What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-12 · 103 added, 249 removed, 102 unchanged (78% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION

AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement

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financial statements and the accompanying notes included in this report.

Considerations

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.

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.

Plan to Focus on Core Specialty Finance Business

May 17, 2021, we issued a press release announcing the formation by our Board of Directors (“Board”) of a Strategic

Review Committee (“SRC”) to identify, review and explore strategic alternatives with a view to enhancing stockholder

With its advisors, the SRC completed a comprehensive review of strategic alternatives for each segment of the Company.

On November 1, 2021, we issued a press release announcing that the Board approved a streamlined go-forward business plan and has

begun implementing several new measures in light of our current governance structure.

The goal of these measures is to improve

our strategic focus, growth profile, and capital allocation.

The Board believes these measures will allow us to generate long-term

value for stockholders.

Environmental,

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sexual orientation, physical conditions, cultural background or country of origin.

Our commitment to ESG initiatives is an endeavor

both the Board and management undertake for the general betterment of those both inside and outside the Company.

nature of our business supports environmental sustainability by being mindful of products we and our partners use in our businesses.

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9 of the notes to the unaudited condensed consolidated financial statements for further information regarding segment information.

Receivables Segment

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.

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.

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

August 26, 2019, we commenced our Pharmaceutical Development segment with the acquisition of Enteris, which became our wholly-owned

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.

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.

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.

Receivables Portfolio Overview

table below provides an overview of our outstanding finance receivables transactions as of, and for the three and nine months

ended September 30, 2021 (in thousands, except rate, share and per share data).

Purchases and Other Financings

table below provides an overview of our outstanding finance receivables transactions as of, and for the three months ended March

31, 2022 (in thousands, except rate, share and per share data).

Royalty Purchases

Licensed Technology

Oncology treatment

Ophthalmic antibiotic

Best ABT, Inc.

Oncology diagnosis

Coflex®/Kybella®/Zalviso®

stenosis/Submental fullness

migraine treatment

disorder treatment

Implant, Inc.

macular edema

overdose treatment

products royalty

Spinal stenosis/submental fullness

NSAID migraine treatment

Depressive disorder treatment

Ideal Implant, Inc.

Diabetic macular edema

Opioid overdose treatment

Ostomy Products Royalty

Ostomy products

Women’s health

Acer Therapeutics, Inc.

Acerus Pharmaceuticals

B&D Dental Corporation

BIOLASE, Inc.

Biotricity, Inc.

Epica International,

eTon Pharmaceuticals,

Flowonix Medical, Inc.

Keystone Dental Group

MolecuLight, Inc.

Sincerus Pharmaceuticals,

Trio Healthcare Ltd.

Method Investment

Regeneration Therapeutics, Inc.

Royalty Financing (Marketable Investment)

Regeneration Therapeutics

Pharmaceuticals, Inc.

Dental Corporation

BioSciences, Inc.

Diagnostics, Inc.

International, Inc.

Pharmaceuticals, Inc.

Medical, Inc.

Pharmaceuticals, Inc.

Healthcare Ltd.

in Fair Value

Misonix, Inc.

Sincerus Pharmaceuticals, Inc.

Exercise Price

in Fair Value

to Purchase Stock

Pharmaceuticals, Inc.

Dental Corporation

BioSciences, Inc.

Diagnostics, Inc.

International, Inc.

Pharmaceuticals, Inc.

Medical, Inc.

Income Recognized

per Share ($)

Acer Therapeutics, Inc.

Acerus Pharmaceuticals

BIOLASE, Inc.

Biotricity, Inc.

CeloNova BioSciences,

DxTerity Diagnostics,

Epica International,

eTon Pharmaceuticals,

EyePoint Pharmaceuticals,

Flowonix Medical, Inc.

Harrow Health, Inc.

Total finance receivables

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Total assets/revenues

considered impaired.

on nonaccrual.

loan/royalty was paid off during 2021.

return premium pursuant to the credit agreement was reached, and the residual royalty agreement commenced during the third

is evaluating strategic alternatives for the business.

The first lien loan is currently in default.

date was amended to December 31, 2021 in July 2021.

date was amended to November 30, 2021 in June 2021.

October 29, 2021, Misonix was acquired by Bioventus.

Upon closing of the transaction, the Misonix term loan was paid off.

We also tendered our Misonix common stock and received $1.9 million in cash and 71,361 shares of Bioventus common stock.

loan was paid off on October 22, 2021.

was paid off during the year ended December 31, 2021.

is considered impaired.

is on nonaccrual.

loan/royalty was paid off during the first quarter of 2022.

amendment was signed in February 2022 to extend the maturity date from November 2022 to August 2023.

otherwise specified, our senior secured debt assets generally are repaid by a revenue interest that is charged on a company’s

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We believe there have been no new critical accounting

policies or material changes to our existing critical accounting policies and estimates during the nine months ended September

policies or material changes to our existing critical accounting policies and estimates during the three months ended March 31,

2022, compared to those discussed in our Annual Report.

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statements for a listing of recent accounting pronouncements and their potential impact to our consolidated financial statements.

of the Three Months Ended September 30, 2021 and 2020 ( in millions )

of the Three Months Ended March 31, 2022 and 2021 ( in millions )

Three Months Ended

September 30,

Interest expense

Pharmaceutical manufacturing, research and development expense

Change in fair value of acquisition-related contingent consideration

Depreciation and amortization expense

General and administrative expense

Other income (expense), net

Income tax expense (benefit)

Consolidated net income

decreased to $9.6 million for the three months ended September 30, 2021 from $10.6 million for the three months ended September

The decrease was primarily the result of a $2.6 million decrease in revenues from our Pharmaceutical Development segment,

partially offset by a $1.5 million increase in interest and fees earned on our finance receivables.

The decrease in Pharmaceutical

Development segment revenue was primarily the result of $2.5 million of non-recurring milestone revenue received in 2020 related

to Enteris’ license agreement with Cara.

The $1.5 million increase in revenue attributable to our Finance Receivables segment

primarily consists of a $1.4 million net increase in royalty income and a $1.1 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 $1.0 million

decrease in interest and fees earned on finance receivables that were paid off or paid down since the third quarter of 2020.

General and administrative

Other (expense) income, net

Income tax expense

increased to $11.1 million for the three months ended March 31, 2022 from $9.4 million for the three months ended March 31, 2021.

The $1.7 million increase in revenues primarily consists of $2.6 million of interest and fees earned from the payoff of two term

loans during the first quarter of 2022 and a $1.9 million increase in interest and fees earned due to funding new and existing

The increase in revenue was partially offset by a $2.0 million decrease in interest and fees earned on finance receivables

that were paid off in 2021 and a $1.0 million net decrease in royalty revenue when compared to the same period of the previous

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 September 30, 2021 and 2020 was $0.1 million, respectively.

Interest expense for both the three months ended March 31, 2022 and 2021 was $0.1 million, respectively.

Pharmaceutical

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manufacturing, research and development expense increased from $1.5 million for the three months ended 2021 to $1.9 million

for the three months ended September 30, 2021.

The $1.3 million increase was primarily due to an increase in manufacturing

materials for pipeline projects and clinical trials.

in Fair Value of Acquisition-Related Contingent Consideration

did not recognize any change in fair value of acquisition-related contingent consideration during the three months ended September

30, 2021, and a $0.2 million remeasurement adjustment was made during the three months ended September 30, 2020.

to Part I, Item I, Financial Statements , Note 7 of the notes to the unaudited condensed consolidated financial statements

for further information regarding acquisition-related contingent consideration.

and Amortization

$1.9 million decrease in depreciation and amortization expense for the three months ended September 30, 2021 primarily consists

of a decrease in amortization expense related to the intangible assets of Enteris.

Amortization expense is aligned with the expected

future cash flows of the intangible assets.

and Administrative

and administrative expenses consist primarily of compensation, stock-based compensation and related costs for management, staff

and Board, legal and audit expenses, and corporate governance expenses.

General and administrative expenses increased to $3.6 million

for the three months ended September 30, 2021 from $2.5 million for the three months ended 2020.

The $1.1 million increase

was primarily due to a $1.0 million increase in expenses incurred in connection with the SRC’s efforts to identify, review and

explore strategic alternatives for the Company;

such expenses primarily consist of legal and financial consulting fees, as well

as Board compensation.

Income (expense), Net

income (expense), net for three months ended September 30, 2021 reflected a net fair market value loss of $0.2 million on

our warrant derivatives and a net fair market value gain of $0.3 million on our Misonix common stock.

Other income (expense),

net for the three months ended September 30, 2020 reflected a net fair market value gain of $0.1 million on our warrant derivatives

and a net fair market value loss of $0.2 million on our Misonix common stock.

Tax Expense (Benefit)

the three months ended September 30, 2021 and 2020, we recognized income tax expense of $0.5 million and income tax benefit

of $0.5 million, respectively.

The $1.0 million increase in income tax expense is a result of higher taxable income for the

three months ended September 30, 2021 when compared to the same period of the prior year.

of the Nine Months Ended September 30, 2021 and 2020 ( in millions )

Nine Months Ended

September 30,

Provision for credit losses and impairment expenses

Interest expense

Pharmaceutical manufacturing, research and development expense

Change in fair value of acquisition-related contingent consideration

Depreciation and amortization expense

General and administrative expense

Other income (expense), net

Income tax expense (benefit)

Consolidated net income

generated revenues of $41.2 million and $25.8 million for the nine months ended September 30, 2021 and 2020, respectively.

The $15.4 million increase consisted primarily of a $6.9 million increase in interest and fees earned on our finance receivables

and a $8.2 million increase in revenues from our Pharmaceutical Development segment.

The increase in Pharmaceutical Development

segment revenue included milestone revenue related to Enteris’ license agreement with Cara.

The $6.9 million increase in revenue

attributable to our Finance Receivables segment was the result of a $5.1 million net increase in royalty income and a $2.8 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 $1.0 million decrease in interest and fees earned on finance receivables that were paid off or paid

down since the third quarter of 2020.

for Credit Losses and Impairment Expense

did not recognize any credit loss provision or impairment expense during the nine months ended September 30, 2021.

We recognized

impairment expense of $0.2 million on our available-for-sale debt security during the nine months ended September 30, 2020.

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 the nine months ended September 30, 2021 and 2020 was $0.3 million and $0.4 million,

respectively.

Pharmaceutical

Manufacturing, Research and Development Expense

Pharmaceutical

manufacturing, research and development expense increased from $3.3 million for the nine months ended September 30, 2020

to $5.6 million for nine months ended September 30, 2021.

The $2.3 million increase was primarily due to an increase

in manufacturing materials for pipeline projects and clinical trials.

in Fair Value of Acquisition-Related Contingent Consideration

recognized a $0.1 million change in fair value of acquisition-related contingent consideration during the nine months ended September

30, 2021, and a $2.0 million remeasurement adjustment was made during the three months ended September 30, 2020.

to Part I, Item I, Financial Statements , Note 7 of the notes to the unaudited condensed consolidated financial statements

for further information regarding acquisition-related contingent consideration.

for the three months ended March 31, 2022.

The $0.4 million increase was primarily due to an increase in manufacturing materials

for pipeline projects and clinical trials.

and Amortization

$6.3 million decrease in depreciation and amortization expense for the nine months ended September 30, 2021 primarily consists

of a decrease in amortization expense related to the intangible assets of Enteris.

$1.0 million decrease in depreciation and amortization expense for the three months ended March 31, 2022 primarily consists of

a decrease in amortization expense related to the intangible assets of Enteris.

Amortization expense is aligned with the expected

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General and administrative expenses increased to $3.2 million

for the nine months ended September 30, 2021 from $8.2 million for the nine months ended September 30, 2020.

The $1.6 million

increase was primarily due to a $1.4 million increase in expenses incurred in connection with the SRC’s efforts to identify, review

and explore strategic alternatives for the Company;

such expenses primarily consist of legal and financial consulting fees, as

well as Board compensation.

The increase also included a $0.2 million increase in salaries and benefits expense, as well as a

$0.3 million increase in overall office, insurance and rent expense.

The increase was partially offset by a $0.2 million decrease

in other professional fees.

Income (Expense), Net

income, net for nine months ended September 30, 2021 reflected a net fair market value gain of $0.7 million on our warrant

derivatives and a net fair market value gain of $1.6 million on our Misonix common stock.

Other expense, net for the nine

months ended September 30, 2020 reflected a net fair market value loss of $1.2 million on our warrant derivatives and a net

fair market value loss of $0.7 million on our Misonix common stock.

the nine months ended September 30, 2021 and 2020, we recognized income tax expense of $5.0 million and tax benefit of $0.2 million,

for the three months ended March 31, 2022 from $2.9 million for the three months ended 2021.

The $0.3 million increase was

primarily due to a $0.1 million increase in general office and rent expense, as well as a $0.2 million increase in accounting,

audit and legal professional fees.

(Expense) Income, Net

(expense) income, net for three months ended March 31, 2022 reflected a net aggregate fair market value loss of $0.7 million

on our warrant derivatives and Bioventus common stock.

Other income (expense), net for the 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, which was tendered in 2021 in exchange for $1.9 million in cash and 71,361 shares of Bioventus common stock.

the three months ended March 31, 2022 and 2021, we recognized income tax expense of $1.1 million and $0.9 million,

respectively.

The $5.2 million increase in income tax expense is a result of higher taxable income for the nine months ended September

30, 2021 when compared to the same period of the prior year.

The $0.2 million increase in income tax expense is a result of slightly higher taxable income and a higher effective

tax rate for the three months ended March 31, 2022 when compared to the same period of 2021.

and Capital Resources

of September 30, 2021, we had $18.6 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 $15.6 million increase in our cash balance was $58.3 million of interest, fees,

principal and royalty payments received on our finance receivables and a net $5.0 million of payments generated by our Pharmaceutical

Development segment (the net $5.0 million includes a $10.0 million payment related to the completion of a milestone under the

License Agreement less $6.1 million paid to the seller of Enteris, pursuant to the provisions of the merger agreement).

was partially offset by $19.8 million of investment funding, net of deferred fees and origination expenses;

$16.0 million of accounts

payable, payroll and benefits expense, including $3.2 million for Enteris’ internal pipeline projects;

and $11.8 million

of net borrowings and repayments on our credit facility.

to September 30, 2021, we received $35.7 million of interest, fees and principal payments on our finance receivables, including

$32.1 million for the payoff of two term loans (please refer to Part I.

Financial Information, Item 1.

Financial Statements, Note

11 of the notes to the unaudited condensed consolidated financial statements for further details).

As of November 8, 2021, we

had $56.8 million in cash and cash equivalents.

of March 31, 2022, we had $41.4 million in cash and cash equivalents, compared to $42.9 million in cash and cash equivalents as

of December 31, 2021.

The primary driver of the $1.5 million decrease in our cash balance was $22.4 million of investment funding,

net of deferred fees and origination expenses;

$2.8 million of accounts payable, including $0.5 million for Enteris’s internal

pipeline projects;

payroll and benefits expense of $2.6 million and $0.1 million of credit facility interest and other expenses.

The decrease was partially offset by $26.0 million of interest, fees, principal and royalty payments received on our finance receivables

and $0.4 million of customer payments generated by our Pharmaceutical Development segment.

ability to generate cash in the future depends primarily upon our success in implementing our Finance Receivables business model

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We generate income primarily from four sources:

Primarily owning or financing

through debt investments, royalties generated by the sales of life science products and related intellectual property;

Receiving interest and other

income by advancing capital in the form of secured debt to companies in the life science sector;

Pharmaceutical development,

manufacturing, and licensing activities utilizing the Peptelligence® platform;

To a lesser extent, realizing

capital appreciation from equity-related investments in the life science sector.

of September 30, 2021, our finance receivables portfolio contains $196.1 million of finance receivables, $3.0 million of marketable

owning or financing through debt investments, royalties generated by the sales of life

science products and related intellectual property;

interest and other income by advancing capital in the form of secured debt to companies

in the life science sector;

Pharmaceutical

development, manufacturing, and licensing activities utilizing the Peptelligence®

a lesser extent, realizing capital appreciation from equity-related investments in the

life science sector.

of March 31, 2022, our finance receivables portfolio contains $188.3 million of finance receivables, $1.1 million of marketable

investments, and $3.5 million related to our cost method investment.

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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.

we expect in the aggregate that the Company will generate positive cash flow in excess of our expenses, given the abrupt decline

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to explore other options with respect to a new credit facility.

As of September 30, 2021, approximately $22.0 million was available

for borrowing under the credit facility.

As of March 31, 2022, $22.0 million was available for borrowing

under the credit facility.

Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis