What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-10 compared with 2022-05-10 · 210 added, 139 removed, 66 unchanged (84% of the section changed)

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

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

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.

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 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

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.

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.

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.

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.

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.

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.

These segments reflect the way the

Company evaluates its 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.

Financial Statements, Note 9 of the notes

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

Receivables Portfolio Overview

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

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

30, 2022 (in thousands, except rate, share and per share data).

Royalty Purchases

Licensed Technology

Oncology treatment

12 unchanged sentences

Women’s health

Revenue Recognized

Acer Therapeutics, Inc.

Acerus Pharmaceuticals

Acerus Pharmaceuticals Corporation

B&D Dental Corporation

1 unchanged sentence

Biotricity, Inc.

Epica International,

eTon Pharmaceuticals,

Epica International, Inc.

eTon Pharmaceuticals, Inc.

Flowonix Medical, Inc.

1 unchanged sentence

MolecuLight, Inc.

Sincerus Pharmaceuticals,

Sincerus Pharmaceuticals, Inc.

Trio Healthcare Ltd.

Method Investment

Regeneration Therapeutics, Inc.

Royalty Financing (Marketable Investment)

International, Inc.

Pharmaceuticals, Inc.

to Purchase Stock

Revenue Recognized

Cost Method Investment

Tissue Regeneration Therapeutics, Inc.

Umbilical cord banking

Income (Loss) Recognized

Marketable Investments

Secured Royalty Financing (Marketable Investment)

Bioventus, Inc.

Epica International, Inc.

Sincerus Pharmaceuticals, Inc.

Income (Loss) Recognized

Warrants to Purchase Stock

Exercise Price

per Share ($)

Acer Therapeutics, Inc.

Acerus Pharmaceuticals

Acerus Pharmaceuticals Corporation

BIOLASE, Inc.

Biotricity, Inc.

CeloNova BioSciences,

DxTerity Diagnostics,

Epica International,

eTon Pharmaceuticals,

EyePoint Pharmaceuticals,

CeloNova BioSciences, Inc.

DxTerity Diagnostics, Inc.

Epica International, Inc.

eTon Pharmaceuticals, Inc.

EyePoint Pharmaceuticals, Inc.

Flowonix Medical, Inc.

Harrow Health, Inc.

Total Revenue

Total finance receivables

3 unchanged sentences

Total assets/revenues

was paid off during the third quarter of 2022.

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

quarterly net sales and royalties.

SWK continues to receive insignificant royalties on international sales.

considered impaired.

on nonaccrual.

was paid off during the six months ended June 30, 2022.

Flowonix is evaluating strategic alternatives for the business.

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

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.

Accounting Policies and Estimates

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.

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 six months ended June 30, 2022, compared to those discussed

in our Annual Report.

Recent Accounting Pronouncements

2 unchanged sentences

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

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

Three Months Ended

Comparison of the

Three Months Ended June 30, 2022 and 2021 ( in millions )

Interest expense

Pharmaceutical manufacturing, research and development expense

Change in fair value of acquisition-related contingent consideration

Depreciation and amortization expense

2 unchanged sentences

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

decreased to $6.9 million for the three months ended June 30, 2022 from $22.3 million for the three months ended June 30, 2021.

million decrease in revenue consisted of a $10.3 million decrease in Pharmaceutical Development segment revenue and a $5.0 million decrease

in Finance Receivables segment revenue.

The decrease in Pharmaceutical Development segment revenue included $10.0 million of milestone

revenue related to Enteris’ License Agreement with Cara received during the three months ended June 30, 2021, which did not recur

during the three months ended June 30, 2022.

The $5.0 million decrease in Finance Receivables segment revenues primarily consists of

a $3.1 million decrease in interest and fees earned on finance receivables that were either paid off or paid down since the second quarter

of 2021 and a $4.0 million decrease in net royalty income primarily due to the achievement of return premiums that caused a step down

in royalty rates.

The decrease in revenue was partially offset by a $2.1 million increase in interest and fees earned due to funding

new and existing loans.

Interest Expense

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.

Interest expense for both the three months ended June 30, 2022 and 2021 was $0.1 million, respectively.

Pharmaceutical

1 unchanged sentence

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.

and Amortization

$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.

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 $3.2 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,

manufacturing, research and development expense for both the three months ended June 30, 2022 and 2021 was $1.5 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.

and Capital Resources

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

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.

Pharmaceutical manufacturing, research and development expense primarily consists of manufacturing materials for

our pipeline projects and clinical trials.

and Amortization

$0.2 million decrease in depreciation and amortization expense for the three months ended June 30, 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.

General 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 decreased to $3.0 million for the

three months ended June 30, 2022 from $3.4 million for the three months ended June 30, 2021.

The $0.4 million decrease was primarily

due to a $0.4 million decrease in corporate strategic planning and related board fees and a $0.2 million decrease in the performance-based

bonus accrual.

The decrease was partially offset by a $0.2 million increase in legal fees related to corporate governance.

Other (Expense)

expense, net for three months ended June 30, 2022 reflected a net aggregate fair market value loss of $1.0 million on our warrant derivatives

and Bioventus common stock.

Other income, net for three months ended June 30, 2021 reflected a net fair market value gain of $0.6 million

on our warrant derivatives and a net fair market value gain of $0.3 million on our Misonix common stock, which was tendered in October

2021 in exchange for $1.9 million in cash and 71,361 shares of Bioventus common stock.

Income Tax Expense

the three months ended June 30, 2022 and 2021, we recognized income tax expense of $0.2 million and $3.5 million, respectively.

The $3.3 million decrease in income tax expense is a result of lower taxable income when compared to the same period of 2021.

Comparison of the

Six Months Ended June 30, 2022 and 2021 ( in millions )

Six Months Ended June 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

Other (expense) income, net

Income tax expense

decreased to $18.1 million for the six months ended June 30, 2022 from $31.6 million for the six months ended June 30, 2021.

million decrease in revenue consisted of a $10.3 million decrease in Pharmaceutical Development segment revenue and a $3.2 million decrease

in Finance Receivables segment revenue.

The decrease in Pharmaceutical Development segment revenue included $10.0 million of milestone

revenue related to Enteris’ License Agreement with Cara received during the six months ended June 30, 2021, which did not recur

during the six months ended June 30, 2022.

The $3.2 million decrease in Finance Receivables segment revenues primarily consists of a

$5.0 million decrease in interest and fees earned on finance receivables that were either paid off or paid down since the second quarter

of 2021 and a $3.8 million decrease in net royalty income primarily due to the achievement of return premiums that caused a step down

in royalty rates.

The decrease in revenue was partially offset by a $3.4 million increase in interest and fees earned due to funding

new and existing loans and a $2.4 million increase in interest and fees earned on the payoff of a term loan during the six months ended

June 30, 2022.

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 six months ended June 30, 2022 and 2021 was $0.2 million, respectively.

Pharmaceutical

Manufacturing, Research and Development Expense

Pharmaceutical

manufacturing, research and development expense increased from $3.1 million for the six months ended June 30, 2021 to $3.4 million for

the six months ended June 30, 2022.

The $0.3 million increase was primarily due to an increase in manufacturing materials for pipeline

projects and clinical trials.

and Amortization

$1.2 million decrease in depreciation and amortization expense for the six months ended June 30, 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.

General 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 for both the six months ended June 30,

2022 and 2021 was $6.2 million.

Other (Expense)

expense, net for six months ended June 30, 2022 reflected a net aggregate fair market value loss of $1.7 million on our warrant

derivatives and Bioventus common stock.

Other income, net for six months ended June 30, 2021 reflected a net fair market value gain of

$0.9 million on our warrant derivatives and a net fair market value gain of $1.2 million on our Misonix common stock, which was tendered

in October 2021 in exchange for $1.9 million in cash and 71,361 shares of Bioventus common stock.

Income Tax Expense

the six months ended June 30, 2022 and 2021, we recognized income tax expense of $1.3 million and $4.5 million, respectively.

The $3.2 million decrease in income tax expense is a result of lower taxable income when compared to the same period of 2021.

Liquidity and Capital

of June 30, 2022, we had $55.1 million in cash and cash equivalents, compared to $42.9 million in cash and cash equivalents as of December

The primary driver of the $12.3 million increase in our cash balance was $49.0 million of interest, fees, principal and royalty

payments received on our finance receivables and $0.6 million of customer payments generated by our Pharmaceutical Development segment.

The increase in our cash balance was partially offset by $25.0 million of investment funding, net of deferred fees and origination expenses;

$5.9 million of accounts payable, including $1.1 million for Enteris’s internal pipeline projects;

payroll and benefits expense of $6.3

million and $0.1 million of credit facility interest and other expenses.

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:

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;

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.

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;

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

development, manufacturing, and licensing activities utilizing the Peptelligence® platform;

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

science sector.

of June 30, 2022, our finance receivables portfolio contains $174.9 million of finance receivables, $0.6 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.

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

We believe we are well positioned to benefit should market interest rates rise in the future.

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.

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.

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.

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, we cannot predict this with certainty.

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.

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

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

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 options

to either extend our current credit facility or obtain a new credit facility.

As of June 30, 2022, $22.0 million was available for borrowing

under the credit facility.

Sheet Arrangements

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.

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.

Off-Balance Sheet

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

Such transactions are used primarily to manage partner companies’ requests for funding and take the form of loan commitments

and lines of credit.

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.

Financial Statements, Note

6 of the notes to the unaudited condensed consolidated financial statements.

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