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, 2022 (“Annual Report”), as well as our unaudited condensed consolidated financial statements and the accompanying notes included in this report. Overview We 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. 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. 20 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, 2023 (in thousands, except rate, share and per share data). Royalty Purchases Licensed Technology Footnote Funded Amount GAAP Balance Revenue (Loss) Recognized Besivance® Ophthalmic antibiotic (1) $ 6,000 $ — $ 12 Best ABT, Inc. Oncology diagnosis (2), (3) 5,784 2,856 — Coflex®/Kybella® Spinal stenosis/submental fullness 4,350 3,834 69 Cambia® NSAID migraine treatment (2) 8,500 137 (82 ) Duo Royalty Japanese women’s health/cystic fibrosis 15,488 15,231 531 Forfivo XL® Depressive disorder treatment 6,000 1,384 251 Ideal Implant, Inc. Aesthetics (3) 4,239 4,239 — Iluvien® Diabetic macular edema 16,501 15,361 544 Veru, Inc. Women’s health 10,000 3,518 132 Term Loans Type Footnote Maturity Date Principal GAAP Balance Rate Revenue Recognized 4Web, Inc. First lien 06/03/23 $ 28,912 $ 31,041 12.8 % $ 1,108 AOTI, Inc. First lien 03/21/27 12,000 12,001 11.0 % 480 Acer Therapeutics, Inc. First lien 03/04/24 13,942 14,671 12.0 % 1,247 Aziyo Biologics, Inc. First lien 08/10/27 25,000 24,946 12.0 % 967 BIOLASE, Inc. First lien 05/31/25 13,300 13,914 10.3 % 537 Biotricity, Inc. First lien 12/21/26 12,364 12,300 14.5 % 528 Epica International, Inc. First lien 07/23/24 12,000 12,516 9.5 % 402 eTon Pharmaceuticals, Inc. First lien 11/13/24 6,615 6,743 10.0 % 248 Exeevo, Inc. First lien 07/01/27 5,000 4,956 15.0 % 216 Flowonix Medical, Inc. First lien (3), (4) 12/23/25 12,482 11,844 14.0 % — MedMinder Systems, Inc. First lien 07/22/27 20,000 19,951 12.9 % 686 MolecuLight, Inc. First lien 12/29/26 10,000 10,102 12.8 % 449 NeoLight, LLC First lien 02/17/27 5,000 4,955 13.5 % 87 SKNV First lien 03/19/26 13,498 13,574 10.4 % 488 Trio Healthcare Ltd. First lien 07/01/26 8,779 8,750 12.5 % 360 Marketable Investments Number of Shares Footnote Funded Amount GAAP Balance Revenue Recognized Secured Royalty Financing (Marketable Investment) N/A (2), (3) $ 3,000 $ 66 $ — Epica International, Inc. 25,000 N/A — — Sincerus Pharmaceuticals, Inc. 26,575 N/A — — 21 Warrants to Purchase Stock Number of Shares Footnote Exercise Price per Share ($) GAAP Balance Income (Loss) Recognized 4Web, Inc. TBD $ — $ — $ — AOTI, Inc. 92,490 — — — Acer Therapeutics, Inc. 150,000 2.46 94 (203 ) Acer Therapeutics, Inc. 100,000 1.51 65 (145 ) Acer Therapeutics, Inc. 250,000 2.39 157 (288 ) Acerus Pharmaceuticals Corporation — — — (5 ) Aziyo Biologics, Inc. 157,895 6.65 201 (314 ) Aziyo Biologics, Inc. 30,075 6.65 38 (60 ) BIOLASE, Inc. 22,039 9.80 2 (3 ) Biotricity, Inc. 57,536 6.26 12 2 CeloNova BioSciences, Inc. TBD — — — DxTerity Diagnostics, Inc. 2,019,231 — — — Epica International, Inc. TBD — — — eTon Pharmaceuticals, Inc. 51,238 5.86 70 27 eTon Pharmaceuticals, Inc. 18,141 6.62 25 10 Exeevo, Inc. 930 — — — EyePoint Pharmaceuticals, Inc. 40,910 11.00 17 (3 ) EyePoint Pharmaceuticals, Inc. 7,773 19.30 2 — Flowonix Medical, Inc. 155,561 (3), (4) — — — MedMinder Systems, Inc. 72,324 — — — MolecuLight, Inc. TBD — — — Assets Total Revenue Total finance receivables, gross $ 248,824 $ 9,260 Total marketable investments 66 N/A Fair value of warrant assets 683 N/A Total assets, gross/revenues $ 249,573 $ 9,260 (1) US royalty was paid off during the year ended December 31, 2021. SWK continues to receive insignificant royalties on international sales. (2) Investment considered partially impaired. (3) Investment on nonaccrual. (4) Flowonix is evaluating strategic alternatives for the business. 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. 22 Environmental, Social and Governance As 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 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. 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, 2023, 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, 2023 and 2022 ( in millions ) Three Months Ended March 31, 2023 2022 Change Revenues $ 9.4 $ 11.1 $ (1.7 ) Interest expense 0.2 0.1 0.1 Pharmaceutical manufacturing, research and development expense 0.7 1.9 (1.2 ) Depreciation and amortization expense 0.6 0.7 (0.1 ) General and administrative 2.5 3.2 (0.7 ) Other expense, net (0.8 ) (0.7 ) (0.1 ) Income tax (benefit) expense (0.1 ) 1.1 (1.2 ) Net income 4.6 3.5 1.1 Revenues Revenues 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 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. 23 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 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. Depreciation and Amortization The $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. 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 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 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 plan. Other (Expense) Income, Net Other 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. Other 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. Income Tax (Benefit) Expense During 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. Liquidity and Capital Resources As 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; $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. 24 We 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. As of March 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. 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, 2023, our finance receivables portfolio contains $237.0 million of finance receivables and $0.1 million of marketable investments. 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. We 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. 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. As 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. 25