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. Recent Developments Agreement and Plan of Merger On October 9, 2025, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Runway Growth Finance Corp., a Maryland corporation (“Parent”), RWAY Portfolio Holding Corp., a Delaware corporation and a direct wholly owned subsidiary of Parent (“Intermediary Sub”), RWAY Portfolio Corp., a Delaware corporation and a direct wholly owned subsidiary of Intermediary Sub (“Acquisition Sub”), and Runway Growth Capital LLC, a Delaware limited liability company (“Parent External Adviser”). The Merger Agreement provides that, among other things and on the terms and subject to the conditions of the Merger Agreement, (i) Acquisition Sub will merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Intermediary Sub (the “Surviving Corporation”), or, in the alternative, the Company will merge with and into Acquisition Sub, with Acquisition Sub continuing as the surviving corporation and as a wholly owned subsidiary of Intermediary Sub (in either case, the “First Merger”), (ii) immediately after the First Merger, the Surviving Corporation will merge with and into Intermediary Sub (the “Second Merger”), with Intermediary Sub surviving the Second Merger as a wholly owned subsidiary of Parent, and (iii) immediately after the Second Merger, Intermediary Sub will merge with and into Parent (the “Third Merger” and, together with the Second Merger and the First Merger, the “Mergers”), with Parent continuing as the surviving corporation in the Third Merger. The foregoing summary description of the Merger Agreement, the Mergers and the other transactions contemplated thereby is subject to and qualified in its entirety by reference to the Merger Agreement, a copy of which is attached hereto as Exhibit 2.01, and the terms of which are incorporated herein by reference. Key Stockholder Agreement Concurrently with the execution and delivery of the Merger Agreement, and as a condition and inducement to Parent’s willingness to enter into the Merger Agreement, Double Black Diamond Offshore Ltd. (the “Key Stockholder”), a stockholder of the Company, has entered into a key stockholder agreement with Parent (the “Key Stockholder Agreement”) pursuant to which the Key Stockholder has, subject to the terms and conditions thereof, agreed, among other things, to vote its shares of Company Common Stock in favor of the adoption of the Merger Agreement and the approval of the transactions contemplated thereunder, including the First Merger. As of October 9, 2025, the Key Stockholder held approximately 69.9% of the voting power of the Company Common Stock. The foregoing summary description of the Key Stockholder Agreement is subject to and qualified in its entirety by reference to the Key Stockholder Agreement, a copy of which is attached hereto as Exhibit 2.02 and the terms of which are incorporated herein by reference. 28 Finance Receivables Portfolio Overview The table below provides an overview of our outstanding finance receivables transactions as of and for the three and nine months ended September 30, 2025 (in thousands, except rate, share and per share data): Revenue Recognized Royalty Purchases Licensed Technology Funded Amount GAAP Balance Q3 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 6,633 — — Ideal Implant, Inc. (2), (3) Aesthetics 4,025 2,522 — — Iluvien® (7) Diabetic macular edema 16,501 — — 519 Revenue Recognized Term Loans Type Maturity Date Principal GAAP Balance Rate Q3 2025 Year-to-Date 4Web, Inc. First lien 12/31/27 $ 19,486 $ 23,037 12.8% $ 1,226 $ 3,083 AOTI, Inc. First lien 02/15/29 19,478 19,623 13.0% 658 1,411 Elutia, Inc. First lien 08/10/27 22,074 27,372 11.0% 2,335 4,161 Biotricity, Inc. First lien 02/15/27 13,846 14,413 11.5% 660 2,004 CDMO Manufacturer First lien 09/13/27 5,000 5,491 13.3% 205 599 eTon Pharmaceuticals, Inc. First lien 12/17/27 30,000 29,644 11.8% 1,156 3,391 Journey Medical Corporation First lien 12/27/27 25,000 25,213 12.8% 925 2,742 MedMinder Systems, Inc. First lien 08/18/28 22,500 22,987 12.3% 814 2,406 MolecuLight, Inc. (7) First lien 12/29/27 — — 12.8% — 27 Nicoya Lifesciences, Inc. First lien 11/30/26 8,500 8,846 12.8% 390 954 NeoLight, LLC First lien 05/15/27 5,553 5,923 13.5% 224 681 Shield Therapeutics, Plc First lien 09/28/28 20,000 20,033 14.3% 865 2,533 SKNV First lien 11/15/28 15,997 16,409 14.0% 505 1,497 Triple Ring First lien 12/06/28 8,000 8,049 12.0% 287 847 ImpediMed First lien 02/05/30 15,000 14,594 13.8% 572 1,198 Gain (Loss) Recognized Marketable Investments Number of Shares Funded Amount GAAP Balance Q3 2025 Year-to-Date AOTI Common Stock (5) 402,634 N/A 230 (191) (276) Elutia, Inc (8) 50,000 N/A $ 45 $ (55) $ (38) 29 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 Q3 2025 Year-to-Date 4Web, Inc. TBD $ — $ — $ — $ — ImpediMed Tranche 1 12,491,870 $ 0.05 180 29 (131) ImpediMed Tranche 2 6,245,935 $ 0.05 90 (88) (88) Aziyo Biologics, Inc. Tranche 1 157,895 $ 6.65 38 (91) (315) Aziyo Biologics, Inc. Tranche 2 30,075 $ 6.65 7 (17) (60) Biotricity, Inc. Tranche 1 9,589 $ 6.26 — — — Biotricity, Inc. Tranche 2 600,000 $ 0.50 309 92 145 Biotricity, Inc. Tranche 3 54,300 $ 2.21 13 (36) (36) Biotricity, Inc Tranche 4 27,150 $ 2.21 13 (36) (36) CDMO Manufacturer 211,442 $ 1.42 — — — DxTerity Diagnostics, Inc. 2,019,231 $ — — — — Epica International, Inc. TBD $ — — — — Eton Pharmaceuticals, Inc. Tranche 1 51,239 $ 5.86 829 367 405 Eton Pharmaceuticals, Inc. Tranche 2 18,141 $ 6.62 288 127 140 Eton Pharmaceuticals, Inc. Tranche 3 289,736 $ 5.32 5,350 2,061 2,342 Nicoya Lifesciences, Inc 276,630 C$ 1.81 — — — Nicoya Lifesciences, Inc 117,305 C$ 6.26 — — — Shield Warrant 8,910,540 $ 0.14 482 232 197 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 Q3 2025 Year-to-Date Total finance receivables, gross $ 253,136 $ 10,822 $ 30,077 Total marketable investments 275 — — Total fair value of warrant assets 7,599 — — Total $ 261,010 $ 10,822 $ 30,077 30 (1) US royalty was paid off but 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 September 30, 2025 (7) Investment was paid off during the nine months ended September 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. 31 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 nine months ended September 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 September 30, 2025 and 2024 ( in millions ) Three Months Ended September 30, 2025 2024 Change $ Revenues $ 10.9 $ 10.4 $ 0.5 Provision (benefit) for credit losses (0.9) 1.4 (2.3) Loss on impairment of intangible assets 0.2 — 0.2 Interest expense 1.2 1.1 0.1 Pharmaceutical manufacturing, research and development expense 0.1 0.6 (0.5) Loss on disposal of inventory 0.3 — 0.3 Depreciation and amortization expense — 0.2 (0.2) General and administrative expense 3.3 3.0 0.3 Other income (expense), net 4.0 0.3 3.7 Income tax expense 1.9 0.9 1.0 Net income 8.8 3.5 5.3 Revenues Revenues increased to $10.9 million for the three months ended September 30, 2025 from $10.4 million for the three months ended September 30, 2024. The $0.5 million increase in revenue for the three months ended September 30, 2025 was primarily due to a $1.1 million increase in Finance Receivables segment revenue. The finance receivables segment revenue increased primarily due to the acceleration of exit fees earned on early payoff of the loan with Elutia, Inc. 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 $0.9 million and a provision for credit losses of $1.4 million during the three months ended September 30, 2025 and 2024, respectively. The change is primarily due to the release of CECL reserves related to the early payoff of the loan with Elutia, Inc. 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 September 30, 2025 as compared to the same period in the previous period. Pharmaceutical Manufacturing, Research and Development Expense Pharmaceutical manufacturing, research and development expense decreased for the three months ended September 30, 2025 as compared to the same period in the previous year as a result of the MOD3 asset sale. Depreciation and Amortization Expense The $0.2 million decrease in depreciation and amortization expense for the three months ended September 30, 2025 primarily due to the suspension of depreciation and amortization on assets held for sale and the subsequent sale of those assets. 32 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 for the three months ended September 30, 2025 as compared to 2024, primarily due to increased legal fees partially offset by a reduction in compensation costs as a result of the MOD3 asset sale. Other Income (Expense), Net Other income (expense), net increased to an income of $4.0 million for the three months ended September 30, 2025 from income of $0.3 million for the three months ended September 30, 2024. The $3.7 million increase primarily relates to the gain on fair value of adjustments of warrants and gain on sale of the MOD3 assets. Income Tax Expense Income tax expense increased for the three months ended September 30, 2025 as compared to the same period in the previous year as a result of the change in the provision for credit losses. 33 Comparison of the nine months ended September 30, 2025 and 2024 ( in millions ) Nine Months Ended September 30, 2025 2024 Change $ Revenues $ 32.8 $ 32.6 $ 0.2 Provision (benefit) for credit losses (1.6) 10.8 (12.4) Loss on impairment of intangible assets 0.2 5.8 (5.6) Interest expense 3.5 3.5 — Pharmaceutical manufacturing, research and development expense 1.6 1.6 — Loss on disposal of inventory 0.3 — 0.3 Change in fair value of acquisition-related contingent consideration — (4.9) 4.9 Depreciation and amortization expense — 1.2 (1.2) General and administrative expense 9.4 8.6 0.8 Other income (expense), net 1.7 3.7 (2.0) Income tax expense 4.2 2.2 2.0 Net income 16.9 7.6 9.3 Revenues Revenues increased to $32.8 million for the nine months ended September 30, 2025 from $32.6 million for the nine months ended September 30, 2024. The $0.2 million increase in revenue for the nine months ended September 30, 2025 consisted of a $0.4 million decrease in Finance Receivables segment revenue offset by a $0.6 million increase in Pharmaceutical Development segment revenue. The $0.4 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 $1.6 million during the nine months ended September 30, 2025 and a provision of $10.8 million during the nine months ended September 30, 2024. The decrease was primarily due to impairments included within the provision for credit losses during the nine months ended September 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 nine months ended September 30, 2025 as compared to the nine months ended September 30, 2024. Pharmaceutical Manufacturing, Research and Development Expense Pharmaceutical manufacturing, research and development expense remained consistent for the nine months ended September 30, 2025 as compared to the same period in the prior year. Depreciation and Amortization Expense The $1.2 million decrease in depreciation and amortization expense for the nine months ended September 30, 2025 primarily consists of a decrease in amortization expense related to no longer amortizing intangible assets related to the license with Cara Therapeutics, Inc, 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 classified as 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 $9.4 million for the nine months ended September 30, 2025 from $8.6 million for the nine months ended September 30, 2024 primarily due to an increase in compensation costs and legal costs during the period. 34 Other Income (Expense), Net Other income (expense), net decreased to income of $1.7 million for the nine months ended September 30, 2025 from income of $3.7 million for the nine months ended September 30, 2024. The $2.0 million decrease is primarily due to a loss on the revaluation of finance receivables in the current period compared to a gain on the revaluation of finance receivables during the same period in the prior year. Income Tax Expense During the nine months ended September 30, 2025 and 2024 we recognized $4.2 million and $2.2 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 nine months ended September 30, 2024 and a change in the Company's provision for credit losses compared to the same period in the prior year. 35 Liquidity and Capital Resources As of September 30, 2025, we had $10.2 million in cash and cash equivalents, compared to $5.9 million as of December 31, 2024. The primary driver of the $4.3 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 September 30, 2025, there was no 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 $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 September 30, 2025, our finance receivables portfolio contains $245.4 million of net finance receivables and $0.3 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. 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 September 30, 2025, we had $2.5 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. 36