What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-10 compared with 2023-05-10 · 201 added, 128 removed, 92 unchanged (78% of the section changed)

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

financial statements and the accompanying notes included in this report.

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.

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

Revenue (Loss)

Royalty Purchases

Licensed Technology

Revenue (Loss)

Ophthalmic antibiotic

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Women’s health

Revenue Recognized

Acer Therapeutics, Inc.

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Trio Healthcare Ltd.

Revenue Recognized

Marketable Investments

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Epica International, Inc.

Sincerus Pharmaceuticals, Inc.

(Loss) Recognized

Warrants to Purchase Stock

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per Share ($)

Income (Loss)

Acer Therapeutics, Inc.

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Acer Therapeutics, Inc.

Acerus Pharmaceuticals Corporation

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MolecuLight, Inc.

Total Revenue

Revenue Recognized

Total finance receivables, gross

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

SWK continues to receive insignificant royalties on international

SWK continues to receive insignificant royalties on international sales.

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.

was paid off during the six months ended June 30, 2023.

July 2023, Ideal Implant assets were sold to an aesthetics company.

was sold to a third party during the six months ended June 30, 2023.

Medical assets were sold to Algorithm Sciences, Inc.

during the six months ended June 30, 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.

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

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.

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.

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

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, 2023, compared to those discussed

in our Annual Report.

Accounting Pronouncements

Financial Information, Item 1.

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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 March 31, 2023 and 2022 ( in millions )

Three Months Ended

of the three months ended June 30, 2023 and 2022 ( in

Provision (benefit) for credit losses

Interest expense

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General and administrative

Other income (expense), net

Income tax expense

increased to $9.5 million for the three months ended June 30, 2023 from $6.9 million for the three months ended June 30, 2022.

million increase in revenue for the three months ended June 30, 2023 consisted of a $2.5 million increase in Finance Receivables segment

revenue and a $0.1 million increase in Pharmaceutical Development segment revenue.

The $2.5 million increase in Finance Receivables segment

revenue was primarily due to $2.5 million increase in interest and fees earned due to funding new and existing loans, a $0.8 million

increase in interest income due to an overall increase in reference rates, and a net $0.5 million increase in royalty revenue when compared

to the same period of the previous year.

The increase was partially offset by a $1.3 million decrease in interest, royalties and fees

earned on finance receivables that were paid off in 2022 and 2023.

(benefit) for Credit Losses

allowance for credit losses is established through charges or credits to income in the form of the provision in order to bring our

allowance for credit losses for loans and unfunded commitments to a level deemed appropriate by management.

Our allowance for credit

losses decreased by $0.7 million during the three months ended June 30, 2023 due to an overall decrease in finance receivables.

Please refer to Item 1., Financial Statements, Note 3 of the notes to the unaudited condensed consolidated financial statements for

further information regarding the provision for credit losses.

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 $0.4 million for three months ended June 30, 2023 from $0.1 million for the three

months ended June 30, 2022.

The $0.3 million increase in interest expense was due to a higher average outstanding balance under the Prior

Credit Agreement with Cadence Bank during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

June 28, 2023, we terminated the Prior Credit Agreement with Cadence Bank and entered into a new Credit Agreement with First Horizon

Please refer to Item 1., Financial Statements, Note 5 of the notes to the unaudited condensed consolidated financial statements

for further information regarding the Credit Agreement with First Horizon.

Pharmaceutical

Manufacturing, Research and Development Expense

We recognized $1.5

million of pharmaceutical manufacturing, research and development expense for both the three months ended June 30, 2023 and

and Amortization

recognized $0.6 million of depreciation and amortization expense during both the three months ended June 30, 2023 and 2022.

and amortization primarily consists of 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.

We recognized $3.0 million of general and administrative expense for both

the three months ended June 30, 2023 and 2022.

income, net for three months ended June 30, 2023 reflected a net aggregate fair market value gain of $0.4 million on our warrant

derivatives and a $0.3 million net 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 the 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.

Our Bioventus common stock was sold during the year ended December 31, 2022.

During the three months ended June 30, 2023 and 2022, we recognized income tax expense of $1.5 million and $0.2 million respectively.

The increase in income tax expense is the result of higher taxable income for the three months ended June 30, 2023 when compared to the

same period of the prior year.

of the six months ended June 30, 2023 and 2022 ( in

Provision (benefit) for credit losses

Interest expense

Pharmaceutical manufacturing, research and development expense

Depreciation and amortization expense

General and administrative

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 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.

Income tax expense

increased to $18.9 million for the six months ended June 30, 2023 from $18.1 million for the six months ended June 30, 2022.

million increase in revenue for the six months ended June 30, 2023 consisted of a $1.3 million increase in Finance Receivables segment

revenue and a $0.5 million decrease in Pharmaceutical Development segment revenue.

The $1.3 million increase in Finance Receivables segment

revenue was due to $4.9 million increase in interest and fees earned due to funding new and existing loans, a $2.4 million increase in

interest income due to an overall increase in reference rates, and a net $0.4 million increase in royalty revenue when compared to the

same period of the previous year.

The increase was partially offset by a $6.4 million decrease in interest, royalties and fees earned

on finance receivables that were paid off in 2022 and 2023.

(benefit) for Credit Losses

allowance for credit losses is established through charges or credits to income in the form of the provision in order to bring our

allowance for credit losses for loans and unfunded commitments to a level deemed appropriate by management.

Our allowance for credit

losses decreased by $0.7 million during the six months ended June 30, 2023 due to an overall decrease in finance receivables.

refer to Item 1., Financial Statements, Note 3 of the notes to the unaudited condensed consolidated financial statements for further

information regarding the provision for credit losses.

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.

Interest expense increased to $0.5 million for six months ended June 30, 2023 from $0.2 million for the six months

ended June 30, 2022.

This $0.3 million increase in interest expense was due to a higher average outstanding balance under the Prior Credit

Agreement with Cadence Bank during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.

2023, we terminated the Prior Credit Agreement with Cadence Bank and entered into a new Credit Agreement with First Horizon Bank.

refer to Item 1., Financial Statements, Note 5 of the notes to the unaudited condensed consolidated financial statements for further

information regarding the Credit Agreement with First Horizon.

Pharmaceutical

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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.

manufacturing, research and development expense decreased from $3.4 million for the six months ended June 30, 2022 to $2.2 million for

the six months ended June 30, 2023.

The $1.2 million decrease was primarily due to a was primarily due to a reduction in headcount as

well as a reduction in R&D and clinical trial expenditures.

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.

recognized $1.3 million of depreciation and amortization expense during both the six months ended June 30, 2023 and 2022.

and amortization primarily consists of 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

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

(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.

General and administrative expenses decreased to $5.5 million for the six

months ended June 30, 2023 from $6.2 million for the six months ended June 30, 2022.

The $0.7 million decrease included a net $0.6 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 $0.3 million decrease in corporate strategic planning and related professional fees expense.

was partially offset by $0.2 million increase in Board fees due to a revised Board compensation plan.

expense, net for the six months ended June 30, 2023 reflected a net aggregate fair market value loss of $0.6 million on our warrant derivatives

and a $0.5 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 the 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.

Our Bioventus common stock was sold during the year ended December 31, 2022.

We recognized income tax expense of $1.3 million for both the six months ended

June 30, 2023 and 2022.

The nominal increase in income tax expense was the result of an increase in taxable income for the six

months ended June 30, 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;

$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.

of June 30, 2023, we had $6.8 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 $0.6 million increase in our cash balance was $31.6 million of interest, fees,

principal and royalty payments received on our finance receivables.

The increase in cash and cash equivalents was partially offset

by $13.7 million of investment funding, net of deferred fees and origination expenses;

payroll, accounts payable and new credit

facility closing costs totaled $9.6 million;

$5.1 million to repurchase shares of the Company’s common stock in the open

and net payments of $2.4 million of credit facility draws, principal, interest and fees paid on our credit facility with

Cadence Bank.

entered into a new $45.0 million revolving credit facility in June 2023 with First Horizon Bank.

The Credit Agreement provides for one

or more incremental increases not to exceed $80.0 million, subject to the consent of the Agent and each Lender, at any time prior to

the Commitment Termination Date.

As of June 30, 2023, no funds have been borrowed, and $45.0 million was available for borrowing under

the new credit facility.

Our Prior Credit Agreement with Cadence Bank was terminated in connection with the establishment of the new

credit facility.

Please refer to Item 1., Financial Statements, Note 5 of the notes to the unaudited condensed consolidated financial

statements for further information regarding the Credit Agreement with First Horizon Bank.

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 property;

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;

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

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

of June 30, 2023, our finance receivables portfolio contains $223.0 million of net 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.

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 SOFR, Prime, or LIBOR-based interest rate floor.

interest 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.

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.

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.

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.

of June 30, 2023, we had $7.4 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