent of our interest and accounts receivable. Pharmaceutical Development Segment For the years ended December 31, 2022 and 2021, Cara accounted for approximately 87 percent and 98 percent, respectively, of Pharmaceutical Development segment revenues. The Company does not expect its current or future credit risk exposures to have a significant impact on its operations. However, there can be no assurance that its business will not experience any adverse impact from credit risk in the future. 49 Stock-based Compensation All employee and director stock-based compensation is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the requisite service period. Stock-based compensation expense is reduced for estimated future forfeitures. These estimates are revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation expense in the period in which the change in estimate occurs. For restricted stock, the Company recognizes compensation expense in accordance with the fair value of the Company’s stock as determined on the grant date, amortized over the applicable service period. When vesting of awards is based wholly or in part upon the future performance of the stock price, such terms result in adjustments to the grant date fair value of the award and the derivation of a service period. If service is provided over the derived service period, the adjusted fair value of the awards will be recognized as compensation expense, regardless of whether or not the awards vest. Fair Value of Financial Instruments The recorded values of cash and restricted cash, accounts and finance receivables, accounts payable, and accrued expenses approximate the fair values due to the short-term nature of the instruments. The recorded values of our foreign currency forwards are fair value based on observable inputs other than quoted prices. Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is recorded to reduce deferred tax assets to an amount where realization is more likely than not. If the Company ultimately determines that the payment of such a liability is not necessary, then the Company reverses the liability and recognizes a tax benefit during the period in which the determination is made that the liability is no longer necessary. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax benefit in the statements of income. Comprehensive Income The consolidated statements of comprehensive income have been omitted, as net income equals comprehensive income for the years ended December 31, 2022 and 2021. 50 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 earnings per share for the following (in thousands, except per share amounts): Schedule of Basic and Diluted Earning per Share Year Ended December 31, 2022 2021 Numerator: Net income $ 13,491 $ 25,929 Denominator: Weighted-average shares outstanding 12,835 12,796 Effect of dilutive securities 45 38 Weighted-average diluted shares 12,880 12,834 Basic net income per share $ 1.05 $ 2.03 Diluted net income per share $ 1.05 $ 2.02 As of December 31, 2022 and 2021, outstanding options to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 248,000 and 368,000 , respectively, have been excluded from the calculation of diluted net income per share, as such securities were anti-dilutive. Recent Accounting Pronouncements 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 generally accepted accounting principles (“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 was effective upon issuance, and the provisions generally can be applied prospectively as of January 1, 2020 through December 31, 2024. 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. 51 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 Accounting Standards Codification 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. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This ASU 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 will adopt the new CECL model effective January 1, 2023, using the modified retrospective approach for all financial assets measured at amortized cost, as well as off-balance sheet credit exposures such a unfunded commitments. The Company has developed a methodology and model to be used upon adoption. As of December 31, 2022, the Company’s Finance Receivables totaled $236.6 million with a corresponding allowance for loan losses of $11.8 million under current GAAP. Management evaluated the calculation of its allowance under ASU 2016-13 parallel to its current modeling, and the Company estimates the adoption of the new guidance will result in an increase to the allowance for credit losses, including the reserve for off-balance sheet credit exposure (please see Note 7 for further details on the Company’s off-balance sheet credit exposure), between $1.0 million and $2.0 million. For other assets within the scope of Topic 326, such as accounts and other receivables, management expects the adoption of this standard to have an immaterial impact on the Company’s consolidated financial statements. As the Company finalizes its implementation of ASU 2016-13, final decisions by management may result in a different impact than that stated above for financial statement and disclosure purposes. 52 Note 2. Goodwill and Intangible Assets Goodwill There was no change in the carrying amount of goodwill from December 31, 2021 to December 31, 2022, and net book value remains at $8.4 million. The net book value of goodwill is solely related to the Enteris acquisition in 2019. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform an impairment test. If the qualitative assessment warrants further analysis, the Company compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of net assets of the reporting unit, goodwill is not impaired. If the carrying value of the reporting unit’s goodwill exceeds its fair value, then the Company must record an impairment charge equal to the difference. As of December 31, 2022, the Company concluded that it is more likely than not that the fair value of the reporting unit is greater than its carrying value, and goodwill is not considered to be impaired. Intangible Assets As of December 31, 2022 and 2021, the gross book value, accumulated amortization, net book value and estimated useful life of acquired intangible assets were as follows (in thousands, except estimated useful life data): Schedule of Intangible Assets As of December 31, 2022 Gross Book Value Accumulated Amortization Net Book Value Estimated Useful Life License Agreement (1) $ 29,400 $ 21,509 $ 7,891 10 Trade names and trademarks 210 71 139 10 Customer relationships 240 80 160 10 Total intangible assets $ 29,850 $ 21,660 $ 8,190 As of December 31, 2021 Gross Book Value Accumulated Amortization Net Book Value Estimated Useful Life License Agreement (1) $ 29,400 $ 19,780 $ 9,620 10 Trade names and trademarks 210 50 160 10 Customer relationships 240 56 184 10 Total intangible assets $ 29,850 $ 19,886 $ 9,964 (1) Prior to our acquisition of Enteris, Enteris entered into the License Agreement with 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 was $ 1.8 million and $ 3.5 million for the years ended December 31, 2022 and 2021 , respectively, and was recorded in the consolidated statements of net income. Based on amounts recorded at December 31, 2022, the Company will recognize acquired intangible asset amortization as follows (in thousands): Schedule of Intangible Asset Amortization Expense 2023 $ 1,703 2024 1,546 2025 1,076 2026 1,076 2027 1,076 Thereafter $ 1,713 Total $ 8,190 53 Note 3. Finance Receivables 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 December 31, 2022, the Company had credit loss allowance of $11.8 million. Of the total $11.8 million, $ 1.2 million is associated with the Company’s Cambia® royalty, $ 0.6 million is associated with the Company’s Besivance® royalty, and $3.5 million is associated with the Company’s TRT cost-method investment. During the year ended December 31, 2022, the Company recognized a full reserve against its cost method investment due to weaker than anticipated operational results. The remaining $ 6.6 million is related to the Best ABT, Inc. (“Best”), second lien term loan that was recognized in order to reflect the Best royalty at its estimated fair value. Approximately $23,906 of cash receipts received from the Company’s Besivance® royalty during the year ended December 31, 2022 were applied toward the allowance for credit losses. The carrying values of finance receivables are as follows (in thousands): Schedule of carrying value of finance receivables December 31, 2022 2021 Term loans $ 188,836 $ 136,312 Royalty purchases 59,565 53,629 Total before allowance for credit losses 248,401 189,941 Allowance for credit losses ( 11,846 ) ( 8,388 ) Total carrying value $ 236,555 $ 181,553 Credit Quality of Finance Receivables The Company originates finance receivables to companies primarily in the life sciences sector. This concentration of credit exposes the Company to a higher degree of risk associated with this sector. On a quarterly basis, the Company evaluates the carrying value of each finance receivable for impairment. A term loan is considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect the amounts due according to the loan contract, including scheduled interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. The Company would generally place term loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain and they are 90 days past due for interest or principal, unless the term loan is both well-secured and in the process of collection. When placed on nonaccrual, the Company would reverse any accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Generally, the Company would return a term loan to accrual status when all delinquent interest and principal become current under the terms of the credit agreement and collectibility of remaining principal and interest is no longer doubtful. In certain circumstances, the Company may place a finance receivable on nonaccrual status but conclude it is not impaired. The Company may retain independent third-party valuations on such nonaccrual positions to support impairment decisions. Receivables associated with royalty stream purchases would be considered to be impaired when it is probable that the Company will be unable to collect the book value of the remaining investment based upon adverse changes in the estimated underlying royalty stream. When the Company identifies a finance receivable as impaired, it measures the impairment based on the present value of expected future cash flows, discounted at the receivable’s effective interest rate, or the estimated fair value of the collateral, less estimated costs to sell. If it is determined that the value of an impaired receivable is less than the recorded investment, the Company would recognize impairment with a charge to the allowance for credit losses. When the value of the impaired receivable is calculated by discounting expected cash flows, interest income would be recognized using the receivable’s effective interest rate over the remaining life of the receivable. 54 The Company individually develops the allowance for credit losses for any identified impaired loans. In developing the allowance for credit losses, the Company considers, among other things, the following credit quality indicators: · business characteristics and financial conditions of obligors; · current economic conditions and trends; · actual charge-off experience; · current delinquency levels; · value of underlying collateral and guarantees; · regulatory environment; and · any other relevant factors predicting investment recovery. The following table presents nonaccrual and performing loans by portfolio financing structure: (in thousands): Schedule of analysis of nonaccrual and performing loans by portfolio segment December 31, 2022 December 31, 2021 Nonaccrual Performing Total Nonaccrual Performing Total Term loans $ 11,304 $ 177,532 $ 188,836 $ 18,288 $ 118,024 $ 136,312 Royalty purchases 6,736 40,983 47,719 3,362 41,879 45,241 Total carrying value $ 18,040 $ 218,515 $ 236,555 $ 21,650 $ 159,903 $ 181,553 As of December 31, 2022, the Company had three finance receivables in nonaccrual status: (1) the term loan to Flowonix Medical, Inc. (“Flowonix”), with a net carrying value of $ 11.3 million ; (2) the Best royalty, with a net carrying value of $ 2.9 million ; and (3) the Ideal Implant, Inc. (“Ideal”) royalty, with a net carrying value of $ 3.8 million . As of December 31, 2021, the Company had three finance receivables in nonaccrual status: (1) the term loan to Flowonix Medical, Inc., with a net carrying value of $ 10.0 million ; (2) the term loan with B&D Dental Corporation (“B&D”), with a carrying amount of $ 8.3 million ; and (3) the Best royalty, with a carrying amount of $ 3.4 million . Although in nonaccrual status, none of the finance receivables were considered impaired as of December 31, 2022 and 2021. The Company collected $0.8 million and $1.2 million on its nonaccrual finance receivables during the year ended December 31, 2022 and December 31, 2021, respectively. Note 4. Property and Equipment, Net Property and equipment, net consisted of the following as of December 31, 2022 and 2021 (in thousands): Schedule of Property and Equipment, Net December 31, 2022 December 31, 2021 Production equipment and other $ 3,895 $ 3,042 Furniture and fixtures 59 38 Leasehold improvements 3,656 3,648 Capitalized software 87 84 Total 7,697 6,812 Less accumulated depreciation and amortization ( 1,857 ) ( 1,033 ) Property and equipment, net $ 5,840 $ 5,779 Depreciation and amortization expense on property and equipment was $ 0.8 million and $ 0.6 million for the years ended December 31, 2022 and 2021, respectively. 55 Note 5. Marketable Investments Investments in corporate debt securities and equity securities as of December 31, 2022 and 2021 consist of the following (in thousands): Schedule of marketable investments Year Ended December 31, 2022 2021 Corporate debt securities $ 76 $ 119 Equity securities — 1,034 Total marketable investments $ 76 $ 1,153 The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale debt securities as of December 31, 2022 and 2021, are as follows (in thousands): Schedule of available-for-sale securities reconciliation Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2022 $ 76 $ — $ — $ 76 December 31, 2021 $ 119 $ — $ — $ 119 The following table presents realized and unrealized gains and losses on equity securities as prescribed by ASC 321, Investments - Equity Securities during the year ended December 31, 2022 and 2021. Schedule of Proceeds from sales, gross unrealized gains and gross unrealized losses for available-for-sale securities December 31, 2022 2021 Unrealized net (loss) gain on equity securities reflected in the Consolidated Statements of Income $ ( 528 ) $ 1,839 Fair value of common stock received upon exercise of warrant to purchase stock 3,667 — Proceeds received on sale/tender of common stock — 1,875 Realized net loss on sale/tender of equity securities reflected in the Consolidated Statements of Income ( 151 ) ( 140 ) Equity Securities During the year ended December 31, 2022, the Company exercised its right to purchase Harrow Health, Inc. (“Harrow”) common stock. Upon exercise, the Company 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, the Company sold its shares of Harrow and Bioventus common stock and received proceeds of $3.7 million and $0.5 million, respectively. 56 Note 6. Revolving Credit Facility On November 16, 2022, the Company entered into the Fifth Amendment to Loan and Security Agreement (the “Fifth Amendment”) with Cadence Bank, N.A. as a lender and the administrative agent. Pursuant to the Fifth Amendment, the Loan and Security Agreement dated as of June 29, 2018 (“Loan Agreement”) was amended to extend the Loan Agreement Termination Date to September 30, 2025 and increase the Loan Agreement Commitment to $35.0 million. The Loan Agreement requires the payment of an unused line fee of 0.50 percent and also provides for quarterly minimum fee income of $60,000 less the aggregate interest and unused line fees paid during the immediately preceding quarter. Unused line fees and minimum fee income are recorded as interest expense. The Loan Agreement accrues interest at the monthly SOFR Rate, with a floor of 1.00 percent, plus a 2.65 percent margin and principal is repayable in full at maturity. Interest is generally required to be paid monthly in arrears. In connection with the Fifth Amendment, the Company paid approximately $173,000 in amendment and other fees, which were capitalized as deferred financing costs and are being amortized on a straight-line basis over the remaining term of the Loan Agreement. The Loan Agreement has an advance rate against the Company’s finance receivables portfolio, including 85 percent against senior first lien loans, 70 percent against second lien loans and 50 percent against royalty receivables, subject to certain eligibility requirements as defined in the Loan Agreement. The Loan Agreement contains certain affirmative and negative covenants including minimum asset coverage and minimum interest coverage ratios. As of December 31, 2022, approximately $ 2.4 million was outstanding under the credit facility, and $ 32.6 million was available for borrowing. During the year ended December 31, 2022 and 2021, the Company recognized $ 0.3 million and $ 0.4 million , respectively, of interest expense. 57 Note 7. Commitments and Contingencies Lease Obligations ASC 842 establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company’s leases consist of operating leases for office space. The Company determines if an arrangement is a lease at inception. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s corporate headquarters is in Dallas, Texas, where it leases approximately 2,400 square feet. Total rent expense recognized under the lease was $ 68,800 for both the years ended December 31, 2022 and 2021. The office lease expires in May 2025. The Enteris headquarters is located in Boonton, New Jersey, where Enteris leases approximately 32,000 square feet of space. Total rent expense recognized under the lease was $ 0.3 million for both the years ended December 31, 2022 and 2021. The office lease expires in December 2024 with an option to renew for an additional five years. Consolidated future minimum rent is as follows (in thousands): Schedule of Future Minimum Rent 2023 $ 335 2024 336 2025 325 2026 277 2027 277 Thereafter 549 Total future lease payments $ 2,099 Contingent Consideration The Company recorded contingent consideration related to the 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 December 31, 2022 and 2021 was $11.2 million and $8.5 million, respectively. The company recognized $5.2 million of remeasurement expense on the change in the estimated fair value of its contingent consideration during year ended December 31, 2022. Unfunded Commitments As of December 31, 2022, the Company’s unfunded commitments were as follows (in millions): Schedule of Unfunded Commitments Exeevo, Inc. $ 2.5 MedMinder Systems, Inc. 5.0 Duo Royalty 2.4 Sincerus Pharmaceuticals, Inc. 2.0 Total unfunded commitments $ 11.9 58 Per the terms of the royalty purchase or credit agreements, unfunded commitments are contingent upon reaching an established revenue threshold or other performance metrics on or before a specified date or period of time, and in the case of loan transactions, are subject to being advanced as long as an event of default does not exist. Litigation The Company is involved in, or has been involved in, arbitrations or various other legal proceedings that arise from the normal course of its business. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material impact on the Company’s results of operations, balance sheets and cash flows due to defense costs, and divert management resources. The Company cannot predict the timing or outcome of these claims and other proceedings. As of December 31, 2022, the Company is not involved in any arbitration and/or other legal proceeding that it expects to have a material effect on its business, financial condition, results of operations and cash flows. Indemnification As permitted by Delaware law, the Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving in such capacity, or in other capacities at the Company’s request. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any such amounts. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is insignificant. Accordingly, the Company had no liabilities recorded for these agreements as of December 31, 2022 and 2021. 59 Note 8. Stockholders’ Equity Common Stock The total number of shares of common stock, $ 0.001 par value, that the Company is authorized to issue is 250,000,000 . Issuer Purchases of Equity Securities On May 31, 2022, the Board authorized a share repurchase program under which the Company was authorized to repurchase up to $ 10.0 million of the Company’s outstanding shares of common stock, from time to time until May 15, 2023, through a Rule 10b5-1 trading plan in compliance with all applicable laws and regulations, including Rule 10b-18 of the Securities Exchange Act. The actual timing, number and value of shares repurchased under the program will depend on several factors, including the constraints specified in the Rule 10b5-1 trading plan, price, and general market conditions. There is no guarantee as to the exact number of shares that will be repurchased under the trading plan. Our Board may also suspend or discontinue the repurchase program at any time, in its sole discretion. The purchase period is July 1, 2022 through May 15, 2023. As of December 31, 2022, the Company has repurchased 63,901 shares under the share repurchase program at a total cost of $1.1 million, or $17.78 per share. As of December 31, 2022, the maximum number of shares that may yet be purchased under the plan was approximately $8.9 million, or 650,385 shares of common stock. Preferred Stock The Company’s Board may, without further action by the stockholders, issue one or more series of preferred stock and fix the rights and preferences of those shares, including the dividend rights, dividend rates, conversion rights, exchange rights, voting rights, terms of redemption, redemption price or prices, liquidation preferences, the number of shares constituting any series and the designation of such series. As of December 31, 2022, no shares of preferred stock have been issued. Stock Compensation Plans The Company’s 2010 Stock Incentive Plan (the “2010 Stock Incentive Plan”) provides for options, restricted stock, and other customary forms of equity to be granted to the Company’s directors, officers, employees, and independent contractors. All forms of equity incentive compensation are granted at the discretion of the Board and have a term not greater than 10 years from the date of grant. The calculation of the fair values of our stock-based compensation plans requires estimates that require management’s judgments. Under ASC 718, the fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model. The valuation models require assumptions and estimates to determine expected volatility, expected life and expected risk-free interest rates. The expected volatility was determined using historical volatility of our stock based on the contractual life of the award. The risk-free interest rate assumption was based on the yield on zero-coupon U.S. Treasury strips at the award grant date. There were no options granted in the fiscal years ended December 31, 2022 and 2021. 60 The following table summarizes activities under the 2010 Stock Incentive Plan for the indicated periods: Schedule of Stock Option Activity Options Outstanding Number of Shares Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Balances, December 31, 2020 362,500 $ 12.47 5.6 $ 810.1 Options canceled and retired — — Options exercised ( 75,000 ) 8.30 Options granted — — Balances, December 31, 2021 287,500 10.75 5.7 1745.8 Options canceled and retired ( 72,500 ) 14.50 Options exercised ( 125,000 ) 12.98 Options granted — — Balances, December 31, 2022 90,000 10.88 6.3 363.8 Options vested and exercisable and expected to be vested and exercisable at December 31, 2022 90,000 $ 10.88 6.3 $ 363.8 Options vested and exercisable at December 31, 2022 82,500 $ 13.35 6.3 $ 353.7 At December 31, 2022, there were approximately 770,334 shares reserved for issuance under the 2010 Stock Incentive Plan, and the Company had $47,000 of total unrecognized stock option expense for time-based awards, net of estimated forfeitures, which will be recognized over the weighted-average remaining period of 4.1 years. The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2022: Schedule of Stock Options Outstanding Exercise Prices Number Outstanding Weighted-Average Remaining Contractual Life (in years) Weighted- Average Exercise Price per Share Number Exercisable Weighted- Average Exercise Price per Share $ 9.61 15,000 3.5 $ 9.61 15,000 $ 9.61 12.50 18,750 6.4 12.50 18,750 12.50 12.50 18,750 6.4 12.50 18,750 12.50 16.29 15,000 7.3 16.29 15,000 16.29 16.29 15,000 7.4 16.29 7,500 16.29 16.29 7,500 7.5 16.29 7,500 16.29 Total 90,000 6.3 $ 10.88 82,500 $ 13.35 Employee stock-based compensation expense recognized for time-vesting options for the years ended December 31, 2022 and 2021, uses the Black-Scholes option pricing model for estimating the fair value of options granted under the Company’s equity incentive plans. Risk-free interest rates for the options were taken from the Daily Federal Yield Curve Rates on the grant dates for the expected life of the options as published by the Federal Reserve. The expected volatility was based upon historical data and other relevant factors such as the Company’s changes in historical volatility and its capital structure, in addition to mean reversion. Employee stock-based compensation expense recognized for market performance-vesting options uses a binomial lattice model for estimating the fair value of options granted under the Company’s equity incentive plan. In calculating the expected life of stock options, the Company determines the amount of time from grant date to exercise date for exercised options and adjusts this number for the expected time to exercise for unexercised options. The expected time to exercise for unexercised options is calculated from grant as the midpoint between the expiration date of the option and the later of the measurement date or the vesting date. In developing the expected life assumption, all amounts of time are weighted by the number of underlying options. 61 During the year ended December 31, 2022, the Company’s Board approved the modification of the previous CEO’s stock options with respect to 100,000 Shares with an exercise price of $13.70 per share pursuant to an award agreement dated August 18, 2014. The Company and the previous CEO agreed that (i) 50 percent of the 2014 award has already vested due to the satisfaction of time-based vesting conditions set forth in the 2014 award agreement, and a cashless exercise of the 2012 award was facilitated by net settlement of exercise price and taxes. The remaining 50 percent of the 2014 award that had not vested as of December 31, 2021 was forfeited as of the date on which the previous CEO separated from the Company, or September 30, 2022. During the year ended December 31, 2022, 41,427 restricted shares were granted and 4,696 restricted shares vested. During the year ended December 31, 2021, 8,761 restricted shares were granted and 24,727 restricted shares vested. As of December 31, 2022 and 2021, there were 71,339 and 74,221 shares of restricted stock outstanding, respectively. In September 2022, the Board approved a change in the compensation plan for non-employee directors such that each non-employee director shall receive a cash retainer of $55,000, payable quarterly in arrears. The Board will also receive an annual equity retainer of $55,000 in restricted shares of the Company’s common stock, subject to a one-year cliff vesting period. In addition, each member of (i) the Audit Committee shall receive an additional quarterly fee of $10,000, with the Audit Committee Chair receiving $15,000; (ii) the Compensation Committee shall receive an additional quarterly fee of $6,000, with the Compensation Committee Chair receiving $8,000; and (iii) the Governance Committee shall receive an additional quarterly fee of $6,000, with the Governance Committee Chair receiving $8,000. Each non-employee director has the option to elect to receive up to 100 percent of the annual cash retainer in shares of the Company’s common stock. During the years ended December 31, 2022 and 2021, the Board approved compensation for Board services by granting 13,168 and 18,978 shares, respectively, of common stock as compensation for the non-employee directors. The Board also received 9,151 restricted shares as compensation for the non-employee directors during the year ended December 31, 2022. The Company recorded $ 0.3 million in Board stock-based compensation expense during both the years ended December 31, 2022 and 2021. The Company recorded aggregate stock-based compensation expense, including the quarterly and annual Board grants, of $0.5 million and $1.2 million during the years ended December 31, 2022 and 2021, respectively. 62 Note 9. 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 years ended December 31, 2022 and 2021. The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying 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. Securities available for sale 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 the contingent consideration obligations and the related intangible assets 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. Changes in fair value of this obligation are recorded as income or expense within operating income in our consolidated statements of income. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement. 63 As of December 31, 2022 and 2021, the acquisition-related contingent consideration was $11.2 million and $8.5 million, respectively. During the year ended December 31, 2022 and 2021, the Company recorded $5.2 million of expense and $0.3 million of income, respectively, for the change in the estimated fair value of contingent consideration. The Company made payments of $2.5 million and $8.1 million against the contingent consideration liability during the years ended December 31, 2022 and 2021, respectively. 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 Instruments 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. During the year ended December 31, 2022, the Company entered into a foreign currency forward contract to manage the impact of fluctuations in foreign currency denominated cash flows expected to be received from one of its royalty finance receivables denominated in a foreign currency. The foreign currency forward contract is not designated as a hedging instrument, and changes in fair value are recognized in earnings. The liability related to the derivative instrument was recorded in other non-current liabilities in the consolidated balance sheets. The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 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 $ 1,220 $ — $ — $ 1,220 Marketable investments 76 — — 76 Financial liabilities: Contingent consideration payable $ 11,200 $ — $ — $ 11,200 Derivative liability - foreign currency forward 754 — — 754 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 64 The changes on the value of the warrant assets during the years ended December 31, 2022 and 2021 were as follows (in thousands): Schedule of fair value assets measured on recurring basis unobservable input reconciliation Fair Value - December 31, 2020 $ 2,972 Issuance 175 Canceled — Change in fair value 272 Fair Value - December 31, 2021 3,419 Issuance 1,180 Exercised ( 3,796 ) Change in fair value 417 Fair Value - December 31, 2022 $ 1,220 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 consolidated balance sheets. The fair values for warrants outstanding, for companies that have a readily determinable value, are measured using the Black-Scholes option pricing model. The following range of assumptions were used in the models to determine fair value: Schedule of weighted average assumptions December 31, 2022 2021 Dividend rate — — Risk-free rate 4.0 % to 4.3 % 0.97 % to 1.44 % Expected life (years) 2.0 to 6.9 2.6 to 7.0 Expected volatility 54.8 % to 139.4 % 60.2 % to 142.0 % 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 December 31, 2022 and 2021 (in thousands): Schedule of weighted average assumptions 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) December 31, 2022 $ 3,545 $ — $ — $ 3,545 December 31, 2021 $ 5,612 $ — $ — $ 5,612 There were no liabilities measured at fair value on a nonrecurring basis as of December 31, 2022 or 2021. 65 The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivative financial instruments. Schedule of fair value by balance sheet grouping For the year ended December 31, 2022 (in thousands): Carrying Value Fair Value Level 1 Level 2 Level 3 Financial assets: Finance receivables $ 236,555 $ 236,555 $ — $ — $ 236,555 Marketable investments 76 76 — — 76 Warrant assets 1,220 1,220 — — 1,220 Financial liabilities Contingent consideration payable $ 11,200 $ 11,200 $ — $ — $ 11,200 Derivative liability - foreign currency forward 754 754 — — 754 For the year ended December 31, 2021 (in thousands): Carrying Value Fair Value Level 1 Level 2 Level 3 Financial assets: 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 10. Revenue Recognition The Company’s Pharmaceutical Development segment recognizes revenues received from contracts with its customers by revenue source, as we believe 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 years ended December 31, 2022 and 2021 (in thousands): Schedule of Revenue Recognized by Revenue Source December 31, 2022 2021 Pharmaceutical Development Segment License Agreement $ 5,255 $ 15,871 Pharmaceutical development and other 753 974 Total contract revenue $ 6,008 $ 16,845 The Company’s contract liabilities represent advance consideration received from customers and are recognized as revenue when the related performance obligation is satisfied. 66 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 December 31, 2022 2021 Pharmaceutical Development Segment Deferred revenue $ 33 $ 185 Total contract liabilities $ 33 $ 185 During the year ended December 31, 2022, the Company recognized $ 0.1 million of 2021 deferred revenue from satisfaction of performance obligations. Please refer to Notes 1 and 2 for further details on the Company’s deferred revenue and License Agreement, respectively. The Company did not have any contract assets nor did it have any contract liabilities related to the License Agreement as of December 31, 2022 or 2021. Note 11. 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 CEO uses to make decisions about the Company’s operating matters. As described in Note 1, SWK Holdings Corporation and Summary of Significant Accounting Policies, 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, nor does the Company report results by geographic region, as these metrics are not used by the Company’s chief executive officer in assessing performance or allocating resources to the segments. Segment performance is evaluated based on several factors, including income (loss) from continuing operations before income taxes. Management uses this measure of profit (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 Company does not report assets by reportable segment, as this metric is not used by the Company’s CEO in assessing performance or allocating resources to the segments. The following tables present financial information for the Company’s reportable segments for the periods indicated (in thousands): Schedule of Reportable Revenue by Geographic Region Year Ended December 31, 2022 Finance Receivables Pharmaceutical Development and Other Holding Company and Other Consolidated Revenue $ 35,461 $ 5,485 $ — $ 40,946 Other revenue 10 523 5 538 Provision for credit losses and impairment expense 3,491 — — 3,491 Interest expense 340 — — 340 Manufacturing, research and development — 6,952 — 6,952 Change in fair value of contingent consideration — 5,170 — 5,170 Depreciation and amortization expense — 2,593 6 2,599 General and administrative 333 3,617 9,014 12,964 Other expense, net ( 477 ) — — ( 477 ) Income tax benefit — — (4,000 ) (4,000 ) Consolidated net income (loss) 30,829 ( 12,324 ) ( 5,014 ) 13,491 67 Year Ended December 31, 2021 Finance Receivables Pharmaceutical Development and Other Holding Company and Other Consolidated Revenue $ 39,310 $ 16,122 $ — $ 55,432 Other revenue — 723 — 723 Interest expense 374 — — 374 Manufacturing, research and development — 7,347 — 7,347 Depreciation and amortization expense — 4,055 6 4,061 Change in fair value of acquisition-related contingent consideration — ( 287 ) — ( 287 ) General and administrative 1,813 3,983 7,824 13,620 Other income, net 1,971 — — 1,971 Income tax expense — — 7,082 7,082 Consolidated net income (loss) 39,094 1,747 ( 14,912 ) 25,929 Included in Holdings Company and Other are the expenses of the parent holding company and certain other enterprise-wide overhead costs, which have been included for purposes of reconciling to the consolidated amounts. Note 12. Income Taxes The components of income before income tax (benefit) expense are as follows (in thousands): Schedule of Income before Income Tax Provision December 31, 2022 2021 U.S. $ 9,491 $ 33,011 During the years ended December 31, 2022 or 2021, the Company’s provision for (benefit from) income taxes was as follows (in thousands): Schedule of Components of Income Tax Expense (Benefit) December 31, 2022 2021 Current (benefit) expense State $ ( 59 ) $ 185 Deferred (benefit) expense Federal ( 3,922 ) 6,944 State ( 19 ) ( 47 ) Total income tax (benefit) expense $ ( 4,000 ) $ 7,082 The components of the income tax provision (benefit) are as follows (in thousands): December 31, 2022 2021 Federal tax provision at statutory rate $ 2,035 $ 6,945 Change in valuation allowance ( 9,587 ) ( 21,208 ) State taxes, net of federal income tax benefit ( 97 ) 95 Mark-to-market adjustments (88 ) (58 ) Tax credits ( 403 ) — Contingent consideration revaluation 1,044 ( 60 ) Other 191 ( 125 ) Write off of deferred tax assets 2,905 21,493 Total income tax (benefit) expense $ ( 4,000 ) $ 7,082 68 The Company records deferred tax assets if the realization of such assets is more likely than not to occur in accordance with accounting standards that address income taxes. Significant management judgment is required in determining whether a valuation allowance against the Company’s deferred tax assets is required. The Company has considered all available evidence, both positive and negative, such as historical levels of income and predictability of future forecasts of taxable income from existing investments, in determining whether a valuation allowance is required. The Company is also required to forecast future taxable income in accordance with accounting standards that address income taxes to assess the appropriateness of a valuation allowance, which further requires the exercise of significant management judgment. The Company focuses on forecasting future taxable income for the investment portfolio that exists as of the balance sheet date. Specifically, the Company evaluated the following criteria when considering a valuation allowance: · the history of tax net operating losses in recent years; · predictability of operating results; · profitability for a sustained period of time; and · level of profitability on a quarterly basis. As of December 31, 2022, the Company had cumulative net income before tax for the three years then ended. Based on its historical operating performance, the Company has concluded that it was more likely than not that the Company would not be able to realize the full benefit of the U.S. federal and state deferred tax assets in the future. However, at December 31, 2022 the Company has concluded that it is more likely than not that the Company will be able to realize approximately $24.5 million benefit of the U.S. federal and state deferred tax assets in the future. The Company will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist on a quarterly basis. Any adjustment to the deferred tax asset valuation allowance would be recorded in the consolidated statements of income for the period that the adjustment is determined to be required. The valuation allowance against deferred tax assets was $6.7 million and $16.3 million as of December 31, 2022 and 2021, respectively. Deferred tax assets consist of the following (in thousands): Schedule of Deferred Tax Assets and Liabilities December 31, 2022 2021 Deferred tax assets: Credit carryforward $ 2,947 $ 3,077 Stock-based compensation 143 138 Other 3,846 3,334 Net operating losses 26,158 32,362 Gross deferred tax assets 33,094 38,911 Deferred tax liabilities: Intangible assets other than goodwill ( 1,288 ) ( 1,609 ) Other ( 629 ) ( 479 ) Valuation allowance ( 6,697 ) ( 16,284 ) Net deferred tax assets $ 24,480 $ 20,539 The Tax Reform Act of 1986 limits the use of NOLs and tax credit carryforwards in certain situations where stock ownership changes occur. In the event the Company has had a change in ownership, the future utilization of the Company’s net operating loss and tax credit carryforwards could be limited. As of December 31, 2022, the Company had NOL carryforwards for federal income tax purposes of approximately $ 124.5 million . The federal NOL carryforwards, if not offset against future income, will expire by 2037. Approximately $4.0 million can be carried forward indefinitely. 69 The Company also had federal research carryforwards of $2.9 million. The federal research credits begin to expire in 2023 and will fully expire by 2042. The Company records liabilities, where appropriate, for all uncertain income tax positions and recognizes potential accrued interest and penalties related to unrecognized tax benefits within income tax expense. As of December 31, 2022 and 2021, the Company had approximately $ 0.6 million and $ 0.3 million , respectively, of unrecognized tax benefit, none of which would impact the effective tax rate if recognized. The Company does not expect the unrecognized tax benefits to change materially over the next twelve months. There are no tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of December 31, 2022. The Company is subject to taxation in the U.S. and various state jurisdictions. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 1999 through December 31, 2022 due to carryforward of unutilized net operating losses and research and development credits. The Company does not anticipate significant changes to its uncertain tax positions through December 31, 2022. 70 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.