SWK Holdings Corp 10-Q

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, 2021 (“Annual Report”), as well as our unaudited condensed consolidated financial statements and the accompanying notes included in this report. Environmental, Social and Governance As overseers of risk and stewards of long-term enterprise value, our management and Board play a vital role in assessing, identifying and understanding the potential impact and related risks of environmental, social and governance (“ESG”) issues on the organization’s operating model. Our Board and management are committed to identifying those ESG issues most likely to impact business operations and growth by focusing our investment strategy around supporting innovative, growth-oriented companies in the life sciences industry that maximize both social and investment value. Among the ESG issues we support within the Company, we are committed to recruiting, motivating and developing a diversity of talent. We promote and foster a company culture where every voice is welcome, heard and respected, regardless of age, gender, race, religion, 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. The nature of our business supports environmental sustainability by being mindful of products we and our partners use in our businesses. We promote recycling to reduce landfill, and we offer our employees a hybrid work model, which allows employees the flexibility to work remotely, thereby reducing the carbon output from commuting in cars or buses. 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 9 of the notes to the unaudited condensed consolidated financial statements for further information regarding segment information. 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, 2022 (in thousands, except rate, share and per share data). Royalty Purchases Licensed Technology Footnote Funded Amount GAAP Balance Revenue Recognized Beleodaq® Oncology treatment $ 7,600 $ 4,421 $ 302 Besivance® Ophthalmic antibiotic (1) 6,000 — 10 Best ABT, Inc. Oncology diagnosis (2), (3) 5,784 3,217 — Coflex®/Kybella®/Zalviso® Spinal stenosis/submental fullness 4,350 4,068 125 Cambia® NSAID migraine treatment (2) 8,500 1,834 (15 ) Forfivo XL® Depressive disorder treatment 6,000 1,434 448 Ideal Implant, Inc. Aesthetics 3,000 3,214 134 Iluvien® Diabetic macular edema 16,501 15,998 585 Narcan® Opioid overdose treatment 17,500 505 1,424 Ostomy Products Royalty Ostomy products 3,900 4,026 163 Veru, Inc. Women’s health 10,000 4,374 288 18 Term Loans Type Footnote Maturity Date Principal GAAP Balance Rate Revenue Recognized 4Web, Inc. First lien 06/03/23 $ 26,931 $ 28,788 15.3 % $ 1,056 AOTI, Inc. First lien 03/21/27 12,000 11,884 11.0 % 39 Acer Therapeutics, Inc. First lien 03/04/24 6,500 6,322 12.0 % 130 Acerus Pharmaceuticals Corporation First lien (4) 10/11/23 — — 12.0 % 538 B&D Dental Corporation First lien (4) 12/10/18 — — 14.0 % 2,401 BIOLASE, Inc. First lien 05/31/25 14,300 14,547 10.3 % 445 Biotricity, Inc. First lien 12/26/26 12,000 11,775 11.5 % 386 Epica International, Inc. First lien 07/23/24 12,000 12,220 9.5 % 353 eTon Pharmaceuticals, Inc. First lien 11/13/24 6,615 6,580 12.0 % 243 Flowonix Medical, Inc. First lien (3) 12/23/25 10,428 9,789 14.0 % — Keystone Dental Group First lien (5) 08/01/23 15,000 15,503 11.5 % 448 MolecuLight, Inc. First lien 12/29/26 10,000 9,923 12.5 % 274 Sincerus Pharmaceuticals, Inc. First lien 03/19/26 11,000 11,106 13.0 % 412 Trio Healthcare Ltd. First lien 07/01/26 6,800 6,750 12.5 % 226 Cost Method Investment Licensed Technology Footnote Maturity Date Principal GAAP Balance Rate Revenue Recognized Tissue Regeneration Therapeutics, Inc. (“TRT”) Umbilical cord banking (3) N/A $ 3,491 $ 3,491 N/A $ — Marketable Investments Number of Shares Footnote Funded Amount GAAP Balance Income (Loss) Recognized Secured Royalty Financing (Marketable Investment) N/A (3) $ 3,000 $ 106 $ — Bioventus, Inc. Common Stock 71,361 N/A 1,006 (28 ) Epica International, Inc. 25,000 N/A — — Sincerus Pharmaceuticals, Inc. 26,575 N/A — — Warrants to Purchase Stock Number of Shares Footnote Exercise Price per Share ($) GAAP Balance Income (Loss) Recognized 4Web, Inc. TBD TBD $ — $ — AOTI, Inc. 92,490 9.56 — — Acer Therapeutics, Inc. 150,000 2.46 156 4 Acerus Pharmaceuticals Corporation 7,764,004 0.053 CAD 230 129 BIOLASE, Inc. 550,977 0.39 130 (54 ) Biotricity, Inc. 57,536 6.26 76 (100 ) CeloNova BioSciences, Inc. TBD (1) 0.01 — — DxTerity Diagnostics, Inc. 2,019,231 (1) 2.08 — — Epica International, Inc. TBD TBD — — eTon Pharmaceuticals, Inc. 51,239 5.86 98 3 eTon Pharmaceuticals, Inc. 18,141 6.62 35 1 EyePoint Pharmaceuticals, Inc. 40,910 11.00 271 (6 ) EyePoint Pharmaceuticals, Inc. 7,773 19.30 40 (1 ) Flowonix Medical, Inc. 155,561 (3) 3.86 — — Harrow Health, Inc. 373,847 (1) 2.08 1,842 (669 ) 19 Assets Revenue Total finance receivables $ 188,278 $ 10,415 Total marketable investments 1,112 N/A Cost method investment 3,491 N/A Fair value of warrant assets 2,878 N/A Total assets/revenues $ 195,759 $ 10,415 (1) Loan/royalty was paid off during the year ended December 31, 2021. (2) Investment is considered impaired. (3) Investment is on nonaccrual. (4) The loan/royalty was paid off during the first quarter of 2022. (5) An amendment was signed in February 2022 to extend the maturity date from November 2022 to August 2023. 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. 20 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, 2022, 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, 2022 and 2021 ( in millions ) Three Months Ended March 31, 2022 2021 Change Revenues $ 11.1 $ 9.4 $ 1.7 Interest expense 0.1 0.1 — Pharmaceutical manufacturing, research and development expense 1.9 1.5 0.4 Depreciation and amortization expense 0.7 1.7 (1.0 ) General and administrative 3.2 2.9 0.3 Other (expense) income, net (0.7 ) 1.2 (1.9 ) Income tax expense 1.1 0.9 0.2 Net income 3.5 3.4 0.1 Revenues Revenues 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 loans. 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 year. 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, 2022 and 2021 was $0.1 million, respectively. Pharmaceutical Manufacturing, Research and Development Expense Pharmaceutical 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 March 31, 2022. The $0.4 million increase was primarily due to an increase in manufacturing materials for pipeline projects and clinical trials. Depreciation and Amortization The $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 future cash flows of the intangible assets. 21 General and Administrative General 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 $3.2 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. Other (Expense) Income, Net Other (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. Income Tax Expense During the three months ended March 31, 2022 and 2021, we recognized income tax expense of $1.1 million and $0.9 million, respectively. 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. Liquidity and Capital Resources As 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. 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, 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. In the aggregate, we expect these assets to generate positive cash flows in 2022. However, the COVID-19 pandemic has created substantial uncertainty in the global markets and economy; therefore, we will continue to monitor the short and long-term impact this may have on our finance receivables portfolio. In addition, the majority of our finance receivables portfolio are debt instruments that carry floating interest rates with a LIBOR-based interest rate floor. Changes in interest rates, including LIBOR rates, may affect the interest income for debt instruments with floating rates. We believe we are well positioned to benefit should market interest rates rise in the future. We 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. 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. 22 We entered into a $20.0 million revolving credit facility in June 2018. The credit facility was amended on September 27, 2021 to extend the termination date to September 30, 2022 and to increase the credit facility commitment to $22.0 million. We continue to explore other options with respect to a new credit facility. As of March 31, 2022, $22.0 million was available for borrowing under the 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 6 of the notes to the unaudited condensed consolidated financial statements. 23