Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our financial statements and the related notes included elsewhere in this Annual Report. Statements below regarding future events or performance are “forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the sections entitled “Risk Factors, ” and ”Special Note Regarding Forward-Looking Statements” as revised and supplemented by those risks described from time to time in other reports which we file with the SEC. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report.
Overview
We have organized our operations into two segments: Finance Receivables and Pharmaceutical Development. These segments reflect the way we evaluate our business performance and manage our operations. Please refer to Part I, Item 1, Business and Part II, Item 8, Financial Statements , Notes 1 and 13 of the notes to the consolidated financial statements for further information regarding segment information.
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 strategic partner an exclusive option to acquire certain of Enteris’ assets related to its business of providing good manufacturing practice (GMP) manufacturing and clinical supply services through Phase 1 and 2 to third parties, subject to certain exclusions. The strategic partner must exercise the Option by or before January 1, 2026. As of December 31, 2024, Enteris is classified as held for sale as the Option is expected to be exercised within the next 12-months. Please refer to Part II, Item 8, Financial Statements , Note 13 and Note 7 of the notes to the consolidated financial statements for further information regarding the Option and Asset Purchase Agreement with the strategic partner and held for sale classification.
Finance Receivables Portfolio Overview
The tables below provide an overview of our outstanding transactions as of, and for the year ended, December 31, 2024 (in thousands, except rate, share and per share data):
Royalty Purchases Licensed Technology Funded Amount GAAP Balance Revenue Recognized
Besivance® (1)
Ophthalmic antibiotic $ 6,000 $ — $ 29
Best ABT, Inc. (2), (3)
Oncology diagnosis 5,784 2,347 —
Coflex®/Kybella® Spinal stenosis/submental fullness 4,350 3,053 246
Cambia® (4)
NSAID migraine treatment 8,500 — 420
Duo Royalty Japanese Women's health/cystic fibrosis 15,353 11,231 2,346
Flowonix Medical, Inc. (3),(5)
Drug delivery device 12,455 8,433 —
Forfivo XL® Depressive disorder treatment 6,000 1,267 1,239
Ideal Implant, Inc. (3), (6)
Aesthetics 4,025 3,050 —
Immune Globulin Immune Globulin Therapeutics 14,100 11,685 1,729
Iluvien®
Diabetic macular edema 16,501 15,865 1,774
Relief Rare Disease Portfolio 7,701 8,005 490
Veru, Inc (7)
Women's health 10,000 — 582
22
Term Loans Type Maturity Date Principal GAAP Balance Rate Revenue Recognized
4Web, Inc. First lien 6/30/25 $ 23,736 $ 26,482 11.3 % $ 4,722
AOTI, Inc. First lien 3/21/27 8,478 8,635 11.2 % 1,895
BIOLASE, Inc. (2) (3)
First lien 5/31/25 1,000 1,000 10.3 % 916
Biotricity, Inc. First lien 2/15/27 14,446 14,749 11.5 % 2,387
CDMO Manufacturer First lien 9/13/27 5,000 5,298 13.3 % 806
Elutia, Inc. First lien 8/10/27 21,045 23,944 12.0 % 3,767
Epica International, Inc. First lien 7/23/24 — — 11.5 % 957
Eton Pharmaceuticals, Inc. First lien 12/17/27 30,000 28,925 12.1 % 900
Exeevo, Inc. (3), (9)
First lien 7/1/27 — — 12.8 % 8
Journey Medical Corporation First lien 12/27/27 25,000 24,964 12.8 % 2,611
MedMinder Systems, Inc. First lien 8/18/28 22,500 22,774 12.3 % 2,884
MolecuLight, Inc. First lien 12/29/27 10,881 11,930 12.8 % 2,617
Nicoya Lifesciences, Inc. First lien 11/30/26 6,000 6,144 12.8 % 1,039
NeoLight, LLC First lien 2/15/26 5,000 5,250 13.5 % 992
Shield Therapeutics, Plc First lien 9/28/28 20,000 19,670 14.3 % 3,296
SKNV First lien 11/15/28 15,997 16,378 12.0 % 2,059
Triple Ring First lien 12/6/28 8,000 7,930 12.0 % 76
Marketable Investments Number of Shares Funded Amount GAAP Balance Change in Fair Value
Secured Royalty Financing (Marketable Investment) (2), (3)
N/A $ 3,000 $ 21 $ —
AOTI Common Stock (8)
402,634 N/A 559 (85)
EyePoint Pharmaceuticals — N/A — (181)
Warrants to Purchase Stock Number of Shares Exercise Price per Share GAAP Balance Change in Fair Value
4Web, Inc. TBD $ — $ — $ —
Aziyo Biologics, Inc. Tranche 1 157,895 6.65 353 70
Aziyo Biologics, Inc. Tranche 2 30,075 6.65 67 13
Biotricity, Inc. Tranche 1 9,589 37.56 2 (2)
Biotricity, Inc. Tranche 2 600,000 0.50 163 (5)
CDMO Manufacturer 211,442 1.42 — —
DxTerity Diagnostics, Inc. 2,019,231 — — —
Epica International, Inc. TBD — — —
Eton Pharmaceuticals, Inc. Tranche 1 51,239 5.86 424 327
Eton Pharmaceuticals, Inc. Tranche 2 18,141 6.62 148 111
Eton Pharmaceuticals, Inc. Tranche 3 289,736 5.32 3,008 1,936
EyePoint Pharmaceuticals, Inc. 40,910 11.00 — 127
EyePoint Pharmaceuticals, Inc. 7,773 19.30 — 22
Shield Warrant (10)
8,910,540 0.14 201 (193)
MedMinder, System, Inc. Tranche 1 57,859 10.37 — —
MedMinder Systems, Inc. Tranche 2 14,465 10.37 — —
Neolight, LLC 52,524 7.62 — —
MolecuLight, Inc. TBD — — —
23
Assets Revenue Recognized
Total gross finance receivables $ 289,009 $ 40,787
Total marketable investments 580 —
Fair value of warrant assets 4,366 —
Total $ 293,955 $ 40,787
(1) US royalty was paid off during the year ended December 31, 2021. SWK continues to receive insignificant royalties on international sales.
(2) Investment considered partially impaired.
(3) Investment on non-accrual.
(4) Carrying value was paid off during the year ended December 31, 2023. SWK continues to receive royalties on actual sales.
(5) Flowonix Medical assets were sold to a medical device company during the year ended December 31, 2023. In exchange for releasing its lien, SWK received cash at close and is expected to receive royalties on sales of two products. The finance receivable is now classified as a royalty.
(6) In July 2023, Ideal Implant assets were sold to an aesthetics company, which is expected to pay SWK a mid-single digit, capped royalty on implant sales.
(7) The Veru royalty was repaid during the year ended 2024.
(8) AOTI warrants exercised and converted to shares.
(9) Investment paid off during the year ended December 31, 2024.
(10) Exercise price is converted from 0.111 British Pound per share.
Unless otherwise specified, our senior secured debt assets generally are repaid by a revenue interest that is charged on a company’s quarterly net sales and royalties.
24
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, stock-based compensation, impairment of finance receivables and long-lived assets, impairment of goodwill and identifiable intangible assets, valuation of warrants and investments, contingent consideration, income taxes and contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our consolidated financial statements because they inherently involve significant judgments and uncertainties. For a discussion of our significant accounting policies, refer to Note 1 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data .
Allowance for Credit Losses
The allowance for credit losses is reviewed for adequacy based on portfolio collateral values and credit quality indicators, including non-performing assets, evaluation of portfolio diversification and concentration as well as economic conditions to determine the need for a qualitative adjustment. We review our finance receivables periodically to determine the probability of loss, and record charge-offs after considering such factors as delinquencies, the financial condition of obligors, the value of underlying collateral, as well as third-party credit enhancements such as guarantees.
The process of determining the level of the allowance for credit losses requires a high degree of judgment. Others given the same information could reach different reasonable conclusions.
Finance Receivables
Finance receivables are measured based upon the difference between the recorded investment in each receivable and either the present value of the expected future cash flows discounted at each receivable’s effective interest rate (the receivable’s contractual interest rate adjusted for any deferred fees, costs, discount or premium at the date of origination or acquisition) or if a receivable is collateral dependent, the collateral’s fair value. When impairment is determined to be probable, the measurement will be based on the fair value of the collateral. The determination of impairment involves management’s judgment and the use of market and third-party estimates regarding collateral values. Valuations of impaired receivables and corresponding impairment affect the level of the reserve for credit losses.
Revenue Recognition
Finance Receivables Segment
Our Finance Receivables segment records interest income on an accrual basis based on the effective interest rate method to the extent that we expect to collect such amounts. Incentive fees, if any, are recognized when earned at the end of the relevant performance period, pursuant to the underlying contract. Other administrative service revenues are recognized when contractual obligations are fulfilled or as services are provided.
Pharmaceutical Development Segment
Our 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 us 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.
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must use its judgment to determine: (a) the number of performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; (c) the stand‑alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above; and d) the contract term and pattern of satisfaction of the performance obligations under step (v) above. Management uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand‑alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied.
25
Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in our consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.
Fair Value of Financial Instruments
The fair value of our financial instruments reflects the amounts 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).
Our financial instruments not required to be adjusted to fair value on a recurring basis consist principally of cash, cash equivalents, and accounts and finance receivables, accounts payable, and accrued expenses. We believe the carrying amount of cash and accounts and finance receivable, accounts payable and accrued expenses approximate fair value due to their relatively short maturities.
Income Taxes
The recognition of certain net deferred tax assets of our reporting entities is dependent upon, but not limited to, the future profitability of the reporting entity, when the underlying temporary differences will reverse, and tax planning strategies. Further, management’s judgment regarding the use of estimates and projections is required in assessing our ability to realize the deferred tax assets relating to NOL carryforwards, as most of these assets are subject to limited carryforward periods.
We will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist at each reporting date. Any adjustments to the deferred tax asset valuation allowance is recorded in the statement of operations in the period it is determined an adjustment is required.
Please refer to Note 14 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data .
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 1 of the notes to the consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data .
26
Results of Operations
This section of this Annual Report generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussion of 2023 items and year-to-year comparisons between 2023 and 2022 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Comparison of the Years Ended December 31, 2024 and 2023
The following table summarizes the results of our operations:
(in millions) For the Year Ended
December 31, Change
2024 2023
Revenues $ 45.0 $ 37.8 $ 7.2
Provision for credit losses 12.8 1.9 $ 10.9
Loss on impairment of intangible assets 5.8 — $ 5.8
Impairment of goodwill — 8.4 $ (8.4)
Interest expense 4.7 1.8 $ 2.9
Pharmaceutical manufacturing, research and development expense 2.2 3.4 $ (1.2)
Change in fair value of acquisition-related contingent consideration (4.9) (6.3) $ 1.4
Depreciation and amortization expense 1.4 2.6 $ (1.2)
General and administrative expense 11.5 11.2 $ 0.3
Other income, net 6.8 — $ 6.8
Income tax expense (benefit) 4.9 (1.3) $ 6.2
Net income 13.5 15.9 $ (2.4)
Revenues
Revenues increased to $45.0 million for the year ended December 31, 2024 from $37.8 million for the year ended December 31, 2023. The $7.2 million increase in revenue for the year ended December 31, 2024 consisted of a $4.8 million increase in Finance Receivables segment revenue and a $2.4 million increase in Pharmaceutical Development segment revenue. The $4.8 million increase in Finance Receivables segment revenue was primarily due to a $8.2 million increase in interest and fees earned due to funding new and existing loans offset by $2.5 million decrease in interest, fees and royalties earned on finance receivables that were paid off during the period. The increase in the Pharmaceutical Development segment was primarily due to the strategic partner collaboration agreement.
Provision for Credit Losses
Our 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 $12.8 million and $1.9 million for the years ended December 31, 2024 and 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 year ended December 31, 2024.
Impairment of Goodwill
We recognized a $8.4 million impairment charge during the year ended December 31, 2023. As part of the Company's annual goodwill impairment analysis, the Company elected to bypass the qualitative goodwill impairment assessment and proceed directly with a quantitative assessment. The goodwill impairment test concluded that the fair value of the Company's Pharmaceutical Development reporting unit did not exceed the carrying amount and the Company recognized an impairment.
Interest Expense
Interest expense consists of interest accrued on our revolving line of credit, 9.00% Senior Notes due 2027, unused line of credit and maintenance fees, as well as amortization of debt issuance costs. Interest expense increased to $4.7 million for year ended December 31, 2024 from $1.8 million for the year ended December 31, 2023. The $2.9 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.
27
Pharmaceutical Manufacturing, Research and Development Expense
Pharmaceutical manufacturing, research and development expense decreased from $3.4 million for the year ended December 31, 2023 to $2.2 million for the year ended December 31, 2024. The $1.2 million decrease was primarily due to a reduction in research and development and clinical trial expenditures related to cancelled projects during the period.
Change in Fair Value of Contingent Consideration
We recognized gains of $4.9 million and $6.3 million from the change in fair value of acquisition-related contingent consideration during the years ended December 31, 2024 and 2023, respectively. The contingent consideration is the earnout related to the 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to a license agreement ("License Agreement") with Cara Therapeutics, Inc. ("Cara") for oral formulation rights to Enteris' technology to develop and commercialize Oral KORSUVA™ in any indication worldwide, excluding South Korea and Japan. During the year ended December 31, 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.
Depreciation and Amortization Expense
The $1.2 million decrease in depreciation and amortization expense for the year ended December 31, 2024 primarily consists of a decrease in amortization expense related to no longer amortizing intangible assets related to the Cara license as the intangible assets were fully impaired during the year. Amortization expense is aligned with the expected future cash flows of the intangible assets. See Note 3 for more information on the impairment of the Cara license.
General and Administrative Expense
General and administrative expenses consist primarily of compensation, stock-based compensation and related costs for management, staff and Board; legal and audit expenses; and corporate governance expenses. General and administrative expenses increased to $11.5 million for the year ended December 31, 2024 from $11.2 million for the year ended December 31, 2023.
Other Income, Net
Other income, net increased to $6.8 million for the year ended December 31, 2024. Other income, net was immaterial for the year ended December 31, 2023. The $6.8 million increase includes a $2.5 million gain on revaluation related to the Iluvien royalty after a contractual re-negotiation, a $2.4 million increase in unrealized gains on warrants, a $1.1 million gain on asset payoff, and a gain of $0.6 million due to foreign currency transactions.
Income Tax Expense
During the years ended December 31, 2024 and 2023 we recognized $4.9 million income tax expense and $1.3 million of income tax benefit, respectively. Income tax expense increased period over period due to the release of valuation allowance on deferred tax assets of $6.7 million during the year ended December 31, 2023 and an increase in the Company's effective tax rate to 26.6% as of December 31, 2024 from a benefit of 8.7% for the same period in the prior year.
Liquidity and Capital Resources
As of December 31, 2024, we had $5.9 million in cash and cash equivalents, compared to $4.5 million as of December 31, 2023. The primary driver of the $1.4 million increase in our cash balance was $88.2 million of interest, fees, principal and royalty payments received on our finance receivables and $5.0 million of cash receipts from pharmaceutical development revenues. The increase in cash and cash equivalents was partially offset by $64.1 million of investment funding, net of deferred fees and origination expenses, a net credit facility payment of $6.2 million, a payroll and benefits expense of $5.4 million, $10.8 million of payments on accounts payable, and share repurchases of $6.0 million.
We entered into a $45.0 million revolving credit facility in June 2023 with First Horizon Bank. The Credit Agreement provides for one or more incremental increases not to exceed $80.0 million, subject to the consent of the Agent and each Lender, at any time prior to the Commitment Termination Date. On October 10, 2023, the Company entered into a First Amendment to Credit Agreement pursuant to which Woodforest National Bank was added as a lender under the Credit Agreement for an aggregate commitment of $15.0 million, thereby increasing the aggregate commitments under the Credit Agreement from $45.0 million to $60.0 million. As of December 31, 2024, there was $6.2 million outstanding amount under the new Credit Agreement, and $35.6 million was available for borrowing. The $60.0 million Credit Agreement contains a $5.0 million liquidity covenant, bringing the total amount available for borrowing to $35.6 million.
28
On October 3, 2023, the Company completed a registered underwritten public offering of $30.0 million of the Notes. On October 27, 2023, the underwriters exercised their option to purchase an additional approximately $3.0 million in aggregate principal amount of the Notes. The Notes will mature on January 31, 2027, unless earlier redeemed, and will bear interest at a rate of 9.00% per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year and at maturity, commencing on December 31, 2023. The Company received net proceeds after discounts, commissions, expenses and fees, of approximately $30.6 million. See Note 8 for more information.
Primary Driver of Cash Flow
Our ability to generate cash in the future depends primarily upon our success in implementing our Finance Receivables business model of generating income by providing capital to a broad range of life science companies, institutions and inventors, as well as the success of our Pharmaceutical Development segment. We generate income primarily from four sources:
1. Primarily owning or financing through debt investments, royalties generated by the sales of life science products and related intellectual property;
2. Receiving interest and other income by advancing capital in the form of secured debt to companies in the life science sector;
3. Pharmaceutical development, manufacturing, and licensing activities; and
4. Realizing capital appreciation from equity-related investments in the life science sector.
As of December 31, 2024, our finance receivables portfolio contains $277.8 million of net finance receivables and $0.6 million of marketable investments. We expect these assets to generate positive cash flows in 2025. We continuously monitor the short and long-term financial position of our finance receivables portfolio. In addition, the majority of our finance receivables portfolio are debt instruments that carry floating interest rates. Changes in interest rates, including the levels of the underlying reference rates may affect the interest income for debt instruments with floating rates. We believe we are well positioned to benefit should market interest rates rise in the future.
We continue to evaluate multiple attractive opportunities that, if consummated, we believe would similarly generate additional income. Since the timing of any investment is difficult to predict, our Finance Receivables segment may not be able to generate positive cash flow above what our existing assets are expected to produce in 2025. We anticipate near-term repayments from borrowers, however, no assurances can be given that actual results would not differ materially from the statement above.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage partner companies’ requests for funding and take the form of loan commitments and lines of credit.
The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the partner company defaults, and the value of any existing collateral becomes worthless. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.
As of December 31, 2024, we had $5.8 million in unfunded commitments. Please refer to Item 1., Financial Statements , Note 9 of the notes to the consolidated financial statements for further information regarding the Company’s commitments and contingencies.
29