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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-15 · 203 added, 126 removed, 107 unchanged (75% 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, 2023 (“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, 2023 (“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, 2024 (in thousands, except rate, share and per share data).

Revenue (Loss)

Royalty Purchases

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Women’s health

Revenue (Loss)

Maturity Date

BIOLASE, Inc.

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Trio Healthcare Ltd.

Revenue (Loss)

Marketable Investments

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Eyepoint Pharma Common Stock

AOTI Common Stock

Change in Fair

Warrants to Purchase Stock

Acer Therapeutics, Inc.

Aziyo Biologics, Inc.

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eTon Pharmaceuticals, Inc.

EyePoint Pharmaceuticals, Inc.

Shield Warrant

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MolecuLight, Inc.

Revenue (Loss)

Total finance receivables, gross

Total marketable investments

Fair value of warrant assets

Total assets, gross/revenues

Total fair value of warrant

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

SWK continues to receive insignificant

royalties on international sales.

SWK continues to receive insignificant royalties on international sales.

considered partially impaired.

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was paid off during the nine months ended September 30, 2023.

SWK continues to receive insignificant royalties.

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.

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.

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.

on implant sales in 2024.

warrants exercised in 1Q 2024 and converted to shares.

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.

The shares were sold during 2Q 2024.

warrants exercised in 2Q 2024 and converted to shares.

the three months ended June 30, 2024, the Company

identified an error in the calculation of revenue related to the release of a holdback liability for ImmuneGlobulin during the three

months ended March 31, 2024.

The error led to finance receivable interest income being overstated by $0.7 million for the three months

ended March 31, 2024.

See Note 1 for more details.

otherwise specified, our senior secured debt assets generally are repaid by a revenue interest that is charged on a company’s quarterly

net sales and royalties.

Accounting Policies and Estimates

critical accounting policies and estimates are described in Part II, Item 7, “Management’s Discussion and Analysis

of Financial Condition and Results of Operations” of our Annual Report.

We believe there have been no new critical accounting

policies or material changes to our existing critical accounting policies and estimates during the three months ended March 31,

2024, 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, 2024, 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, 2024 and 2023 ( in millions )

Three Months Ended

Provision for credit losses

of the three months ended June 30, 2024 and 2023 ( in

Provision (benefit) for credit losses

Loss on impairment of intangible assets

Interest expense

Pharmaceutical manufacturing, research and development expense

Change in fair value of acquisition-related contingent consideration

Depreciation and amortization expense

General and administrative expense

Other (expense) income, net

Income tax expense (benefit)

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.

$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.

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

Other income, net

Income tax expense

Revenues increased to $11.5 million

for the three months ended June 30, 2024 from $9.5 million for the three months ended June 30, 2023.

The $2.0 million increase in revenue

for the three months ended June 30, 2024 consisted of a $1.4 million increase in Finance Receivables segment revenue and a $0.6 million

increase in Pharmaceutical Development segment revenue.

The $1.4 million increase in Finance Receivables segment revenue was primarily

due an increase of $3.1 million in interest and fees earned due to funding new and existing loans offset by $1.7 million decrease

in interest, fees and royalties earned on finance receivables that were paid off during the period.

(Benefit) for Credit Losses

provision 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.

Note 3 to the unaudited condensed consolidated financial statements for further information on the allowance for credit losses.

losses of $4.1 million during the three months ended June 30, 2024 and $0.7 million benefit during three months ended June 30,

2023, respectively.

The $2.1 million impairment on the Trio loan and $2.2 million impairment on the Exeevo loan were both 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.

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.

Interest expense increased to $1.1 million for the three months ended June 30,

2024 from $0.4 million for the three months ended June 30, 2023.

The $0.7 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 June 30, 2023.

See Note 6 for further information on the Notes, new Credit Agreement, and Prior Credit Agreement.

Pharmaceutical

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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.

and Amortization

$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.

and Administrative

General and administrative expenses consist primarily of compensation;

manufacturing, research and development expense decreased from $1.5 million for the three months ended June 30, 2023 to $0.5 million

for the three months ended June 30, 2024.

The $1.0 million decrease was primarily due to reduction in research and development and clinical

trial related to cancelled projects.

and Amortization Expense

$0.2 million decrease in depreciation and amortization expense for the three months ended June 30, 2024 primarily consists of a decrease

in amortization expense related to no longer amortizing intangible assets related to the Cara license.

Amortization expense is aligned

with the expected future cash flows of the intangible assets.

and Administrative Expense

and administrative expenses consist primarily of compensation;

stock-based compensation and related costs for management, staff and Board;

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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.

(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.

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.

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.

General and administrative expenses decreased to $2.9 million for the

three months ended June 30, 2024 from $3.0 million for the three months ended June 30, 2023 resulting in an immaterial change in

total activity between the periods.

income, net increased to $3.8 million for the three months ended June 30, 2024 from $0.7 million for the three months ended

June 30, 2023.

The $3.1 million increase includes a $2.5 million gain on revaluation related to the Iluvien royalty after a contractual

re-negotiation during the current quarter, and also includes a gain of $0.7 million from the exercise of warrants during current quarter.

the three months ended June 30, 2024 we recognized $1.0 million of income tax expense, while for the three months ended June 30,

2023 we recognized income tax of $1.5 million.

The change in income tax expense is primarily attributed to changes in pre-tax

net income, and the Company’s effective tax rate, which was 20.9% and 10.1% as of June 30, 2024 and 2023.

of the six months ended June 30, 2024 and 2023 ( in

Provision (benefit) for credit losses

Loss on impairment of intangible assets

Interest expense

Pharmaceutical manufacturing, research and development expense

Change in fair value of acquisition-related contingent consideration

Depreciation and amortization expense

General and administrative expense

Other income (expense), net

Income tax expense

increased to $22.6 million for the six months ended June 30, 2024 from $18.9 million for the six months ended June 30, 2023.

The $3.7 million increase in revenue for the six months ended June 30, 2024 consisted of a $2.9 million increase in Finance

Receivables segment revenue and a $0.8 million increase in Pharmaceutical Development segment revenue.

The $2.9 million increase

in Finance Receivables segment revenue was primarily due to a $6.3 million increase in interest and fees earned due to funding new and

existing loans offset by $3.4 million decrease in interest, fees and royalties earned on finance receivables that were paid off during

(Benefit) for Credit Losses

provision 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 $9.4 million during the six months ended June 30, 2024 and a $0.7 million benefit during six months

ended June 30, 2023, respectively.

Most of the change was related to a $8.1 million impairment on the Trio loan and $2.2 million

impairment on the Exeevo loan that were included within the provision for credit losses during the period.

See Note 3 to the unaudited

condensed consolidated financial statements for further information on the allowance for credit losses.

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 $2.4 million for the six months ended June 30,

2024 from $0.5 million for the six months ended June 30, 2023.

The $1.9 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.

See Note 6 for further information

on the Notes, new Credit Agreement, and Prior Credit Agreement.

Pharmaceutical

Manufacturing, Research and Development Expense

Pharmaceutical

manufacturing, research and development expense decreased from $2.2 million for the six months ended June 30, 2023 to $1.1 million

for the six months ended June 30, 2024.

The $1.1 million decrease was primarily due to a reduction in research and development and

clinical trial expenditures related to cancelled projects during the period.

and Amortization Expense

$0.4 million decrease in depreciation and amortization expense for the six months ended June 30, 2024 primarily consists of a decrease

in amortization expense related to no longer amortizing intangible assets related to the Cara license.

Amortization expense is aligned

with the expected future cash flows of the intangible assets.

See Note 4 for more information on the impairment of the Cara license.

and Administrative Expense

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 $5.6 million for the

six months ended June 30, 2024 from $5.5 million for the six months ended June 30, 2023 resulting in an immaterial change in total

activity between the periods.

Income (Expense), Net

expense, net increased to $3.4 million for the six months ended June 30, 2024 from $0.1 million for the six months ended June

The $3.5 million increase includes a $2.5 million gain on revaluation related to the Iluvien royalty after a contractual re-negotiation,

a gain of $0.7 million due to the exercise of warrants, a loss of $0.3 million on the sale of common shares, and the remaining

activity relating to warrant fair value adjustments based on share price.

the six months ended June 30, 2024 and 2023 we recognized $1.3 million of income tax expense.

Income tax expense remained

consistent period over period and the Company’s effective

tax rate was 20.9% and 10.1% as of June 30, 2024 and 2023, respectively, and a release of valuation allowance on deferred tax assets

of $0.6 million took place during the six months ended June 30, 2023

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

The increase in cash and cash equivalents was partially offset by $0.4 million of investment funding, net of deferred fees

and origination expenses;

of June 30, 2024, we had $5.5 million in cash and cash equivalents and restricted cash, compared to $5.2 million as of December 31, 2023.

The primary driver of the $0.3 million increase in our cash balance was $29 million of interest,

fees, principal and royalty payments received on our finance receivables.

The increase in cash and cash equivalents was partially offset

by $8.2 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;

a net credit facility

payment of $12.4 million;

a payroll and benefits expense of $2.4 million;

$3.2 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 .

and $1.9 million to

repurchase shares of the Company’s common stock on the open market, pursuant to the Company’s stock repurchase program.

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

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commitments under the Credit Agreement from $45.0 million to $60.0 million.

As of March 31, 2024, $0.0 million was outstanding under

As of June 30, 2024, there was no outstanding amount under

the new Credit Agreement, and $55.0 million was available for borrowing.

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).

The $60.0 million Credit Agreement contains a $5.0 million liquidity

covenant, bringing the total amount available for borrowing to $55.0 million.

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).

October 3, 2023, the Company completed a registered underwritten public offering of $30.0 million of the Notes.

On October 27, 2023,

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

Primary Driver of Cash

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.

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.

received net proceeds after discounts, commissions, expenses and fees, of approximately $30.6 million.

As of the date of this filing

the Company is in process of amending the Credit Agreement whereby the covenant for net charge-off percentage will be revised upwards,

and will include an increase to the Company’s share buyback basket.

The amendment will be retroactively applicable to the quarter

ended June 30, 2024.

See Note 5 for more information.

Driver of Cash Flow

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, 2024, our finance receivables portfolio contains $261.3 million of net finance receivables and $0.4 million of marketable

of June 30, 2024, our finance receivables portfolio contains $265.5 million of net finance receivables and $731 thousand of marketable

We expect these assets to generate positive cash flows in 2024.

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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.

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.

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, 2024, we had $5 million of unfunded commitments.

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, 2024, we had $5.0 million in 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.

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