Item 1. Business
ITEM
1. BUSINESS
Overview
In
July 2012, we commenced a strategy of building a specialty finance and asset management business. In August 2019, we commenced a complementary
strategy of building a pharmaceutical development, manufacturing and intellectual property licensing business. Our operations comprise
two reportable segments: “Finance Receivables” and “Pharmaceutical Development.” We allocate capital to each
segment in order to generate income through the sales of life science products by third parties. We are headquartered in Dallas, Texas.
Finance
Receivables Segment
Our
Finance Receivables segment strategy is to be a leading healthcare capital provider by offering sophisticated, customized financing solutions
to a broad range of life science companies, institutions and inventors. This segment is primarily focused on monetizing cash flow streams
derived from commercial-stage products and related intellectual property through royalty purchases and financings, as well as through
the creation of synthetic revenue interests in commercialized products. We have been deploying our assets to earn interest, fees, and
other income pursuant to this strategy, and we continue to identify and review financing and similar opportunities on an ongoing basis.
In addition, through our wholly-owned subsidiary, SWK Advisors LLC, we provide non-discretionary investment advisory services to institutional
clients in separately managed accounts to similarly invest in life science finance. SWK Advisors LLC is registered as an investment advisor
with the Texas State Securities Board. We intend to fund transactions through our own working capital and our revolving credit facility,
as well as by building our asset management business by raising additional third-party capital to be invested alongside our capital.
We
fill a niche that we believe is underserved in the sub-$50 million transaction size market. Since many of our competitors that provide
longer term, non-traditional debt and/or royalty-related financing options have much greater financial resources than us, they tend not
to focus on transaction sizes below $50 million, as it is generally inefficient for them to do so. In addition, we do not believe that
a sufficient number of other companies offer similar types of long-term financing options to fill the demand of the sub-$50 million market.
As such, we believe we face less competition from such investors in transactions that are less than $50 million.
As
of March 21, 2022, and since inception of the strategy, we and our partners have executed transactions with 43 different parties
under our specialty finance strategy, funding an aggregate of approximately $619.7 million in various financial products across the life
science sector. Our 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.
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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”), and we tailor our financial solutions to the needs of our business partners. Our business partners are primarily engaged
in selling products that directly or indirectly cure diseases and/or improve the wellness of people or animals, or they receive royalties
paid on the sales of such products. For example, our biotechnology and pharmaceutical business partners manufacture medication that directly
treat disease states, whereas our life science tools partners sell a wide variety of research instrumentation to help other companies
conduct research into disease states.
The
objective of our Finance Receivables segment 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 sciences sector.
In
our portfolio we seek to achieve attractive risk-adjusted current yields and opportunities with the potential for equity-like returns
with protection that credit provides.
The
majority of our finance receivables transactions are structured similarly to factoring transactions whereby we provide capital in exchange
for an interest in an existing revenue stream. We do not anticipate providing capital in situations prior to the commercialization of
a product. The existing revenue stream can take several forms, but is most commonly either a royalty derived from the sales of a life
science product (1) from the marketing efforts of a third party, such as a royalty paid to an inventor on the sales of a medicine, or
(2) from the marketing efforts of a partner company, such as a medical device company that directly sells its own products. Our structured
debt investments may include warrants or other features, giving us the potential to realize enhanced returns on a portion of our portfolio.
Capital that we provide directly to our partners is generally used for growth and general working capital purposes, as well as for acquisitions
or recapitalizations in select cases. We generally fund the full amount of transactions up to $20 million through our working capital.
In
circumstances where a transaction is greater than $20 million, we seek to syndicate amounts in excess of $20 million to both other investors
and our investment advisory clients. We do not expect to earn investment advisory income in transactions where we partner with investors
other than our investment advisory clients.
Our
investment advisory agreements are currently non-discretionary, and each client determines individually if it wants to participate in
a transaction. Though we have partnered with investment advisory clients in the past, we currently do not have any transactions in which
we have partnered with investment advisory clients. We expect to continue to offer transaction opportunities to our investment advisory
clients, as appropriate for each client’s investment strategy. When a client opts into a transaction, each client receives its
pro rata allocation of income produced by a transaction in which it participates, and the client pays us management and incentive fees
according to a written investment advisory agreement. Fees paid by clients may differ depending upon the terms negotiated with each client
and are paid directly by the client upon receipt of an invoice from us. We may seek to raise discretionary capital from similar investors
in the future.
We
source our investment opportunities through a combination of our senior management’s proprietary relationships within the industry,
outbound business development efforts and inbound inquiry from companies, institutions and inventors interested in learning about our
capital financing alternatives. Our investment advisory clients generally do not originate investment opportunities for us.
Pharmaceutical
Development Segment
On
August 26, 2019, we commenced our 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, such as BCS Class II,
III, and IV peptides and 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, some of
which extends until 2036.
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Our
Pharmaceutical Development segment strategy is to utilize the technology platform to create a wholly-owned portfolio of milestone and
royalty income by out-licensing our technology in two ways. First, we intend to continue to out-license our Peptelligence® 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 assets from our internal product pipeline of off-patent previously approved drug compounds
with which we seek to create novel formulations using our proprietary technology to develop treatments that have meaningful therapeutic
benefits for patients and caregivers. We also seek to generate income by providing customers pharmaceutical development, formulation
and manufacturing services with the ultimate goal of generating new licensing and partnership agreements.
Peptelligence®
is the subject of several active external development programs, including an oral formulation of Cara Therapeutics, Inc.’s (“Cara”)
KORSUVA™, a potent peripheral kappa opioid receptor agonist for pruritus, currently progressing towards Phase III clinical development.
Our
internal product pipeline consists of Ovarest®, an oral leuprolide tablet being evaluated for its potential to treat an endocrine
disease, and a novel product to treat a condition of the central nervous system.
Tax
Attributes
We
view our ability to carry forward our net operating losses, or NOLs, as an important and substantial asset. In order to preserve stockholder
value by protecting our ability to carry forward our NOLs, we entered into a rights agreement that provided for a dividend distribution
of one preferred share purchase right for each outstanding share of our common stock. The purchase rights may become exercisable after
the acquisition or attempted acquisition of 4.9 percent or more of our outstanding common stock without the prior approval of our board
of directors. Our current rights agreement (the “Rights Agreement”) was entered into as of April 8, 2016 and has been extended
to expire on April 8, 2022. Under the Rights Agreement, Carlson Capital, L.P. and its affiliates (collectively, “Carlson”),
are designated as Exempt Persons (as defined in the Rights Agreement) unless they own more than 76 percent of the outstanding shares
of our common stock in the aggregate. We have also designated other shareholders as Exempt Persons because the Board determined that
such ownership would not jeopardize or endanger the availability to us of the NOLs, although potential stockholders should not assume
a similar determination would be made with respect to future acquisitions of beneficial ownership of our common stock.
At
this time, under current law, we do not anticipate that our current business strategies will generate sufficient income to permit us
to utilize all of our NOLs prior to their respective expiration dates. As such, it is possible that we might pursue additional strategies
that we believe might result in our ability to utilize more of our NOLs.
Competition
In
our Finance Receivables segment, we face competition in the pursuit of outside investors, investment management clients and opportunities
to deploy our capital in attractive healthcare related companies. Our primary competitors provide financing to prospective companies
and include non-bank financial institutions, federal or state chartered banks, venture debt funds, venture capital funds, private equity
funds, pharmaceutical royalty and other investment funds, business development companies and investment banks. Many of these entities
have greater financial and managerial resources than we have. Some of these competitors may also have a lower cost of capital and access
to funding sources that are not available to us, which may create a competitive disadvantage for us. As a result, we tend not to compete
on price, but instead focus on our industry experience, flexible financing options and speed to evaluate and complete a transaction.
In addition, since many of our competitors that provide non-traditional debt and/or longer term, royalty-related financing options have
much greater financial resources than us, they tend not to focus on transaction sizes below $50 million as it is generally inefficient
for them to do so. As such, we believe we face less competition from such investors in transactions that are less than $50 million.
In
our Pharmaceutical Development segment, we face competition in introducing products that improve efficacy, safety, patients’ and
clinicians’ ease of use and cost-effectiveness. The success of new product offerings will depend on many factors, including our
ability to properly anticipate and satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture products
in an economic and timely manner, obtain or maintain advantageous positions with respect to intellectual property, and differentiate
products from competitors. A failure by us to successfully commercialize existing or planned products could have a material adverse effect
on our business, financial condition and results of operations.
For
additional information concerning the competitive risks we face, see Item 1A., Risk
Factors .
Governmental
Regulation
For
additional information concerning the effect of existing or probable government regulation on our business, see Item 1A., Risk
Factors .
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Employees
As
of December 31, 2021, we had 35 employees, all of whom are full-time. None of our employees are represented by a labor union,
and we consider our employee relations to be good.
Additional
Information
We
file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as
amended (the “Exchange Act’’), with the Securities and Exchange Commission (“SEC”). Our SEC filings are
available to the public from the SEC’s internet site at http://www.sec.gov.
Our
internet site is http://www.swkhold.com. We will make available free of charge through our website in the “Investor Relations -
SEC Filings” section our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements
and Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to those reports filed or furnished pursuant
to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also,
posted on our website in the “Investor Relations - Corporate Governance” section are charters for our Audit Committee, Compensation
Committee and Governance and Nominating Committee as well as our Code of Ethics and Insider Trading Policy governing our directors, officers
and employees. Information on or accessible through our website is not a part of, and is not incorporated into, this report.
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