SWK Holdings Corp 10-Q

10-Q 1 e20569_swkh-10q.htm UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2020 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-39184 SWK Holdings Corporation (Exact Name of Registrant as Specified in its Charter) Delaware 77-0435679 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 14755 Preston Road, Suite 105 Dallas, TX 75254 (Address of Principal Executive Offices) (Zip Code) (Registrant’s Telephone Number, Including Area Code): (972) 687-7250 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered Common Stock, par value $0.001 per share SWKH The Nasdaq Stock Market LLC Preferred Stock Purchase Rights SWKH The Nasdaq Stock Market LLC Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x YES o NO Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x YES o NO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act: Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o Smaller Reporting Company x Emerging Growth Company o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO As of November 10, 2020, there were 12,789,493 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding. SWK Holdings Corporation Form 10-Q Quarter Ended September 30, 2020 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Unaudited Condensed Consolidated Balance Sheets—September 30, 2020 and December 31, 2019 1 Unaudited Condensed Consolidated Statements of Income—Three and Nine Months Ended September 30, 2020 and 2019 2 Unaudited Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended September 30, 2020 and 2019 3 Unaudited Condensed Consolidated Statements of Stockholders’ Equity—Three and Nine Months Ended September 30, 2020 and 2019 4 Unaudited Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2020 and 2019 5 Notes to the Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 Item 4 Controls and Procedures 34 PART II. OTHER INFORMATION Item 1. Legal Proceedings 35 Item 1A. Risk Factors 35 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37 Item 3. Defaults Upon Senior Securities 37 Item 4. Mine Safety Disclosures 37 Item 5. Other Information 37 Item 6. Exhibits 38 Signatures 39 FORWARD-LOOKING STATEMENTS In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions, and include, but are not limited to, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Words such as “anticipate,” “believe,” “estimate,” “expects,” “intend,” “plan,” “will” and variations of these words and similar expressions identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially (both favorably and unfavorably) from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include, but are not limited to, those described in Part II, Item 1A Risk Factors and elsewhere in this report. Forward-looking statements that were believed to be true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value and share data) September 30, 2020 December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 9,314 $ 11,158 Interest and accounts receivable, net 4,608 2,554 Marketable investments 1,136 1,802 Other current assets 1,911 1,087 Total current assets 16,969 16,601 Finance receivables, net 183,242 172,825 Marketable investments 254 466 Deferred tax asset, net 25,986 25,780 Warrant assets 2,407 3,555 Intangible assets, net 15,983 25,113 Goodwill 8,404 8,404 Property and equipment, net 3,368 1,292 Other non-current assets 190 336 Total assets $ 256,803 $ 254,372 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 3,625 $ 3,061 Total current liabilities 3,625 3,061 Contingent consideration payable 16,464 14,500 Warrant liability — 76 Other non-current liabilities 1,013 203 Total liabilities 21,102 17,840 Commitments and contingencies (Note 8) Stockholders’ equity: Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively — — Common stock, $0.001 par value; 250,000,000 shares authorized; 12,782,151 and 12,917,348 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 13 13 Additional paid-in capital 4,430,757 4,432,146 Accumulated deficit (4,195,069 ) (4,195,627 ) Total stockholders’ equity 235,701 236,532 Total liabilities and stockholders’ equity $ 256,803 $ 254,372 See accompanying notes to the unaudited condensed consolidated financial statements. 1 SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues: Finance receivables interest income, including fees $ 7,869 $ 6,198 $ 22,738 $ 21,243 Pharmaceutical development 2,778 149 3,076 149 Other — 2 9 4 Total revenues 10,647 6,349 25,823 21,396 Costs and expenses: Provision for credit losses — — — 609 Impairment expense — — 163 — Interest expense 101 79 365 259 Pharmaceutical manufacturing, research and development expense 1,182 286 3,311 286 Change in fair value of acquisition-related contingent consideration 174 — 1,964 — Depreciation and amortization expense 2,681 358 9,629 368 General and administrative 2,527 2,718 8,215 5,301 Total costs and expenses 6,665 3,441 23,647 6,823 Other (expense) income, net Unrealized net gain (loss) on warrants 87 (1,152 ) (1,151 ) (146 ) Unrealized net (loss) gain on equity securities (178 ) 1,787 (666 ) 1,787 Income before provision (benefit) for income taxes 3,891 3,543 359 16,214 Provision (benefit) for income taxes (451 ) (614 ) (199 ) 1,171 Consolidated net income $ 4,342 $ 4,157 $ 558 $ 15,043 Net income per share Basic $ 0.34 $ 0.32 $ 0.04 $ 1.17 Diluted $ 0.34 $ 0.32 $ 0.04 $ 1.17 Weighted Average Shares Basic 12,905 12,904 12,891 12,903 Diluted 12,916 12,908 12,898 12,906 See accompanying notes to the unaudited condensed consolidated financial statements. 2 SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Consolidated net income $ 4,342 $ 4,157 $ 558 $ 15,043 Other comprehensive income, net of tax — — — — Comprehensive income $ 4,342 $ 4,157 $ 558 $ 15,043 See accompanying notes to the unaudited condensed consolidated financial statements. 3 SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Nine Months Ended September 30, 2020 Additional Total Common Stock Paid-In Accumulated Stockholders’ Shares Amounts Capital Deficit Equity Balances at December 31, 2019 12,917,348 $ 13 $ 4,432,146 $ (4,195,627 ) $ 236,532 Stock-based compensation — — 187 — 187 Issuance of common stock 5,937 — — — — Repurchases of common stock in open market (5,279 ) — (62 ) — (62 ) Net loss — — — (4,660 ) (4,660 ) Balances at March 31, 2020 12,918,006 13 4,432,271 (4,200,287 ) 231,997 Stock-based compensation — — 183 — 183 Issuance of common stock in payment of employee cash bonuses 5,200 — 60 — 60 Issuance of common stock 4,569 — — — — Repurchases of common stock in open market (78,537 ) — (1,033 ) — (1,033 ) Net income — — — 876 876 Balances at June 30, 2020 12,849,238 13 4,431,481 (4,199,411 ) 232,083 Stock-based compensation — — 179 — 179 Issuance of common stock 3,089 — — — — Repurchases of common stock in open market (70,176 ) — (903 ) — (903 ) Net income — — — 4,342 4,342 Balances at September 30, 2020 12,782,151 $ 13 $ 4,430,757 $ (4,195,069 ) $ 235,701 Nine Months Ended September 30, 2019 Additional Total Common Stock Paid-In Accumulated Stockholders’ Shares Amounts Capital Deficit Equity Balances at December 31, 2018 12,933,674 $ 13 $ 4,432,499 $ (4,219,455 ) $ 213,057 Stock-based compensation — — 102 — 102 Issuance of common stock 42,225 — — — — Repurchases of common stock in open market (77,300 ) — (745 ) — (745 ) Net income — — — 6,559 6,559 Balances at March 31, 2019 12,898,599 13 4,431,856 (4,212,896 ) 218,973 Stock-based compensation — — 88 — 88 Issuance of common stock 11,000 — — — — Repurchases of common stock in open market (5,200 ) — (53 ) — (53 ) Net income — — — 4,327 4,327 Balances at June 30, 2019 12,904,399 13 4,431,891 (4,208,569 ) 223,335 Stock-based compensation — — 147 — 147 Issuance of common stock 4,344 — — — — Repurchases of common stock in open market (900 ) — (11 ) — (11 ) Net income — — — 4,157 4,157 Balances at September 30, 2019 12,907,843 $ 13 $ 4,432,027 $ (4,204,412 ) $ 227,628 See accompanying notes to the unaudited condensed consolidated financial statements 4 SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Nine Months Ended September 30, 2020 2019 Cash flows from operating activities: Consolidated net income $ 558 $ 15,043 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan credit losses — 609 Impairment expense 163 — Amortization of debt issuance costs 141 140 Deferred income taxes (206 ) 1,171 Change in fair value of warrants 1,151 146 Change in fair value of equity securities 666 (1,787 ) Change in fair value of acquisition-related contingent consideration 1,964 — Loan discount amortization and fee accretion (1,598 ) 122 Interest paid-in-kind (2,369 ) (875 ) Stock-based compensation 549 337 Interest income in excess of cash received — (82 ) Depreciation and amortization expense 9,629 368 Changes in operating assets and liabilities: Interest and accounts receivable (2,054 ) (112 ) Other assets (819 ) (252 ) Accounts payable and other liabilities 1,434 (1,434 ) Net cash provided by operating activities 9,209 13,394 Cash flows from investing activities: Acquisition of business, net of cash acquired — (19,707 ) Investment in equity securities — (159 ) Investment in finance receivables (12,458 ) (41,039 ) Repayment of finance receivables 5,928 32,630 Corporate debt security principal payments 49 49 Purchases of property and equipment (2,354 ) — Other (220 ) (100 ) Net cash used in investing activities (9,055 ) (28,326 ) Cash flows from financing activities: Repurchases of common stock, including fees and expenses (1,998 ) (809 ) Net cash used in financing activities (1,998 ) (809 ) Net decrease in cash and cash equivalents (1,844 ) (15,741 ) Cash and cash equivalents at beginning of period 11,158 20,227 Cash and cash equivalents at end of period $ 9,314 $ 4,486 See accompanying notes to the unaudited condensed consolidated financial statements. 5 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 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, and as of September 30, 2020, the Company had 32 employees. 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 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 November 10, 2020, and since inception of the strategy, the Company and its partners have executed transactions with 38 different parties under its specialty finance strategy, funding an aggregate $550.4 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. On August 26, 2019, the Company commenced its Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”), which is a wholly-owned subsidiary of the Company. Enteris is a clinical stage biopharmaceutical company offering innovative formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence® platform. Since its founding in 2013, Enteris has advanced multiple internal and external programs leveraging Peptelligence®, 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. Peptelligence® utilizes a unique multifaceted approach to increase the solubility and absorption of peptides and small molecules, addressing the complex challenges regarding solubility and permeability of therapeutics with low oral bioavailability. Peptelligence® is protected by an extensive patent estate that extends until 2036. Basis of Presentation and Principles of Consolidation The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). 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. 6 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, 2020. 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, 2019, filed with the SEC on March 30, 2020. 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. 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, plant and equipment; intangible assets; goodwill; valuation of warrants; 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 as of August 26, 2019, the Company’s 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. The financial results of Enteris are included in the Pharmaceutical Development segment as of the acquisition date. 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. Deferred revenue was $0.5 million and $0.1 million as of September 30, 2020 and December 31, 2019, respectively, and is included in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets. 7 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 unaudited condensed consolidated statements of operations. Recent Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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 is effective from March 12, 2020 through December 31, 2022. An entity may elect to adopt the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. An entity may elect to apply the amendments in ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The one-time election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity may be made at any time after March 12, 2020 but no later than December 31, 2022. The Company expects that it will elect to apply some of the expedients and exceptions provided in ASU 2020-04; however, the Company is still evaluating the guidance, and therefore, the impact of the adoption of ASU 2020-04 on the Company’s financial condition and results of operations has not yet been determined. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This 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 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 is currently evaluating the new guidance but believes it is likely to incur more upfront losses on its portfolio under the new CECL model. 8 Note 2. 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 net income per share for the following periods (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Numerator: Net income $ 4,342 $ 4,157 $ 558 $ 15,043 Denominator: Weighted-average shares outstanding 12,905 12,904 12,891 12,903 Effect of dilutive securities 11 4 7 3 Weighted-average diluted shares 12,916 12,908 12,898 12,906 Basic net income per share $ 0.34 $ 0.32 $ 0.04 $ 1.17 Diluted net income per share $ 0.34 $ 0.32 $ 0.04 $ 1.17 For the three months ended September 30, 2020 and 2019, outstanding stock options, restricted stock units and warrants to purchase shares of common stock in an aggregate of approximately 409,000 and 436,000, respectively, have been excluded from the calculation of diluted net income per share as all such securities were anti-dilutive. For the nine months ended September 30, 2020 and 2019, outstanding stock options, restricted stock units and warrants to purchase shares of common stock in an aggregate of approximately 455,000, and 428,000, respectively, have been excluded from the calculation of diluted net income per share as all such securities were anti-dilutive. 9 Note 3. Business Combinations On August 26, 2019, Enteris, a biotechnology company offering innovative formulation solutions utilizing its proprietary oral drug delivery technology, became a wholly-owned subsidiary of the Company. The total merger consideration was $34.6 million, which included contingent consideration of $14.5 million, which was remeasured to $16.5 million as of September 30, 2020. During the three months ended September 30, 2020, the Company recognized $2.5 million of revenue and accounts receivable related to the completion of a milestone under the License Agreement (as defined below) with Cara Therapeutics, Inc. (“Cara”). Subsequent to September 30, 2020, the Company paid $1.0 million of such amount to the seller of Enteris, pursuant to earnout provisions of the merger agreement. The purchase price was subject to certain adjustments with respect to cash, debt, working capital, transaction expenses and the value of the contingent consideration agreement entered into, in connection with the transaction. Prior to the acquisition, Enteris entered into a non-exclusive commercial license agreement with Cara (the “License Agreement”), 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. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the merger consideration was allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition. The excess of the merger consideration over the estimated fair value of the net assets of Enteris was recorded as goodwill, which consists largely of synergies and the acquisition of intangible assets. The resulting goodwill is not expected to be deductible for tax purpose. The following table summarizes the allocation of the merger consideration (at fair value) to the assets and liabilities of Enteris as of August 26, 2019 (the date of acquisition) (in thousands): Cash $ 334 Accounts receivable 145 Inventory 274 Prepaid expenses and other current assets 121 Property and equipment 1,324 Patents and other intangible assets 29,850 Right of use operating lease asset 348 Other assets 110 Goodwill 8,404 Accounts payable (255 ) Accrued expenses and other current liabilities (1,365 ) Deferred revenue (385 ) Lease liability (348 ) Deferred tax liability (3,988 ) Total purchase price $ 34,569 Unaudited Supplemental Pro Forma Information The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2019, the earliest period presented herein (in thousands): Nine Months Ended September 30, 2019 Revenues $ 34,355 Net income 19,775 The pro forma financial information includes adjustments that are directly attributable to the business combination and are factually supportable. The pro forma adjustments include incremental amortization and depreciation of intangible assets and property and equipment based on preliminary values of each asset and acquisition-related expenses. The pro forma financial information excludes non-recurring acquisition-related expenses. These pro forma results are illustrative only and not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations. 10 Goodwill There was no change in the carrying amount of goodwill from December 31, 2019 to September 30, 2020, and net book value remains at $8.4 million. The net book value of goodwill is solely related to the Enteris acquisition in 2019. As of September 30, 2020, the Company concluded that it is more likely than not that fair value of the reporting unit is greater than its carrying value, and goodwill is not considered to be impaired. Intangible Assets As of September 30, 2020, 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): As of September 30, 2020 Gross Book Value Accumulated Amortization Net Book Value Estimated Useful Life Licensing agreement $ 29,400 $ 14,007 $ 15,393 10 Patents 198 110 88 1 - 20 Trade names and trademarks 210 23 187 10 Customer relationships 240 26 214 10 30,048 14,166 15,882 Deferred patent costs 101 — 101 N/A Total intangibles $ 30,149 $ 14,166 $ 15,983 Amortization expense from the acquisition of Enteris was $9.4 million for the nine months ended September 30, 2020 and was recorded in depreciation and amortization expense. Based on amounts recorded at September 30, 2020, the Company will recognize acquired intangible asset amortization as follows (in thousands): 2020 (remaining) $ 2,380 2021 3,603 2022 1,765 2023 1,765 2024 1,421 Thereafter 4,948 $ 15,882 11 Note 4. Finance Receivables, Net 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 September 30, 2020, the Company had a credit loss allowance of $8.4 million. Of the total $8.4 million, $1.2 million and $0.6 million are associated with the Company’s Cambia® and Besivance® royalties, respectively. The remaining $6.6 million is related to the ABT Molecular Imaging, Inc. (“ABT”), now known as Best ABT, Inc. (“Best”), second lien term loan that was recognized in order to reflect the Best royalty at its estimated fair value of $4.1 million. The carrying values of finance receivables are as follows (in thousands): Portfolio September 30, 2020 December 31, 2019 Term loans $ 158,877 $ 150,453 Royalty purchases 32,753 30,760 Total before allowance for credit losses 191,630 181,213 Allowance for credit losses (8,388 ) (8,388 ) Total carrying value $ 183,242 $ 172,825 The following table presents nonaccrual and performing finance receivables by portfolio segment, net of credit loss allowance (in thousands): September 30, 2020 December 31, 2019 Nonaccrual Performing Total Nonaccrual Performing Total Term loans $ 8,334 $ 150,543 $ 158,877 $ 8,337 $ 142,116 $ 150,453 Royalty purchases, net of credit loss allowance 7,467 16,898 24,365 7,614 14,758 22,372 Total carrying value $ 15,801 $ 167,441 $ 183,242 $ 15,951 $ 156,874 $ 172,825 As of September 30, 2020 and December 31, 2019, the Company had three finance receivables in nonaccrual status: (a) the term loan to B&D Dental Corporation (“B&D”), with a net carrying value of $8.3 million, (b) the Best royalty, with a net carrying value of $4.0 million and (c) the Tissue Regeneration Therapeutics, Inc. (“TRT”) royalty, with a net carrying value of $3.5 million. Although in nonaccrual status, the B&D term loan and the TRT royalty were not considered impaired as of both September 30, 2020 and December 31, 2019. The Company collected an aggregate $0.2 million in cash on two of its nonaccrual finance receivables during the nine months ended September 30, 2020. (Please see B&D, Best and TRT below for further details regarding nonaccrual and impaired finance receivables). 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 $60,000. The loan was scheduled to mature on December 10, 2018. Subsequently, the terms of the loan have been amended, and the Company has funded additional amounts to B&D. As of December 31, 2019, the total amount funded was $8.3 million. B&D is currently evaluating strategic options, including a potential sale of the business. 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 2016 and 2018, the Company executed three additional amendments to the loan to advance an additional $0.7 million in order to directly pay critical vendors and protect the value of the collateral. The Company obtained a third-party valuation of B&D as of September 30, 2020. As a result of the third-party valuation and facts and circumstances regarding B&D’s operations, the Company believes its collateral position is greater than the unpaid balance; thus, accrued interest has not been reversed nor has an allowance been recorded as of September 30, 2020. 12 Best On October 31, 2018, ABT announced that it entered into an asset purchase agreement with Best, a wholly-owned subsidiary of Best Medical International, Inc. for aggregate consideration of (i) $500,000, paid over ten years in equal quarterly installments, plus (ii) a ten percent royalty on ABT’s net sales, including any commercialized improvements made to ABT’s technology, paid quarterly for the ten year period from closing pursuant to a royalty security agreement by and between Best and SWK Funding LLC, a wholly-owned subsidiary of the Company (“SWK Funding”). SWK Funding will receive 100 percent of the consideration. On November 8, 2018, the Bankruptcy Court approved the asset sale transaction, and the Company has no further funding liabilities. During the year ended December 31, 2018, the Company re-evaluated its collateral position, considering the expected outcome of the Chapter 11 process, and as a result, the Company recognized an impairment expense of $5.3 million to write off the second lien term loan, as well as provision for credit losses of $5.0 million to reflect the Best royalty at its estimated fair value of $5.7 million. During the year ended December 31, 2019, the Company re-evaluated the value of the Best royalty based on 2019 business trends, and as a result, the Company recognized a provision for credit losses of $1.6 million to reflect the Best royalty at its then estimated fair value of $4.1 million. TRT On June 13, 2013, the Company purchased two royalty streams from TRT derived from the licensed use of TRT’s technology in the family cord banking services sector for $2.0 million, plus additional consideration of $1.25 million was paid on October 20, 2014 upon aggregate royalty payments reaching a certain threshold. As of June 30, 2020, the fair value of the royalty was $3.5 million. On August 21, 2020, the Company and TRT agreed to terminate the royalty purchase agreement in exchange for TRT issuing the Company TRT common equity and a convertible note. The convertible note carries no interest, can be redeemed in cash without penalty at any time by TRT, and converts into common equity of TRT at decreasing valuations over time to induce repayment in cash. As of September 30, 2020, the Company does not believe there is an impairment of the carrying value of the investment in TRT. 13 Note 5. Marketable Investments Investments in corporate debt securities and equity securities at September 30, 2020 and December 31, 2019 consist of the following (in thousands): September 30, 2020 December 31, 2019 Corporate debt securities $ 254 $ 466 Equity securities 1,136 1,802 Total marketable investments $ 1,390 $ 2,268 The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale debt securities as of September 30, 2020 and December 31, 2019, are as follows (in thousands): September 30, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Fair Value Corporate debt securities $ 254 $ — $ — $ 254 December 31, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Fair Value Corporate debt securities $ 466 $ — $ — $ 466 The following table presents unrealized net gains and losses on equity securities during the three and nine months ended September 30, 2020 and 2019 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Unrealized net (loss) gain on equity securities reflected in the unaudited condensed consolidated statements of income $ (178 ) $ 1,787 $ (666 ) $ 1,787 Equity Securities As of September 30, 2020, the Company’s equity securities include 96,810 shares of Misonix, Inc. (“Misonix”) common stock received pursuant to Misonix’s purchase of Solsys Medical, Inc. (“Solsys”) on September 27, 2019. During the three months ended September 30, 2019 and prior to the acquisition, the Company exercised its Solsys warrants in a cashless transaction to purchase Solsys preferred stock and exercised its preemptive right to protect against dilution of its Solsys equity position. Of the total 109,472 shares of Misonix common stock received for its Solsys equity interests, 12,662 shares are held in escrow by Misonix, are subject to reduction based on terms of the acquisition agreement, and any shares remaining at the end of the escrow period will be released within 15 to 18 months post closing of the acquisition. The 96,810 shares were subject to a one year lock-up that expired on September 27, 2020. As of September 30, 2020, the 96,810 shares of Misonix common stock are reflected at their estimated fair value of $1.1 million. 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 June 30, 2016. Total cash collected during the nine months ended September 30, 2020 and 2019 was $49,000 and $48,000, respectively, which was credited to the notes’ carrying value. During the nine months ended September 30, 2020, impairment expense of $0.2 million was recognized in order to reflect the notes at their estimated fair value of $0.3 million. The notes are included in long-term marketable investments in the unaudited condensed consolidated balance sheets. 14 Note 6. Revolving Credit Facility On June 29, 2018, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with State Bank and Trust Company as a lender and the administrative agent (“State Bank”) pursuant to which State Bank provides the Company with up to a $20 million revolving senior secured credit facility, which the Company can draw down and repay until maturity, subject to borrowing base eligibility. The Loan Agreement matures on June 29, 2021. The Loan Agreement accrues interest at the Daily LIBOR Rate, with a floor of 1.00 percent, plus a 3.25 percent margin and principal is repayable in full at maturity. Interest is generally required to be paid monthly in arrears. The Loan Agreement requires the payment of an unused line fee of 0.50 percent, which will be recorded as interest expense. The Company paid $0.5 million in fees at closing, which have been capitalized as deferred financing costs and are being amortized on a straight-line basis over the 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. During the nine months ended September 30, 2020 and 2019, the Company recognized $0.4 and $0.3 million, respectively, of interest expense. On March 17, 2020, the Company drew $15.0 million on its revolving credit facility in order to support existing business partners and to finance future investment opportunities. The line of credit was repaid by August 17, 2020. As of September 30, 2020, no amount was outstanding under the revolving credit facility, and $20.0 million was available for borrowing. Note 7. Related Party Transactions On September 6, 2013, in connection with entering into a credit facility, the Company issued warrants to an affiliate of a stockholder, Carlson Capital, L.P. (the “Stockholder”), for 100,000 shares of the Company’s common stock at a strike price of $13.88 per share. The warrants had a price anti-dilution mechanism that was triggered by the price that shares were sold by the Company in a rights offering in 2014, and as a result, the strike price of the warrants was reduced to $13.48 per share. The warrants expired on September 6, 2020. The Company determined the fair value of the warrants as of December 31, 2019 using the Black-Scholes option pricing model with the following assumptions: Dividend rate — Risk-free rate 1.6 % Expected life (years) 0.7 Expected volatility 31.8 % The changes on the value of the warrant liability during the nine months ended September 30, 2020 were as follows (in thousands): Fair value – December 31, 2019 $ 76 Issuances — Canceled (22 ) Changes in fair value (54 ) Fair value – September 30, 2020 $ — 15 Note 8. Commitments and Contingencies Unfunded Commitments As of September 30, 2020, the Company’s unfunded commitments were as follows (in millions): eTon Pharmaceuticals, Inc. $ 8.0 Total unfunded commitments $ 8.0 All unfunded commitments are contingent upon reaching an established revenue threshold or other performance metrics on or before a specified date or period of time per the terms of the royalty purchase or credit agreements, and in the case of loan transactions, are only subject to being advanced as long as an event of default does not exist. Note 9. Stockholders’ Equity Stock Compensation Plans During the nine months ended September 30, 2020 and 2019, the Company’s Board of Directors (the “Board”) approved compensation for Board services by granting 13,595 and 10,069 shares, respectively, of common stock as compensation for the non-employee directors. During the nine months ended September 30, 2020 and 2019, the Company recorded approximately $0.3 million and $0.1 million, respectively, in Board stock-based compensation expense. The aggregate stock-based compensation expense, including the quarterly Board grants, recognized by the Company for the nine months ended September 30, 2020 and 2019 was $0.5 million and $0.3 million, respectively. During the nine months ended September 30, 2020, the Company issued 5,200 shares of its common stock valued at $0.1 million to two of its employees as partial payment in lieu of cash for their 2019 bonuses. Share Repurchase Programs On December 21, 2018, September 5, 2019 and March 26, 2020, the Board authorized share repurchase programs, which are more fully described in Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds . The March 26, 2020 share repurchase program expired on September 30, 2020. 16 Note 10. 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 nine months ended September 30, 2020. The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying unaudited condensed 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. Marketable Investments 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. Please refer to Note 3, Business Combinations , for further details on the Company’s acquisition of Enteris and contingent consideration. 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 condensed consolidated statements of operations. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement. 17 As of September 30, 2020 and December 31, 2019, the Company’s contingent consideration was recorded at its estimated fair value of $16.5 million and $14.5 million, respectively. Marketable Investments and Derivative Securities 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 Securities 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. The following table presents financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 (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 $ 2,407 $ — $ — $ 2,407 Marketable investments 1,390 1,136 — 254 Financial Liabilities: Contingent consideration payable $ 16,464 $ — $ — $ 16,464 The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 (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 $ 3,555 $ — $ — $ 3,555 Marketable investments 2,268 1,802 — 466 Financial Liabilities: Contingent consideration payable $ 14,500 $ — $ — $ 14,500 Warrant liability 76 — — 76 18 The changes on the value of the warrant assets during the nine months ended September 30, 2020 were as follows (in thousands): Fair value – December 31, 2019 $ 3,555 Issued 79 Canceled — Change in fair value (1,227 ) Fair value – September 30, 2020 $ 2,407 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 unaudited condensed consolidated balance sheets. The fair values for warrants outstanding, which do not have a readily determinable value, are measured using the Black-Scholes option pricing model. The following ranges of assumptions were used in the models to determine fair value: September 30, 2020 December 31, 2019 Dividend rate range — — Risk-free rate range 0.16% to 0.47 % 1.7% to 1.8 % Expected life (years) range 3.8 to 7.6 4.6 to 7.4 Expected volatility range 71.4% to 173.9 % 50.3% to 114.6 % As of September 30, 2020 and December 31, 2019, the Company had three royalties, Besivance®, 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 September 30, 2020 and December 31, 2019 (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) September 30, 2020 Impaired royalties $ 8,525 $ — $ — $ 8,525 December 31, 2019 Impaired royalties $ 10,004 $ — $ — $ 10,004 There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2020 and December 31, 2019. The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying unaudited condensed consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivative financial instruments. As of September 30, 2020 (in thousands): Carry Value Fair Value Level 1 Level 2 Level 3 Financial Assets Cash and cash equivalents $ 9,314 $ 9,314 $ 9,314 $ — $ — Finance receivables 183,242 183,242 — — 183,242 Marketable investments 1,390 1,390 1,136 — 254 Warrant assets 2,407 2,407 — — 2,407 Financial Liabilities Contingent consideration payable $ 16,464 $ 16,464 $ — $ — $ 16,464 19 As of December 31, 2019 (in thousands): Carry Value Fair Value Level 1 Level 2 Level 3 Financial Assets Cash and cash equivalents $ 11,158 $ 11,158 $ 11,158 $ — $ — Finance receivables 172,825 172,825 — — 172,825 Marketable investments 2,268 2,268 1,802 — 466 Warrant assets 3,555 3,555 — — 3,555 Financial Liabilities Contingent consideration payable $ 14,500 $ 14,500 $ — $ — $ 14,500 Warrant liability 76 76 — — 76 20 Note 11. 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 three and nine months ended September 30, 2020 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Pharmaceutical Development Segment License Agreement $ 2,768 $ 89 $ 2,992 $ 89 Other 10 60 84 60 Total Contract Revenue $ 2,778 $ 149 $ 3,076 $ 149 As of September 30, 2020 and December 31, 2019, the Company recorded $2.7 million and $0.1 million, respectively, of accounts receivable related to its contract revenue. Contract Assets and Liabilities Our contract liabilities represent advance consideration received from customers and are recognized as revenue when the related performance obligation is satisfied. The Company’s contract liabilities are presented as deferred revenues and are included in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets (in thousands): September 30, 2020 December 31, 2019 Pharmaceutical Development Segment Deferred revenue $ 490 $ 103 Total Contract Liabilities $ 490 $ 103 Please refer to Notes 1 and 3 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 September 30, 2020 or December 31, 2019. 21 Note 12. 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 chief operating decision-makers use 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. Segment performance is evaluated based on several factors, including income (loss) from continuing operations before income. 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 following tables present financial information for the Company’s reportable segments for the periods indicated (in thousands): Three Months Ended September 30, 2020 Finance Receivables Pharmaceutical Development Holding Company and Other Consolidated Revenues $ 7,869 $ 2,778 $ — $ 10,647 Interest expense 101 — — 101 Pharmaceutical manufacturing, research and development expense — 1,182 — 1,182 Depreciation and amortization — 2,678 3 2,681 Change in fair value of acquisition-related contingent consideration — 174 — 174 General and administrative 127 1,044 1,356 2,527 Other income (expense), net (192 ) — 101 (91 ) Benefit for income taxes — — (451 ) (451 ) Net income (loss) 7,449 (2,300 ) (807 ) 4,342 Nine months ended September 30, 2020 Finance Receivables Pharmaceutical Development Holding Company and Other Consolidated Revenues $ 22,746 $ 3,076 $ 1 $ 25,823 Provision for credit losses and impairment expense 163 — — 163 Interest expense 365 — — 365 Pharmaceutical manufacturing, research and development expense — 3,311 — 3,311 Depreciation and amortization — 9,621 8 9,629 Change in fair value of acquisition-related contingent consideration — 1,964 — 1,964 General and administrative 1,429 3,167 3,619 8,215 Other income (expense), net (1,893 ) — 76 (1,817 ) Provision for income taxes — — (199 ) (199 ) Net income (loss) 18,896 (14,987 ) (3,351 ) 558 Included in Holding Company and Other are the expenses of the parent holding company and certain other enterprise-wide overhead costs, including public company costs and non-Enteris corporate employees, which have been included for purposes of reconciling to the consolidated amounts. 22 Note 13. Subsequent Events Trio Healthcare Limited On October 22, 2020, SWK Funding closed a royalty purchase agreement with Trio Healthcare Limited. SWK Funding paid $3.9 million at closing in exchange for 100 percent of royalties paid on sales of a portfolio of ancillary ostomy products until a certain royalty cap has been received by SWK Funding. SWK Funding is also entitled to receive a residual royalty after the royalty cap has been achieved until the tenth anniversary of the date on which the royalty cap was achieved. Aimmune Therapeutics, Inc. On October 20, 2020, Aimmune Therapeutics, Inc. repaid its term loan. SWK Funding received approximately $4.4 million at payoff for its portion of the term loan, which included accrued interest, a prepayment penalty and exit fees. 23 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, and the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2019 (“Annual Report”), as well as our unaudited condensed consolidated financial statements and the accompanying notes included in this report. COVID-19 Considerations In December 2019, a novel strain of coronavirus (“COVID-19”) was identified and the disease has since spread across the world, including the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. We are subject to risks related to public health crises such as the global pandemic associated with COVID-19. In the last two weeks in March 2020 and through the date of this filing, our Pharmaceutical Development segment has seen a reduction in its productivity as well as delays in receiving some of its needed supplies as a direct result of the pandemic and the impact on key vendors. This slow-down is likely to continue in the near term until such time as certain restrictions that have been imposed on us and our suppliers are lifted. Such events may result in business disruption and reduced revenues, any of which could materially affect our business, financial condition and results of operations. In late-March 2020, the governor of New Jersey, where the manufacturing facility of our Pharmaceutical Development segment is located, issued “shelter-in-place” or “stay at home” orders restricting non-essential activities, travel and business operations for an indefinite period of time, subject to certain exceptions for necessary activities. Such orders or restrictions have resulted in our Pharmaceutical Development segment significantly reducing activities at its manufacturing facility, thereby negatively impacting our operations. Starting in July 2020, the governor of New Jersey began a phased re-opening of the state’s economy, though some non-essential activities remain limited, which continues to impact operations. We continue to monitor COVID-19 recommendations mandated by the governor’s office. Other disruptions or potential disruptions include restrictions on our personnel and personnel of our customers and suppliers to travel and access customers; delays in product development efforts; and additional government requirements or other incremental mitigation efforts that may further impact our business. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets and a recession or market correction that could materially affect our business and the value of our common stock. We are continuously monitoring our own operations and intend to take appropriate actions to mitigate the risks arising from the COVID-19 pandemic to the best of our abilities, but there can be no assurances that we will be successful in doing so. To the extent we are able to obtain information about and maintain communications with our customers, suppliers, vendors and other business partners, we will seek to minimize disruptions to our Pharmaceutical Development segment’s supply chain. We are continuously monitoring the potential impact of COVID-19 on the liquidity of our business partners and remain in regular contact with the individual management teams across the portfolio of our Finance Receivables segment. We have and will continue to amend certain performance covenants under some of our credit agreements and will continue to consider advancing additional capital or allow some interest payments to be paid in-kind for specified periods in order to support our business partners. The value of the marketable securities that we hold might also be negatively impacted as a result of COVID-19. The ultimate extent of the effects of the COVID-19 pandemic on us is highly uncertain and will depend on future developments which cannot be predicted. Please refer to Part II, Item 1A, Risk Factors , for additional information on risk factors related to the pandemic or other risks that could impact our business and results of operations. 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 I, Financial Statements , Note 12 of the notes to the unaudited condensed consolidated financial statements for further information regarding segment information. Finance Receivables Segment In our Finance Receivables segment, we evaluate and invest in a broad range of healthcare related companies and products with innovative intellectual property, including the biotechnology, medical device, medical diagnostics and related tools, animal health and pharmaceutical industries (together “life science”) by tailoring financial solutions to the needs of our business partners. 24 Our investment objective is to maximize our portfolio total return and thus increase our net income and book value by generating income from three sources: (1) primarily owning or financing through debt investments, royalties or revenue interests 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, and (3) to a lesser extent, realizing capital appreciation from equity-related investments in the life science sector. We primarily provide capital in exchange for an interest in an existing revenue stream, which can take several forms, but is most commonly either a royalty derived from the sales of a life science product from the marketing efforts of a third party or from the marketing efforts of a partner company. Our structured debt investments may include warrants or other features, giving us the potential to realize enhanced returns on a portion of our portfolio. Pharmaceutical Development Segment On August 26, 2019, we commenced our Pharmaceutical Development segment with the acquisition of Enteris, which became our wholly-owned subsidiary. Enteris is a clinical stage biopharmaceutical company offering innovative formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence® platform. Since its founding in 2013, Enteris has advanced multiple internal and external programs leveraging Peptelligence®, 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. Our strategy is to utilize the Peptelligence® platform to create a portfolio of milestone and royalty income, and thus increase our net income and book value, by out-licensing our technology in two ways. First, we intend to out-license our technology to pharmaceutical companies to create novel and important oral therapeutic treatments for a wide variety of indications. Second, we intend to out-license to pharmaceutical companies our internally developed reformulations of approved, off-patent injectable therapeutic treatments where Peptelligence® enables oral delivery, resulting in meaningful improvements for patients and caregivers. We also generate income by providing customers pharmaceutical development, formulation and manufacturing with the ultimate goal of generating new out-license agreements of our technology. Finance Receivables Portfolio Overview The table below provides an overview of our outstanding finance receivables transactions as of, and for the nine months ended September 30, 2020 (in thousands, except rate, share and per share data). Royalty Purchases and License Funded GAAP Revenue Recognized Financings Technology Footnote Amount Balance Rate YTD Q3 Beleodaq® Oncology treatment $ 7,600 $ 5,519 N/A $ 1,300 $ 449 Besivance® Ophthalmic antibiotic (1) 6,000 510 N/A (76 ) (103 ) Best ABT, Inc. Oncology diagnosis (1), (2) 5,784 3,976 N/A — — Coflex®/Kybella® Spinal stenosis/Submental fullness 4,350 4,606 N/A 130 130 Cambia® NSAID migraine treatment (1) 8,500 4,039 N/A 258 43 Forfivo XL® Depressive disorder treatment 6,000 1,661 N/A 1,500 681 Narcan® Opioid overdose treatment 17,500 564 N/A 1,885 695 Secured Royalty Financing (Marketable Investment) Women’s health (1), (2), (3) 3,000 254 11.5 % — — Tissue Regeneration Therapeutics Umbilical cord banking (2), (4) 3,250 3,490 N/A — — 25 Maturity GAAP Revenue Recognized Term Loans Type Footnote Date Principal Balance Rate YTD Q3 4Web, Inc. First Lien (5) 06/03/23 $ 21,112 $ 21,693 12.8 % $ 2,301 823 Acerus Pharmaceuticals, Inc. First Lien 10/11/23 8,500 8,109 12.0 % 1,073 356 Aimmune Therapeutics, Inc. First Lien (6) 12/31/24 3,928 3,946 8.50 % 234 91 B&D Dental Corporation First Lien (2), (7) 12/10/18 8,365 8,334 14.0 % — — B&D Dental Corporation First Lien Equipment Loan (8) 03/31/20 — — 16.3 % — — BIOLASE, Inc. First Lien (9) 11/09/23 14,300 14,040 12.3 % 1,708 556 CeloNova BioSciences, Inc. First Lien 07/31/21 3,811 3,951 12.5 % 398 135 DxTerity Diagnostics, Inc. First Lien (10) 12/31/21 11,120 11,423 16.3 % 1,301 473 Epica International, Inc. First Lien 07/23/23 12,000 12,222 13.5 % 1,386 464 eTon Pharmaceuticals, Inc. First Lien (11) 11/13/24 7,000 6,774 12.0 % 585 222 Harrow Health, Inc. First Lien (12) 07/19/23 9,635 9,397 9.0% - 12.0 % 833 303 Keystone Dental, Inc. First Lien (13) 11/14/22 15,000 15,333 11.5 % 1,421 469 Misonix, Inc. First Lien 06/30/23 30,096 29,994 10.0% - 12.3 % 2,386 809 Tenex Health, Inc. First Lien 06/30/21 6,042 6,312 13.0 % 722 234 Thermedx, LLC Sub Note 05/20/29 414 414 11.8 % 35 12 Veru, Inc. Synthetic Royalty 03/05/25 6,936 6,935 N/A 3,358 1,027 Change in Fair Value Common Stock Footnote No of Shares GAAP Balance YTD Q3 Misonix, Inc. 96,810 $ 1,136 $ (666 ) $ (178 ) 26 Number of Exercise Price GAAP Change in Fair Value Warrants to Purchase Stock Footnote Shares per Share Balance YTD Q3 4Web, Inc. TBD TBD $ — $ — $ — Acerus Pharmaceuticals, Inc. 6,693,107 0.11 CAD 225 (89 ) (46 ) B&D Dental Corporation (2), (7) 225 0.01 — — — BIOLASE, Inc. (9) 550,977 0.39 152 (52 ) (98 ) BIOLASE, Inc. (9) — — — 4 — CeloNova BioSciences, Inc. TBD 0.01 — — — DxTerity Diagnostics, Inc. 1,201,923 2.08 — — — Epica International, Inc. TBD TBD — — — eTon Pharmaceuticals, Inc. 51,239 5.86 289 77 110 eTon Pharmaceuticals, Inc. 18,141 6.62 103 24 24 EyePoint Pharmaceuticals, Inc. 409,091 1.10 92 (336 ) (73 ) EyePoint Pharmaceuticals, Inc. 77,721 1.93 13 (56 ) (12 ) Harrow Health, Inc. 373,847 2.08 1,533 (799 ) 81 Tenex Health, Inc. 2,693,878 0.37 — — — Revenue Recognized Assets YTD Q3 Total Finance Receivables $ 183,242 $ 22,738 $ 7,869 Total Marketable Investments 1,390 — — Fair Value of Warrant Assets 2,407 — — Total Assets/Revenues $ 187,039 $ 22,738 $ 7,869 (1) Investment considered impaired. (2) Investment on nonaccrual. (3) Impairment expense of $163 was recognized during the nine months ended September 30, 2020. (4) On August 21, 2020, the royalty purchase agreement was terminated in exchange for TRT common equity and a convertible note. Please see Part 1, Item 1, Financial Statements , Note 4 of the notes to the unaudited condensed consolidated financial statements for further details. (5) In accordance with credit agreement, $3,000 was funded on January 16, 2020. (6) In accordance with credit agreement, $2,500 was funded on February 19, 2020. Loan was repaid in October 2020. (7) B&D is evaluating strategic alternatives for the business. The loan is currently in default. (8) B&D retired the facility in April 2020 with its final scheduled payment. (9) We executed an amendment on May 15, 2020, which consolidated first, second and third warrants, for a total of 550,977 shares at $0.39198 per share. (10) We amended the facility to allow DxTerity to pay in kind the interest payments due in January 2019 and April 2019, subject to DxTerity raising additional subordinated capital, which it accomplished. The amendment also allowed DxTerity to pay in-kind the interest payments due in October 2019, January 2020 and April 2020, subject to DxTerity raising additional subordinated capital, which DxTerity did not accomplish by the required date. This resulted in a default under the credit agreement. DxTerity paid the interest payments due in July 2020 and October 2020, and we are currently working with DxTerity to remedy the default. (11) We executed an amendment on August 11, 2020 to increase the maximum principal amount of the term loan to $15,000. eTon may draw up to $8,000 upon reaching certain milestones outlined in the amendment; $2,000 was funded at closing. (12) In accordance with credit agreement, $608 was funded on April 1, 2020. (13) We executed an amendment on March 27, 2020, which extended the maturity date to November 2022. 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. 27 Critical Accounting Policies and Estimates Our critical accounting policies and estimates are described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 30, 2020. We believe there have been no new critical accounting policies or material changes to our existing critical accounting policies and estimates during the nine months ended September 30, 2020, compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2019. Recent Accounting Pronouncements Refer to Part I, Item 1, Financial Statements , Note 1 of the notes to the unaudited condensed consolidated financial statements for a listing of recent accounting pronouncements and their potential impact to our consolidated financial statements. Comparison of the Three Months Ended September 30, 2020 and 2019 (in millions) Three Months Ended September 30, 2020 2019 Change Revenues $ 10.6 $ 6.3 $ 4.3 Interest expense 0.1 0.1 — Pharmaceutical manufacturing, research and development expense 1.2 0.3 0.9 Change in fair value of acquisition-related contingent consideration 0.2 — 0.2 Depreciation and amortization expense 2.7 0.4 2.3 General and administrative expense 2.5 2.7 (0.2 ) Other (expense) income, net (0.1 ) 0.6 (0.7 ) Benefit for income taxes (0.5 ) (0.6 ) 0.1 Consolidated net income 4.3 4.2 0.1 Revenues We generated revenues of $10.6 and $6.3 million for the three months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020, revenues consisted primarily of $7.9 million of interest, fees and royalties earned on our finance receivables and $2.8 million recognized from our pharmaceutical development segment. For the three months ended September 30, 2019, revenues consisted primarily of $6.2 million of interest, fees and royalties earned on our finance receivables and $0.1 million received from our pharmaceutical development segment, which was acquired in the third quarter of 2019. The $4.3 million increase in total revenues during the 2020 period included $2.5 million of milestone revenue related to Enteris’ license agreement with Cara, a $0.9 million net increase in royalty income and a $0.7 million net increase in fees and interest earned on our finance receivables due to additional funding on existing loans. Interest Expense Interest expense consists of interest on amounts borrowed, unused line of credit and maintenance fees, as well as amortization of debt issuance costs on our revolving line of credit. Interest expense was $0.1 million for both the three months ended September 30, 2020 and 2019. Pharmaceutical Manufacturing, Research and Development Expense Pharmaceutical manufacturing, research and development expense totaling $1.2 million was incurred by our Pharmaceutical Development segment during the three months ended September 30, 2020, compared to $0.3 million for the period following our acquisition of Enteris through September 30, 2019. Change in Fair Value of Contingent Consideration The change in the fair value of the contingent consideration for three months ended September 30, 2020 was $0.2 million. The contingent consideration is the earnout related to the August 26, 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement (please refer to Part I, Item 1, Financial Statements , Note 3 of the notes to the unuadited condensed consolidated financial statements for further information on contingent consideration and the acquisition of Enteris). The contingent consideration was remeasured to fair value as of September 30, 2020. The carrying amount of the liability may fluctuate significantly, and actual amounts paid may be materially different from the estimated value of the liability. 28 Depreciation and Amortization Depreciation and amortization increased by $2.3 million as a result of a full quarter of depreciation and amortization of property and equipment and intangible assets that were obtained in the acquisition of Enteris, which was consummated on August 26, 2019. General and Administrative General and administrative expenses consist primarily of compensation, stock-based compensation and related costs for management, staff, Board of Directors, legal, accounting and audit expenses, and corporate governance. General and administrative expenses decreased to $2.5 million for the three months ended September 30, 2020 from $2.7 million for the three months ended September 30, 2019, which was primarily due to a $1.1 million decrease in state tax, legal, accounting and other professional fees related to the Enteris acquisition. The decrease was offset by a $0.9 million increase in general office, rent, salaries and benefits expense, which included a $0.2 million increase in the performance-based bonus accrual. Other Income (Expense), Net Other income (expense), net for the three months ended September 30, 2020 reflected a net fair market value gain of $0.1 million on our warrant derivatives and a net fair market value loss of $0.2 million on our Misonix common stock. Other income for the three months ended September 30, 2019 reflected a net fair market value loss of $1.2 million on our warrant derivatives and a net fair market value gain of $1.8 million on our Misonix common stock. Income Tax Benefit During the three months ended September 30, 2020, we recognized an income tax benefit of $0.5 million when compared to $0.6 million income tax benefit for the three months ended September 30, 2019, which represented effective tax rates of negative 48.1 percent and 17.1 percent, respectively. The provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate for the full fiscal year to ordinary income or loss for the interim reporting period. The annual effective tax rate is adjusted for nondeductible expenses and other permanent differences, including changes in fair value in our acquisition-related contingent consideration, warrant derivatives and equity securities. The change in the estimated annual effective tax rate was primarily the result of a decrease in forecasted pretax income for the three months ended September 30, 2020 when compared to the three months ended September 30, 2019. Comparison of the Nine Months Ended September 30, 2020 and 2019 (in millions) Nine Months Ended September 30, 2020 2019 Change Revenues $ 25.8 $ 21.4 $ 4.4 Provision for credit losses and impairment expense 0.2 0.6 (0.4 ) Interest expense 0.4 0.3 0.1 Pharmaceutical manufacturing, research and development expense 3.3 0.3 3.0 Change in fair value of acquisition-related contingent consideration 2.0 — 2.0 Depreciation and amortization expense 9.6 0.4 9.2 General and administrative expense 8.2 5.3 2.9 Other (expense) income, net (1.8 ) 1.6 (3.4 ) (Benefit) provision for income taxes (0.2 ) 1.2 (1.4 ) Consolidated net income 0.6 15.0 (14.4 ) 29 Revenues We generated revenues of $25.8 and $21.4 million for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020, revenues consisted primarily of $22.7 million of interest, fees and royalties earned on our finance receivables and $3.1 million recognized from our pharmaceutical development segment. For the nine months ended September 30, 2019, revenues consisted primarily of $21.2 million of interest, fees and royalties earned on our finance receivables and $0.1 million received from our pharmaceutical development segment, which was acquired in the third quarter of 2019. The increase in revenue was primarily the result of a $7.3 million increase in interest, fees and royalties earned on our finance receivables due to additional funding on existing loans and the addition of one term loan and one new royalty since the third quarter of 2019. Of the $7.3 million increase, $2.0 million of revenue was received from Veru, Inc. The total increase in revenue also included $2.5 million of milestone revenue related to Enteris’s license agreement with Cara. The increase in revenue was partially offset by a $4.8 million decrease in interest and fees earned on finance receivables that were either paid off or paid down since the third quarter of 2019. Provision for Credit Losses and Impairment Expense We recognized impairment expense of $0.2 million on our debt securities during the nine months ended September 30, 2020. Please refer to Part I, Item I, Financial Statements , Note 5 of the Notes to the unaudited condensed consolidated financial statements for further information regarding the provision for credit loss recognized during the nine months ended September 30, 2020. During the nine months ended September 30, 2019, we recognized credit loss provision expense of $0.6 million related to the Besivance® royalty, which was due to increases in sales chargebacks and various rebates (gross sales to net sales deductions) and lower sales volumes . Interest Expense Interest expense includes interest on amounts borrowed, unused line of credit and maintenance fees, as well as amortization of debt issuance costs on our revolving line of credit. Interest expense was $0.4 million and $0.3 million for the nine months ended September 30, 2020 and 2019, respectively. On March 17, 2020, we drew $15.0 million on our revolving credit facility in order to support existing business partners and to finance future investment opportunities, which accounts for the $0.1 million increase in interest expense. The line of credit was repaid by August 17, 2020, and no amount was outstanding on the line of credit as of September 30, 2020. Pharmaceutical Manufacturing, Research and Development Expense Pharmaceutical manufacturing, research and development expense of $3.3 million was incurred by our Pharmaceutical Development segment during the nine months ended September 30, 2020, compared to $0.3 million for the period following our acquisition of Enteris through September 30, 2019. Change in Fair Value of Contingent Consideration The change in the fair value of the contingent consideration for the nine months ended September 30, 2020 was $2.0 million. The contingent consideration is the earnout related to the August 26, 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement (please refer to Part I, Item 1, Financial Statements , Note 3 of the notes to the unuadited condensed consolidated financial statements for further information on contingent consideration and the acquisition of Enteris). The contingent consideration was remeasured to fair value as of September 30, 2020. 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 increased by $9.2 million due to the increase in property and equipment and intangible assets that were obtained in the acquisition of Enteris, which was acquired in the third quarter of 2019. General and Administrative General and administrative expenses consist primarily of compensation, stock-based compensation and related costs for management, staff, Board of Directors, legal, accounting and audit expenses, and corporate governance. General and administrative expenses increased to $8.2 million for the nine months ended September 30, 2020 from $5.3 million for the nine months ended September 30, 2019, which was due to a $2.1 million increase in salaries, benefits and stock-based compensation expense; a $1.0 million increase in general office, insurance and rent expense; and an $0.2 million increase in accounting, audit, legal and other professional fees. The increase in general and administrative expenses was primarily due to the addition of Enteris, which was acquired in the third quarter of 2019, along with our recent uplisting to the Nasdaq Stock Market. 30 Other Income (Expense), Net Other income (expense), net for the nine months ended September 30, 2020 reflected a net fair market value loss of $1.2 million on our warrant derivatives and a net fair market value loss of $0.7 million on our Misonix common stock. We believe that the net fair market value losses in our warrant derivative and common stock holdings is primarily attributable to the impact the COVID-19 pandemic has had on global markets. Other income for the nine months ended September 30, 2019 reflected a $0.1 million net fair market value loss on our warrant derivatives and a $1.8 million gain on our Misonix common stock. Income Tax (Benefit) Expense During the nine months ended September 30, 2020 and 2019, we recognized income tax benefit of $0.2 million and income tax expense of $1.2 million, respectively, which represented effective tax rates of negative 48.1 percent and 17.1 percent, respectively. The provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate for the full fiscal year to ordinary income or loss for the interim reporting period. The annual effective tax rate is adjusted for nondeductible expenses and other permanent differences, including changes in fair value in our acquisition-related contingent consideration, warrant derivatives and equity securities. The decrease in income tax expense was primarily the result of a decrease in forecasted pretax income for the nine months ended September 30, 2020 when compared to the nine months ended September 30, 2019. Income tax expense for the nine months ended September 30, 2019 also included a $1.2 million adjustment to our deferred tax asset and other discrete items that resulted from the acquisition of Enteris. 31 Liquidity and Capital Resources As of September 30, 2020, we had $9.3 million in cash and cash equivalents, compared to $11.2 million in cash and cash equivalents as of December 31, 2019. The primary driver of the decrease in our cash balance was $12.5 million of investment funding, net of deferred fees and origination expenses; $10.8 million of salaries, employee benefits and accounts payable; $2.3 million to purchase property and equipment for the expansion of the Enteris manufacturing facility; $2.0 million to repurchase shares of the Company’s common stock on the open market; and a net $0.2 million of interest, fees and other costs related to our credit facility. The decrease in cash was partially offset by $25.1 million of interest, fees, principal and royalty payments received on our finance receivables and $1.1 million received from our pharmaceutical development segment. Our ability to generate cash in the future depends primarily upon our success in implementing our Finance Receivable segment business model of generating income by providing capital to a broad range of life science companies, institutions and inventors, as well as the success of our Pharmaceutical Development segment. We generate income primarily from four sources: 1. Primarily owning or financing through debt investments, royalties generated by the sales of life science products and related intellectual property; 2. Receiving interest and other income by advancing capital in the form of secured debt to companies in the life science sector; 3. Pharmaceutical development, manufacturing, and licensing activities utilizing the Peptelligence® platform; and 4. To a lesser extent, realizing capital appreciation from equity-related investments in the life science sector. As of September 30, 2020, our finance receivables portfolio contains $183.2 million of finance receivables and $1.4 million of marketable investments. We expect these assets to generate positive cash flows in 2020. However, the COVID-19 pandemic has created substantial uncertainty in the global markets and economy; therefore, we will continue to monitor the short and long-term impact this may have on our finance receivables portfolio. In addition, the majority of our finance receivables portfolio are debt instruments that carry floating interest rates with a LIBOR-based interest rate floor. Changes in interest rates, including LIBOR 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 2020. 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. As of September 30, 2020, our Pharmaceutical Development segment did not have a material impact on our cash flow. We expect the Pharmaceutical Development segment to generate positive cash flow above its expenses from proceeds received under its license agreements and customer relationships; however, the timing of the receipt of payments under the license agreements is uncertain and dependent upon the success of our technology licensees’ pharmaceutical development candidates. Also, the COVID-19 pandemic has resulted in disruption and delays to pharmaceutical clinical trials in general and may impact the expected timing of our technology licensees’ ability to achieve milestones upon which we receive income pursuant to our license agreements. Though we expect in the aggregate that the Company will generate positive cash flow in excess of our expenses, given the abrupt decline in global economic activity, and the uncertain recovery from such decline, caused by COVID-19, we cannot predict with this with certainty. We entered into a $20.0 million revolving credit facility in June 2018. On March 17, 2020, the Company drew $15.0 million on its revolving credit facility in order to support existing business partners and to finance future investment opportunities. The line of credit was repaid by August 17, 2020. As of September 30, 2020, no amount was outstanding under the revolving credit facility, and $20.0 million was available for borrowing. 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. Please refer to Part I, Item I, Financial Statements , Note 8 of the notes to the unaudited condensed consolidated financial statements. 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. During the nine months ended September 30, 2020, our cash and cash equivalents were deposited in accounts at well capitalized financial institutions. The fair value of our cash and cash equivalents at September 30, 2020 approximated its carrying value. Investment and Interest Rate Risk We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flow. As we seek to provide capital to a broad range of life science companies, institutions and investors with the majority of our finance receivables portfolio paying interest based on floating interest rates with a LIBOR floor, our net investment income is dependent, in part, upon the difference between the rate at which we earn on our cash and cash equivalents and the rate at which we lend those funds to third parties. As a result, we are subject to risks relating to changes in market interest rates. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations by providing capital at variable interest rates. We do not currently engage in any interest rate hedging activities. We constantly monitor our portfolio and position our portfolio to respond appropriately to a reduction in credit rating of any of our investments. During 2018, we entered into a revolving credit facility. As we borrow funds to make additional investments, our income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we are subject to risks relating to changes in market interest rates. In periods of rising interest rates when we have debt outstanding, our cost of funds would increase, which could reduce our income, especially to the extent we continue to hold fixed rate investments. We generally seek to mitigate this risk by pricing our debt investments with floating interest rates to maintain the spread of our portfolio over the cost of leverage. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations, which we have not done. Adverse developments resulting from changes in interest rates or hedging transactions could have a materially adverse effect on our business, financial condition and results of operations. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our investment income, net of borrowing expenses. The interest rates of many of our term loans to partner companies are priced using a spread over LIBOR. LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in term loans we extend to partner companies such that the interest due to us pursuant to a term loan extended to a partner company is calculated using LIBOR. Most of our term loan agreements with partner companies contain a stated minimum value for LIBOR. As of December 31, 2019, 100 percent of the term loans with our partner companies utilized LIBOR, including a stated minimum of LIBOR, as a reference rate. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time whether or not LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities, known as the Secured Overnight Funding Rate (“SOFR”). SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question. As such, the future of LIBOR at this time is uncertain. If LIBOR ceases to exist, we may need to renegotiate the credit agreements with our partner companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. Our term loans typically contain provisions to facilitate the transition to such new standard. If affected credit agreements with our partner companies are unable to be renegotiated, our investments may bear interest at a lower rate, subject to any contractual minimum LIBOR floors, which would decrease investment income and potentially the value of such investments. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market value for or value of any LIBOR-linked loans and other financial obligations or extensions of credit held by or due to us and could have a material adverse effect on our business, financial condition and results of operations. Due to the uncertainty of the replacement for LIBOR, the potential effect of any such event on our cost of capital and investment income cannot yet be determined. 33 Inflation We do not believe that inflation has had a significant impact on our revenues or operations. ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In connection with the preparation of this report, our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Changes in Internal Control over Financial Reporting Other than accounting integration of the Enteris acquisition, there have been no changes during the nine months ended September 30, 2020 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 34 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are involved in, or have been involved in, arbitrations or various other legal proceedings that arise from the normal course of our business. We cannot predict the timing or outcome of these claims and other proceedings. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact on our results of operations, balance sheets and cash flows due to defense costs, and divert management resources. Currently, we are not involved in any arbitration and/or other legal proceeding that we expect to have a material effect on our business, financial condition, results of operations and cash flows. ITEM 1A. RISK FACTORS Information regarding the Company’s risk factors appears in Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 30, 2020. Below are material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Risks Related to Pharmaceutical Development Segment The COVID-19 pandemic is highly dynamic in the United States and throughout the world and may adversely affect our operations and financial condition. We are subject to risks related to the public health crises such as the global pandemic associated with COVID-19. Economic and health conditions in the United States and across most of the globe continue to change rapidly. The COVID-19 outbreak is expected to continue to disrupt our operations through its impact on our employees, our partner companies and their businesses, and certain industries in which our partner companies operate. In the last two weeks in March and through the date of this filing, our Pharmaceutical Development segment has seen a reduction in its productivity as well as delays in receiving some of its needed supplies as a direct result of the pandemic and the impact on key vendors. This slow-down is likely to continue in the near term until such time as certain restrictions that have been imposed on us and our suppliers are lifted. Such events may result in business disruption and reduced revenues, any of which could materially affect our business, financial condition and results of operations. Numerous state and local jurisdictions have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Starting in late-March 2020, the governor of New Jersey, where the manufacturing facility of our Pharmaceutical Development segment is located, issued “shelter-in-place” or “stay at home” orders restricting non-essential activities, travel and business operations for an indefinite period of time, subject to certain exceptions for necessary activities. Starting in July 2020, the governor of New Jersey began a phased re-opening of the state’s economy, though some non-essential activities remain limited, which continues to impact operations. Such orders or restrictions have resulted in our Pharmaceutical Development segment significantly reducing activities at its manufacturing facility, thereby negatively impacting our operations. Other disruptions or potential disruptions include restrictions on our personnel and personnel of our customers and suppliers to travel and access customers; delays in product development efforts; and additional government requirements or other incremental mitigation efforts that may further impact our business. We continue to monitor COVID-19 recommendations mandated by the governor’s office. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets and a recession or market correction that could materially affect our business, including the ability of our borrowers or the marketers of products upon which we derive our royalty income to raise capital in order to fund their operations during the pandemic, and the value of our common stock. The COVID-19 outbreak may disrupt our operations through its impact on our employees, our portfolio companies and their businesses, and certain industries in which our portfolio companies operate. Disruptions to our partner companies may impair their ability to fulfill their obligations to us and could result in increased risk of delinquencies, defaults, declining collateral values associated with our existing loans, and impairments or losses on our loans. We are continuously monitoring our own operations and intend to take appropriate actions to mitigate the risks arising from the COVID-19 pandemic, but there can be no assurances that we will be successful in doing so. To the extent we are able to obtain information about and maintain communications with our customers, suppliers, vendors and other business partners, we will seek to minimize disruptions to our Pharmaceutical Development segment’s supply chain. The ultimate extent of the effects of the COVID-19 pandemic on us is highly uncertain and will depend on future developments which cannot be predicted. 35 Risks Related to Finance Receivables Segment Currently, we have a limited number of assets, which subjects our aggregate returns, and the value of our common stock, to a greater risk of significant loss if any of our debt or equity securities declines in value or if any of our royalty investments substantially underperforms our expectations. Our total investment in companies may be significant individually or in the aggregate. A consequence of our currently limited number of assets in our Finance Receivables segment is that the aggregate returns we realize may be significantly adversely affected if one or more of our significant partner company investments perform poorly or if we need to write down the value of any one significant investment, which may be more severe than if we had made smaller investments in more companies. Our financial results could be materially adversely affected if these portfolio companies or any of our other significant portfolio companies encounter financial difficulty and fail to repay their obligations or to perform as expected. Risks Related to Our Business and Structure We are dependent upon our key management personnel for our future success. We depend on the diligence, skill and network of business contacts of our senior management and their access to the investment professionals and the information and deal flow generated by these investment professionals in the course of their investment and portfolio management activities. Our senior management team evaluates, negotiates, structures, closes, monitors and services our investments. Our success depends to a significant extent on the continued service of this senior management team, in particular, Winston L. Black, Chief Executive Officer. His departure could have a material adverse effect on our ability to achieve our business objectives. In addition, we have very few employees, so the loss of any employee could be disruptive to our business. In addition, if members of our key management team were to be affected by COVID-19, this could significantly impair our ability to execute our business. We are taking precautions to protect the safety and well-being of our employees, including enhancing our standard operating procedures at Enteris to provide for additional cleaning and hygiene measures, as well as, social distancing. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employees’ ability to service the finance receivables portfolio or Enteris’ customers. 36 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On December 21, 2018, the Board authorized a share repurchase program under which the Company was authorized to repurchase up to $3.5 million of the Company’s outstanding shares of common stock, or approximately 312,497 common shares, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act. The December 21, 2018 share repurchase program expired on May 31, 2019 and was renewed on September 5, 2019 and March 26, 2020. Under the March 26, 2020 share repurchase program, the Board authorized the repurchase of up to $2.0 million worth of common shares. The program expired on September 30, 2020. As of September 30, 2020, the Company has repurchased 303,892 shares under the share repurchase programs at a total cost of $3.5 million, or $11.37 per share. Through November 10, 2020, the Company has repurchased an aggregate of 384,368 shares of its outstanding common stock, including three privately negotiated purchases outside of the share repurchase programs, at a total cost of $4.2 million or $11.06 per share. The table below summarizes information about our purchases of common stock during the three months ended September 30, 2020: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plan Maximum Number of Shares That May Yet Be Purchased Under the Plan Balance as of June 30, 2020 78,781 July 1, 2020 through July 31, 2020 46,812 $ 12.62 46,812 31,969 August 1, 2020 through August 31, 2020 6,866 13.03 6,866 25,103 September 1, 2020 through September 30, 2020 16,498 13.55 16,498 — 70,176 $ 12.87 70,176 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable. ITEM 5. OTHER INFORMATION. None. 37 ITEM 6. EXHIBITS Number Exhibit Description Filing Filed Form Exhibit Date Herewith 31.01 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.02 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* X 32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* X 101.INS+ XBRL Instance X 101.SCH+ XBRL Taxonomy Extension Schema X 101.CAL+ XBRL Taxonomy Extension Calculation X 101.DEF+ XBRL Taxonomy Extension Definition X 101.LAB+ XBRL Taxonomy Extension Labels X 101.PRE+ XBRL Taxonomy Extension Presentation X * These certifications accompany this Quarterly Report on Form 10-Q. They are not deemed “filed” with the Securities and Exchange Commission and are not to be incorporated by reference in any filing of SWK Holdings Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. + XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 13, 2020. SWK Holdings Corporation By: /s/ Winston L. Black Winston L. Black Chief Executive Officer (Principal Executive Officer) By: /s/ Charles M. Jacobson Charles M. Jacobson Chief Financial Officer (Principal Financial Officer) 39