See accompanying notes to the unaudited condensed consolidated financial statements.

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMESTOCKHOLDERS’ EQUITY

(in thousands)thousands, except share data)

See accompanying notes to the unaudited condensed consolidated financial statements.

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

See accompanying notes to the unaudited condensed consolidated financial statements.

SWK HOLDINGS CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. SWK Holdings Corporation and Summary of Significant Accounting Policies

Nature of Operations

SWK Holdings Corporation (the “Company”) was incorporated in July 1996 in California and reincorporated in Delaware in September 1999. In July 2012, the Company commenced its strategy of building a specialty finance and asset management business. In August 2019, the Company commenced a complementary strategy of building a pharmaceutical development, manufacturing and intellectual property licensing business. The Company’s strategy isoperations comprise two reportable segments: “Finance Receivables” and “Pharmaceutical Development.” The Company allocates capital to be a leading healthcare capital provider by offering sophisticated, customized financing solutionseach segment in order to a broad rangegenerate income through the sales of life science companies, institutions and inventors.products by third parties. The Company is primarily focused on monetizing cash flow streams derived from commercial-stage productsheadquartered in Dallas, Texas, and related intellectual property through royalty purchases and financings, as well as through the creation of synthetic revenue interests in commercialized products. The Company has been deploying its assets to earn interest, fees, and other income pursuant to this strategy, andJune 30, 2023, the Company continues to identify and review financing and similar opportunities on an ongoing basis. In addition, through the Company’s wholly-owned subsidiary, SWK Advisors LLC, the Company provides non-discretionary investment advisory services to institutional clients in separately managed accounts to similarly invest in life science finance. SWK Advisors LLC is registered as an investment advisor with the Texas State Securities Board. The Company intends to fund transactions through its own working capital, as well as by building its asset management business by raising additional third party capital to be invested alongside the Company’s capital.had 23 full-time employees.

The Company fills a niche that it believes is underserved in the sub-$50 million transaction size. Since many of its competitors that provide longer term, debt and royalty-related financing options have much greater financial resources than the Company, they tend to not focus on transaction sizes below $50 million as it is generally inefficient for them to do so. In addition, the Company does not believe that a sufficient number of other companies offer similar types of long-term financing options to fill the demand of the sub-$50 million market. As such, the Company believes it faces less competition from such longer term, investors in transactions that are less than $50 million.

The Company has net operating loss carryforwards (“NOLs”) and believes that the ability to utilize these NOLs is an important and substantial asset. The Company believes that the foregoing business strategies can create value for its stockholders, and produce prospective taxable income (or the ability to generate capital gains) that might permit the Company to utilize the NOLs. However, at this time, under current law, we dothe Company does not anticipate that our life science business strategythe Finance Receivables and/or Pharmaceutical Development segments will generate sufficient income to permit usthe Company to utilize all of ourits NOLs prior to their respective expiration dates. As such, it is possible that wethe Company might pursue additional strategies that we believeit believes might result in ourthe ability to utilize more of ourthe NOLs. The Company is unable to assure investors that it will find suitable financing opportunities or that it will be able to utilize its existing NOLs.

As of November 7, 2017August 5, 2023, the Company and its partners have executed transactions with 2650 different parties under its specialty finance strategy, funding an aggregate $374of $725.7 million since 2012 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.

TheDuring 2019, the Company commenced its Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”). Enteris is headquartered in Dallas, Texas.

a clinical development and manufacturing organization providing development services to pharmaceutical partners as well as innovative formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence® platform.

Basis of Presentation and Principles of Consolidation

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The unaudited condensed 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 (a) the Company, as the general partner or managing member, exercises effective control, even though the Company’s ownership may be less than 50 percent, (b) the related governing agreements provide the Company with broad powers, and (c) the other parties do not participate in the management of the entities and do not effectively have the substantial 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 unaudited condensed consolidated financial statements, it would have no effect on its operations and/or total stockholders’ equity attributable to the Company.

Unaudited Interim Financial Information

The unaudited condensed consolidated financial statements have been prepared by the Company and reflect all normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the interim financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 2017.2023. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2022, filed with the SEC on March 17, 2017.31, 2023.

Use of Estimates

The preparation of the Company’s unaudited condensed 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 unaudited condensed 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,recognition; stock-based compensation,compensation; valuation of interest and accounts receivable; impairment of finance receivablesreceivables; allowance for credit losses; long-lived assets; property and long-lived assets,equipment; intangible assets; goodwill; valuation of warrants and other investments; contingent consideration; income taxestaxes; 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 unaudited condensed 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 clinical development and manufacturing services as well as oral therapeutic formulation solutions built around Enteris’ pharmaceutical Peptelligence® platform, which enables the oral delivery of molecules that are typically injected, including peptides and BCS Class II, III, and IV small molecules in an enteric-coated tablet formulation.

Revenue Recognition

The Company’s Pharmaceutical Development segment enters into collaboration and licensing agreements with strategic partners, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.

Deferred revenue includes amounts that have been billed per the contractual terms but have not been recognized as revenue. The Company classifies as current the portion of deferred revenue that is expected to be recognized within one year from the balance sheet date and is included in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets.

Reclassification

Certain prior year amounts have been reclassified to conform to current year presentation. The amounts for prior periods have been reclassified to be consistent with current year presentation and have no impact on previously reported total assets, total stockholders’ equity or net income.

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.

Recent Accounting Pronouncements

In January 2016,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardsStandard Update (“ASU”) No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition2020-04, “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 Measurementexceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include: (i) contract modifications, (ii) hedging relationships, and (iii) sales or transfers of Financial Assetsdebt securities classified as held-to-maturity. ASU 2020-04 was effective upon issuance, and Financial Liabilities.” This guidance changes how entities measure equity investments that do not result in consolidation and are not accounted for under the equity method. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values; however, the exception requires the entity to consider relevant transactions thatprovisions generally can be reasonably known to identify any observable price changes that would impact the fair value. This guidance also changes certain disclosure requirements and other aspectsapplied prospectively as of current GAAP. This guidance is effective for annual periods beginning afterJanuary 1, 2020 through December 15, 2017 and is applicable to the Company in fiscal 2018.31, 2024. The Company has beenidentified existing loans that reference LIBOR and is in the process of evaluating the new guidance and believes ASU 2016-01alternatives in each situation. The Company expects that it will not have a material impact on its consolidated financial statements upon adoption in fiscal 2018.

In March 2016, the FASB issued ASU No. 2016-07, “Equity Method and Joint Ventures (Topic 323).” This guidance simplifies the accounting for equity method investments by eliminating the requirement in Topic 323 that requires an entityelect to retroactively adopt the equity method of accounting if an investment qualifies for useapply some of the equity method as a result of an increaseexpedients and exceptions provided in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interestASU 2020-04 and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. ASU 2016-07 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. ASU 2016-07 did not have a material impact on the Company’s unaudited condensed consolidated financial statements upon adoption.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about:

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) — Narrow-Scope Improvements and Practical Expedients,” which clarified guidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters. The new guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company has been evaluating the impact of ASU 2014-09 and related ASUs, and aside from enhanced disclosures surrounding revenue recognized from contracts with customers, the Company does not believe theythe adoption of this standard will have a material impact on the Company’s consolidated financial statements.

The Company currently intends to useadopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), as amended, on January 1, 2023 using the modified prospectiveretrospective approach upon adoption.

method. ASU 2016-13 replaced the incurred loss impairment methodology with a methodology that reflects a current expected credit loss (“CECL”). ASU 2016-13 impacted all of the Company’s investments held at amortized cost. At December 31, 2022, the Company’s allowance for credit losses of $11.8 million was the accumulation of allowance for credit losses (“ACL”) applied to specific finance receivables, representing management’s prior estimates of potential future losses on such finance receivables. As part of the Company’s adoption of ASU 2016-13, management reviewed its prior estimates of finance receivable-specific ACL and chose to apply the full $11.8 million ACL under legacy GAAP to the finance receivables such allowance applied. Under the new CECL model, the net GAAP balances of such finance receivables are presented net of previously reported ACL and are included in the Company’s estimated ACL for its Royalties portfolio segment.

Upon adoption of ASC 2016-13 on January 1, 2023, the Company’s transition adjustment included $11.8 million of ACL on finance receivables, which is presented as a reduction to finance receivables, and a $0.4 million ACL on unfunded loan commitments, which is recorded within other non-current liabilities. The Company recorded a net decrease of $9.7 million to accumulated deficit as of January 1, 2023 for the cumulative effect of adopting ASU 2016-13, which reflects the transition adjustments noted above, net of the applicable deferred tax assets of $2.5 million. Results for reporting periods beginning after January 1, 2023 are presented under ASU 2016-13, while prior period amounts continue to be reported in accordance with previously applicable accounting standards. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on finance receivables when placed on nonaccrual status, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. Please refer to Note 3 for more information on how the Company determines its allowance for credit losses on finance receivables.

In March 2016,2022, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation2022-02, Financial Instruments - Credit Losses (Topic 718).”326): Troubled Debt Restructurings and Vintage Disclosures, which removes the accounting guidance for troubled debt restructurings and requires entities to evaluate whether a modification provided to a borrower results in a new loan or continuation of an existing loan. The amendment enhances existing disclosures and requires new disclosures for receivables when there has been a modification in contractual cash flows due to a borrower experiencing financial difficulties. Additionally, the amendments require public business entities to disclose gross charge-off information by year of ASU 2016-09 were issued as part of the FASB’s simplification initiative focused on improving areas of GAAP for which cost and complexity may be reduced while maintaining or improving the usefulness of information disclosed within the financial statements. The amendments focused on simplification specifically with regard to share-based payment transactions, including income tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows.

Effective as of January 1, 2017, the Company adopted a change in accounting policy in accordance with ASU 2016-09 to account for excess tax benefits and tax deficiencies as income tax expense or benefit, treated as discrete itemsorigination in the reporting period in which they occur, and to recognize previously unrecognized deferred tax assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation recognized for financial reporting.vintage disclosures. The change was applied on a modified retrospective basis, and no prior periods were restated as a result of this change in accounting policy.

ASU 2016-09 also eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the associated tax benefit can be recognized as an increase in paid-in capital. Approximately $1.9 million of net operating losses have been attributed to tax deduction for stock-based compensation in excess of the related book expense. Under ASU 2016-09, these previously unrecognized deferred tax assets were recognized on a modified retrospective basis as of January 1, 2017, the start of the year in which the Company adopted ASU 2016-09. The net operating losses recognized as of2022-02 on January 1, 2017, as described above, have been offset by a valuation allowance. As a result, there was no tax-related cumulative-effect adjustment to retained earnings.2023 and incorporated the required disclosures into Note 3, Finance Receivables.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326).” The new standard adds an impairment model, known as the current expected credit loss (CECL) model, that is based on expected losses rather than incurred losses. Under the new 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. The 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. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. The Company is currently evaluating the new guidance but believes it is likely to incur more upfront loan losses under the new CECL model.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The FASB issued this guidance with the intent of reducing diversity in practice with respect to classification of eight types of cash receipts and payments: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero coupon bonds, (3) contingent consideration payments after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies and bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. For the Company, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company believes ASU 2016-15 will not have a material impact on the Company’s consolidated financial statements upon adoption.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718),” to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting required by Topic 718. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and should be applied prospectively to an award modified on or after the adoption date. The Company believes ASU 2017-09 will not have a material impact on the Company’s consolidated financial statements upon adoption in fiscal 2018.

Note 2. Net Income per Share

Basic net income per share is computed using the weighted-average number of outstanding shares of common stock.stock during the applicable period. Diluted net income per share is computed using the weighted-average number of outstanding shares of common stock during the applicable period, and when dilutive, shares of common stock issuable upon exercise of options and warrants deemed outstanding using the treasury stock method.

The following table shows the computation of basic and diluted net income per share for the following periods (in thousands, except per share amounts):

Schedule of Basic and Diluted Earning per Share

For the three months ended SeptemberJune 30, 20172023 and 2016,2022, outstanding stock options and warrants to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 287,000118,000 and 403,000,308,000, respectively, have been excluded from the calculation of diluted net income per share, as all such securities were anti-dilutive. For the ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, outstanding stock options and warrants to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 324,000119,000 and 374,000,309,000, respectively, have been excluded from the calculation of diluted net income per share, as all such securities were anti-dilutive.

Note 3. Finance Receivables, Net

Finance receivables are reported at their determined principal balances net of any unearned income, cumulative charge-offswrite offs charged against the allowance for credit losses, 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.

The carrying valuevalues of finance receivables are as follows (in thousands):

Schedule of carrying value of finance receivables

Allowance for Credit QualityLosses

The ACL is management’s estimate of the amount of expected credit losses over the life of the loan portfolio, or the amount of amortized cost basis not expected to be collected, at the balance sheet date. This estimate encompasses information about historical events, current conditions and reasonable and supportable economic forecasts. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Given the current level of economic uncertainty, the complexity of the ACL estimate and level of management judgment required, we believe it is possible that the ACL estimate could change, potentially materially, in future periods. Changes in the ACL may result from changes in current economic conditions, our economic forecast, and circumstances not currently known to us that may impact the financial condition and operations of our borrowers, among other factors.

Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. For finance receivables that do not share similar risk characteristics with other finance receivables, expected credit losses are estimated on an individual basis. Expected credit losses are estimated over the contractual terms of the finance receivables, adjusted for expected prepayments and unfunded commitments, generally excluding extensions and modifications. The loan portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. As part of the Company’s quarterly assessment of the allowance, the finance receivables portfolio included two portfolio segments: Term Loans and Royalties.

The implementation of ASU 2016-13 also impacted the Company’s ACL on unfunded loan commitments, as the ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The reserve for unfunded commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment. The funding rate represents management’s estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data. On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $0.4 million for the adoption of ASU 2016-13. As of June 30, 2023, the $0.4 million liability for credit losses on off-balance-sheet credit exposures is included in other liabilities. Please refer to Note 6 for further information on the Company’s unfunded commitments.

The following table details the changes in the allowance for credit losses by portfolio segment for the respective periods (in thousands):

Schedule of Allowance for Credit Losses

Non-Accrual 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 eachits finance receivables. Recognition of income is suspended, and the finance receivable for impairment. A term loan is considered to be impairedplaced on non-accrual status when based on current information and events, itmanagement determines that collection of future income is determined that the Company will not be able to collect the amounts due according to the loan contract, including scheduled interest payments.probable. 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 collectabilitycollectibility 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.

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:

The following table presents nonaccrual and performing finance receivables by portfolio segment, net of credit loss allowance (in thousands):

Schedule of analysis of nonaccrual and performing loans by portfolio segment

As of SeptemberJune 30, 20172023, the Company had three finance receivables in nonaccrual status: (1) the term loan to Flowonix Medical, Inc. (“Flowonix”), with a net carrying value of $11.9 million; (2) the Best royalty, with a net carrying value of $2.8 million; and (3) the Ideal Implant, Inc. (“Ideal”) royalty, with a net carrying value of $4.3 million. Although in nonaccrual status, none of the finance receivables were considered impaired as of June 30, 2023. The Company collected $0.2 million on its nonaccrual finance receivables during the six months ended June 30, 2023.

Credit Quality of Finance Receivables

The Company evaluates all finance receivables on a quarterly basis and assigns a risk rating based upon management’s assessment of the borrower’s likelihood of repayment. The assessment is subjective and based on multiple factors, including but not limited to, financial strength of borrowers and operating results of the underlying business. The credit risk analysis and rating assignment is performed quarterly in conjunction with the Company’s assessment of its allowance for credit losses. The Company uses the following definitions for its risk ratings for Term Loans:

1: Borrower performing well below Company expectations, and the borrower’s ability to raise sufficient capital to operate its business or repay debt is highly in question. Finance receivables rated a 1 are on non-accrual and are at an elevated risk for principal impairment.

2: Borrower performing below plan, and the loan-to-value is generally worse than at the time of underwriting. Borrower has limited access to additional capital to operate its business. Finance receivables rated a 2 might be placed on non-accrual. While there is a potential for future principal impairment, we may refrain from placing borrower on non-accrual due to enterprise value coverage, continued receipt of interest payments, and/or anticipate a near-term capital raise.

3: Borrower performing inline-to-modestly below Company expectations, and loan-to-value is similar to slightly worse than at the time of underwriting. Borrower has demonstrated access to capital markets.

4: Borrower performing inline-to-modestly above Company expectations and loan-to-value similar or modestly better than underwriting case. Borrower has demonstrated access to capital markets.

5: Borrower performing in excess of Company expectations, and loan-to-value is better than at time of origination.

The Company uses an internal credit rating system which rates each Royalty on a color scale of Green to Red, with Green typically indicative of a Royalty that is exceeding base underwritten case and Red reflective of underperformance relative to plan.

The following table summarizes the carrying value of Finance Receivables by origination year, grouped by risk rating as of June 30, 2023:

Schedule of Financing Receivable by origination year

Schedule of September 30, 2017, neither are deemed to be impaired. (Please seeABT Molecular Imaging, Inc. andB&D DentalCorporationbelow for further details regarding nonaccrual term loans.)Unfunded Commitments

ABT Molecular Imaging, Inc. (“ABT”)

On October 10, 2014, the Company entered into a credit agreement pursuant to which the Company provided ABT a second lien term loan in the principal amount of $10.0 million. The loan matures on October 8, 2021. The synthetic royalty payment due to the Company on December 15, 2015 was blocked by ABT’s first lien lender pursuant to the terms of the intercreditor agreement by and between the Company and the first lien lender as a result of a forbearance agreement entered into between ABT and the first lien lender. Per the terms of the forbearance agreement,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 first lien lender deferred principal payments until maturitycase of the first lien in March 2016 and ABT raised additional equity capital.  loan transactions, are subject to being advanced as long as an event of default does not exist.

In February 2016, ABT violated the terms of the forbearance agreement with the first lien lender. In order to control the work out of the default under the first lien loan and prevent the equity sponsors from taking control of the first lien term loan,On January 1, 2023, the Company purchased fromadopted ASU 2016-13, which replaced the incurred loss methodology with an unrelated partyexpected loss model known as the first lien term loan at parCECL model. See Note 3 for a purchase price of $0.7 million. The equity sponsors funded cash shortfalls intoinformation regarding the second quarter of 2016.Company’s allowance for credit losses related to its unfunded commitments.

Litigation

Since June 7, 2016, the Company entered into additional amendments to the first lien term loan, which provided for an additional $5.8 million of liquidity under the first lien credit agreement. ABT has drawn down $5.8 million as of November 7, 2017. The Company is currently working with ABT andinvolved in, or has been involved in, arbitrations or various other legal proceedings that arise from the normal course of its advisors to complete a strategic transaction; thebusiness. 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 June 30, 2023, 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 processcapacity, or in other capacities at the Company’s request. The term of the indemnification period is currently uncertain.

The collateral for the loanofficer’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 been individually reviewed,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 that the fair market value of the loan, less costs to sell, was greater than the recorded investments in the loans as of September 30, 2017. Based on the impairment analysis, the Company has determined that recording a provision for credit losses as of September 30, 2017 is not required. The Company considered several factors in this determination, including an independent third-party valuation and developments in ABT’s business and industry.

B&D Dental Corporation (“B&D”)

On December 10, 2013, the Company entered into a five-year credit agreement to provide B&D a senior secured term loan with a principal amount of $6.0 million funded upon close, net of an arrangement fee of $60 thousand. Subsequently, the terms of the loan have been amended, and the Company has funded additional amounts to B&D. As of September 30, 2017, the total amount funded was $8.1 million.

B&D is currently in default under the terms of the credit agreement, and as a result, the Company classified the loan to nonaccrual status as of September 30, 2015. During the first quarter of 2017, the Company executed an additional amendment to the loan to advance an additional $0.1 million to finance the purchase of certain equipment to support its manufacturing operations and to protect the value of the collateral. The Company expects B&D to pay interest and principal on the equipment purchase advance and continues to work with B&D to improve its operational performance and pursue strategic alternatives. The Company is currently working with B&D to review strategic alternatives for the business; the outcome of such process is uncertain.

The collateral for the loan has been individually reviewed, and the Company believes that the fair market value of the loan, less costs to sell, was greater than the recorded investments in the loans as of September 30, 2017. Based on the impairment analysis, the Company has determined that recording a provision for credit losses as of September 30, 2017 is not required. The Company considered several factors in this determination, including an independent third-party valuation and developments in B&D’s business and industry.

Note 4. Marketable Investments

Investment in securities at September 30, 2017 and December 31, 2016 consist of the following (in thousands):

The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale securities as of September 30, 2017 and December 31, 2016, are as follows (in thousands):

Equity Securities

The Company’s equity securities include 661,076 shares of Cancer Genetics common stock and 77,922 shares of Hooper Holmes common stock. During the nine months ended September 30, 2017, the Company sold 75,000 shares of Cancer Genetics common stock, which resulted in a realized gain of $0.2 million. As of September 30, 2017, the Cancer Genetics and Hooper Holmes equity securities are reflected at fair value of $1.8 million and $46 thousand, respectively, as available-for-sale securities.

Debt Securities

On July 9, 2013, the Company entered into a note purchase agreement to purchase, at par, $3.0 million of a total of $100.0 million aggregate principal amount of senior secured notes due in November 2026.  The agreement allows the first interest payment date to include paid-in-kind notes for any cash shortfall, of which the Company received $0.1 million on November 15, 2013. The notes are secured only by certain royalty and milestone payments associated with the sales of pharmaceutical products.

The senior secured notes have been placed on non-accrual status as of September 30, 2016. Total cash collected during the nine months ended September 30, 2017 was $76,000, which was credited to the notes’ carrying value. As of September 30, 2017, the notes are reflected at their estimated fair value of $1.5 million and classified as available-for-sale securities.

Note 5. Variable Interest Entities