Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, and the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2024 (“Annual Report”), as well as our unaudited condensed consolidated financial statements and the accompanying notes included in this report.
Overview
We have organized our operations into two segments: Finance Receivables and Pharmaceutical Development. These segments reflect the way the Company evaluates its business performance and manages its operations. Please refer to Item 1. Financial Statements, Note 9 of the notes to the unaudited condensed consolidated financial statements for further information regarding segment information.
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Finance Receivables Portfolio Overview
The table below provides an overview of our outstanding finance receivables transactions as of and for the three months ended March 31, 2025 (in thousands, except rate, share and per share data):
Revenue Recognized
Royalty Purchases Licensed Technology Funded Amount GAAP Balance Year-to-Date
Besivance® (1)
Ophthalmic antibiotic $ 6,000 $ — $ 2
Forfivo XL® (7)
Depressive disorder treatment 6,000 1,110 506
Coflex®/Kybella® (7)
Spinal stenosis/submental fullness 4,350 2,702 48
Cambia® (4) (7)
NSAID migraine treatment 8,500 — 98
Duo Royalty (7)
Japanese Women's health/cystic fibrosis 15,353 10,083 591
Immune Globulin (7)
Immune Globulin Therapeutics 14,100 10,452 443
Relief (7)
Rare Disease Portfolio 7,701 7,331 336
Best ABT, Inc. (2), (3)
Oncology diagnosis 5,784 2,347 —
Flowonix Medical, Inc. (2), (3), (5)
Drug delivery device
12,455 7,433 —
Ideal Implant, Inc. (2), (3)
Aesthetics 4,025 3,039 —
Iluvien® (8)
Diabetic macular edema 16,501 — 519
Revenue Recognized
Term Loans Type Maturity Date Principal GAAP Balance Rate Year-to-Date
4Web, Inc. First lien 06/30/25 $ 20,336 $ 23,238 12.8% $ 944
AOTI, Inc. First lien 03/21/27 8,478 8,674 11.2% 342
Elutia, Inc. First lien 08/10/27 21,045 24,351 12.0% 891
Biotricity, Inc. First lien 02/15/27 14,446 14,876 11.5% 675
CDMO Manufacturer First lien 09/13/27 5,000 5,368 13.3% 195
eTon Pharmaceuticals, Inc. First lien 12/17/27 30,000 29,148 12.1% 1,102
Journey Medical Corporation First lien 12/27/27 25,000 25,068 12.8% 901
MedMinder Systems, Inc. First lien 08/18/28 22,500 22,825 12.3% 774
MolecuLight, Inc. (8)
First lien 12/29/27 — — 12.8% 27
Nicoya Lifesciences, Inc. First lien 11/30/26 6,000 6,191 12.8% 248
NeoLight, LLC First lien 02/15/26 5,186 5,499 13.5% 243
Shield Therapeutics, Plc First lien 09/28/28 20,000 19,777 14.3% 820
SKNV First lien 11/15/28 15,997 16,385 12.0% 494
Triple Ring First lien 12/06/28 8,000 7,967 12.0% 278
ImpediMed First lien 02/05/30 10,000 9,675 13.8% 235
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Loss Recognized
Marketable Investments Number of Shares Funded Amount GAAP Balance Year-to-Date
Secured Royalty Financing (Marketable Investment) (2), (3)
N/A $ 3,000 $ 13 $ —
AOTI Common Stock (6)
402,634 N/A $ 442 $ (105)
Change in Fair Value
Warrants to Purchase Stock Number of Shares Exercise Price per Share ($) GAAP Balance Year-to-Date
4Web, Inc. TBD $ — $ — $ —
ImpediMed 12,491,870 0.05 169 (134)
Aziyo Biologics, Inc. Tranche 1 157,895 6.65 196 (157)
Aziyo Biologics, Inc. Tranche 2 30,075 6.65 37 (30)
Biotricity, Inc. Tranche 1 57,356 37.56 2 —
Biotricity, Inc. Tranche 2 600,000 0.50 196 33
CDMO Manufacturer 211,442 1.42 — —
DxTerity Diagnostics, Inc. 2,019,231 — — —
Epica International, Inc. TBD — — —
Eton Pharmaceuticals, Inc. Tranche 1 51,239 5.86 403 (21)
Eton Pharmaceuticals, Inc. Tranche 2 18,141 6.62 141 (7)
Eton Pharmaceuticals, Inc. Tranche 3 289,736 5.32 2,922 (86)
Shield Warrant 8,910,540 0.14 179 (22)
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 — — —
Revenue Recognized
Assets Year-to-Date
Total finance receivables, gross $ 231,861 $ 8,688
Total finance receivables and related interest receivable held for sale 33,990 2,024
Total marketable investments 455 —
Total fair value of warrant assets 4,245 —
Total $ 270,551 $ 10,712
(1) US royalty was paid off continues to receive insignificant royalties on international sales.
(2) Investment considered partially impaired.
(3) Investment on non-accrual.
(4) Investment was paid off and SWK continues to receive royalties on actual sales.
(5) Flowonix Medical assets were sold to a medical device company in a prior period. In exchange for releasing its lien, SWK received cash at close and is expected to receive royalties on sales of two products.
(6) AOTI warrants exercised and converted to shares.
(7) As of March 31, 2025 these royalties are included in finance receivables held for sale
(8) Investment was paid off during the three months ended March 31, 2025
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.
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Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report. We believe there have been no new critical accounting policies or material changes to our existing critical accounting policies and estimates during the three months ended March 31, 2025, compared to those discussed in our Annual Report.
Recent Accounting Pronouncements
Refer to Part I. Financial Information, Item 1. Financial Statements, Note 1 of the notes to the unaudited condensed consolidated financial statements for a listing of recent accounting pronouncements and their potential impact to our consolidated financial statements.
Comparison of the three months ended March 31, 2025 and 2024 ( in millions )
Three Months Ended
March 31,
2025 2024 Change $
Revenues $ 11.8 $ 11.4 $ 0.4
Provision (benefit) for credit losses (1.5) 5.3 (6.8)
Interest expense 1.1 1.3 (0.2)
Pharmaceutical manufacturing, research and development expense 0.8 0.5 0.3
Depreciation and amortization expense — 0.5 (0.5)
General and administrative expense 3.3 2.7 0.6
Other income (expense), net (2.3) (0.4) (1.9)
Income tax expense 1.3 0.2 1.1
Net income 4.5 0.5 4.0
Revenues
Revenues increased to $11.8 million for the three months ended March 31, 2025 from $11.4 million for the three months ended March 31, 2024. The $0.4 million increase in revenue for the three months ended March 31, 2025 was primarily due to a $0.3 million decrease in Finance Receivables segment revenue and a $0.7 million increase in Pharmaceutical Development segment revenue. The increase in Pharmaceutical development revenues was due to the collaboration agreement with a strategic partner.
Provision (benefit) 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 benefit for credit losses of $1.5 million during the three months ended March 31, 2025 and a net provision of $5.3 million during three months ended March 31, 2024. The benefit was primarily due to a release of the allowance for credit losses associated with finance receivables held for sale, compared to the same period in the prior year in which there was additional provision recognized on certain receivables.
Interest Expense
Interest expense consists mostly 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 remained flat compared for for the three months ended March 31, 2025 as compared to the same period in the previous period.
Pharmaceutical Manufacturing, Research and Development Expense
Pharmaceutical manufacturing, research and development expense remained consistent for the three months ended March 31, 2025 as compared to the same period in the previous year resulting in an immaterial change in total expense.
Depreciation and Amortization Expense
The $0.5 million decrease in depreciation and amortization expense for the three months ended March 31, 2025 primarily consisted 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.
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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 by $0.6 million for the three months ended March 31, 2025 as compared to 2024. The increase is primarily due to increased compensation costs as well as legal costs associated with the Company's royalty sale.
Other Income (Expense), Net
Other income (expense), net decreased to an expense of $2.3 million for the three months ended March 31, 2025 from other expense, net of $0.4 million for the three months ended March 31, 2024. The $1.9 million decrease primarily relates to the loss on revaluation of finance receivables and related interest receivable held for sale, offset by a gain on the early payoff of the Iluvien royalty.
Income Tax Expense
During the three months ended March 31, 2025 we recognized $1.3 million of income tax expense, for the three months ended March 31, 2024 we recognized an income tax expense of $0.2 million. Income tax expense increased period over period due to an increase in net income compared to the previous period.
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Liquidity and Capital Resources
As of March 31, 2025, we had $29.8 million in cash and cash equivalents, compared to $5.9 million as of December 31, 2024. The primary driver of the $23.9 million increase in our cash balance was primarily related to interest fees and principal and royalty payments received on finance receivables. The increase in cash and cash equivalents was partially offset by investment funding, net of deferred fees and origination expenses, net payments of our credit facility, payments for payroll and benefits expense, payments on accounts payable, and share repurchases.
We entered into a $45.0 million revolving credit facility in June 2023 with First Horizon Bank. The Credit Agreement provides for one or more incremental increases not to exceed $80.0 million, subject to the consent of the Agent and each Lender, at any time prior to the Commitment Termination Date. On October 10, 2023, the Company entered into a First Amendment to Credit Agreement pursuant to which Woodforest National Bank was added as a lender under the Credit Agreement for an aggregate commitment of $15.0 million, thereby increasing the aggregate commitments under the Credit Agreement from $45.0 million to $60.0 million. As of March 31, 2025, there was no outstanding amount under the new Credit Agreement, and $55.0 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 $55.0 million.
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. To a lesser extent, realizing capital appreciation from equity-related investments in the life science sector.
As of March 31, 2025, our finance receivables portfolio contains $223.1 million of net finance receivables and $0.5 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 do not assume any near-term repayments from borrowers, and as a result, no assurances can be given that actual results would not differ materially from the statement above.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage partner companies’ requests for funding and take the form of loan commitments and lines of credit.
The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the partner company defaults, and the value of any existing collateral becomes worthless. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.
As of March 31, 2025, we had $7.5 million in unfunded commitments. Please refer to Item 1., Financial Statements, Note 7 of the notes to the unaudited condensed consolidated financial statements for further information regarding the Company’s commitments and contingencies.
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