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, 2023 (“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. 25 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, 2024 (in thousands, except rate, share and per share data). Royalty Purchases Licensed Technology Footnote Funded Amount GAAP Balance Revenue Recognized Besivance® Ophthalmic antibiotic (1) $ 6,000 $ — $ 9 Best ABT, Inc. Oncology diagnosis (2), (3) 5,784 2,497 — Coflex®/Kybella® Spinal stenosis/submental fullness 4,350 3,184 93 Cambia® NSAID migraine treatment (4) 8,500 — 117 Duo Royalty Japanese Women’s health/cystic fibrosis 15,353 12,390 615 Flowonix Medical, Inc. Drug delivery device (3), (5) 12,455 10,433 — Forfivo XL® Depressive disorder treatment 6,000 1,317 480 Ideal Implant, Inc. Aesthetics (3), (6) 4,025 3,566 — Immune Globuin Immune Globulin Therapeutics 14,100 12,445 1,234 Iluvien® Diabetic macular edema 16,501 14,363 558 Veru, Inc. Women’s health 10,000 3,439 129 Term Loans Type Footnote Maturity Date Principal GAAP Balance Rate Revenue Recognized 4Web, Inc. First lien 12/31/24 $ 26,411 $ 28,998 12.8 % $ 1,322 AOTI, Inc. First lien 03/21/27 12,478 12,620 11.0 % 521 Elutia, Inc. First lien 08/10/27 21,045 22,708 12.0 % 966 BIOLASE, Inc. First lien 05/31/25 12,970 13,946 11.3 % 578 Biotricity, Inc. First lien 12/21/26 12,364 12,508 14.5 % 518 CDMO Manufacturer First lien 09/13/27 5,000 5,092 13.3 % 198 Epica International, Inc. First lien 07/23/24 9,000 9,787 9.5 % 356 eTon Pharmaceuticals, Inc. First lien 11/13/24 5,075 5,344 10.0 % 213 Journey Medical Corporation First lien 12/27/27 15,000 14,848 15.0 % 541 Exeevo, Inc. First lien (3) 07/01/27 6,793 6,765 12.8 % — MedMinder Systems, Inc. First lien 08/18/27 20,000 20,179 12.9 % 722 MolecuLight, Inc. First lien 12/29/26 10,000 10,271 12.8 % 476 Nicoya Lifesciences, Inc. First lien 11/30/26 6,000 6,011 12.8 % 257 NeoLight, LLC First lien 02/17/27 5,000 5,038 13.5 % 212 Shield Therapeutics, Plc First lien 09/28/28 20,000 19,402 14.3 % 814 SKNV First lien 05/15/27 13,496 13,785 10.4 % 525 Trio Healthcare Ltd. First lien (2), (3) 07/01/26 3,598 3,573 12.5 % — 26 Marketable Investments Number of Shares Footnote Funded Amount GAAP Balance Revenue Recognized Secured Royalty Financing (Marketable Investment) N/A (2), (3) $ 3,000 $ 41 $ — Eyepoint Pharma Common Stock 17,066 (7) N/A 353 — Warrants to Purchase Stock Number of Shares Footnote Exercise Price per Share ($) GAAP Balance Change in Fair Value 4Web, Inc. TBD $ — $ — $ — AOTI, Inc. 92,490 — — — Acer Therapeutics, Inc. 150,000 2.46 — — Acer Therapeutics, Inc. 100,000 1.51 — — Acer Therapeutics, Inc. 250,000 2.39 — — Acer Therapeutics, Inc. 500,000 1.00 — — Aziyo Biologics, Inc. 157,895 6.65 312 29 Aziyo Biologics, Inc. 30,075 6.65 59 6 BIOLASE, Inc. 22,039 9.80 1 — Biotricity, Inc. 57,536 6.26 6 2 CDMO Manufacturer 211,442 1.42 — — CeloNova BioSciences, Inc. TBD — — — DxTerity Diagnostics, Inc. 2,019,231 — — — Epica International, Inc. TBD — — — eTon Pharmaceuticals, Inc. 51,239 5.86 74 (23 ) eTon Pharmaceuticals, Inc. 18,141 6.62 28 (8 ) Exeevo, Inc. 930 — — — Shield Warrant 8,910,540 — 130 (250 ) MedMinder Systems, Inc. 72,324 — — — MolecuLight, Inc. TBD — — — Assets Revenue Recognized Total finance receivables, gross $ 274,509 $ 11,454 Total marketable investments 394 — Fair value of warrant assets 610 — Total assets, gross/revenues $ 275,513 $ 11,454 (1) U.S. 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 non-accrual. (4) Investment was paid off during the nine months ended September 30, 2023. SWK continues to receive insignificant royalties. (5) Flowonix Medical assets were sold to a medical device company during the nine months ended September 30, 2023. In exchange for releasing its lien, SWK received cash at close and is expected to receive royalties on sales of two products. The finance receivable is now classified as a royalty. (6) In July 2023, Ideal Implant assets were sold to an aesthetics company, which is expected to pay SWK a mid-single digit, capped royalty on implant sales beginning in 2024. (7) Eyepoint warrants exercised in 1Q24 and converted to shares. 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. 27 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, 2024, 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, 2024 and 2023 ( in millions ) Three Months Ended March 31, 2024 2023 Change $ Revenues $ 11.8 $ 9.4 $ 2.4 Provision for credit losses 5.3 — 5.3 Interest expense 1.3 0.2 1.1 Pharmaceutical manufacturing, research and development expense 0.5 0.7 (0.2 ) Depreciation and amortization expense 0.5 0.6 (0.1 ) General and administrative expense 2.7 2.5 0.2 Other (expense) income, net (0.4 ) (0.8 ) 0.4 Income tax expense (benefit) 0.2 (0.1 ) 0.3 Net income 0.9 4.6 (3.7 ) Revenues Revenues increased to $11.8 million for the three months ended March 31, 2024 from $9.4 million for the three months ended March 31, 2023. The $2.4 million increase in revenue for the three months ended March 31, 2024 consisted of a $2.2 million increase in Finance Receivables segment revenue and a $0.2 million increase in Pharmaceutical Development segment revenue. The $2.2 million increase in Finance Receivables segment revenue was primarily due to a $4.1 million increase in interest and fees earned due to funding new and existing loans offset by $1.9 million decrease in interest, fees and royalties earned on finance receivables that were paid off in 2023. Allowance for Credit Losses Our 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. We recognized a net provision for credit losses of $5.3 million during the three months ended March 31, 2024 and no recognition for provision for credit loss during three months ended March 31, 2023, respectively. The $6.0 million impairment on the Trio loan was included within the provision for credit losses. See Note 3 to the unaudited condensed consolidated financial statements for further information on the allowance for credit losses. Interest Expense Interest expense consists of interest accrued on our revolving line of credit, 9.00% Senior Notes due 2027, unused line of credit and maintenance fees, as well as amortization of debt issuance costs. Interest expense increased to $1.3 million for the three months ended March 31, 2024 from $0.2 million for the three months ended March 31, 2023. The $1.1 million increase in interest expense was mainly due to issuing approximately $32.9 million of Notes in an underwritten public offering in October of 2023, and the establishment of the Credit Agreement as of March 31, 2023. See Note 6 for further information on the Notes, new Credit Agreement, and Prior Credit Agreement. 28 Pharmaceutical Manufacturing, Research and Development Expense Pharmaceutical manufacturing, research and development expense decreased from $0.7 million for the three months ended March 31, 2023 to $0.5 million for the three months ended March 31, 2024. The $0.2 million decrease was primarily due to reduction in research and development and clinical trial expenditures during the period. Depreciation and Amortization The $0.1 million decrease in depreciation and amortization expense for the three months ended March 31, 2024 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 increased to $2.7 million for the three months ended March 31, 2024 from $2.5 million for the three months ended March 31, 2023. The $0.2 million increase included a $0.1 million decrease to salaries & wages and a $0.2 million increase in professional fees. Other (Expense) Income, Net Other expense, net decreased to $0.4 million for the three months ended March 31, 2024 from $0.8 million for the three months ended March 31, 2023. The $0.4 million decrease reflected a net aggregate decrease in unrealized loss on warrants of $0.8 million related to changes in fair value of warrants assets and foreign currency adjustments offset by $0.4 million in realized losses on sales of marketable investments and exercise of warrants. Income Tax (Benefit) Expense During the three months ended March 31, 2024 we recognized $0.2 million of income tax expense, while for the three months ended March 31, 2023 we recognized income tax benefit of $0.1 million. The change in income tax expense (benefit) is primarily attributed to changes in pre-tax net income, the Company's effective tax rate, which was 20.9% and 10.1% as of March 31, 2024 and 2023, respectively, and a release of valuation allowance on deferred tax assets of $0.6 million during the three months ended March 31, 2023. Liquidity and Capital Resources As of March 31, 2024, we had $5.5 million in cash and cash equivalents, compared to $4.5 million in cash and cash equivalents as of December 31, 2023. The primary driver of the $1.0 million increase in our cash balance was $19.0 million of interest, fees, principal and royalty payments received on our finance receivables. The increase in cash and cash equivalents was partially offset by $0.4 million of investment funding, net of deferred fees and origination expenses; $0.8 million holdback repayment; a net credit facility payment of $12.4 million; a payroll and benefits expense of $2.4 million; $2.3 million of accounts payable; and $1.0 million to repurchase shares of the Company's common stock on the open market, pursuant to the Company’s stock repurchase program . 29 We entered into a $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. On October 10, 2023, the Company entered into a First Amendment to Credit Agreement pursuant to which Woodforest National Bank was added as a lender under the Credit Agreement for an aggregate commitment of $15.0 million, thereby increasing the aggregate commitments under the Credit Agreement from $45.0 million to $60.0 million. As of March 31, 2024, $0.0 million was outstanding under the new Credit Agreement , and $55.0 million was available for borrowing. Our Prior Credit Agreement with Cadence Bank was terminated in connection with the establishment of the new Credit Agreement (please refer to Part II, Item 8, Financial Statements and Supplementary Data , Note 6 of the notes to the consolidated financial statements for further information regarding the Credit Agreement with First Horizon Bank). On October 3, 2023, the Company completed a registered underwritten public offering of $30.0 million of the Notes. On October 27, 2023, the underwriters exercised their option to purchase an additional approximately $3.0 million in aggregate principal amount of the Notes. The Notes will mature on January 31, 2027, unless earlier redeemed, and will bear interest at a rate of 9.00% per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year and at maturity, commencing on December 31, 2023. The Company received net proceeds after discounts, commissions, expenses and fees, of approximately $30.6 million. Primary Driver of Cash Flow 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, 2024, our finance receivables portfolio contains $261.3 million of net finance receivables and $0.4 million of marketable investments. We expect these assets to generate positive cash flows in 2024. 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. Changes in interest rates, including the levels of 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 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 2024. 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, 2024, we had $5 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. 30