SWK Holdings Corp 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our financial statements and the related notes included elsewhere in this Annual Report. Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the sections entitled “Risk Factors, ” and ”Special Note Regarding Forward-Looking Statements” as revised and supplemented by those risks described from time to time in other reports which we file with the SEC. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report. Overview We have organized our operations into two segments: Finance Receivables and Pharmaceutical Development. These segments reflect the way we evaluate our business performance and manage our operations. Please refer to Part I, Item 1, Business and Part II, Item 8, Financial Statements , Notes 1 and 11 of the notes to the consolidated financial statements for further information regarding segment information. With an effective date of January 1, 2024, we entered into an exclusive option and asset purchase agreement with Aptar on March 14, 2024 which granted Aptar an exclusive option to acquire certain of Enteris’ assets related to its business of providing good manufacturing practice (GMP) manufacturing and clinical supply services through Phase 1 and 2 to third parties, subject to certain exclusions. Aptar must exercise the option by or before January 1, 2026. Please refer to Part II, Item 8, Financial Statements , Note 13 of the notes to the consolidated financial statements for further information regarding the Option and Asset Purchase Agreement with Aptar. 28 Finance Receivables Portfolio Overview The tables below provide an overview of our outstanding transactions as of, and for the year ended, December 31, 2023 (in thousands, except rate, share and per share data): Royalty Purchases Licensed Technology Footnote Funded Amount GAAP Balance Revenue (Loss) Recognized Besivance® Ophthalmic antibiotic (1) $ 6,000 $ — $ 23 Best ABT, Inc. Oncology diagnosis (2), (3) 5,784 2,587 — Coflex®/Kybella® Spinal stenosis/submental fullness 4,350 3,212 (270 ) Cambia® NSAID migraine treatment (4) 8,500 — 100 Duo Royalty Japanese Women’s health/cystic fibrosis 15,488 13,588 2,701 Flowonix Medical, Inc. Drug delivery device (3), (5) 10,433 10,433 — Forfivo XL® Depressive disorder treatment 6,000 1,340 1,053 Ideal Implant, Inc. Aesthetics (3), (6) 3,834 3,834 — Iluvien® Diabetic macular edema 16,501 14,650 2,041 Immune Globulin Portfolio Immune Globulin Therapeutics 14,100 14,197 — Veru, Inc. Women’s health 10,000 3,419 526 Term Loans Type Footnote Maturity Date Principal GAAP Balance Rate Revenue (Loss) Recognized 4Web, Inc. First lien 12/31/24 $ 29,411 $ 31,807 12.8 % $ 4,769 AOTI, Inc. First lien 03/21/27 12,000 12,104 11.0 % 1,989 Acer Therapeutics, Inc. First lien (7) 03/04/24 — — 12.0 % 1,560 Elutia, Inc. First lien 08/10/27 23,045 24,285 12.0 % 3,992 BIOLASE, Inc. First lien 05/31/25 13,135 14,015 11.3 % 2,263 Biotricity, Inc. First lien 12/21/26 12,364 12,493 14.5 % 2,286 CDMO Manufacturer First lien 09/13/27 5,000 5,026 13.3 % 234 Epica International, Inc. First lien 07/23/24 9,750 10,485 9.5 % 1,863 eTon Pharmaceuticals, Inc. First lien 11/13/24 5,460 5,696 10.0 % 972 Exeevo, Inc. First lien 07/01/27 6,952 6,924 15.0 % 960 Journey Medical Corporation First lien 12/27/27 15,000 14,802 12.8 % 24 MedMinder Systems, Inc. First lien 08/18/27 20,000 20,107 12.9 % 2,849 MolecuLight, Inc. First lien 12/29/26 10,000 10,227 12.8 % 1,867 Nicoya Lifesciences, Inc. First lien 11/30/26 6,000 5,971 12.8 % 221 NeoLight, LLC First lien 02/17/27 5,000 5,016 13.5 % 720 Shield Therapeutics, Plc First lien 09/28/28 20,000 19,325 14.3 % 799 SKNV First lien 05/15/27 13,497 13,734 10.4 % 2,055 Trio Healthcare Ltd. First lien (3) 07/01/26 9,152 9,128 12.5 % 749 29 Marketable Investments Number of Shares Footnote Funded Amount GAAP Balance Change in Fair Value Active Investment as of 12/31/23 Secured Royalty Financing (Marketable Investment) N/A (2), (3) $ 3,000 $ 48 $ — Yes Epica International, Inc. 25,000 N/A — — Yes Sincerus Pharmaceuticals, Inc. 26,575 N/A — — Yes Warrants to Purchase Stock Number of Shares Footnote Exercise Price per Share GAAP Balance Change in Fair Value 4Web, Inc. TBD $ — $ — $ — AOTI, Inc. 92,490 — — — Acer Therapeutics, Inc. 150,000 2.46 — (185 ) Acer Therapeutics, Inc. 100,000 1.51 — (132 ) Acer Therapeutics, Inc. 250,000 2.39 — (259 ) Acer Therapeutics, Inc. 500,000 1.00 — 24 Acerus Pharmaceuticals Corporation — — — (5 ) Aziyo Biologics, Inc. 157,895 6.65 283 (232 ) Aziyo Biologics, Inc. 30,075 6.65 54 (45 ) BIOLASE, Inc. 22,039 9.80 — (4 ) Biotricity, Inc. 57,536 6.26 3 (7 ) CDMO Manufacturer 211,442 1.42 — — CeloNova BioSciences, Inc. TBD — — — DxTerity Diagnostics, Inc. 2,019,231 — — — Epica International, Inc. TBD — — — eTon Pharmaceuticals, Inc. 51,239 5.86 97 53 eTon Pharmaceuticals, Inc. 18,141 6.62 37 20 Exeevo, Inc. 930 — — — EyePoint Pharmaceuticals, Inc. 40,910 11.00 711 690 EyePoint Pharmaceuticals, Inc. 7,773 19.30 125 123 Shield Warrant 8,910,540 — 449 (96 ) MedMinder Systems, Inc. 57,859 — — — MolecuLight, Inc. TBD — — — 30 Assets Revenue Recognized Total gross finance receivables $ 288,405 $ 36,346 Total marketable investments 48 — Fair value of warrant assets 1,759 — Total gross assets/revenues $ 290,212 $ 36,346 (1) US royalty was paid off during the year ended December 31, 2021. SWK continues to receive insignificant royalties on international sales. (2) Investment considered partially impaired. (3) Investment on non-accrual. (4) Investment was paid off during the year ended December 31, 2023. (5) Flowonix Medical assets were sold to Algorithm Sciences, Inc. during the year ended December 31, 2023. In exchange for releasing its lien, the Flowonix estate received $2.5M cash and is expected to receive royalties on sales of two products. The finance receivable is now classified as a royalty. (6) In July 2023, Ideal Implant assets were sold to an aesthetics company, which is expected to pay SWK a mid-single digit, capped royalty on implant sales beginning in 2024. (7) Loan was sold to a third party during the year ended December 31, 2023. Unless otherwise specified, our senior secured debt assets generally are repaid by a revenue interest that is charged on a company’s quarterly net sales and royalties. 31 Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, stock-based compensation, impairment of finance receivables and long-lived assets, impairment of goodwill and identifiable intangible assets, valuation of warrants and investments, contingent consideration, income taxes and contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our consolidated financial statements because they inherently involve significant judgments and uncertainties. For a discussion of our significant accounting policies, refer to Note 1 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data . Allowance for Credit Losses The allowance for credit losses is reviewed for adequacy based on portfolio collateral values and credit quality indicators, including non-performing assets, evaluation of portfolio diversification and concentration as well as economic conditions to determine the need for a qualitative adjustment. We review our finance receivables periodically to determine the probability of loss, and record charge-offs after considering such factors as delinquencies, the financial condition of obligors, the value of underlying collateral, as well as third-party credit enhancements such as guarantees. The process of determining the level of the allowance for credit losses requires a high degree of judgment. Others given the same information could reach different reasonable conclusions. Finance Receivables Finance receivables are measured based upon the difference between the recorded investment in each receivable and either the present value of the expected future cash flows discounted at each receivable’s effective interest rate (the receivable’s contractual interest rate adjusted for any deferred fees, costs, discount or premium at the date of origination or acquisition) or if a receivable is collateral dependent, the collateral’s fair value. When impairment is determined to be probable, the measurement will be based on the fair value of the collateral. The determination of impairment involves management’s judgment and the use of market and third party estimates regarding collateral values. Valuations of impaired receivables and corresponding impairment affect the level of the reserve for credit losses. Revenue Recognition Finance Receivables Segment Our Finance Receivables segment records interest income on an accrual basis based on the effective interest rate method to the extent that we expect to collect such amounts. Incentive fees, if any, are recognized when earned at the end of the relevant performance period, pursuant to the underlying contract. Other administrative service revenues are recognized when contractual obligations are fulfilled or as services are provided. 32 Pharmaceutical Development Segment Our Pharmaceutical Development segment enters into collaboration and licensing agreements with strategic partners, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to us of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products. In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must use its judgment to determine: (a) the number of performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; (c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above; and d) the contract term and pattern of satisfaction of the performance obligations under step (v) above. Management uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in our consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. Fair Value of Financial Instruments The fair value of our financial instruments reflects the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Our financial instruments not required to be adjusted to fair value on a recurring basis consist principally of cash, cash equivalents, and accounts and finance receivables, accounts payable, and accrued expenses. We believe the carrying amount of cash and accounts and finance receivable, accounts payable and accrued expenses approximate fair value due to their relatively short maturities. Income Taxes The recognition of certain net deferred tax assets of our reporting entities are dependent upon, but not limited to, the future profitability of the reporting entity, when the underlying temporary differences will reverse, and tax planning strategies. Further, management’s judgment regarding the use of estimates and projections is required in assessing our ability to realize the deferred tax assets relating to NOL carryforwards, as most of these assets are subject to limited carryforward periods. We will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist at each reporting date. Any adjustments to the deferred tax asset valuation allowance is recorded in the statement of operations in the period it is determined an adjustment is required. Please refer to Note 12 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data . Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, refer to Note 1 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data . 33 Results of Operations This section of this Annual Report generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussion of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Comparison of the Years Ended December 31, 2023 and 2022 The following table summarizes the results of our operations for the years ended December 31, 2023 and 2022: (in millions) For the Year Ended December 31, 2023 2022 Change Revenues $ 37.8 $ 41.5 $ (3.7 ) Allowance for credit losses 1.9 3.5 (1.6 ) Interest expense 1.8 0.3 1.5 Impairment of goodwill 8.4 — 8.4 Pharmaceutical manufacturing, research and development expense 3.4 7.0 (3.6 ) Increase (decrease) in fair value of acquisition-related contingent consideration (6.3 ) 5.2 (11.5 ) Depreciation and amortization expense 2.6 2.6 — General and administrative expense 11.2 13.0 (1.8 ) Other (expense) income, net — (0.5 ) 0.5 Income tax expense (1.3 ) (4.0 ) 2.7 Net income 15.9 13.5 2.4 Revenues We generated revenues of $37.8 million and $41.5 million for the years ended December 31, 2023 and 2022, respectively. The $3.7 million decrease in revenue for the year ended December 31, 2023, consisted mainly of a $4.3 million decrease in Pharmaceutical Development segment revenue and a $0.9 million increase in Finance Receivables segment revenue. The decrease in Pharmaceutical Development segment revenue was primarily due to $5.0 million of milestone revenue related to Enteris’ license agreement ("License Agreement") with Cara Therapeutics, Inc. ("Cara") received during the year ended December 31, 2022, and no similar milestone revenue was recognized during year end December 31, 2023. The $0.9 million increase in Finance Receivables segment revenue was primarily due to $9.0 million increase in interest and fees earned due to funding new and existing loans and a $3.8 million increase in interest earned on our finance receivables due to an overall increase in reference rates. The increase was partially offset by a net $1.2 million decrease in royalty revenue when compared to the same period of the previous year and an $10.5 million decrease in interest, royalties and fees earned on finance receivables that were paid off in 2022. Allowance for Credit Losses Our allowance for credit losses is established through charges or credits to income in the form of the provision in order to bring our allowance for credit losses for loans and unfunded commitments to a level deemed appropriate by management. We recognized Allowance for credit loss expense of $1.9 million and $3.5 million during the years ended December 31, 2023 and 2022, respectively (please refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 3 of the notes to the consolidated financial statements for further information on the allowance for credit losses). 34 Interest Expense Interest expense consists of interest accrued on our revolving line of credit, 9.00% Senior Notes due 2027 (“Notes”), unused line of credit and maintenance fees, as well as amortization of debt issuance costs. Interest expense increased to $1.8 million for the year ended December 31, 2023 from $0.3 million for the year ended December 31, 2022. This increase in interest expense was mainly due to issuing approximately $32.9 million of Notes in an underwritten public offering in October of 2023. Additionally, during the year ended December 31, 2023 there was acceleration of debt issuance costs related to the Prior Credit Agreement with Cadence Bank, as well as interest expense incurred on both the Prior Credit Agreement and the new Credit Agreement with First Horizon Bank. See Note 6 for further information on the Notes, new Credit Agreement, and Prior Credit Agreement. Impairment of Goodwill We recognized a $8.4 million impairment charge during the year ended December 31, 2023. As part of the Company’s annual goodwill impairment analysis, the Company elected to bypass the qualitative goodwill impairment assessment and proceed directly with a quantitative assessment. The goodwill impairment test concluded that the fair value of the Company’s Pharmaceutical Development reporting unit did not exceed the carrying amount and the Company recognized an impairment charge of $8.4 million and reduced the goodwill balance to $0. Refer to Note 2 for further information. Pharmaceutical Manufacturing, Research and Development Expense Pharmaceutical manufacturing, research and development expense decreased from $7.0 million for the year ended December 31, 2022 to $3.4 million for the year ended December 31, 2023. The $3.6 million decrease was primarily due to a reduction in headcount, as well as a reduction in research and development and clinical trial expenditures. Change in Fair Value of Contingent Consideration We recognized a $6.3 million gain from the change in fair value of acquisition-related contingent consideration during the year ended December 31, 2023 and recognized a $5.2 million loss in 2022. The contingent consideration is the earnout related to the 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement with Cara for oral formulation rights to Enteris' Peptelligence® technology to develop and commercialize Oral KORSUVA™ in any indication worldwide, excluding South Korea and Japan (please refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 7 of the notes to the consolidated financial statements for further information on contingent consideration). The carrying amount of the liability may fluctuate significantly, and actual amounts paid may be materially different from the estimated value of the liability. Depreciation and Amortization Depreciation and amortization expense for the year ended December 31, 2023 and 2022 was $2.6 million. Amortization expense is aligned with the expected future cash flows of the intangible assets. General and Administrative General and administrative expenses consist primarily of compensation, including stock-based compensation and related costs for management, staff and Board; legal and audit expenses; and corporate governance expenses. General and administrative expenses decreased to $11.2 million for the year ended December 31, 2023 from $13.0 million for the year ended December 31, 2022. The $1.8 million decrease was primarily driven by a one-time severance payment of $1.1 million paid to the former CEO during the three months ended September 30, 2022; a $0.8 million decrease in one-time professional fees and other expense related to corporate strategic planning; and a net $0.5 million decrease in Pharmaceutical Development segment operational expenses due to a reduction in headcount and business development expense. The decrease was partially offset by a $0.6 million increase in salaries and wages for the Finance Receivables segment due to additional headcount and annual pay increases. 35 Other (Expense) Income, Net Other expense, net for the year ended December 31, 2023 was approximately $36.9 thousand which consisted of a realized loss of $0.8 million from the write off of warrants and a net aggregate fair market value loss of approximately $54.4 thousand on our warrant derivatives. This was offset by a $0.8 million gain from the remeasurement of foreign currency transactions into our functional currency. Other income, net for the year ended December 31, 2022 reflected a net aggregate fair market value gain of $0.4 million on our warrant derivatives and a net fair value loss $0.5 million on the change in fair value of our Bioventus and Harrow common stock. Additionally, a realized loss $0.2 million was reflected on the sale of our Bioventus and Harrow common stock, in addition to a $0.2 million loss from the remeasurement of foreign currency transactions into our functional currency, net of changes in fair value of the foreign currency forward contract. Income Tax (Benefit) Expense During the years ended December 31, 2023 and 2022, we recognized income tax benefit of $1.3 million and $4.0 million, respectively. The $2.7 million decrease in income tax benefit is mainly the result of releasing the valuation allowance against deferred tax assets. As of December 31, 2023 and 2022, our cumulative gross deferred tax assets were $28.4 million and $33.1 million, respectively. Based on historical and expected future operating performance, we concluded that it was more likely than not that we will not be able to realize the full benefit of the U.S. federal and state deferred tax assets in the future. The valuation allowance against deferred tax assets was $0 and $6.7 million as of December 31, 2023 and 2022, respectively. As of December 31, 2023, we believe it is more likely than not that we will realize approximately $28.3 million of benefit from the U.S. federal and state deferred tax assets in the future. As of December 31, 2023, we had NOLs for federal income tax purposes of $87.7 million. The federal NOL carryforwards, if not offset against future income, will expire by 2037. Approximately $6.9 million of the $87.7 million can be carried forward indefinitely. We also had federal research credit carryforwards of $3.0 million. The federal federal research credits begin to expire in 2023 and will fully expire by 2042. Liquidity and Capital Resources As of December 31, 2023, we had $5.2 million in cash, cash equivalents and restricted cash, compared to $6.2 million as of December 31, 2022. The primary driver of the $0.9 million decrease in our cash balance was $55.8 million of interest, fees, principal and royalty payments received on our finance receivables, a $9.9 million net increase on our credit facility, a $0.9 million increase in Enteris revenue receipts, and $33.0 million cash received from the issuance of Senior Notes. The increase in cash and cash equivalents was offset by $74.1 million of investment funding, net of deferred fees and origination expenses; payroll, accounts payable and credit facility closing costs of $18.4 million; and $6.3 million to repurchase shares of the Company’s common stock in the open market. We entered into a new $45.0 million revolving credit facility in June 2023 with First Horizon Bank. The Credit Agreement provides for one or more incremental increases not to exceed $80.0 million, subject to the consent of the Agent and each Lender, at any time prior to the Commitment Termination Date. On October 10, 2023, the Company entered into a First Amendment to Credit Agreement pursuant to which Woodforest National Bank was added as a lender under the Credit Agreement for an aggregate commitment of $15.0 million, thereby increasing the aggregate commitments under the Credit Agreement from $45.0 million to $60.0 million. As of December 31, 2023, $12.4 million was outstanding under the new Credit Agreement, and $47.7 million was available for borrowing. Our Prior Credit Agreement with Cadence Bank was terminated in connection with the establishment of the new Credit Agreement (please refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 6 of the notes to the consolidated financial statements for further information regarding the Credit Agreement with First Horizon Bank). 36 On October 3, 2023, the Company completed a registered underwritten public offering of $30.0 million of the Notes. On October 27, 2023, the underwriters exercised their option to purchase an additional approximately $3.0 million in aggregate principal amount of the Notes. The Notes will mature on January 31, 2027, unless earlier redeemed, and will bear interest at a rate of 9.00 percent per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year and at maturity, commencing on December 31, 2023. The Company received net proceeds after discounts, commissions, expenses and fees, of approximately $30.6 million. Primary Driver of Cash Flow Our ability to generate cash in the future depends primarily upon our success in implementing our Finance Receivable segment business model of generating income by providing capital to a broad range of life science companies, institutions and inventors, as well as the success of our Pharmaceutical Development segment. We generate income primarily from four sources: 1. Primarily owning or financing through debt investments, royalties generated by the sales of life science products and related intellectual property; 2. Receiving interest and other income by advancing capital in the form of secured debt to companies in the life science sector; 3. Pharmaceutical development, manufacturing, and licensing activities; and 4. To a lesser extent, realizing capital appreciation from equity-related investments in the life science sector. As of December 31, 2023, our finance receivables portfolio contains $274.5 million of net finance receivables and $48,000 of marketable investments. We expect these assets to generate positive cash flows in 2024. We continuously monitor the short and long-term financial position of our finance receivables portfolio. In addition, the majority of our finance receivables portfolio are debt instruments that carry floating interest rates. Changes in interest rates, including the levels of the underlying reference rates may affect the interest income for debt instruments with floating rates. We believe we are well positioned to benefit should market interest rates rise in the future. We continue to evaluate multiple attractive opportunities that, if consummated, we believe would similarly generate additional income. Since the timing of any investment is difficult to predict, our Finance Receivables segment may not be able to generate positive cash flow above what our existing assets are expected to produce in 2023. We do not assume any near-term repayments from borrowers, and as a result, no assurances can be given that actual results would not differ materially from the statement above. Off-Balance Sheet Arrangements In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage partner companies’ requests for funding and take the form of loan commitments and lines of credit. The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the partner company defaults, and the value of any existing collateral becomes worthless. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. As of December 31, 2023, we had $5.0 million of unfunded commitments. Please refer to Part II, Item 8, Financial Statements , Note 7 of the notes to the consolidated financial statements for further information regarding the Company’s commitments and contingencies. 37