What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-09 · 160 added, 254 removed, 60 unchanged (87% 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 (“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.

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

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.

We have organized our operations

into two segments:

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, 2022 (“Annual Report”), as well as our unaudited condensed consolidated

financial statements and the accompanying notes included in this report.

have organized our operations into two segments:

Finance Receivables and Pharmaceutical Development.

These segments reflect the way the Company evaluates its 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.

Finance Receivables Portfolio Overview

The table below provides

an overview of our outstanding finance receivables transactions as of, and for the three and nine months ended September 30, 2022 (in

thousands, except rate, share and per share data).

Revenue Recognized

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

31, 2023 (in thousands, except rate, share and per share data).

Royalty Purchases

Licensed Technology

Funded Amount

Oncology treatment

Revenue (Loss)

Ophthalmic antibiotic

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NSAID migraine treatment

Japanese women’s health/cystic fibrosis

Depressive disorder treatment

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Diabetic macular edema

Opioid overdose treatment

Ostomy Products Royalty

Ostomy products

Women’s health

Revenue Recognized

Maturity Date

Acer Therapeutics, Inc.

Acerus Pharmaceuticals Corporation

Aziyo Biologics, Inc.

B&D Dental Corporation

BIOLASE, Inc.

3 unchanged sentences

Flowonix Medical, Inc.

Keystone Dental Group

MedMinder Systems, Inc.

MolecuLight, Inc.

Sincerus Pharmaceuticals, Inc.

NeoLight, LLC

Trio Healthcare Ltd.

Revenue Recognized

Cost Method Investment

Licensed Technology

Maturity Date

Tissue Regeneration Therapeutics, Inc.

Umbilical cord banking

Income (Loss) Recognized

Marketable Investments

Number of Shares

Funded Amount

Secured Royalty Financing (Marketable Investment)

Bioventus, Inc.

Epica International, Inc.

Sincerus Pharmaceuticals, Inc.

Income (Loss) Recognized

Warrants to Purchase Stock

Number of Shares

Exercise Price per Share ($)

Exercise Price

per Share ($)

Income (Loss)

Acer Therapeutics, Inc.

Acerus Pharmaceuticals Corporation

Aziyo Biologics

Aziyo Biologics, Inc.

BIOLASE, Inc.

8 unchanged sentences

Flowonix Medical, Inc.

Harrow Health, Inc.

MedMinder Systems, Inc.

MolecuLight, Inc.

Total Revenue

Total finance receivables

Total finance receivables, gross

Total marketable investments

Cost method investment

Fair value of warrant assets

Total assets/revenues

Royalty was paid off during the third quarter of 2022.

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

continues to receive insignificant royalties on international sales.

Investment considered impaired.

Investment on nonaccrual.

Loan was paid off during the nine months ended September 30, 2022.

Flowonix is evaluating strategic alternatives for the business.

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

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

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 nine months ended September 30, 2022, compared to those discussed in our Annual

Total assets, gross/revenues

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

SWK continues to receive insignificant royalties on international

considered partially impaired.

on nonaccrual.

is evaluating strategic alternatives for the business.

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.

Environmental,

Social and Governance

overseers of risk and stewards of long-term enterprise value, our management and Board of Directors (“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

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.

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.

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,

2023, compared to those discussed in our Annual Report.

Recent Accounting Pronouncements

Refer to Part I.

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 September

30, 2022 and 2021 ( in millions )

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.

of the three months ended March 31, 2023 and 2022 ( in millions )

Three Months Ended

September 30,

Interest expense

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General and administrative

Other income, net

Income tax expense

Revenues increased to $13.6

million for the three months ended September 30, 2022 from $9.6 million for the three months ended September 30, 2021.

The $4.0 million

increase in revenue was due to $5.0 million of milestone revenue related to Enteris’ License Agreement with Cara received during

the three months ended September 30, 2022, which did not occur during the three months ended September 30, 2021.

The increase in revenue

was partially offset by a $0.9 million net decrease in Finance Receivables segment revenues.

The decrease in Finance Receivables segment

revenue was due to a $1.3 million net decrease in royalty income primarily due to the achievement of return premiums that caused a step

down in royalty rates, which was partially offset by a net increase of $0.4 million in interest and fees earned on finance receivables.

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

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

Pharmaceutical Manufacturing, Research

and Development Expense

Pharmaceutical manufacturing,

research and development expense decreased from $2.5 million for the three months ended September 30, 2021 to $1.8 million for

the three months ended September 30, 2022.

The $0.7 million decrease was primarily due to a decrease in manufacturing

materials for pipeline projects and clinical trials.

Depreciation and Amortization

Other expense, net

Income tax (benefit) expense

decreased to $9.4 million for the three months ended March 31, 2023 from $11.1 million for the three months ended March 31, 2022.

The $1.7 million decrease in revenue for the three months ended March 31, 2023 consisted of a $1.1 million decrease in Finance

Receivables segment revenue and a $0.6 million decrease in Pharmaceutical Development segment revenue.

The $1.1 million decrease

in depreciation and amortization expense for the three months ended September 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

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

in Finance Receivables segment revenue was primarily due to a $5.3 million decrease in interest, fees and royalties earned on

finance receivables that were paid off in 2022, which was partially offset by a $4.4 million increase in interest and fees earned

due to funding new and existing loans.

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 increased to $0.2 million for three months ended March 31, 2023 from $0.1 million for

the three months ended March 31, 2022.

This slight increase in interest expense was due to a higher average outstanding balance

on our credit facility during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

Pharmaceutical

Manufacturing, Research and Development Expense

Pharmaceutical

manufacturing, research and development expense decreased from $1.9 million for the three months ended March 31, 2022 to

$0.7 million for the three months ended March 31, 2023.

The $1.2 million decrease was primarily due to a decrease in manufacturing

activity related to our pipeline projects and clinical trials.

and Amortization

$0.1 million decrease in depreciation and amortization expense for the three months ended March 31, 2023 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

legal and audit expenses;

and corporate governance expenses.

General and administrative expenses increased to $4.3 million for the three months ended

September 30, 2022 from $3.6 million for the three months ended September 30, 2021.

The $0.7 million increase was primarily due to

a $1.3 million increase in salaries and benefits expense, of which $1.1 million is related to the former CEO’s severance pay pursuant

to the Separation and Release Agreement dated August 31, 2022, and a $0.2 million increase in salaries and benefits expense due to an

increase in personnel and the performance-based bonus accrual.

The increase in general and administrative expense also included a $0.7

million increase in audit and legal fees related to amending the Company’s Articles of Incorporation and Bylaws and other corporate governance,

financing and strategic matters.

The increase was partially offset by a $0.9 million decrease in corporate strategic planning and related

special committee board fees, as well as a $0.1 million decrease in stock-based compensation expense related to the forfeiture of stock-options

held by the former CEO upon his departure on September 30, 2022.

Other (Expense) Income, Net

Other expense, net for three

months ended September 30, 2022 reflected a net aggregate fair market value gain of $1.8 million on our warrant derivatives and Bioventus

common stock.

Other income, 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, 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

During the three months ended

September 30, 2022 and 2021, we recognized income tax expense of $1.9 million and $0.5 million, respectively.

The $1.4 million increase

in income tax expense is the result of an increase in taxable income for the three months ended September 30, 2022 when compared to the

same period of the previous year.

Comparison of the Nine Months Ended September

30, 2022 and 2021 ( in millions )

Nine 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

Other income, net

Income tax expense

Revenues decreased to $31.7

million for the nine months ended September 30, 2022 from $41.2 million for the nine months ended September 30, 2021.

The $9.5 million

decrease in revenue consisted of a $5.4 million decrease in Pharmaceutical Development segment revenue and a $4.1 million decrease in

Finance Receivables segment revenue.

The decrease in Pharmaceutical Development segment revenue included $5.0 million of milestone revenue

related to Enteris’ License Agreement with Cara received during the nine months ended September 30, 2022, compared to $10.0 million

of milestone revenue for the same period of 2021.

The decrease in Finance Receivables segment revenue was due to a $5.1 million net decrease

in royalty income primarily due to the achievement of return premiums that caused a step down in royalty rates, which was partially offset

by a net increase of $1.0 million in interest and fees earned on finance receivables.

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

Interest expense for the nine months ended September 30, 2022 and 2021 was $0.2 million and $0.3 million, respectively.

Pharmaceutical Manufacturing, Research

and Development Expense

Pharmaceutical manufacturing,

research and development expense decreased from $5.6 million for the nine months ended September 30, 2021 to $5.2 million for the nine

months ended September 30, 2022.

The $0.4 million decrease was primarily due to a decrease in manufacturing materials for pipeline projects

and clinical trials.

Depreciation and Amortization

General and administrative expenses decreased to $2.5 million

for the three months ended March 31, 2023 from $3.2 million for the three months ended March 31, 2022.

The $0.7 million decrease

in depreciation and amortization expense for the nine months ended September 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

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

and corporate governance expenses.

General and administrative expenses increased to $10.5 million for the nine months ended

September 30, 2022 from $9.8 million for the nine months ended September 30, 2021.

The $0.7 million increase was primarily due to a $1.1

million increase in salaries and benefits expense related to the former CEO’s severance pay pursuant to the Separation and Release Agreement

dated August 31, 2022.

The increase in general and administrative expense also included a $0.9 million increase in audit and legal fees

related to amending the Company’s Articles of Incorporation and Bylaws and other corporate governance, financing and strategic matters.

The increase was partially offset by a $1.4 million decrease in corporate strategic planning and related special committee board fees,

as well as a $0.1 million decrease in stock-based compensation expense related to the forfeiture of stock-options held by the former CEO

upon his departure on September 30, 2022.

Other Income, Net

Other income, net for the

nine months ended September 30, 2022 reflected a net aggregate fair market value gain of $0.1 million on our warrant derivatives and Bioventus

common stock.

Other income, net for the 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, 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

During the nine months ended

September 30, 2022 and 2021, we recognized income tax expense of $3.2 million and $5.0 million, respectively.

The $1.8 million

decrease in income tax expense is the result of a decrease in taxable income for the nine months ended September 30, 2022 when compared

to the same period of the previous year.

Liquidity and Capital Resources

As of September 30, 2022, we

had $19.4 million in cash and cash equivalents, compared to $42.9 million in cash and cash equivalents as of December 31, 2021.

primary driver of the $23.5 million decrease in our cash balance was $71.2 million of investment funding, net of deferred fees and

origination expenses;

$8.2 million for payments of accounts payable, including $1.9 million for Enteris’s internal pipeline

and business development projects;

included a net $0.8 million decrease in salaries, benefits, general office and maintenance expense mainly due to a reduction in

employee headcount in our Pharmaceutical Development segment;

and a $0.2 million decrease in corporate strategic planning expense.

The decrease was partially offset by $0.2 million increase in professional fees and Board fees due to a revised Board compensation

(Expense) Income, Net

expense, net for three months ended March 31, 2023 reflected a net aggregate fair market value loss of $1.0 million on our warrant

derivatives and a $0.2 million gain from the remeasurement of foreign currency transactions into our functional currency, net of

changes in fair value of the foreign currency forward contract.

expense, 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, which we sold during the year ended December 21, 2022.

(Benefit) Expense

the three months ended March 31, 2023 and 2022, we recognized income tax benefit of $0.1 million and income tax expense of $1.1

million, respectively.

The annual effective tax rate decreased to 10.1 percent for the three months ended March 31, 2023 from 23.5

percent for the three months ended March 31, 2022.

The decrease in the effective tax rate, along with a $0.6 million release of the

valuation allowance, resulted in a $1.2 million decrease in income tax expense for the three months ended March 31, 2023

when compared to the same period of the prior year.

and Capital Resources

of March 31, 2023, we had $3.2 million in cash and cash equivalents, compared to $6.2 million in cash and cash equivalents as

of December 31, 2022.

The primary driver of the $2.9 million decrease in our cash balance was $13.4 million of investment funding,

net of deferred fees and origination expenses;

payroll and benefits expense of $3.0 million;

$0.6 million to repurchase shares of the

Company’s common stock on the open market;

and $0.3 million of credit facility interest and other expenses.

The decrease in

cash and cash equivalents was partially offset by $64.4 million of interest, fees, principal and royalty payments received on our

finance receivables and $0.7 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

$2.4 million of accounts payable;

and $0.5 million to repurchase shares of the Company’s common stock on the open market.

The decrease in cash and cash equivalents

was partially offset by a net $8.0 million received from our credit facility, and $8.6 million of interest, fees, principal and

royalty payments received on our finance receivables.

entered into a $20.0 million revolving credit facility in June 2018.

The credit facility was amended on November 16, 2022 to extend

the termination date to September 30, 2025 and increase the borrowing size under the credit facility to $35.0 million.

31, 2023, approximately $24.5 million was available for borrowing under the credit facility.

We are continuing to explore other

options with respect to a new credit facility.

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:

Primarily owning or financing through debt investments, royalties generated by the sales of life science products and related intellectual

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;

1 unchanged sentence

To a lesser extent, realizing capital appreciation from equity-related investments in the life science sector.

As of September 30, 2022,

our finance receivables portfolio contains $213.0 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.

the majority of our finance receivables portfolio are debt instruments that carry floating interest rates with a reference rate-based

interest rate floor.

Changes in interest rates, including the underlying reference 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 entered into a $20.0 million

revolving credit facility in June 2018.

The credit facility was amended on September 26, 2022 to extend the termination date to November

We continue to work with our current lender to extend our credit facility.

As of September 30, 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

of March 31, 2023, our finance receivables portfolio contains $237.0 million of finance receivables and $0.1 million of marketable

We expect these assets to generate positive cash flows in 2023.

However, we continuously monitor the short and long-term

financial position of 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 the

levels of LIBOR rates or the replacement of LIBOR with another reference rate, such as SOFR, the Secured Overnight Financing Rate,

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.

continue to evaluate multiple attractive opportunities that, if consummated, we believe would similarly generate additional income.

Since the timing of any investment is difficult to predict, our Finance Receivables segment may not be able to generate positive

cash flow above what our existing assets are expected to produce in 2023.

We do not assume any near-term repayments from borrowers,

and as a result, no assurances can be given that actual results would not differ materially from the statement above.

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.

of March 31, 2023, we had $11.9 million of unfunded commitments.

Please refer to Item 1., Financial Statements, Note 6 of the

notes to the unaudited condensed consolidated financial statements for further information regarding the Company’s commitments

and contingencies.

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