SWK Holdings Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, and the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 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 10 of the notes to the unaudited condensed consolidated financial statements for further information regarding segment information. 26 Finance Receivables Portfolio Overview The table below provides an overview of our outstanding finance receivables transactions as of and for the three and six months ended June 30, 2025 (in thousands, except rate, share and per share data): Revenue Recognized Royalty Purchases Licensed Technology Funded Amount GAAP Balance Q2 2025 Year-to-Date Besivance® (1) Ophthalmic antibiotic $ 6,000 $ — $ — $ 2 Forfivo XL® (6) Depressive disorder treatment 6,000 — — 506 Coflex®/Kybella® (6) Spinal stenosis/submental fullness 4,350 — — 48 Cambia® (6) NSAID migraine treatment 8,500 — — 98 Duo Royalty (6) Japanese Women's health/cystic fibrosis 15,353 — — 591 Immune Globulin (6) Immune Globulin Therapeutics 14,100 — — 443 Relief (6) Rare Disease Portfolio 7,701 — — 336 Best ABT, Inc. (2), (3) Oncology diagnosis 5,784 2,347 — — Flowonix Medical, Inc. (2), (3), (4) Drug delivery device 12,455 7,133 — — Ideal Implant, Inc. (2), (3) Aesthetics 4,025 2,832 — — Iluvien® (7) Diabetic macular edema 16,501 — — 519 Revenue Recognized Term Loans Type Maturity Date Principal GAAP Balance Rate Q2 2025 Year-to-Date 4Web, Inc. First lien 07/14/25 $ 19,886 $ 22,953 12.8% $ 913 $ 1,857 AOTI, Inc. First lien 02/15/29 19,478 19,602 13.0% 411 753 Elutia, Inc. First lien 08/10/27 21,509 25,175 11.0% 935 1,826 Biotricity, Inc. First lien 02/15/27 14,446 14,994 11.5% 669 1,344 CDMO Manufacturer First lien 09/13/27 5,000 5,442 13.3% 199 394 eTon Pharmaceuticals, Inc. First lien 12/17/27 30,000 29,389 11.8% 1,133 2,235 Journey Medical Corporation First lien 12/27/27 25,000 25,178 12.8% 916 1,817 MedMinder Systems, Inc. First lien 08/18/28 22,500 22,912 12.3% 818 1,592 MolecuLight, Inc. (7) First lien 12/29/27 — — 12.8% — 27 Nicoya Lifesciences, Inc. First lien 11/30/26 8,500 8,746 12.8% 316 564 NeoLight, LLC First lien 05/15/27 5,362 5,702 13.5% 214 457 Shield Therapeutics, Plc First lien 09/28/28 20,000 19,905 14.3% 848 1,668 SKNV First lien 11/15/28 15,997 16,396 14.0% 498 992 Triple Ring First lien 12/06/28 8,000 8,007 12.0% 282 560 ImpediMed First lien 02/05/30 10,000 9,717 13.8% 391 626 Gain (Loss) Recognized Marketable Investments Number of Shares Funded Amount GAAP Balance Q2 2025 Year-to-Date Secured Royalty Financing (Marketable Investment) (2), (3) N/A $ 3,000 $ 6 $ — $ — AOTI Common Stock (5) 402,634 N/A 498 37 (68) Elutia, Inc (8) 50,000 N/A $ 99 $ 17 $ 17 27 Privately Held Shares Number of Shares Epica International, Inc 25,000 Sincerus Pharmaceuticals, Inc 26,575 MolecuLight, Inc 250,000 Change in Fair Value Warrants to Purchase Stock Number of Shares Exercise Price per Share GAAP Balance Q2 2025 Year-to-Date 4Web, Inc. TBD $ — $ — $ — $ — ImpediMed 12,491,870 $ 0.05 157 (26) (160) Aziyo Biologics, Inc. Tranche 1 157,895 $ 6.65 129 (67) (224) Aziyo Biologics, Inc. Tranche 2 30,075 $ 6.65 25 (13) (43) Biotricity, Inc. Tranche 1 9,589 $ 6.26 — — — Biotricity, Inc. Tranche 2 600,000 $ 0.50 216 20 53 CDMO Manufacturer 211,442 $ 1.42 — — — DxTerity Diagnostics, Inc. 2,019,231 $ — — — — Epica International, Inc. TBD $ — — — — Eton Pharmaceuticals, Inc. Tranche 1 51,239 $ 5.86 461 59 38 Eton Pharmaceuticals, Inc. Tranche 2 18,141 $ 6.62 162 20 13 Eton Pharmaceuticals, Inc. Tranche 3 289,736 $ 5.32 3,289 367 281 Nicoya Lifesciences, Inc 276,630 C$ 1.81 — — — Nicoya Lifesciences, Inc 117,305 C$ 6.26 — — — Shield Warrant 8,910,540 $ 0.14 173 (13) (35) MedMinder, System, Inc. Tranche 1 57,859 $ 10.37 — — MedMinder Systems, Inc. Tranche 2 7,233 $ 10.37 — — — Neolight, LLC 105,048 $ 7.62 — — MolecuLight, Inc. 394,322 C$ 0.84 — — — Revenue Recognized Assets Q2 2025 Year-to-Date Total finance receivables, gross $ 246,430 $ 8,543 $ 19,255 Total marketable investments 603 — — Total fair value of warrant assets 4,612 — — Total $ 251,645 $ 8,543 $ 19,255 (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) 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. (5) AOTI warrants exercised and converted to shares. (6) Royalties sold as of June 30, 2025 (7) Investment was paid off during the six months ended June 30, 2025 (8) Elutia common stock received as part of amendment to term loan. 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. 28 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 six months ended June 30, 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 June 30, 2025 and 2024 ( in millions ) Three Months Ended June 30, 2025 2024 Change $ Revenues $ 10.1 $ 10.8 $ (0.7) Provision for credit losses 0.8 4.1 (3.3) Loss on impairment of intangible assets — 5.8 (5.8) Interest expense 1.2 1.1 0.1 Pharmaceutical manufacturing, research and development expense 0.6 0.5 0.1 Change in fair value of acquisition-related contingent consideration — (4.9) 4.9 Depreciation and amortization expense — 0.4 (0.4) General and administrative expense 2.8 2.9 (0.1) Other income (expense), net (0.1) 3.8 (3.9) Income tax expense 1.0 1.0 — Net income 3.5 3.7 (0.2) Revenues Revenues decreased to $10.1 million for the three months ended June 30, 2025 from $10.8 million for the three months ended June 30, 2024. The $0.7 million decrease in revenue for the three months ended June 30, 2025 was primarily due to a $1.2 million decrease in Finance Receivables segment revenue and a $0.5 million increase in Pharmaceutical Development segment revenue. The finance receivables segment revenue decreased primarily due to the sale of the majority of the Company's royalty portfolio. The increase in pharmaceutical development revenues was due to the collaboration agreement with Aptar. 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 $0.8 million and $4.1 million during the three months ended June 30, 2025 and 2024, respectively. The decrease is primarily due to impairments totaling $4.3 million during the same period in the prior year. 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 consistent for the three months ended June 30, 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 June 30, 2025 as compared to the same period in the previous year resulting in an immaterial change in total expense. 29 Depreciation and Amortization Expense The $0.4 million decrease in depreciation and amortization expense for the three months ended June 30, 2025 primarily related to no longer amortizing intangible assets related to the Cara license as the intangible assets were fully impaired. In addition, MOD3 was classified as held for sale for the current period resulting in no depreciation on fixed assets included in held for sale. 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 remained consistent for the three months ended June 30, 2025 as compared to 2024. Other Income (Expense), Net Other income (expense), net decreased to an expense of $0.1 million for the three months ended June 30, 2025 from other income of $3.8 million for the three months ended June 30, 2024. The $3.9 million decrease primarily relates to the gain on revaluation of finance receivables and gain on exercise of warrants in the same period the prior year. Income Tax Expense Income tax expense remained consistent for the three months ended June 30, 2025 as compared to the same period in the previous year resulting in an immaterial change in total expense. 30 Comparison of the six months ended June 30, 2025 and 2024 ( in millions ) Six Months Ended June 30, 2025 2024 Change $ Revenues $ 21.9 $ 22.2 $ (0.3) Provision (benefit) for credit losses (0.7) 9.4 (10.1) Loss on impairment of intangible assets — 5.8 (5.8) Interest expense 2.3 2.4 (0.1) Pharmaceutical manufacturing, research and development expense 1.4 1.1 0.3 Change in fair value of acquisition-related contingent consideration — (4.9) 4.9 Depreciation and amortization expense — 0.9 (0.9) General and administrative expense 6.1 5.6 0.5 Other income (expense), net (2.4) 3.4 (5.8) Income tax expense 2.3 1.3 1.0 Net income 8.1 4.1 4.0 Revenues Revenues decreased to $21.9 million for the six months ended June 30, 2025 from $22.2 million for the six months ended June 30, 2024. The $0.3 million decrease in revenue for the six months ended June 30, 2025 consisted of a $1.5 million decrease in Finance Receivables segment revenue offset by a $1.2 million increase in Pharmaceutical Development segment revenue. The $1.5 million decrease in Finance Receivables segment revenue was primarily due to a decrease in interest, fees and royalties earned on finance receivables that were paid off or sold during the period. The increase in the Pharmaceutical Development segment was primarily due to the Aptar collaboration agreement. 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 $0.7 million during the six months ended June 30, 2025 and a $9.4 million provision during the six months ended June 30, 2024. The decrease was primarily due to impairments included within the provision for credit losses during the six months ended June 30, 2024. See Note 3 to the unaudited condensed consolidated financial statements for further information on the allowance for credit losses. Interest Expense Interest expense consists of interest accrued on our revolving line of credit, 9.00% Senior Notes due 2027, unused line of credit and maintenance fees, as well as amortization of debt issuance costs. Interest expense remained consistent for the six months ended June 30, 2025 as compared to the six months ended June 30, 2024. Pharmaceutical Manufacturing, Research and Development Expense Pharmaceutical manufacturing, research and development expense increased from $1.1 million for the six months ended June 30, 2024 to $1.4 million for the six months ended June 30, 2025. The $0.3 million increase was primarily due to increased compensation costs due to additional headcount during the period. Depreciation and Amortization Expense The $0.9 million decrease in depreciation and amortization expense for the six months ended June 30, 2025 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 three months ended June 30, 2024. In addition, MOD3 was classified as held for sale for the current period resulting in no depreciation on fixed assets included in held for sale. 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 $6.1 million for the six months ended June 30, 2025 from $5.6 million for the six months ended June 30, 2024 primarily due to an increase in compensation costs during the period. 31 Other Income (Expense), Net Other income (expense), net decreased to an expense of $2.4 million for the six months ended June 30, 2025 from an income of $3.4 million for the six months ended June 30, 2024. The $5.8 million decrease is primarily due to net losses on finance receivables in the current period compared to net gains on finance receivables during the same period in the prior year. Income Tax Expense During the six months ended June 30, 2025 and 2024 we recognized $2.3 million and $1.3 million of income tax expense, respectively. Income tax expense increased period over period due to the release of valuation allowance on deferred tax assets of $1.0 million during the six months ended June 30, 2024 and a decrease in the Company's provision for credit losses compared to the same period in the prior year. 32 Liquidity and Capital Resources As of June 30, 2025, we had $8.0 million in cash and cash equivalents, compared to $5.9 million as of December 31, 2024. The primary driver of the $2.1 million increase in our cash balance was primarily related to interest, fees, principal and royalty payments received on finance receivables, and proceeds from the sale of finance receivables. The increase in cash and cash equivalents was partially offset by the payment of dividends, 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 June 30, 2025, there was $0.3 million outstanding amount under the new Credit Agreement. The $60.0 million Credit Agreement contains a $5.0 million liquidity covenant, bringing the total amount available for borrowing to $54.7 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 June 30, 2025, our finance receivables portfolio contains $237.6 million of net finance receivables and $0.6 million of marketable investments. We expect these assets to generate positive cash flows during the remainder of 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 June 30, 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. 33