Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
SWK HOLDINGS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share data)
September 30,
2024 December 31,
2023
Assets:
Current assets:
Cash and cash equivalents $ 17,178 $ 4,503
Restricted cash — 733
Interest, accounts receivable and other receivables, net 6,420 4,729
Other current assets 1,610 1,904
Total current assets 25,208 11,869
Finance receivables, net of allowance for credit losses of $ 14,343 and $ 13,901 as of September 30, 2024 and December 31, 2023, respectively
255,904 274,504
Collateral on foreign currency forward contract 2,750 2,750
Marketable investments 755 48
Deferred tax assets, net 26,190 28,290
Warrant assets 2,026 1,759
Intangible assets, net 220 6,487
Property and equipment, net 4,816 5,438
Other non-current assets 3,410 3,109
Total assets $ 321,279 $ 334,254
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued liabilities $ 2,874 $ 3,935
Deferred income 2,109 9
Total current liabilities 4,983 3,944
Contingent consideration payable — 4,900
Unsecured senior notes, net 31,243 30,781
Revolving credit facility — 12,350
Other non-current liabilities 1,622 1,964
Total liabilities 37,848 53,939
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $ 0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding
— —
Common stock, $ 0.001 par value; 250,000,000 shares authorized; 12,263,982 and 12,497,770 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively
12 12
Additional paid-in capital 4,420,604 4,425,104
Accumulated deficit ( 4,137,185 ) ( 4,144,801 )
Total stockholders' equity 283,431 280,315
Total liabilities and stockholders' equity $ 321,279 $ 334,254
See accompanying notes to the unaudited condensed consolidated financial statements.
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SWK HOLDINGS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended
September 30, Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues:
Finance receivable interest income, including fees $ 9,498 $ 8,608 $ 30,519 $ 27,146
Pharmaceutical development 628 315 1,711 616
Other 292 39 395 108
Total revenues 10,418 8,962 32,625 27,870
Costs and expenses:
Provision (benefit) for credit losses 1,385 223 10,777 ( 459 )
Loss on impairment of intangibles assets — — 5,771 —
Interest expense 1,139 176 3,514 721
Pharmaceutical manufacturing, research and development expense 585 606 1,635 2,834
Change in fair value of acquisition-related contingent consideration — — ( 4,900 ) —
Depreciation and amortization expense 234 652 1,169 1,937
General and administrative expense 2,993 2,979 8,600 8,516
Income from operations 4,082 4,326 6,059 14,321
Other income (expense), net
Unrealized net gain (loss) on warrants 47 ( 162 ) 178 ( 745 )
Unrealized net (loss) gain on marketable investments ( 6 ) — 12 —
Realized gain on sale of marketable investments — — 495 —
Realized loss on sale of assets — — ( 228 ) —
Gain on revaluation of finance receivable — — 2,495 —
Realized and unrealized foreign currency transaction gains (losses) 251 ( 76 ) 775 426
Income before income tax expense (benefit) 4,374 4,088 9,786 14,002
Income tax expense (benefit) 906 ( 386 ) 2,170 959
Net income $ 3,468 $ 4,474 $ 7,616 $ 13,043
Net income per share
Basic $ 0.28 $ 0.36 $ 0.61 $ 1.03
Diluted $ 0.28 $ 0.36 $ 0.61 $ 1.02
Weighted average shares outstanding
Basic 12,318 12,539 12,417 12,703
Diluted 12,408 12,582 12,492 12,746
See accompanying notes to the unaudited condensed consolidated financial statements.
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SWK HOLDINGS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Nine Months Ended September 30, 2024
Common Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders' Equity
Shares Amount
Balances at December 31, 2023
12,497,770 $ 12 $ 4,425,104 $ ( 4,144,801 ) $ 280,315
Stock-based compensation — — 111 — 111
Forfeiture of unvested restricted stock ( 6,446 ) — — — —
Issuance of common stock upon vesting of restricted stock 48,918 — — — —
Repurchases of common stock in open market ( 58,298 ) — ( 999 ) — ( 999 )
Net income — — — 468 468
Balances at March 31, 2024
12,481,944 12 4,424,216 ( 4,144,333 ) 279,895
Stock-based compensation — — 249 — 249
Issuance of common stock upon vesting of restricted stock 17,323 — — — —
Repurchases of common stock in open market ( 54,667 ) — ( 950 ) — ( 950 )
Net settlement for employee taxes on stock options — — ( 43 ) — ( 43 )
Stock options exercised, net 2,595 — — — —
Net income — — — 3,680 3,680
Balances at June 30, 2024
12,447,195 12 4,423,472 ( 4,140,653 ) 282,831
Stock-based compensation — — 348 — 348
Issuance of common stock upon vesting of restricted stock 7,123 — — — —
Repurchases of common stock in open market ( 190,336 ) — ( 3,216 ) — ( 3,216 )
Net income — — — 3,468 3,468
Balances at September 30, 2024
12,263,982 $ 12 $ 4,420,604 $ ( 4,137,185 ) $ 283,431
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Nine Months Ended September 30, 2023
Common Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders' Equity
Shares Amount
Balances at December 31, 2022
12,843,157 $ 12 $ 4,430,922 $ ( 4,151,005 ) $ 279,929
Stock-based compensation — — 35 — 35
Effect of adoption of ASU 2016-13 — — — ( 9,683 ) ( 9,683 )
Issuance of common stock upon vesting of restricted stock 16,008 — — — —
Repurchases of common stock in open market ( 28,766 ) — ( 531 ) — ( 531 )
Net income — — — 4,635 4,635
Balances at March 31, 2023
12,830,399 12 4,430,426 ( 4,156,053 ) 274,385
Stock-based compensation — — 164 — 164
Issuance of common stock upon vesting of restricted stock 8,612 — — — —
Repurchases of common stock in open market ( 272,492 ) — ( 4,599 ) — ( 4,599 )
Net income — — — 3,934 3,934
Balances at June 30, 2023
12,566,519 12 4,425,991 ( 4,152,119 ) 273,884
Stock-based compensation — — 170 — 170
Issuance of common stock 4,592 — — — —
Repurchases of common stock in open market ( 60,335 ) — ( 963 ) — ( 963 )
Net income — — — 4,474 4,474
Balances at September 30, 2023
12,510,776 $ 12 $ 4,425,198 $ ( 4,147,645 ) $ 277,565
See accompanying notes to the unaudited condensed consolidated financial statements.
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SWK HOLDINGS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
2024 2023
Cash flows from operating activities:
Net income $ 7,616 $ 13,043
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (benefit) for credit losses 10,777 ( 459 )
Loss on impairment of intangible assets 5,771 —
Right-of-use amortization and cease use costs 339 244
Amortization of debt issuance costs 775 243
Deferred income taxes, net 2,100 915
Unrealized net (gain) loss on warrants ( 178 ) 745
Net realized gain on exercise of warrants ( 495 ) —
Realized loss from sale of assets 228 —
Change in fair value of acquisition-related contingent consideration ( 4,900 ) —
Gain on revaluation of finance receivable ( 2,495 ) —
Foreign currency transaction gain ( 459 ) ( 375 )
Unrealized gain on marketable investments ( 12 ) —
Loan discount amortization and fee accretion ( 2,461 ) ( 2,959 )
Interest paid-in-kind ( 1,359 ) ( 1,826 )
Stock-based compensation 708 369
Depreciation and amortization expense 1,169 1,937
Changes in operating assets and liabilities:
Interest, accounts receivable and other receivables ( 1,691 ) ( 1,317 )
Other assets 30 ( 738 )
Accounts payable, accrued expenses, and other non-current liabilities ( 1,403 ) ( 632 )
Deferred income 2,100 ( 3 )
Net cash provided by operating activities 16,160 9,187
Cash flows from investing activities:
Sale of finance receivables — 13,942
Investment in finance receivables ( 17,736 ) ( 17,525 )
Sale of marketable investments 574 —
Repayment of finance receivables 30,582 7,430
Corporate debt securities principal payments 20 26
Purchases of property and equipment ( 50 ) ( 299 )
Net cash provided by investing activities 13,390 3,574
Cash flows from financing activities:
Net settlement for employee taxes on stock options ( 43 ) —
Net (payments on) proceeds from credit facility ( 12,350 ) 19,555
Payments for financing costs ( 50 ) ( 1,345 )
Repurchases of common stock, including fees and expenses ( 5,165 ) ( 6,093 )
Net cash (used in) provided by financing activities ( 17,608 ) 12,117
Net increase in cash, cash equivalents, and restricted cash 11,942 24,878
Cash, cash equivalents, and restricted cash at beginning of period 5,236 6,156
Cash, cash equivalents, and restricted cash at end of period $ 17,178 $ 31,034
Supplemental non-cash investing and financing activities:
Derecognition of right-of-use assets and operating lease liabilities upon termination of lease $ 82 $ —
Fair value of warrants received with finance receivables $ 1,073 $ 822
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See accompanying notes to the unaudited condensed consolidated financial statements.
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SWK HOLDINGS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SWK Holdings Corporation and Summary of Significant Accounting Policies
Nature of Operations
SWK Holdings Corporation (the “Company,” “we,” or “us”) was incorporated in July 1996 in California and reincorporated in Delaware in September 1999. In July 2012, we commenced a strategy of building a specialty finance and asset management business. In August 2019, we commenced a complementary strategy of building a pharmaceutical development, manufacturing and intellectual property licensing business. Our operations comprise two reportable segments: “Finance Receivables” and “Pharmaceutical Development.” We evaluate and invest in a broad range of healthcare related companies and products with innovative intellectual property, including the biotechnology, medical device, medical diagnostics and related tools, animal health and pharmaceutical industries (collectively, “life sciences”). We allocate capital to each segment in order to generate income through the sales of life science products by third parties and related earned income sources. The Company is headquartered in Dallas, Texas, and as of September 30, 2024, the Company had 22 full-time employees.
The Company has net operating loss carryforwards (“NOLs”) and believes that the ability to utilize these NOLs is an important and substantial asset.
As of November 7, 2024, the Company and its partners have executed transactions with 56 different parties under its specialty finance strategy, funding an aggregate of $ 798.5 million in various financial products across the life science sector. The Company’s portfolio includes senior and subordinated debt backed by royalties and synthetic royalties paid by companies in the life science sector, and purchased royalties generated by sales of life science products and related intellectual property.
During 2019, we commenced our Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”). Enteris is a clinical development and manufacturing organization providing development services to pharmaceutical partners as well as innovative formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence® platform. We seek to generate income by providing customers pharmaceutical development, formulation and manufacturing services as well as licensing its internally developed intellectual property.
With an effective date of April 21, 2023, we entered into a collaboration agreement with a strategic partner under which we would be the exclusive provider of certain contract development and manufacturing organization ("CDMO") services to its customers. Fee revenue generated as a result of this agreement is presented as pharmaceutical development revenue on the unaudited condensed consolidated statement of income and is accounted for in accordance with our revenue recognition policy as described under Revenue Recognition below.
With an effective date of January 1, 2024, we entered into an Option and Asset Purchase Agreement with the same strategic partner on March 14, 2024, which granted the partner an exclusive option to acquire certain of Enteris’ assets related to its business of providing CDMO services to third parties, subject to certain exclusions. The partner must exercise the option by or before January 1, 2026.
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of all subsidiaries and affiliates in which the Company holds a controlling financial interest as of the financial statement date. Normally a controlling financial interest reflects ownership of a majority of the voting interests. The Company consolidates a variable interest entity (“VIE”) when it possesses both the power to direct the activities of the VIE that most significantly impact its economic performance and the Company is either obligated to absorb the losses that could potentially be significant to the VIE or the Company holds the right to receive benefits from the VIE that could potentially be significant to the VIE, after elimination of intercompany accounts and transactions.
The Company owns interests in various partnerships and limited liability companies, or LLCs. The Company consolidates its investments in these partnerships or LLCs where the Company, as the general partner or managing member, exercises effective control. Even though the Company’s ownership may be less than 50 percent, the related governing agreements provide the Company with broad powers, and the other parties do not participate in the management of the entities and do not effectively have the ability to remove the Company. The Company has reviewed each of the underlying agreements to determine if it has effective control. If circumstances change and it is determined this control does not exist, any such investment would be recorded using the equity method of accounting. Although this would change individual line items within the Company’s consolidated financial statements, it would have no effect on its operations and/or total stockholders’ equity attributable to the Company.
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Unaudited Interim Financial Information
The unaudited condensed consolidated financial statements have been prepared by the Company and reflect all normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the interim financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 2024. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 20, 2024.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition; stock-based compensation; valuation of interest and accounts receivable; allowance for credit losses; valuation or impairment of long-lived assets; property and equipment; intangible assets; valuation of warrants and other investments; contingent consideration; income taxes; and contingencies and litigation, among others. Some of these judgments can be subjective and complex, and consequently, actual results may differ from these estimates. The Company’s estimates often are based on complex judgments, probabilities and assumptions that it believes to be reasonable but that are inherently uncertain and unpredictable. For any given individual estimate or assumption made by the Company, there may also be other estimates or assumptions that are reasonable.
The Company regularly evaluates its estimates and assumptions using historical experience and other factors, including the economic environment. As future events and their effects cannot be determined with precision, the Company’s estimates and assumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause changes to those estimates and assumptions. Market conditions, such as illiquid credit markets, health crises such as the COVID-19 global pandemic, volatile equity markets, and economic downturns, can increase the uncertainty already inherent in the Company’s estimates and assumptions. The Company adjusts its estimates and assumptions when facts and circumstances indicate the need for change. Those changes generally will be reflected in our consolidated financial statements on a prospective basis unless they are required to be treated retrospectively under the relevant accounting standard. It is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.
Segment Information
The Company earns revenues from its two U.S.-based business segments: its specialty finance and asset management business offering customized financing solutions to a broad range of life-sciences companies ("Finance Receivable segment"), and its business offering CDMO services to pharmaceutical partners as well as innovative formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence ® platform (“Pharmaceutical Development segment”).
Revenue Recognition
The Company’s Pharmaceutical Development segment enters into collaboration and licensing agreements with strategic partners, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products. Deferred revenue includes amounts that have been billed per the contractual terms but have not been recognized as revenue.
Correction of Errors in Previously Issued Unaudited Condensed Consolidated Financial Statements
The Company identified certain errors that affected the unaudited condensed consolidated financial statements for the quarters ended March 31, 2024 and June 30, 2024. The errors corrected revenue recognition for three investments which related to a holdback liability that should not have been recorded to revenue, interest income recognized when no payment was expected in the period, a revaluation write-up that was not factored into the amortization schedule, and royalty forecasted cash flows that did not reflect the most current estimates for the respective periods. The errors were determined to be immaterial to the prior period's unaudited condensed consolidated financial statements and did not warrant restatement and reissuance of the previously issued unaudited condensed consolidated financial statements. However, the Company recorded corrections to the prior quarters ended March 31, 2024 and June 30, 2024 and the financial statements will be revised the next time they are presented as comparative information in future filings. The Company based its qualitative and quantitative analysis on SEC Staff’s Accounting Bulletins Topic 1.M, "Materiality and Topic 1.N, Considering the Effects of Misstatements when Quantifying Misstatements in the Current Year Financial Statements."
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The following tables detail the revisions to the line items of our previously issued unaudited condensed financial statements to reflect the correction of the errors (in thousands):
Three Months Ended March 31, 2024 As Reported Adjustment (1)
As Revised
Revenues:
Finance receivable interest income, including fees $ 11,454 $ ( 419 ) $ 11,035
Pharmaceutical development 279 — 279
Other 46 — 46
Total revenues 11,779 ( 419 ) 11,360
Expenses:
Provision for credit losses $ 5,323 $ ( 26 ) $ 5,297
Net income $ 861 $ ( 393 ) $ 468
Basic net income per share $ 0.07 $ ( 0.03 ) $ 0.04
Diluted net income per share $ 0.07 $ ( 0.03 ) $ 0.04
Assets:
Finance receivables, net of allowance for credit losses $ 261,285 $ ( 393 ) $ 260,892
Total assets $ 322,350 $ ( 393 ) $ 321,957
Stockholders' equity:
Accumulated deficit $ ( 4,143,940 ) $ ( 393 ) $ ( 4,144,333 )
Total stockholders' equity $ 280,288 $ ( 393 ) $ 279,895
(1) Consists of two error corrections, one which was identified during the three months ended June 30, 2024 and one which was identified during the three months ended September 30, 2024.
Three Months Ended June 30, 2024 As Reported Adjustment As Revised
Revenues:
Finance receivable interest income, including fees $ 10,680 $ ( 694 ) $ 9,986
Pharmaceutical development 804 — 804
Other 57 — 57
Total revenues $ 11,541 $ ( 694 ) $ 10,847
Expenses:
Provision for credit losses $ 4,074 $ 21 $ 4,095
Net income $ 4,395 $ ( 715 ) $ 3,680
Basic net income per share $ 0.35 $ ( 0.06 ) $ 0.29
Diluted net income per share $ 0.35 $ ( 0.06 ) $ 0.29
Assets:
Finance receivables, net of allowance for credit losses $ 265,470 $ ( 373 ) $ 265,097
Total assets $ 321,374 $ ( 373 ) $ 321,001
Stockholders' equity:
Accumulated deficit $ ( 4,140,280 ) $ ( 373 ) $ ( 4,140,653 )
Total stockholders' equity $ 283,204 $ ( 373 ) $ 282,831
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Six Months Ended June 30, 2024 As Reported Adjustment As Revised
Revenues:
Finance receivable interest income, including fees $ 21,399 $ ( 378 ) $ 21,021
Pharmaceutical development 1,083 — 1,083
Other 103 — 103
Total revenues 22,585 ( 378 ) 22,207
Expenses:
Provision for credit losses $ 9,397 $ ( 5 ) $ 9,392
Net income $ 4,521 $ ( 373 ) $ 4,148
Basic net income per share $ 0.36 $ ( 0.03 ) $ 0.33
Diluted net income per share $ 0.36 $ ( 0.03 ) $ 0.33
Assets:
Finance receivables, net of allowance for credit losses $ 265,470 $ ( 373 ) $ 265,097
Total assets $ 321,374 $ ( 373 ) $ 321,001
Stockholders' equity:
Accumulated deficit ( 4,140,280 ) ( 373 ) ( 4,140,653 )
Total stockholders' equity $ 283,204 $ ( 373 ) $ 282,831
Research and Development
Research and development expenses include the costs associated with internal research and development and research and development conducted for the Company by third parties. These costs primarily consist of salaries, pre-clinical and clinical trials, outside consultants, and supplies. All research and development costs discussed above are expensed as incurred. Third-party expenses reimbursed under research and development contracts, which are not refundable, are recorded as a reduction to pharmaceutical manufacturing research and development expense in the unaudited condensed consolidated statements of income.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include: (i) contract modifications, (ii) hedging relationships, and (iii) sales or transfers of debt securities classified as held-to-maturity. ASU 2020-04 was effective upon issuance, and the provisions generally can be applied prospectively as of January 1, 2020 through December 31, 2024. The Company has identified existing loans that reference London Inter-Bank Offered Rate (“LIBOR”) and is in the process of evaluating alternatives in each situation. The Company expects that it will elect to apply some of the expedients and exceptions provided in ASU 2020-04 and does not believe the adoption of this standard will have a material impact on the Company’s consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures," which requires public entities to disclose information about their reportable segments’ significant expenses on an interim and annual basis. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. Public entities are required to adopt the changes retrospectively, recasting each prior-period disclosure for which a comparative income statement is presented in the period of adoption. The Company is currently evaluating the impact of this ASU on the Company's consolidated financial statements and disclosures.
In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." The standard is intended to provide greater transparency in various income tax components that affect the rate reconciliation based on the applicable taxing jurisdictions, as well as the qualitative and quantitative aspects of those components. The ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.
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Note 2. Net Income per Share
Basic net income per share is computed using the weighted-average number of outstanding shares of common stock. Diluted net income per share is computed using the weighted-average number of outstanding shares of common stock, and when dilutive, shares of common stock issuable upon exercise of options and warrants deemed outstanding using the treasury stock method.
The following table shows the computation of basic and diluted net income per share for the following periods (in thousands, except per share amounts):
Three Months Ended
September 30, Nine Months Ended
September 30,
2024 2023 2024 2023
Numerator:
Net income $ 3,468 $ 4,474 $ 7,616 $ 13,043
Denominator:
Weighted-average shares outstanding 12,318 12,539 12,417 12,703
Effect of dilutive securities 90 43 75 43
Weighted-average diluted shares 12,408 12,582 12,492 12,746
Basic net income per share $ 0.28 $ 0.36 $ 0.61 $ 1.03
Diluted net income per share $ 0.28 $ 0.36 $ 0.61 $ 1.02
For the three months ended September 30, 2024 and 2023, outstanding options to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 160,000 and 127,000 , respectively, have been excluded from the calculation of diluted net income per share, as such securities were anti-dilutive. For the nine months ended September 30, 2024 and 2023, outstanding options to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 161,000 and 121,000 , respectively, have been excluded from the calculation of diluted net income per share, as such securities were anti-dilutive.
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Note 3. Finance Receivables
Finance receivables are reported at their determined principal balances net of any unearned income, cumulative write offs charged against the allowance for credit losses, and unamortized deferred fees and costs. Unearned income and deferred fees and costs are amortized to interest income based on all cash flows expected using the effective interest method.
The carrying values of finance receivables were as follows (in thousands):
September 30, 2024 December 31, 2023
Term loans
$ 197,975 $ 221,145
Royalty purchases
72,272 67,260
Total before allowance for credit losses
270,247 288,405
Allowance for credit losses
( 14,343 ) ( 13,901 )
Total carrying value
$ 255,904 $ 274,504
Allowance for Credit Losses
The allowance for credit losses ("ACL") is management's estimate of the amount of expected credit losses over the life of the loan portfolio, or the amount of amortized cost basis not expected to be collected, at the balance sheet date. This estimate encompasses information about historical events, current conditions and reasonable and supportable economic forecasts. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Given the current level of economic uncertainty, the complexity of the ACL estimate and level of management judgment required, we believe it is possible that the ACL estimate could change, potentially materially, in future periods. Changes in the ACL may result from changes in current economic conditions, our economic forecast, and circumstances not currently known to us that may impact the financial condition and operations of our borrowers, among other factors.
Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. For finance receivables that do not share similar risk characteristics with other finance receivables, expected credit losses are estimated on an individual basis. Expected credit losses are estimated over the contractual terms of the finance receivables, adjusted for expected prepayments and unfunded commitments, generally excluding extensions and modifications. The loan portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses.
The Company adopted ASU 2016-13, as amended, on January 1, 2023 using the modified retrospective approach method. The implementation of ASU 2016-13 also impacted the Company's ACL on unfunded loan commitments, as the ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The reserve for unfunded commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment. The funding rate represents management's estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data. On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $ 0.4 million for the adoption of ASU 2016-13. As of September 30, 2024 and December 31, 2023 the Company has a $ 0.2 million liability for credit losses on off-balance sheet exposures related to unfunded commitments, with this liability included in accounts payable and accrued liabilities on the condensed consolidated balance sheets. Please refer to Note 6 for further information on the Company's unfunded commitments.
Allowance for Credit Losses - methodology update during the three months ended June 30, 2024
During the three months ended June 30, 2024, the Company revised its methodology for calculating the allowance for credit losses to be more directly tied to the individual risk ratings, as determined by management, of finance receivables. This resulted in a re-allocation of the existing allowance and did not have a material impact on the total allowance for credit losses amount. Previously, the Company's quarterly assessment of the allowance included two portfolio pools: Term Loans and Royalties. After the change in methodology effective for the quarter ended June 30, 2024, these pools are further broken down into individual risk ratings applied to each investment to allow for a more precise method for calculating the allowance for credit losses.
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The following table details the changes in the allowance for credit losses by Term Loans and Royalties (in thousands):
Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023
Term Loans Royalties Total Term Loans Royalties Total
Allowance at beginning of period $ 9,731 $ 4,170 $ 13,901 $ — $ 11,846 $ 11,846
Effect of adoption of ASU 2016-13 — — — 8,900 2,886 11,786
Provision (benefit) for credit losses 10,202 575 10,777 ( 922 ) 463 ( 459 )
Write offs ( 10,335 ) — ( 10,335 ) — ( 11,846 ) (1) ( 11,846 )
Allowance at end of period $ 9,598 $ 4,745 $ 14,343 $ 7,978 $ 3,349 $ 11,327
(1) Reversal of finance receivable-specific ACL recognized in prior periods. No impact to unaudited condensed consolidated statement of income for the nine months ended September 30, 2023.
Non-Accrual Finance Receivables
The Company originates finance receivables to companies primarily in the life sciences sector. This concentration of credit exposes the Company to a higher degree of risk associated with this sector.
On a quarterly basis, the Company evaluates the carrying value of its finance receivables. Recognition of income is suspended, and the finance receivable is placed on non-accrual status when management determines that collection of future income is not probable. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. The Company would generally place term loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain and they are 90 days past due for interest or principal, unless the term loan is both well-secured and in the process of collection. When placed on nonaccrual, the Company would reverse any accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Generally, the Company would return a term loan to accrual status when all delinquent interest and principal become current under the terms of the credit agreement.
The following table presents nonaccrual and performing finance receivables by portfolio pool, net of allowance for credit losses (in thousands) as of:
September 30, 2024 December 31, 2023
Nonaccrual Performing Total Nonaccrual Performing Total
Term loans $ 21,857 $ 176,118 $ 197,975 $ 9,128 $ 212,017 $ 221,145
Royalty purchases 16,362 55,910 72,272 16,854 50,406 67,260
Total before allowance for credit losses $ 38,219 $ 232,028 $ 270,247 $ 25,982 $ 262,423 $ 288,405
Allowance for credit losses ( 5,734 ) ( 8,609 ) ( 14,343 ) ( 1,447 ) ( 12,454 ) ( 13,901 )
Total carrying value $ 32,485 $ 223,419 $ 255,904 $ 24,535 $ 249,969 $ 274,504
As of September 30, 2024, the Company had six finance receivables in nonaccrual status: (1) the term loan to Trio Healthcare Ltd. (“Trio”), with a carrying value of $ 1.5 million; (2) the term loan to Exeevo, Inc (“Exeevo”), with a carrying value of $ 4.5 million; (3) the term loan to BIOLASE, Inc ("BIOLASE"), with a carrying value of $ 15.8 million; (4) the Flowonix Medical, Inc. (“Flowonix”) royalty, with a carrying value of $ 10.4 million; (5) the Best ABT, Inc. (“Best”) royalty, with a carrying value of $ 2.4 million; and (6) the Ideal Implant, Inc. (“Ideal”) royalty, with a carrying value of $ 3.6 million. As of September 30, 2024 Trio was considered impaired by $ 8.1 million and Exeevo was impaired by $ 2.2 million with the impairments recognized as a reduction in the allowance for credit losses on the unaudited condensed consolidated statements of income for the nine months ended September 30, 2024. The Company collected $ 2.6 million and $ 2.3 million on its nonaccrual finance receivables for the nine months ended September 30, 2024 and 2023 , respectively .
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Loan Modifications Made to Borrowers Experiencing Financial Difficulty
Effective January 1, 2023, the Company adopted the provisions of ASU 2022-02 "Troubled Debt Restructuring ("TDRs") and Vintage Disclosures (Topic 326)", which eliminated the accounting for TDRs while expanding loan modification and vintage disclosure requirements. The update specifically required additional disclosures on loan modifications to borrowers experiencing financial difficulties that involved an interest rate reduction, other-than-insignificant payment delay, a term extension, principal forgiveness or a combination thereof.
The Company evaluates the carrying value of each finance receivable for impairment. A term loan is considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect the amounts due according to the loan contract, including scheduled interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. In certain circumstances, the Company may place a finance receivable on nonaccrual status but conclude it is not impaired. The Company may retain independent third-party valuations on such nonaccrual positions to support impairment decisions. On an ongoing basis, the Company monitors the performance of modified loans to their restructured terms.
Revaluation of Finance Receivable
During the three months ended June 30, 2024, the Company revalued its royalty for Iluvien as a result of entering into an amendment during the quarter. Pursuant to the amendment, the forecast of cash flows to be received over the life of the financial royalty was revised resulting in a revaluation gain of $ 2.5 million and corresponding mark-up to the carrying value which is included in the "Gain on revaluation of finance receivable" caption on our unaudited condensed consolidated statements of income for the nine months ended September 30, 2024.
Credit Quality of Finance Receivables
The Company evaluates all finance receivables on a quarterly basis and assigns a risk rating based upon management’s assessment of the borrower’s ability and likelihood of repayment. The assessment is subjective and based on multiple factors, including but not limited to, financial strength of borrowers and operating results of the underlying business. The credit risk analysis and rating assignment is performed quarterly in conjunction with the Company's assessment of its allowance for credit losses. The Company uses the following definitions for its risk ratings for Term Loans:
1: Borrower performing well below Company expectations, and the borrower's ability to raise sufficient capital to operate its business or repay debt is highly in question. Finance receivables rated a 1 are on non-accrual and are at an elevated risk for principal impairment.
2: Borrower performing below plan, and the loan-to-value is generally worse than at the time of underwriting. Borrower has limited access to additional capital to operate its business. Finance receivables rated a 2 are generally on non-accrual, and while no loss of impairment is anticipated, there is potential for future principal impairment.
3: Borrower performing in-line-to-modestly below Company expectations, and loan-to-value is similar to slightly worse than at the time of underwriting. Borrower has demonstrated access to capital markets.
4: Borrower performing in-line-to-modestly above Company expectations and loan-to-value similar or modestly better than underwriting case. Borrower has demonstrated access to capital markets.
5: Borrower performing in excess of Company expectations, and loan-to-value is better than at time of origination.
The Company uses an internal credit rating system which rates each Royalty on a color scale of Green to Red, with Green typically indicative of a Royalty that is exceeding base underwritten case, Yellow indicates a Royalty performing in-line with underwritten plan, and Red reflective of underperformance relative to plan. Royalties rated as Red are generally classified as non-accrual.
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The following table summarizes the carrying value of Finance Receivables by origination year, grouped by risk rating as of September 30, 2024 and December 31, 2023 (in thousands):
September 30, 2024
2024 2023 2022 2021 2020 2019 Prior Total
Term Loans
5 $ — $ — $ — $ 13,907 $ — $ 3,583 $ — $ 17,490
4 — 31,226 52,391 — — — — 83,617
3 — 24,770 — 11,211 — 26,329 — 62,310
2 — — — 12,701 — — — 12,701
1 — — 4,538 1,473 — — 15,846 21,857
Subtotal - Term Loans $ — $ 55,996 $ 56,929 $ 39,292 $ — $ 29,912 $ 15,846 $ 197,975
Royalties
Green $ 7,839 $ 11,689 $ 12,652 $ — $ 16,038 $ — $ 1,285 $ 49,503
Yellow — — — — 3,117 — 3,290 6,407
Red — — — 3,552 10,433 — 2,377 16,362
Subtotal - Royalties $ 7,839 $ 11,689 $ 12,652 $ 3,552 $ 29,588 $ — $ 6,952 $ 72,272
Total Finance Receivables, gross $ 7,839 $ 67,685 $ 69,581 $ 42,844 $ 29,588 $ 29,912 $ 22,798 $ 270,247
December 31, 2023
2023 2022 2021 2020 2019 Prior Total
Term Loans
5 $ — $ — $ 13,734 $ — $ 5,696 $ — $ 19,430
4 25,799 32,211 — — — 10,485 68,495
3 24,341 24,285 10,227 — 31,807 — 90,660
2 — 6,924 12,493 — — 14,015 33,432
1 — — 9,128 — — — 9,128
Subtotal - Term Loans $ 50,140 $ 63,420 $ 45,582 $ — $ 37,503 $ 24,500 $ 221,145
Royalties
Green $ 27,785 $ — $ — $ 14,650 $ — $ 1,340 $ 43,775
Yellow — — — 3,212 — 3,419 6,631
Red — — 3,834 10,433 — 2,587 16,854
Subtotal - Royalties $ 27,785 $ — $ 3,834 $ 28,295 $ — $ 7,346 $ 67,260
Total Finance Receivables, gross $ 77,925 $ 63,420 $ 49,416 $ 28,295 $ 37,503 $ 31,846 $ 288,405
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Note 4. Intangible Assets
As of September 30, 2024 and December 31, 2023, the gross book value, accumulated amortization, net book value and estimated useful life of acquired intangible assets were as follows (in thousands, except estimated useful life data):
September 30, 2024
Gross Book Value Accumulated Amortization Net Book Value Estimated Useful Life
Trade names and trademarks $ 210 $ 107 $ 103 10
Customer relationships 240 123 117 10
Total intangible assets $ 450 $ 230 $ 220
December 31, 2023
Gross Book Value Accumulated Amortization Net Book Value Estimated Useful Life
Licensing Agreement (1)
$ 29,400 $ 23,167 $ 6,233 10
Trade names and trademarks 210 92 118 10
Customer relationships 240 104 136 10
Total intangible assets $ 29,850 $ 23,363 $ 6,487
(1) Prior to the Company's acquisition of Enteris, Enteris entered into the License Agreement with Cara Therapeutics, Inc. ("Cara"), for oral formulation rights to Enteris’ Peptelligence® technology to develop and commercialize Oral KORSUVA TM in any indication worldwide, excluding South Korea and Japan. Cara is obligated to pay Enteris certain development, regulatory and tiered commercial milestone payments, as well as low single-digit royalties based on net sales in the licensed territory. During the three months ended June 30, 2024, the Company concluded that the milestones and royalties pursuant to the License Agreement would not be realized as a result of non-viability of product covered by the License Agreement. The Company has recognized a full impairment on the license of its remaining net book value of $ 5.8 million which is included in the "Loss on impairment of intangible assets" section of our unaudited condensed consolidated statements of income for the nine months ended September 30, 2024.
Amortization expense was $ 11.3 thousand for the three months ended September 30, 2024 and $ 0.4 million for the three months ended September 30, 2023 , and was recognized within depreciation and amortization expense on the unaudited condensed consolidated statements of income. Amortization expense related to intangible assets was $ 0.5 million and $ 1.3 million for the nine months ended September 30, 2024 and 2023 , respectively. Based on amounts recorded at September 30, 2024 , the Company will recognize acquired intangible asset amortization as follows (in thousands):
Remainder of 2024 $ 11
2025 45
2026 45
2027 45
2028 45
Thereafter 29
Total $ 220
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Note 5. Debt
Revolving Credit Facility
On June 28, 2023, the Company entered into a new credit agreement (the “Credit Agreement”) by and among SWK Funding LLC, the Company’s wholly-owned subsidiary (together with the Company, the “Borrower”), the lenders party thereto (“Lenders”), and First Horizon Bank as a Lender and Agent (the “Agent”). The Credit Agreement provides for a revolving credit facility with an initial maximum principal amount of $ 45.0 million. The Credit Agreement provides that the Company may request one or more incremental increases in an aggregate amount not to exceed $ 80.0 million, subject to the consent of the Agent and each Lender, at any time prior to the termination of the revolving credit period on June 28, 2026 (the “Commitment Termination Date”). The revolving credit period will be followed by a one-year amortization period, with the final maturity date of the Credit Agreement occurring on June 28, 2027.
The outstanding principal balance of the Credit Agreement will bear interest at a rate per annum equal to the sum of (i) Term Secured Overnight Financing Rate, or SOFR (as defined in the Credit Agreement) plus (ii) 3.75 percent at all times prior to the Commitment Termination Date. The outstanding principal balance of the revolving credit facility will bear interest at a rate per annum equal to the sum of (i) Term SOFR (as defined in the Credit Agreement) plus (ii) 4.25 percent at all times on and after the Commitment Termination Date. Under the terms of the Credit Agreement, all accrued and unpaid interest shall be due and payable, in arrears, on the first business day of each calendar month.
The Credit Agreement contains customary affirmative and negative covenants, in addition to financial covenants specifying that, as of the end of each calendar month, (i) the consolidated leverage ratio of Borrower will not exceed 1.00 to 1.00, (ii) the consolidated interest coverage ratio of Borrower will not be less than 4.00 to 1.00, (iii) the cash collection rate in relation to Borrower’s portfolio of loan assets will not be less than 4.5 percent for such calendar month, (iv) the net charge-off percentage in relation to Borrower’s portfolio of loan assets will not exceed 3 percent for such calendar month, (v) the weighted average risk rating in relation to Borrower portfolio of loan assets will not be less than 3.00 , and (vi) the Company's cumulative share repurchases will not exceed $ 5 million in value in any 12-month period. In addition, the Credit Agreement provides that at no time shall the Company permit its consolidated tangible net worth to be less than $ 145.0 million, or its liquidity (as defined in the Credit Agreement) to be less than $ 5.0 million. The Credit Agreement also contains events of default customary for such financings, the occurrence of which would permit the Agent and Lenders to accelerate the aggregate principal amount due thereunder.
The Credit Agreement refinances the Company’s Loan and Security Agreement dated as of June 29, 2018 (the “Prior Credit Agreement”), as amended, between the Company and Cadence Bank, N.A. (“Cadence Bank”), as the lender and administrative agent, which was due to expire on September 30, 2025. The Prior Credit Agreement was terminated by the Company, effective as of June 28, 2023.
On October 10, 2023, the Company entered into an amendment to the 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.
On August 29, 2024, the Company entered into an amendment to the Credit Agreement pursuant to which the consolidated interest coverage ratio of Borrower will not be less than 2.00 to 1:00, the net charge-off percentage in relation to Borrower's portfolio of loan assets will not be less than 8 percent for such calendar month, and cumulative share repurchases will not exceed $ 7.0 million in value in any 12-month period.
As of September 30, 2024 there were no amounts outstanding under the new Credit Agreement. During each of the three months ended September 30, 2024 and 2023, the Company recognized $ 0.2 million, of interest expense relating to the Credit Agreement. During the nine months ended September 30, 2024 and 2023, the Company recognized $ 0.8 million and $ 0.7 million, respectively, of interest expense in connection with the Credit Agreement and Prior Credit Agreement, respectively.
Senior Notes Due 2027
On October 3, 2023, the Company issued a $ 30.0 million aggregate principal amount of 9.00 % Senior Notes due 2027 ("2027 Senior Notes" or "Notes”) in a registered underwritten public offering. On October 27, 2023, the underwriter exercised, in full, its over-allotment option by purchasing an additional approximately $ 3.0 million aggregate principal amount of the 2027 Senior Notes. The interest rates are fixed at 9.00 % per annum and are payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year, commencing on December 31, 2023, and until maturity. The Notes will mature on January 31, 2027. The total net proceeds from the debt offering, after deducting initial purchase discounts and debt issuance costs, were approximately $ 30.6 million. The Company intends to use the net proceeds from the offering for general corporate purposes, including funding future acquisitions and investments, repaying indebtedness, making capital expenditures, and funding working capital.
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The following table summarizes the outstanding balance of the Notes, net of debt issuance costs (in thousands):
September 30, 2024 December 31, 2023
2027 Senior Notes $ 32,969 $ 32,969
Debt issuance costs ( 1,726 ) ( 2,188 )
Total unsecured senior notes, net $ 31,243 $ 30,781
The Company’s future principal obligations for the Notes were as follows (in thousands):
September 30, 2024
Remainder of 2024 $ —
2025 —
2026 —
2027 32,969
Total unsecured senior notes, net $ 32,969
The Company may redeem the Notes for cash in whole or in part at any time (i) on or after September 30, 2025 (the “First Call Date”) and prior to September 30, 2026, at a price equal to the sum of 102 % of their principal amount, and (ii) on or after September 30, 2026 at a price equal to the sum of 100 % of their principal amount, plus (in each case noted above) accrued and unpaid interest to, but excluding, the date of redemption. At any time prior to the First Call Date, the Company may, at its option, redeem the Notes for cash, in whole at any time or in part from time to time at a redemption price equal to (i) 100 % of the principal amount of Notes redeemed, plus (ii) a Make-Whole Amount (as defined in the Indenture), plus (iii) accrued and unpaid interest, if any, to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes. Additionally, upon the occurrence of a Triggering Event (as defined in the Indenture), holders of the Notes will have the right to require the Company to make an offer to repurchase all or any portion of their Notes for cash at a purchase price equal to 100 % of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the date of purchase.
The Notes are senior unsecured obligations of the Company and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness.
The Company evaluated the 2027 Senior Notes for derivatives pursuant to Accounting Standard Codification ("ASC") 815, "Derivatives and Hedging," and identified an embedded derivative that required bifurcation as the feature is not clearly and closely related to the host instrument. The embedded derivative was a default provision, which could require additional interest payments. The Company reassesses the feature quarterly to determine if it requires separate accounting. There have been no changes to the Company’s assessment that the fair value of the embedded derivative is immaterial through September 30, 2024.
Note 6. Commitments and Contingencies
Lease Obligations
All the Company’s material leases are operating leases. right-of-use ("ROU") assets related to operating leases are included on the unaudited condensed consolidated balance sheets in other non-current assets. Operating lease cost is recognized over the lease term on a straight-line basis and is recorded within general and administrative expenses on the unaudited condensed consolidated statements of income. In March of 2023, the Company entered into a new lease for office space in Dallas, Texas on Sherry Lane. The Company’s corporate office space in Dallas, Texas totals approximately 4,450 square feet.
On June 10, 2024, the Company entered into a lease termination agreement to its Preston Road office lease in Dallas (the “Lease Termination”). The Lease Termination terminated the Company’s rights and obligations with respect to the leased premises on June 30, 2024. As such, the ROU assets and operating lease liabilities were written off, and the Company recorded a gain of $ 4 thousand for the nine months ended September 30, 2024 and paid an early termination fee of $ 9 thousand.
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The Enteris headquarters is located in Boonton, New Jersey, where Enteris leases approximately 32,000 square feet of space. The office lease expires in December 2029 with an option to renew for an additional five years .
The components of lease cost were as follows (in thousands):
Three Months Ended
September 30, Nine Months Ended
September 30,
2024 2023 2024 2023
Operating lease cost $ 108 $ 139 $ 366 $ 361
Variable lease cost 17 11 49 35
Total lease cost $ 125 $ 150 $ 415 $ 396
Future minimum rent on the Company's operating leases was as follows as of September 30, 2024 (in thousands):
Remainder of 2024 $ 110
2025 456
2026 461
2027 465
2028 405
Thereafter 272
Total future lease payments $ 2,169
Contingent Consideration
During fiscal year 2019 the Company recorded contingent consideration related to the 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement. Contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved, with changes in the estimated fair value recognized in earnings. During the three months ended June 30, 2024, it was determined the milestones and royalties pursuant to the License Agreement would not be realized as a result of non-viability of the product covered by the License Agreement. Accordingly, the Company concluded that the liability for contingent consideration, previously held at its estimated fair value of $ 4.9 million, should be $ 0 . The write-off of this contingent consideration liability resulted in a gain of $ 4.9 million during the three months ended June 30, 2024, and is included in the "Change in fair value of acquisition-related contingent consideration" caption of our unaudited condensed consolidated statements of income for the nine months ended September 30, 2024.
Unfunded Commitments
Per the terms of the royalty purchase or credit agreements, unfunded commitments are contingent upon reaching an established revenue threshold or other performance metrics on or before a specified date or period of time, and in the case of loan transactions, are subject to being advanced as long as an event of default does not exist. As of September 30, 2024, SWK had $ 39.0 million of unfunded commitments.
Litigation
The Company is involved in, or has been involved in, arbitrations or various other legal proceedings that arise from the normal course of its business. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material impact on the Company’s results of operations, balance sheets and cash flows due to defense costs, and divert management resources. The Company cannot predict the timing or outcome of these claims and other proceedings. As of September 30, 2024, the Company is not involved in any arbitration and/or other legal proceeding that it expects to have a material effect on its business, financial condition, results of operations and cash flows.
Indemnification
As permitted by Delaware law, the Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving in such capacity, or in other capacities at the Company’s request. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any such amounts. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is insignificant. Accordingly, the Company had no liabilities recorded for these agreements as of September 30, 2024 and December 31, 2023.
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Note 7. Fair Value Measurements
The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the three hierarchy levels.
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in inactive markets.
Level 3: Unobservable inputs are not corroborated by market data. This category is comprised of financial and non-financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies using significant inputs that are generally less readily observable from objective sources.
Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers occurred. There were no transfers between any levels during the nine months ended September 30, 2024 and 2023.
The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivative financial instruments, other than investment in affiliates.
Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized.
Cash and cash equivalents
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.
Finance Receivables
Finance receivables are measured at amortized cost, which approximates fair value. The fair value of finance receivables is estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the finance receivables. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. These receivables are classified as Level 3. Finance receivables are not measured at fair value on a recurring basis, but estimates of fair value are reflected below.
Contingent Consideration
The fair value measurements of the contingent consideration obligations arising from business combinations are classified as Level 3 estimates under the fair value hierarchy, as these items have been valued using unobservable inputs. These inputs include: (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Changes in fair value of this obligation are recorded as income or expense within operating income in our consolidated statements of income. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement. As noted above in Note 6, the acquisition-related contingent consideration liability was written down to $ 0 during the three months ended June 30, 2024 due to non-viability of the underlying product.
Marketable Investments
If active market prices are available, fair value measurement is based on quoted active market prices and, accordingly, these securities are classified as Level 1. If active market prices are not available, fair value measurement is based on observable inputs other than quoted prices included within Level 1, such as prices for similar assets or broker quotes utilizing observable inputs, and accordingly these securities are classified as Level 2. If market prices are not available and there are no observable inputs, then fair value would be estimated by using valuation models including discounted cash flow methodologies, commonly used option-pricing models and broker quotes. Such securities are classified as Level 3, if the valuation models and broker quotes are based on inputs that are unobservable in the market. If fair value is based on broker quotes, the Company checks the validity of received prices based on comparison to prices of other similar assets and market data such as relevant benchmark indices. Available-for-sale securities are measured at fair value on a recurring basis, while securities with no readily available fair market value are not, but estimates of fair value are reflected below.
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Derivative Instruments
For exchange-traded derivatives, fair value is based on quoted market prices, and accordingly, would be classified as Level 1. For non-exchange traded derivatives, fair value is based on option pricing models and are classified as Level 3.
The Company uses a foreign currency forward contract to manage the impact of fluctuations in foreign currency denominated cash flows expected to be received from one of its royalty finance receivables denominated in a foreign currency. The foreign currency forward contract is not designated as a hedging instrument, and changes in fair value are recognized in earnings. The foreign currency forward contract was recorded in other non-current assets in the condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023 and totaled to $ 1.6 million and $ 1.0 million, respectively. The Company recognized a loss of $ 1.0 million and a gain of $ 0.5 million due to changes in fair value related to its foreign currency forward contract during the three months ended September 30, 2024 and September 30, 2023, respectively. The Company recognized a $ 0.6 million and $ 2.1 million gain due to changes in fair value related to its foreign currency forward contract for the nine months ended September 30, 2024 and September 30, 2023, respectively.
The following table presents financial assets measured at fair value on a recurring basis as of September 30, 2024 (in thousands):
Total
Carrying
Value in
Consolidated
Balance
Sheets Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Financial Assets
Warrant assets $ 2,026 $ — $ — $ 2,026
Marketable investments 755 727 — 28
Foreign currency forward contract 1,611 — — 1,611
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 (in thousands):
Total
Carrying
Value in
Consolidated
Balance
Sheets Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Financial Assets
Warrant assets $ 1,759 $ — $ — $ 1,759
Marketable investments 48 — — 48
Foreign currency forward contract 974 — — 974
Financial liabilities:
Contingent consideration payable $ 4,900 $ — $ — $ 4,900
The contingent consideration payable was valued using a discounted cash flow approach and included a significant unobservable input which is the discount rate. During the nine months ended September 30, 2024 there was a write off of the full balance of contingent consideration liability due to the non-viability of the underlying product. See Note 6 for further information.
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The changes in fair value of the warrant assets during the nine months ended September 30, 2024 and 2023 were as follows (in thousands):
September 30, 2024 September 30, 2023
Fair value - December 31, 2023 $ 1,759 Fair value - December 31, 2022
$ 1,220
Issued 1,072 Issued 822
Exercised ( 985 ) Exercised —
Change in fair value 178 Change in fair value ( 745 )
Loss on foreign currency transactions $ 2 Loss on foreign currency transactions $ —
Fair value - September 30, 2024
$ 2,026 Fair value - September 30, 2023
$ 1,297
The Company holds warrants issued to the Company in conjunction with certain term loan investments. These warrants meet the definition of a derivative and are included in the unaudited condensed consolidated balance sheets. The fair values for warrants outstanding, which do not have a readily determinable value, are measured using the Black-Scholes option pricing model. The following ranges of assumptions were used in the models to determine fair value:
September 30, 2024 December 31, 2023
Dividend rate range — —
Risk-free rate range 3.7 % to 4.7 %
3.8 % to 4.8 %
Expected life (years) range 2.4 to 7.0
1.2 to 5.8
Expected volatility range 54.7 % to 177.7 %
75.3 % to 154.3 %
The warrant assets are valued using a market approach and include significant unobservable inputs such as risk-free rate, expected life, and expected volatility. For the nine months ended September 30, 2024 the risk-free rate range weighted average was 4.0 %, and had a median of 4.3 %. For the year ended December 31, 2023 the risk-free rate range weighted average was 4.3 %, and had a median of 3.8 %. For the nine months ended September 30, 2024 the expected life range weighted average was 6.0 years, and had a median of 4.5 years. For the year ended December 31, 2023 the expected life range weighted average was 3.4 years, and had a median of 4.4 years. For the nine months ended September 30, 2024 the expected volatility range weighted average was 74.3 %, and had a median of 90.8 %. For the year ended December 31, 2023 the expected volatility range weighted average 124.6 %, and median of 134.4 %.
As of September 30, 2024 and December 31, 2023, the Company had one royalty, Best, that was deemed to be impaired based on reductions in carrying value in prior periods. As of September 30, 2024, the Company had two loans, Trio Healthcare and Exeevo, that were deemed to be impaired based on reductions in carrying value during the nine months ended September 30, 2024 . The following table presents this royalty and the loans measured at amortized cost using the effective interest method, which approximates fair value, on a nonrecurring basis as of September 30, 2024 and December 31, 2023 (in thousands):
Total
Carrying
Value in
Consolidated
Balance
Sheets Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
September 30, 2024
$ 8,388 $ — $ — $ 8,388
December 31, 2023
$ 2,587 $ — $ — $ 2,587
There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2024 and December 31, 2023.
The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying unaudited condensed consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivative financial instruments measured at fair value on a recurring and non-recurring basis.
22
The following table presents the fair value of financial assets as of September 30, 2024 (in thousands):
Carrying Value Fair Value Level 1 Level 2 Level 3
Financial Assets
Finance receivables, net $ 255,904 $ 255,904 $ — $ — $ 255,904
Marketable investments 755 755 727 — 28
Warrant assets 2,026 2,026 — — 2,026
Foreign currency forward contract 1,611 1,611 — — 1,611
The following table presents the fair value of financial assets and liabilities as of year ended December 31, 2023 (in thousands):
Carrying Value Fair Value Level 1 Level 2 Level 3
Financial Assets
Finance receivables, net $ 274,504 $ 274,504 $ — $ — $ 274,504
Marketable investments 48 48 — — 48
Warrant assets 1,759 1,759 — — 1,759
Foreign currency forward contract 974 974 — — 974
Financial liabilities
Contingent consideration payable $ 4,900 $ 4,900 $ — $ — $ 4,900
Note 8. Revenue Recognition
The Company's Pharmaceutical Development segment recognizes revenues received from contracts with its customers by revenue source, as we believe it best depicts the nature, amount, timing and uncertainty of our revenue and cash flow. The Company's Finance Receivables segment does not have any revenues received from contracts with customers.
The following table provides the contract revenue recognized by revenue source for the three and nine months ended September 30, 2024 and 2023 (in thousands):
Three Months Ended
September 30, Nine Months Ended
September 30,
2024 2023 2024 2023
Pharmaceutical Development Segment
License Agreement $ — $ — $ 49 $ 10
Pharmaceutical Development 628 315 1,662 606
Total contract revenue $ 628 $ 315 $ 1,711 $ 616
The Company's contract liabilities represent advance consideration received from customers and are recognized as revenue when the related performance obligation is satisfied.
The Company’s contract liabilities are presented as deferred income and are included in accounts payable and accrued liabilities in the consolidated balance sheets (in thousands):
September 30,
2024 December 31, 2023
Pharmaceutical Development Segment
Deferred income $ 2,109 $ 9
Total contract liabilities $ 2,109 $ 9
23
During the nine months ended September 30, 2024, the Company recognized the full remaini ng balance of $ 9 thousand of 2023 deferred income from satisfaction of performance obligations. The Company did not have any contra ct assets as of September 30, 2024 or December 31, 2023.
Enteris Exclusive Option and Asset Purchase Agreement
With an effective date of January 1, 2024, we entered into an exclusive option and asset purchase agreement with a strategic partner on March 14, 2024 which granted the partner an exclusive option to acquire certain of Enteris’ assets related to its business of providing clinical manufacturing and development services. The partner must exercise the option by or before January 1, 2026. In exchange for the exclusive purchase option the partner is to provide consideration in the form of an "option fee" and "guaranteed revenue payments."
The option fee is broken into two components: A low-single digit million fee due within 30 business days of executing the agreement; and should the option not be exercised by the first anniversary of the effective date, an additional low-single digit million fee will be due at that time. The first option fee was paid in April 2024. Option fee payments will be included in deferred income until the earlier of term expiration or exercise of the purchase option. Should the partner exercise the purchase option, any option fee payments made will be applied towards the purchase price.
The guaranteed revenue payments include two components: A mid-single digit million guaranteed revenue payment in 2024 and a mid-single digit million guaranteed revenue payment in 2025. The revenue is to be derived by the partner under an existing collaboration agreement, and the partner is to pay the difference should the minimum amount not be met each year. Each year's guaranteed revenue amount is to be paid in two installments semi-annually each year. Should revenue exceed the 2024 or 2025 guaranteed revenue amounts after receiving a difference payment in the first half of the year, we must repay the partner the amount of such overpayment. Guaranteed revenue of $ 0.4 million was recognized during the nine months ended September 30, 2024.
Note 9. Segment Information
Selected financial and descriptive information is required to be provided about reportable operating segments, considering a “management approach” concept as the basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the Company for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are evident from the structure of the Company’s internal organization, focusing on financial information that the Company’s CEO uses to make decisions about the Company’s operating matters.
As described in Note 1, SWK Holdings Corporation and Summary of Significant Accounting Policies, the Company has determined it has two reportable segments: Finance Receivables and Pharmaceutical Development, and each are individually managed and provide separate services. Revenues by segment represent revenues earned on the services offered within each segment. The Company does not report assets by reportable segment, nor does the Company report results by geographic region, as these metrics are not used by the Company’s chief executive officer in assessing performance or allocating resources to the segments.
Segment performance is evaluated based on several factors, including income (loss) from continuing operations before income taxes. Management uses this measure of profit (loss) to evaluate segment performance because the Company believes this measure is indicative of performance trends and the overall earnings potential of each segment. The Company does not report assets by reportable segment, as this metric is not used by the Company's CEO in assessing performance or allocating resources to the segments.
24
The following tables present financial information for the Company's reportable segments for the periods indicated (in thousands):
Three Months Ended September 30, 2024
Finance Receivables Pharmaceutical Development and Other Holding Company and Other Consolidated
Revenue $ 9,498 $ 628 $ — $ 10,126
Other revenue 289 3 — 292
Provision for credit losses 1,385 — — 1,385
Interest expense 230 2 907 1,139
Pharmaceutical manufacturing, research and development expense — 585 — 585
Depreciation and amortization expense — 214 20 234
General and administrative expense 88 722 2,183 2,993
Other income, net 292 — — 292
Income tax expense — — 906 906
Net income (loss) 8,376 ( 892 ) ( 4,016 ) 3,468
Three Months Ended September 30, 2023
Finance Receivables Pharmaceutical Development and Other Holding Company and Other Consolidated
Revenue $ 8,608 $ 315 $ — $ 8,923
Other revenue 39 — — 39
Provision for credit losses 223 — — 223
Interest expense 176 — — 176
Pharmaceutical manufacturing, research and development expense — 606 — 606
Depreciation and amortization expense — 630 22 652
General and administrative expense 213 574 2,192 2,979
Other expense, net ( 238 ) — — ( 238 )
Income tax benefit — — ( 386 ) ( 386 )
Net income (loss) 7,797 ( 1,495 ) ( 1,828 ) 4,474
25
Nine Months Ended September 30, 2024
Finance Receivables Pharmaceutical Development and Other Holding Company and Other Consolidated
Revenue $ 30,519 $ 1,711 $ — $ 32,230
Other revenue 392 3 — 395
Provision for credit losses 10,777 — — 10,777
Loss on impairment of intangible assets — 5,771 — 5,771
Interest expense 820 7 2,687 3,514
Pharmaceutical manufacturing, research and development — 1,635 — 1,635
Change in fair value of acquisition-related contingent consideration — ( 4,900 ) — ( 4,900 )
Depreciation and amortization expense — 1,106 63 1,169
General and administrative expense 257 2,179 6,164 8,600
Other income (expense), net 4,135 — ( 408 ) 3,727
Income tax expense — — 2,170 2,170
Net income (loss) 23,192 ( 4,084 ) ( 11,492 ) 7,616
Nine Months Ended September 30, 2023
Finance Receivables Pharmaceutical Development and Other Holding Company and Other Consolidated
Revenue $ 27,146 $ 616 $ — $ 27,762
Other revenue 106 — 2 108
Benefit for credit losses ( 459 ) — — ( 459 )
Interest expense 721 — — 721
Pharmaceutical manufacturing, research and development expense — 2,834 — 2,834
Depreciation and amortization expense — 1,907 30 1,937
General and administrative expense 380 2,282 5,854 8,516
Other expense, net ( 319 ) — — ( 319 )
Income tax expense — — 959 959
Net income (loss) 26,291 ( 6,407 ) ( 6,841 ) 13,043
Included in Holding Company and Other are the expenses of the parent holding company and certain other enterprise-wide overhead costs, including public company costs and non-Enteris corporate employees, which have been included for purposes of reconciling to the consolidated amounts.
Note 10. Subsequent Events
On November 14, 2024, the Company sold its investment interest in Exeevo to a third-party purchaser. Consideration received or to be received for the sale consists of (a) $ 3.4 million cash at closing, (b) $ 0.7 million contingent payment on January 2, 2025 with contingency based on third-party purchaser executing a new agreement with an existing key vendor, (c) $ 0.5 million cash on February 1, 2025, and (d) three year earn out consisting of 30 % of the annual increase in SAAS gross margin. The Company is in the process of completing its accounting for the sale, but does not believe that there is any indication of impairment to the carrying value as of September 30, 2024.
On October 1, 2024, BIOLASE filed for Chapter 11 bankruptcy protection with a third-party stalking horse bidder in place. The Company agreed to make additional fundings to support the Chapter 11 process through Debtor-in-Possession (“DIP”) Financing. On October 9, 2024, the Company advanced an additional $ 1.4 million DIP Financing to BIOLASE. On November 4, 2024, an auction was held for the purchase of the BIOLASE assets and was won by an international third-party bidder with an all-cash bid of $ 20.1 million. The Company is in the process of completing its accounting for the transaction, but does not believe that there is any indication of impairment to the carrying value as of September 30, 2024.
26
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.