SWK Holdings Corp 10-Q

10-Q 1 e21372_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 March 31, 2021 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 x 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 May 10, 2021, there were 12,795,554 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding. SWK Holdings Corporation Form 10-Q Quarter Ended March 31, 2021 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Unaudited Condensed Consolidated Balance Sheets—March 31, 2021 and December 31, 2020 1 Unaudited Condensed Consolidated Statements of Income (Loss)—Three Months Ended March 31, 2021 and 2020 2 Unaudited Condensed Consolidated Statements of Stockholders’ Equity—Three Months Ended March 31, 2021 and 2020 3 Unaudited Condensed Consolidated Statements of Cash Flows—Three Months Ended March 30, 2021 and 2020 4 Notes to the Unaudited Condensed Consolidated Financial Statements 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4 Controls and Procedures 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 1A. Risk Factors 26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26 Item 3. Defaults Upon Senior Securities 26 Item 4. Mine Safety Disclosures 26 Item 5. Other Information 26 Item 6. Exhibits 27 Signatures 28 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. Table of Contents PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value and share data) March 31, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 1,610 $ 3,008 Interest and accounts receivable, net 2,171 1,911 Marketable investments 2,142 1,210 Other current assets 984 542 Total current assets 6,907 6,671 Finance receivables, net 209,903 204,491 Marketable investments 223 241 Investment in TRT 3,491 3,491 Deferred tax asset, net 26,573 27,491 Warrant assets 3,255 2,972 Intangible assets, net 11,853 13,617 Goodwill 8,404 8,404 Property and equipment, net 5,451 5,211 Other non-current assets 1,158 1,312 Total assets $ 277,218 $ 273,901 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 4,045 $ 3,652 Revolving credit facility 11,159 11,758 Total current liabilities 15,204 15,410 Contingent consideration payable 16,900 16,900 Other non-current liabilities 1,036 1,079 Total liabilities 33,140 33,389 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 March 31, 2021 and December 31, 2020, respectively — — Common stock, $0.001 par value; 250,000,000 shares authorized; 12,795,607 and 12,792,586 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively 13 13 Additional paid-in capital 4,431,101 4,430,924 Accumulated deficit (4,187,036 ) (4,190,425 ) Total stockholders’ equity 244,078 240,512 Total liabilities and stockholders’ equity $ 277,218 $ 273,901 See accompanying notes to the unaudited condensed consolidated financial statements. 1 Table of Contents SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (in thousands, except per share data) Three Months Ended March 31, 2021 2020 Revenues: Finance receivables interest income, including fees $ 8,679 $ 7,136 Pharmaceutical development 198 148 Other 496 18 Total revenues 9,373 7,302 Costs and expenses: Impairment expense — 163 Interest expense 145 101 Pharmaceutical manufacturing, research and development expense 1,548 1,150 Depreciation and amortization expense 1,682 3,505 General and administrative 2,885 3,040 Total costs and expenses 6,260 7,959 Other income (expense), net Unrealized net gain (loss) on warrants 283 (1,860 ) Unrealized net gain (loss) on equity securities 932 (890 ) Income (loss) before provision for income taxes 4,328 (3,407 ) Provision for income taxes 939 1,253 Consolidated net income (loss) $ 3,389 $ (4,660 ) Net income (loss) per share Basic $ 0.26 $ (0.36 ) Diluted $ 0.26 $ (0.36 ) Weighted Average Shares Basic 12,793 12,913 Diluted 12,810 12,913 See accompanying notes to the unaudited condensed consolidated financial statements. 2 Table of Contents SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Three Months Ended March 31, 2021 Common Stock Total Additional Paid- Accumulated Stockholders’ Shares Amounts In Capital Deficit Equity Balances at December 31, 2020 12,792,586 $ 13 $ 4,430,924 $ (4,190,425 ) $ 240,512 Stock-based compensation — — 177 — 177 Issuance of common stock 3,021 — — — — Net income — — — 3,389 3,389 Balances at March 31, 2021 12,795,607 $ 13 $ 4,431,101 $ (4,187,036 ) $ 244,078 Three Months Ended March 31, 2020 Common Stock Total Additional Paid- Accumulated Stockholders’ Shares Amounts In 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 See accompanying notes to the unaudited condensed consolidated financial statements. 3 Table of Contents SWK HOLDINGS CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Three Months Ended March 31, 2021 2020 Cash flows from operating activities: Consolidated net income (loss) $ 3,389 $ (4,660 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Impairment expense — 163 Amortization of debt issuance costs 46 47 Deferred income taxes 918 1,253 Change in fair value of warrants (283 ) 1,860 Change in fair value of equity securities (699 ) 890 Loan discount amortization and fee accretion (628 ) (536 ) Interest paid-in-kind (13 ) (467 ) Stock-based compensation 177 187 Depreciation and amortization expense 1,682 3,505 Changes in operating assets and liabilities: Interest and accounts receivable (260 ) 543 Other assets (308 ) (462 ) Accounts payable and other liabilities 350 994 Net cash provided by operating activities 4,371 3,317 Cash flows from investing activities: Investment in equity securities (233 ) — Investment in finance receivables (7,100 ) (5,500 ) Repayment of finance receivables 2,304 1,348 Corporate debt securities principal payment 18 18 Purchases of property and equipment (321 ) — Other 163 (249 ) Net cash used in investing activities (5,169 ) (4,383 ) Cash flows from financing activities: Net (payments) proceeds from credit facility (600 ) 14,288 Repurchases of common stock, including fees and expenses — (62 ) Net cash (used in) provided by financing activities (600 ) 14,226 Net (decrease) increase in cash and cash equivalents (1,398 ) 13,160 Cash and cash equivalents at beginning of period 3,008 11,158 Cash and cash equivalents at end of period $ 1,610 $ 24,318 See accompanying notes to the unaudited condensed consolidated financial statements. 4 Table of Contents 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 March 31, 2021, the Company had 34 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/or Pharmaceutical Development segments will generate sufficient income to permit the Company to utilize all of its NOLs prior to their respective expiration dates. As such, it is possible that the Company might pursue additional strategies that it believes might result in the ability to utilize more of the NOLs. As of May 10, 2021, the Company and its partners have executed transactions with 42 different parties under its specialty finance strategy, funding an aggregate $587 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”). 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 United States. The consolidated financial statements include the accounts of all subsidiaries and affiliates in which the Company holds a controlling financial interest as of the financial statement date. Normally a controlling financial interest reflects ownership of a majority of the voting interests. The Company consolidates a variable interest entity (“VIE”) when it possesses both the power to direct the activities of the VIE that most significantly impact its economic performance and the Company is either obligated to absorb the losses that could potentially be significant to the VIE or the Company holds the right to receive benefits from the VIE that could potentially be significant to the VIE, after elimination of intercompany accounts and transactions. The Company owns interests in various partnerships and limited liability companies, or LLCs. The Company consolidates its investments in these partnerships or LLCs, where the Company, as the general partner or managing member, exercises effective control, even though the Company’s ownership may be less than 50 percent, the related governing agreements provide the Company with broad powers, and the other parties do not participate in the management of the entities and do not effectively have the ability to remove the Company. The Company has reviewed each of the underlying agreements to determine if it has effective control. If circumstances change and it is determined this control does not exist, any such investment would be recorded using the equity method of accounting. Although this would change individual line items within the Company’s consolidated financial statements, it would have no effect on its operations and/or total stockholders’ equity attributable to the Company. 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, 2021. 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, 2020, filed with the SEC on March 31, 2021. 5 Table of Contents Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition; stock-based compensation; valuation of accounts receivable; impairment of finance receivables; long-lived assets; property and equipment; intangible assets; goodwill; valuation of warrants and other investments; contingent consideration; income taxes; and contingencies and litigation, among others. Some of these judgments can be subjective and complex, and consequently, actual results may differ from these estimates. The Company’s estimates often are based on complex judgments, probabilities and assumptions that it believes to be reasonable but that are inherently uncertain and unpredictable. For any given individual estimate or assumption made by the Company, there may also be other estimates or assumptions that are reasonable. The Company regularly evaluates its estimates and assumptions using historical experience and other factors, including the economic environment. As future events and their effects cannot be determined with precision, the Company’s estimates and assumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause changes to those estimates and assumptions. Market conditions, such as illiquid credit markets, health crises such as the COVID-19 global pandemic, volatile equity markets, and economic downturns, can increase the uncertainty already inherent in the Company’s estimates and assumptions. The Company adjusts its estimates and assumptions when facts and circumstances indicate the need for change. Those changes generally will be reflected in our consolidated financial statements on a prospective basis unless they are required to be treated retrospectively under the relevant accounting standard. It is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. Segment Information The Company earns revenues from its two U.S.-based business segments: its specialty finance and asset management business offering customized financing solutions to a broad range of life-sciences companies, and its business offering oral therapeutic formulation solutions built around Enteris’ pharmaceutical Peptelligence® platform, which enables the oral delivery of molecules that are typically injected, including peptides and BCS Class II, III, and IV small molecules in an enteric-coated tablet formulation. Revenue Recognition The Company’s Pharmaceutical Development segment enters into collaboration and licensing agreements with strategic partners, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products. Deferred revenue includes amounts that have been billed per the contractual terms but have not been recognized as revenue. The Company classifies as current the portion of deferred revenue that is expected to be recognized within one year from the balance sheet date and is included in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets. Research and Development Research and development expenses include the costs associated with internal research and development and research and development conducted for the Company by third parties. These costs primarily consist of salaries, pre-clinical and clinical trials, outside consultants, and supplies. All research and development costs discussed above are expensed as incurred. Third-party expenses reimbursed under research and development contracts, which are not refundable, are recorded as a reduction to pharmaceutical manufacturing research and development expense in the consolidated statements of income. 6 Table of Contents 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. 7 Table of Contents Note 2. Net Income (Loss) per Share Basic net income (loss) per share is computed using the weighted average number of outstanding shares of common stock. Diluted net income (loss) 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 (loss) per share for the following periods (in thousands, except per share amounts): Three Months Ended March 31, 2021 2020 Numerator: Net income (loss) $ 3,389 $ (4,660 ) Denominator: Weighted-average shares outstanding 12,793 12,913 Effect of dilutive securities 17 — Weighted-average diluted shares 12,810 12,913 Basic net income (loss) per share $ 0.26 $ (0.36 ) Diluted net income (loss) per share $ 0.26 $ (0.36 ) For the three months ended March 31, 2021 and 2020, outstanding stock options and restricted stock units to purchase shares of common stock in an aggregate of approximately 411,000 and 460,000, respectively, have been excluded from the calculation of diluted net income (loss) per share as all such securities were anti-dilutive. 8 Table of Contents Note 3. 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 March 31, 2021 and December 31, 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 $3.7 million. The carrying values of finance receivables are as follows (in thousands): Portfolio March 31, 2021 December 31, 2020 Term loans $ 170,456 $ 164,032 Royalty purchases 47,835 48,847 Total before allowance for credit losses 218,291 212,879 Allowance for credit losses (8,388 ) (8,388 ) Total carrying value $ 209,903 $ 204,491 The following table presents nonaccrual and performing finance receivables by portfolio segment, net of credit loss allowance (in thousands): March 31, 2021 December 31, 2020 Nonaccrual Performing Total Nonaccrual Performing Total Term loans $ 8,334 $ 162,122 $ 170,456 $ 8,334 $ 155,698 $ 164,032 Royalty purchases, net of credit loss allowance 3,683 35,764 39,447 3,863 36,596 40,459 Total carrying value $ 12,017 $ 197,886 $ 209,903 $ 12,197 $ 192,294 $ 204,491 As of March 31, 2021, the Company had two finance receivables in nonaccrual status: (1) the term loan to B&D Dental Corporation (“B&D”), with a net carrying value of $8.3 million and (2) the Best royalty, with a net carrying value of $3.7 million. Although in nonaccrual status, the B&D term loan was not considered impaired as of March 31, 2021 and December 31, 2020. The Company collected $0.2 million on the Best royalty during the three months ended March 31, 2021, which was credited toward the royalty’s carrying value. The Company did not collect any cash on its nonaccrual royalties during the three months ended March 31, 2020. (Please see B&D, Best and Besivance 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 March 31, 2021, 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 periodically obtains third-party valuations of B&D. As a result of the third-party valuations and facts and circumstances regarding B&D’s operations, including its intellectual property position, improved profitability and working capital position, 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 March 31, 2021. 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. 9 Table of Contents During the year ended December 31, 2018, the Company re-evaluated its collateral position, considering the expected outcome of ABT’s 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. The estimated fair value as of March 31, 2021 is $3.7 million. Note 4. Investment in Tissue Regeneration Therapeutics, Inc. On June 13, 2013, the Company purchased royalties from Tissue Regeneration Therapeutics, Inc. (“TRT”) related to its technology licenses in the family cord banking services sector for $2.0 million, and on October 20, 2014, funded an additional $1.25 million upon the achievement of royalty receipts-based milestones. During the quarter ended March 31, 2016, royalty payments from the primary U.S. licensee ended as a result of the licensee terminating a technology license. SWK and TRT continue to evaluate both options in regard to enforcing TRT’s intellectual property rights against this licensee, as well as seeking additional U.S. licensees. 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. The convertible feature is at the option of TRT. As of March 31, 2021, the Company does not believe there is an impairment of the carrying value of the investment in TRT. The Company evaluated several factors in this determination, including input from intellectual property counsel regarding the strength of the related intellectual property, advancements with TRT’s intellectual property estate and technology license agreements generally, continued receipt of Canadian licensee royalty payments and a third party valuation of the Company’s investment in TRT. As of March 31, 2021, there were no adjustments to the carrying amount of $3.5 million. Note 5. Marketable Investments Investments in available-for-sale corporate debt securities and equity securities as of March 31, 2021 and December 31, 2020 consist of the following (in thousands): March 31, 2021 December 31, 2020 Corporate debt securities $ 223 $ 241 Equity securities 2,142 1,210 Total marketable investments $ 2,365 $ 1,451 The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale corporate debt securities as of March 31, 2021 and December 31, 2020, are as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Fair Value March 31, 2021 $ 223 $ — $ — $ 223 December 31, 2020 $ 241 $ — $ — $ 241 The following table presents unrealized net income (loss) on equity securities during the three months ended March 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Unrealized net income (loss) on equity securities reflected in the unaudited condensed consolidated statements of income (loss) $ 932 $ (890 ) 10 Table of Contents Note 6. Goodwill and Intangible Assets Goodwill There was no change in the carrying amount of goodwill from December 31, 2020 to March 31, 2021, 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 March 31, 2021, 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 The following table summarizes the components of gross intangible assets, accumulated amortization and net intangible asset balances as of March 31, 2021 and December 31, 2020 (in thousands): March 31, 2021 December 31, 2020 Gross Book Value Accumulated Amortization Net Book Value Gross Book Value Accumulated Amortization Net Book Value Licensing Agreement (1) $ 29,400 $ (17,925 ) $ 11,475 $ 29,400 $ (16,336 ) $ 13,064 Patents — — — 198 (153 ) 45 Trade names and trademarks 210 (34 ) 176 210 (29 ) 181 Customer relationships 240 (38 ) 202 240 (32 ) 208 29,850 (17,997 ) 11,853 30,048 (16,550 ) 13,498 Deferred patent costs — — — 119 — 119 Total intangible assets $ 29,850 $ (17,997 ) $ 11,853 $ 30,167 $ (16,550 ) $ 13,617 (1) Prior to the acquisition, Enteris entered into a non-exclusive commercial license agreement (the “License Agreement”) with Cara Therapeutics, Inc. (“Cara”), for oral formulation rights to Enteris’ Peptelligence® technology to develop and commercialize Oral KORSUVA TM in any indication worldwide, excluding South Korea and Japan. Cara is obligated to pay Enteris certain development, regulatory and tiered commercial milestone payments, as well as low single-digit royalties based on net sales in the licensed territory. Amortization expense related to intangible assets was $1.6 million and $3.4 million for the three months ended March 31, 2021 and 2020, respectively. The estimated future amortization expense related to intangible assets as of March 31, 2021 is as follows (in thousands): Fiscal Year Amount Remainder of 2021 $ 1,965 2022 1,757 2023 1,757 2024 1,413 2025 1,069 2026 and thereafter 3,892 Total $ 11,853 11 Table of Contents Note 7. 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 $20.0 million revolving senior secured credit facility, which the Company can draw down and repay until maturity, subject to borrowing base eligibility. 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 is 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 both the three months ended March 31, 2021 and 2020, the Company recognized $0.1 million of interest expense. As of March 31, 2021, $11.2 million was outstanding under the revolving credit facility, and $8.8 million was available for borrowing. The credit facility was paid off subsequent to quarter ended March 31, 2021, and $20.0 was available for borrowing as of May 10, 2021. The Loan Agreement matures on June 30, 2021; however, the Company has the option to extend the maturity date by 90 days. The Company continues to explore other options with respect to a new credit facility. Note 8. Commitments and Contingencies 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 6 for further details on the License Agreement). Contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved, with changes in the estimated fair value recognized in earnings. As of March 31, 2021, the estimated fair value of the contingent consideration was $16.9 million. The Company did not recognize a change in the estimated fair value of its contingent consideration for the three months ended March 31, 2021. Unfunded Commitments As of March 31, 2021, the Company’s unfunded commitments were as follows (in millions): Sincerus Pharmaceuticals, Inc. $ 1.9 Total unfunded commitments $ 1.9 As of May 10, 2021, aggregate unfunded commitments increased to $3.9 million due to SWK Funding entering into a synthetic royalty agreement with Ideal Implant, Inc. (“Ideal”) on April 27, 2021 (please refer to Note 12 for further details on SWK Funding’s royalty agreement with Ideal). 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. 12 Table of Contents Note 9. Fair Value Measurements The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the three hierarchy levels. Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in inactive markets. Level 3 Unobservable inputs are not corroborated by market data. This category is comprised of financial and non-financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies using significant inputs that are generally less readily observable from objective sources. Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers occurred. There were no transfers between any levels during the three months ended March 31, 2021. 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 Notes 6 and 8 for further details on the License Agreement and contingent consideration, respectively). The fair value measurements of contingent consideration obligations 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. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement. 13 Table of Contents 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 March 31, 2021 (in thousands): Total Carrying Value in Consolidated Balance Sheets Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Warrant assets $ 3,255 $ — $ — $ 3,255 Marketable investments 2,365 2,142 — 223 Financial Liabilities: Contingent consideration payable $ 16,900 $ — $ — $ 16,900 The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 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 $ 2,972 $ — $ — $ 2,972 Marketable investments 1,451 1,210 — 241 Financial Liabilities: Contingent consideration payable $ 16,900 $ — $ — $ 16,900 14 Table of Contents The changes in fair value of the warrant assets during the three months ended March 31, 2021 were as follows (in thousands): Fair value – December 31, 2020 $ 2,972 Issued — Canceled — Change in fair value 283 Fair value – March 31, 2021 $ 3,255 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: March 31, 2021 December 31, 2020 Dividend rate range — — Risk-free rate range 0.35% - 1.40% 0.17% to 0.65% Expected life (years) range 3.3 - 7.1 3.6 to 7.4 Expected volatility range 64.3% - 187.9% 74.3% to 174.7% As of March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 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) March 31, 2021 $ 7,268 $ — $ — $ 7,268 December 31, 2020 $ 7,937 $ — $ — $ 7,937 There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2021 and December 31, 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 measured at fair value on a recurring and non-recurring basis. As of March 31, 2021 (in thousands): Carrying Value Fair Value Level 1 Level 2 Level 3 Financial Assets Cash and cash equivalents $ 1,610 $ 1,610 $ 1,610 $ — $ — Finance receivables 209,903 209,903 — — 209,903 Marketable investments 2,365 2,365 2,142 — 223 Warrant assets 3,255 3,255 — — 3,255 Financial Liabilities Contingent consideration payable $ 16,900 $ 16,900 $ — $ — $ 16,900 15 Table of Contents As of December 31, 2020 (in thousands): Carrying Value Fair Value Level 1 Level 2 Level 3 Financial Assets Cash and cash equivalents $ 3,008 $ 3,008 $ 3,008 $ — $ — Finance receivables 204,491 204,491 — — 204,491 Marketable investments 1,451 1,451 1,210 — 241 Warrant assets 2,972 2,972 — — 2,972 Financial Liabilities Contingent consideration payable $ 16,900 $ 16,900 $ — $ — $ 16,900 Note 10. Revenue Recognition The Company’s Pharmaceutical Development segment recognizes revenues received from contracts with its customers by revenue source, as the Company believes 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 months ended March 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Pharmaceutical Development Segment License Agreement $ 179 $ 98 Pharmaceutical Development and other 515 50 Total contract revenue $ 694 $ 148 Contract Assets and Liabilities The Company’s 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 consolidated balance sheets (in thousands): March 31, 2021 December 31, 2020 Pharmaceutical Development Segment Deferred revenue $ 6 $ 350 Total contract liabilities $ 6 $ 350 During the three months ended March 31, 2021, the Company recognized $0.3 million of 2020 deferred revenue from satisfaction of performance obligations. Please refer to Note 6 for further details on the Company’s License Agreement. The Company did not have any contract assets nor did it have any contract liabilities related to the License Agreement as of March 31, 2021 or December 31, 2020. 16 Table of Contents Note 11. Segment Information Selected financial and descriptive information is required to be provided about reportable operating segments, considering a “management approach” concept as the basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the Company for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are evident from the structure of the Company’s internal organization, focusing on financial information that the Company’s chief executive officer uses to make decisions about the Company’s operating matters. As described in Note 1, 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 income (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 March 31, 2021 Three Months Ended March 31, 2021 Finance Receivables Pharmaceutical Development Holding Company and Other Consolidated Revenue $ 8,679 $ 198 $ — $ 8,877 Other revenue — 496 — 496 Interest expense 145 — — 145 Manufacturing, research and development — 1,548 — 1,548 Depreciation and amortization expense — 1,680 2 1,682 General and administrative 184 1,106 1,595 2,885 Other income, net 1,215 — — 1,215 Provision for income taxes — — 939 939 Consolidated net income (loss) 9,565 (3,640 ) (2,536 ) 3,389 Three Months Ended March 31, 2020 Three Months Ended March 31, 2020 Finance Receivables Pharmaceutical Development Holding Company and Other Consolidated Revenue $ 7,136 $ 148 $ — $ 7,284 Other revenue — 18 — 18 Provision for credit losses and impairment 163 — — 163 Interest expense 101 — — 101 Manufacturing, research and development — 1,150 — 1,150 Depreciation and amortization expense — 3,502 3 3,505 General and administrative 512 1,047 1,481 3,040 Other expense, net (2,697 ) — (53 ) (2,750 ) Provision for income taxes — — 1,253 1,253 Consolidated net income (loss) 3,663 (5,533 ) (2,790 ) (4,660 ) 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. 17 Table of Contents Note 12. Subsequent Events Tenex Health, Inc. On April 1, 2021, SWK Funding received $6.5 million for the payoff of the Tenex Health, Inc. term loan in connection with its sale. The proceeds included accrued interest, proceeds from the termination of the warrant, and exit fees. Ideal Implant, Inc. On April 27, 2021, SWK Funding closed a synthetic royalty purchase agreement with Ideal. SWK Funding paid $3.0 million at closing with another $2.0 available for borrowing should Ideal achieve certain milestones. In exchange, SWK Funding will receive royalties based on sales of implants. Harrow Health, Inc. On April 30, 2021, Harrow Health, Inc. repaid its term loan. SWK Funding received approximately $9.4 million at payoff for its portion of the term loan, which included accrued interest, prepayment and exit fees. 18 Table of Contents 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, 2020 (“Annual Report”), as well as our unaudited condensed consolidated financial statements and the accompanying notes included in this report. COVID-19 Considerations We are subject to risks related to public health crises such as the global pandemic associated with COVID-19. 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. Please refer to Part II, Item 1A, Risk Factors, as well as the Risk Factors in our Annual Report, 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 the Company evaluates it business performance and manages its operations. Please refer to Item 1. Financial Statements, Note 11 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. 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. 19 Table of Contents Finance Receivables Portfolio Overview The table below provides an overview of our outstanding finance receivables transactions as of, and for the three months ended March 31, 2021 (in thousands, except rate, share and per share data). Royalty Purchases and Other Financings Licensed Technology Footnote Funded Amount GAAP Balance Contract Rate Revenue Recognized Beleodaq® Oncology treatment $ 7,600 $ 5,173 N/A $ 465 Besivance® Ophthalmic antibiotic (1) 6,000 245 N/A 16 Best ABT, Inc. Oncology diagnosis (1), (2) 5,784 3,683 N/A — Coflex®/Kybella®/Zalviso® Spinal stenosis/Submental fullness 4,350 4,345 N/A 155 Cambia® NSAID migraine treatment (1) 8,500 3,340 N/A — Forfivo XL® Depressive disorder treatment 6,000 1,537 N/A 358 Iluvien® Diabetic macular edema 16,501 16,588 N/A 589 Narcan® Opioid overdose treatment 17,500 544 N/A 912 Secured Royalty Financing (Marketable Investment) Women’s health (1), (2) 3,000 223 11.5% — Tissue Regeneration Therapeutics Umbilical cord banking (2) 3,250 3,491 N/A — Ostomy products royalty Ostomy products 3,900 3,992 N/A — Term Loans Type Footnote Maturity Date Principal GAAP Balance Contract Rate Revenue Recognized 4Web, Inc. First Lien 06/03/23 $ 21,112 $ 22,021 14.9 % $ 843 Acerus Pharmaceuticals, Inc. First Lien 10/11/23 8,250 8,038 12.0 % 343 B&D Dental Corporation First Lien (2), (3) 12/10/18 8,365 8,334 14.0 % — BIOLASE, Inc. First Lien 11/09/23 14,300 14,213 12.3 % 539 CeloNova BioSciences, Inc. First Lien 07/31/21 3,812 4,009 12.5 % 131 DxTerity Diagnostics, Inc. First Lien 12/31/21 10,474 10,888 16.3 % 509 Epica International, Inc. First Lien 07/23/23 12,000 12,178 13.5 % 403 eTon Pharmaceuticals, Inc. First Lien 11/13/24 7,000 6,740 12.0 % 252 Flowonix Medical, Inc. First Lien 12/23/25 10,000 9,940 11.0 % 312 Harrow Health, Inc. First Lien (4) 07/19/23 8,724 8,540 9.0% - 12.0 % 293 Keystone Dental, Inc. First Lien 11/14/22 15,000 15,392 11.5 % 461 Misonix, Inc. First Lien 06/30/23 30,096 29,981 10.0% - 12.3 % 785 Sincerus Pharmaceuticals, Inc. First Lien 03/19/26 7,100 7,058 13.0 % 33 Tenex Health, Inc. First Lien (5) 06/30/21 6,042 6,397 13.0 % 240 Thermedx, LLC Sub Note 05/20/29 440 439 11.8 % 12 Veru, Inc. Synthetic Royalty 03/05/25 6,288 6,288 N/A 1,028 Common Stock Footnote No of Shares GAAP Balance Change in Fair Value Misonix, Inc. Common Stock 109,353 $ 2,142 $ 932 20 Table of Contents Warrants to Purchase Stock Footnote Number of Shares Exercise Price per Share GAAP Balance Change in Fair Value 4Web, Inc. TBD TBD $ — $ — Acerus Pharmaceuticals, Inc. 7,764,004 0.053 CAD 324 110 B&D Dental Corporation (2), (3) 225 0.01 — — BIOLASE, Inc. 550,977 0.39 459 231 CeloNova BioSciences, Inc. TBD 0.01 — — DxTerity Diagnostics, Inc. 1,201,923 2.08 — — Epica International, Inc. TBD TBD — — eTon Pharmaceuticals, Inc. 51,239 5.86 230 (70 ) eTon Pharmaceuticals, Inc. 18,141 6.62 83 (25 ) EyePoint Pharmaceuticals, Inc. 40,910 11.00 234 108 EyePoint Pharmaceuticals, Inc. 7,773 19.30 37 18 Flowonix Medical, Inc. 155,561 3.86 — — Harrow Health, Inc. (4) 373,847 2.08 1,888 (89 ) Tenex Health, Inc. (5) 2,693,878 0.37 — — Assets Revenue Recognized Total finance receivables $ 209,903 $ 8,679 Total marketable investments 2,365 N/A Investment in Tissue Regeneration Therapeutics 3,491 — Fair value of warrant assets 3,255 N/A Total assets/revenues $ 219,014 $ 8,679 (1) Investment considered impaired. (2) Investment on nonaccrual. (3) B&D is evaluating strategic alternatives for the business. The loan is currently in default. (4) The loan was paid off on April 30, 2021. Please see Part 1, Item 1, Financial Statements, Note 12 of the notes to the unaudited condensed consolidated financial statements for further details). (5) The loan was paid off on April 1, 2021. Please see Part 1, Item 1, Financial Statements, Note 12 of the notes to the unaudited condensed consolidated financial statements for further details). 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. 21 Table of Contents 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. We believe there have been no new critical accounting policies or material changes to our existing critical accounting policies and estimates during the three months ended March 31, 2021, compared to those discussed in our Annual Report. Recent Accounting Pronouncements Refer to Part I. Financial Information, 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 March 31, 2021 and 2020 ( in millions ) Three Months Ended March 31, 2021 2020 Change Revenues $ 9.4 $ 7.3 $ 2.1 Provision for credit losses and impairment expenses — 0.2 (0.2 ) Interest expense 0.1 0.1 — Pharmaceutical manufacturing, research and development expense 1.5 1.2 0.3 Depreciation and amortization expense 1.7 3.5 (1.8 ) General and administrative expense 2.9 3.0 (0.1 ) Other income (expense), net 1.2 (2.8 ) 4.0 Provision for income taxes 0.9 1.3 (0.4 ) Consolidated net income (loss) 3.4 (4.7 ) 8.1 Revenues We generated revenues of $9.4 million and $7.3 million for the three months ended March 31, 2021 and 2020, respectively, which consisted of a $1.5 million increase in interest and fees earned on our finance receivables and a $0.5 million increase in revenues from our Pharmaceutical Development segment. The $1.5 million increase in revenue attributable to our Finance Receivables segment primarily consists of a $1.0 million net increase in royalty income and a $0.9 million increase in fees and interest earned on our finance receivables due to funding new and existing loans. The increase in revenue was partially offset by a $0.4 million decrease in interest and fees earned on finance receivables that were paid off or paid down since the second quarter of 2020. Provision for Credit Losses and Impairment Expense We did not recognize any credit loss provision or impairment expense during the three months ended March 31, 2021. We recognized impairment expense of $0.2 million on our available-for-sale debt security during the three months ended March 31, 2020. Interest Expense Interest expense consists of interest accrued on our revolving line of credit, unused line of credit and maintenance fees, as well as amortization of debt issuance costs. Interest expense for both the three months ended March 31, 2021 and 2020 was $0.1 million. Pharmaceutical Manufacturing, Research and Development Expense Pharmaceutical manufacturing, research and development expense increased from $1.2 million for the three months ended March 31, 2020 to $1.5 million for three months ended March 31, 2021. The $0.3 million increase was primarily due to an increase in purchases of manufacturing materials. Depreciation and Amortization The $1.8 million decrease in depreciation and amortization expense for the three months ended March 31, 2021 primarily consists of a decrease in amortization expense related to the intangible assets of Enteris. 22 Table of Contents General and Administrative General and administrative expenses consist primarily of compensation, stock-based compensation and related costs for management, staff, Board of Directors, legal and audit expenses, and corporate governance. General and administrative expenses decreased to $2.9 million for the three months ended March 31, 2021 from $3.0 million for the three months ended March 31, 2020, which was due to a $0.2 million decrease in professional fees, office and rent expense, partially offset by a $0.1 million increase in salaries, wages and benefits. Other Income (Expense), Net Other income, net for three months ended March 31, 2021 reflected a net fair market value gain of $0.3 million on our warrant derivatives and a net fair market value gain of $0.9 million on our Misonix common stock. Other expense, net for the three months ended March 31, 2020 reflected a net fair market value loss of $1.9 million on our warrant derivatives and a net fair market value loss of $0.9 million on our Misonix common stock. Provision for Income Tax During the three months ended March 31, 2021 and 2020, we recognized income tax expense of $0.9 million and $1.3 million, respectively, which represented effective tax rates of 21 percent and negative 37 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 on our warrant derivatives and equity securities, which resulted in a $0.4 million decrease in income tax expense during the three months ended March 31, 2021 when compared to the same period of the prior year. 23 Table of Contents Liquidity and Capital Resources As of March 31, 2021, we had $1.6 million in cash and cash equivalents, compared to $3.0 million in cash and cash equivalents as of December 31, 2020. The primary driver of the $1.4 million decrease in our cash balance was $7.1 million of investment funding, net of deferred fees and origination expenses; $3.9 million of payments of accounts payable, payroll and benefits expense, including $0.3 million to purchase property and equipment for the expansion of the Enteris manufacturing facility; and $0.6 million of net borrowings and repayments on our credit facility. The decrease was partially offset by $10.4 million of interest, fees, principal and royalty payments received on our finance receivables. Our ability to generate cash in the future depends primarily upon our success in implementing our Finance Receivables 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 March 31, 2021, our finance receivables portfolio contains $209.9 million of finance receivables, $2.4 million of marketable investments, and $3.5 million related to our investment in Tissue Regeneration Therapeutics, Inc. We expect these assets to generate positive cash flows in 2021. 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. As of March 31, 2021, 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 this with certainty. We entered into a $20.0 million revolving credit facility in June 2018. As of March 31, 2021, $11.2 million was outstanding under the revolving credit facility, and $8.8 million was available for borrowing. The credit facility was paid off subsequent to quarter ended March 31, 2021, and $20.0 was available for borrowing as of May 10, 2021. The Loan Agreement matures on June 30, 2021; however, the Company has the option to extend the maturity date by 90 days. We continue to explore other options with respect to a new credit facility. 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 Item 1. Financial Statements, Note 8 of the notes to the unaudited condensed consolidated financial statements. 24 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. During the three months ended March 31, 2021, our cash and cash equivalents were deposited in accounts at well capitalized financial institutions. The fair value of our cash and cash equivalents at March 31, 2021 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. 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 There have been no changes during the three months ended March 31, 2021 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 25 Table of Contents 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, 2020, filed with the SEC on March 31, 2021. 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, 2020. Our board of directors intends to form a strategic review committee to explore strategic alternatives. On May 17, 2021, we issued a press release announcing the intention of our board of directors to form a strategic review committee to identify, review and explore strategic alternatives with a view to enhancing stockholder value. We also announced the withdrawal of the previously-announced proposal submitted by funds affiliated with Carlson Capital, L.P. to acquire our loan and royalty assets. Our board of directors has not made any decision to enter into any transaction at this time, and there can be no assurance that the exploration of strategic alternatives will result in any transaction being announced or agreed upon. We have not set a timetable for the exploration of strategic alternatives, and we do not intend to comment on the strategic process any further until our board of directors and the strategic committee have approved a specific transaction or as we otherwise determine to be appropriate or required by law. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable. ITEM 5. OTHER INFORMATION. None. 26 Table of Contents 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. 27 Table of Contents 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 May 17, 2021. 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) 28