UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended SeptemberJune 30, 20172023
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-27163001-39184
SWK Holdings Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware | 77-0435679 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
Dallas, TX | 75225 |
(Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code): (972) (972) 687-7250
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Common Stock, par value $0.001 per share | SWKH | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x YES Yeso NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).x YES Yeso NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer | Smaller Reporting Company x | Emerging Growth Company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES xNO
As of November 7, 2017,August 5, 2023, there were 13,047,645 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.
SWK Holdings Corporation
Form 10-Q
Quarter Ended SeptemberJune 30, 20172023
Table of Contents
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.amended (the “Exchange Act”). From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions, and include, but are not limited to, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.Operations.” Words such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “should,” “will” and variations of these words and similar expressions identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially (both favorably and unfavorably) from those expressed or forecasted in the forward-looking statements.
These risks and uncertainties include, but are not limited to, those described in Part II, Item 1A, “Risk Factors”Factors,” and elsewhere in this report. Forward-looking statements that were believed to be true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
PART I. FINANCIAL INFORMATION
SWK HOLDINGS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share data)
September 30, 2017 | December 31, 2016 | June 30, 2023 | December 31, 2022 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 15,975 | $ | 32,182 | $ | 6,805 | $ | 6,156 | ||||||||
Accounts receivable | 1,598 | 1,054 | ||||||||||||||
Finance receivables, net | 163,719 | 126,366 | ||||||||||||||
Interest and accounts receivable, net | 4,381 | 3,094 | ||||||||||||||
Other current assets | 1,885 | 1,114 | ||||||||||||||
Total current assets | 13,071 | 10,364 | ||||||||||||||
Finance receivables, net of allowance for credit losses of $11,104 and $11,846, as of June 30, 2023 and December 31, 2022, respectively | 222,950 | 236,555 | ||||||||||||||
Collateral on foreign currency forward contract | 2,750 | 2,750 | ||||||||||||||
Marketable investments | 3,319 | 2,621 | 59 | 76 | ||||||||||||
Investment in unconsolidated entity | — | 6,985 | ||||||||||||||
Deferred tax asset | 32,311 | 38,471 | ||||||||||||||
Deferred tax assets, net | 25,689 | 24,480 | ||||||||||||||
Warrant assets | 1,403 | 1,013 | 1,459 | 1,220 | ||||||||||||
Other assets | 169 | 240 | ||||||||||||||
Intangible assets, net | 7,339 | 8,190 | ||||||||||||||
Goodwill | 8,404 | 8,404 | ||||||||||||||
Property and equipment, net | 5,598 | 5,840 | ||||||||||||||
Other non-current assets | 3,123 | 1,742 | ||||||||||||||
Total assets | $ | 218,494 | $ | 208,932 | $ | 290,442 | $ | 299,621 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 1,492 | $ | 682 | $ | 2,996 | $ | 3,902 | ||||||||
Warrant liability | 197 | 189 | ||||||||||||||
Revolving credit facility | — | 2,445 | ||||||||||||||
Total current liabilities | 2,996 | 6,347 | ||||||||||||||
Contingent consideration payable | 11,200 | 11,200 | ||||||||||||||
Other non-current liabilities | 2,362 | 2,145 | ||||||||||||||
Total liabilities | 1,689 | 871 | 16,558 | 19,692 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Commitments and contingencies (Note 6) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | — | — | ||||||||||||||
Common stock, $0.001 par value; 250,000,000 shares authorized; 13,160,198 and 13,144,292 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 13 | 13 | ||||||||||||||
Treasury stock, $0.001 par value; 112,553 and 53 shares held as of September 30, 2017 and December 31, 2016, respectively | — | — | ||||||||||||||
Preferred stock, $ | par value; shares authorized; shares issued and outstanding— | — | ||||||||||||||
Common stock, $ | par value; shares authorized; and shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively12 | 12 | ||||||||||||||
Additional paid-in capital | 4,433,511 | 4,433,289 | 4,425,991 | 4,430,922 | ||||||||||||
Accumulated deficit | (4,217,507 | ) | (4,228,910 | ) | (4,152,119 | ) | (4,151,005 | ) | ||||||||
Accumulated other comprehensive income (loss) | 788 | (87 | ) | |||||||||||||
Total SWK Holdings Corporation stockholders’ equity | 216,805 | 204,305 | ||||||||||||||
Non-controlling interests in consolidated entity | — | 3,756 | ||||||||||||||
Total stockholders’ equity | 216,805 | 208,061 | 273,884 | 279,929 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 218,494 | $ | 208,932 | $ | 290,442 | $ | 299,621 |
See accompanying notes to the unaudited condensed consolidated financial statements.
1
SWK HOLDINGS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenues: | ||||||||||||||||
Finance receivable interest income, including fees | $ | 9,278 | $ | 6,828 | $ | 18,538 | $ | 17,243 | ||||||||
Pharmaceutical development | 183 | 114 | 301 | 350 | ||||||||||||
Other | 36 | — | 69 | 480 | ||||||||||||
Total revenues | 9,497 | 6,942 | 18,908 | 18,073 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Provision (benefit) for credit losses | (682 | ) | — | (682 | ) | — | ||||||||||
Interest expense | 363 | 80 | 545 | 160 | ||||||||||||
Pharmaceutical manufacturing, research and development expense | 1,509 | 1,480 | 2,228 | 3,381 | ||||||||||||
Depreciation and amortization expense | 637 | 626 | 1,285 | 1,330 | ||||||||||||
General and administrative | 2,997 | 3,018 | 5,537 | 6,178 | ||||||||||||
Income from operations | 4,673 | 1,738 | 9,995 | 7,024 | ||||||||||||
Other income (expense), net | ||||||||||||||||
Unrealized net gain (loss) on warrants | 399 | (472 | ) | (583 | ) | (1,165 | ) | |||||||||
Unrealized net loss on equity securities | — | (519 | ) | — | (547 | ) | ||||||||||
Gain on foreign currency transactions | 316 | — | 502 | — | ||||||||||||
Income before income tax expense | 5,388 | 747 | 9,914 | 5,312 | ||||||||||||
Income tax expense | 1,454 | 182 | 1,345 | 1,269 | ||||||||||||
Net income | $ | 3,934 | $ | 565 | $ | 8,569 | $ | 4,043 | ||||||||
Net income per share | ||||||||||||||||
Basic | $ | 0.31 | $ | 0.04 | $ | 0.67 | $ | 0.32 | ||||||||
Diluted | $ | 0.31 | $ | 0.04 | $ | 0.67 | $ | 0.31 | ||||||||
Weighted average shares outstanding | ||||||||||||||||
Basic | 12,741 | 12,835 | 12,787 | 12,833 | ||||||||||||
Diluted | 12,785 | 12,885 | 12,830 | 12,882 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Finance receivable interest income, including fees | $ | 5,423 | $ | 2,783 | $ | 15,813 | $ | 12,710 | ||||||||
Marketable investments interest income | — | — | — | 92 | ||||||||||||
Income related to investments in unconsolidated entity | — | 1,296 | 10,539 | 5,098 | ||||||||||||
Other | 64 | 133 | 73 | 159 | ||||||||||||
Total revenues | 5,487 | 4,212 | 26,425 | 18,059 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Provision for credit losses | — | — | — | 1,659 | ||||||||||||
Impairment expense | — | 314 | — | 7,243 | ||||||||||||
General and administrative | 1,484 | 617 | 3,096 | 2,334 | ||||||||||||
Total costs and expenses | 1,484 | 931 | 3,096 | 11,236 | ||||||||||||
Other income (expense), net | ||||||||||||||||
Unrealized net gain (loss) on derivatives | (191 | ) | 496 | (805 | ) | 936 | ||||||||||
Gain on sale of marketable securities | — | — | 243 | — | ||||||||||||
Income before provision for income taxes | 3,812 | 3,777 | 22,767 | 7,759 | ||||||||||||
Provision for income taxes | 1,054 | — | 6,160 | — | ||||||||||||
Consolidated net income | 2,758 | 3,777 | 16,607 | 7,759 | ||||||||||||
Net income attributable to non-controlling interests | — | 656 | 5,204 | 2,588 | ||||||||||||
Net income attributable to SWK Holdings Corporation Stockholders | $ | 2,758 | $ | 3,121 | $ | 11,403 | $ | 5,171 | ||||||||
Net income per share attributable to SWK Holdings Corporation stockholders: | ||||||||||||||||
Basic | $ | 0.21 | $ | 0.24 | $ | 0.87 | $ | 0.39 | ||||||||
Diluted | $ | 0.21 | $ | 0.24 | $ | 0.87 | $ | 0.39 | ||||||||
Weighted Average Shares | ||||||||||||||||
Basic | 13,043 | 13,132 | 13,036 | 13,127 | ||||||||||||
Diluted | 13,047 | 13,135 | 13,040 | 13,130 |
See accompanying notes to the unaudited condensed consolidated financial statements.
2
SWK HOLDINGS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMESTOCKHOLDERS’ EQUITY
(in thousands)thousands, except share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Consolidated net income | $ | 2,758 | $ | 3,777 | $ | 16,607 | $ | 7,759 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Unrealized gains (losses) on investment in securities | (836 | ) | 4 | 875 | (51 | ) | ||||||||||
Total other comprehensive income (loss) | (836 | ) | 4 | 875 | (51 | ) | ||||||||||
Comprehensive income | 1,922 | 3,781 | 17,482 | 7,708 | ||||||||||||
Comprehensive income attributable to non-controlling interests | — | 656 | 5,204 | 2,588 | ||||||||||||
Comprehensive income attributable to SWK Holdings Corporation Stockholders | $ | 1,922 | $ | 3,125 | $ | 12,278 | $ | 5,120 |
Six Months Ended June 30, 2023 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Common Stock | Additional | Accumulated | Stockholders’ | |||||||||||||||||
Shares | Amount | Paid-In Capital | Deficit | Equity | ||||||||||||||||
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 ASC 326 | — | — | — | (9,683 | ) | (9,683 | ) | |||||||||||||
Issuance of common stock upon vesting of restricted stock | 16,008 | — | — | — | — | |||||||||||||||
Repurchase 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 | — | — | — | — | |||||||||||||||
Repurchase 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 | ||||||||||
Six Months Ended June 30, 2022 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Common Stock | Additional | Accumulated | Stockholders’ | |||||||||||||||||
Shares | Amount | Paid-In Capital | Deficit | Equity | ||||||||||||||||
Balances at December 31, 2021 | 12,836,133 | $ | 13 | $ | 4,431,719 | $ | (4,164,496 | ) | $ | 267,236 | ||||||||||
Stock-based compensation | — | — | 85 | — | 85 | |||||||||||||||
Issuance of common stock upon vesting of restricted stock | 5,495 | — | — | — | — | |||||||||||||||
Forfeiture of unvested restricted stock | (6,815 | ) | — | — | — | — | ||||||||||||||
Net income | — | — | — | 3,478 | 3,478 | |||||||||||||||
Balances at March 31, 2022 | 12,834,813 | 13 | 4,431,804 | (4,161,018 | ) | 270,799 | ||||||||||||||
Stock-based compensation | — | — | 166 | — | 166 | |||||||||||||||
Issuance of common stock upon vesting of restricted stock | 4,305 | — | — | — | — | |||||||||||||||
Net income | — | — | — | 565 | 565 | |||||||||||||||
Balances at June 30, 2022 | 12,839,118 | $ | 13 | $ | 4,431,970 | $ | (4,160,453 | ) | $ | 271,530 |
See accompanying notes to the unaudited condensed consolidated financial statements.
3
SWK HOLDINGS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30, | Six Months Ended | |||||||||||||||
2017 | 2016 | 2023 | 2022 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Consolidated net income | $ | 16,607 | $ | 7,759 | ||||||||||||
Net income | $ | 8,569 | $ | 4,043 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Income from investment in unconsolidated entity | (10,539 | ) | (5,098 | ) | ||||||||||||
Provision for loan credit losses | — | 1,659 | ||||||||||||||
Impairment expense | — | 7,243 | ||||||||||||||
Provision (benefit) for credit losses | (682 | ) | — | |||||||||||||
Right-of-use asset amortization | 156 | 113 | ||||||||||||||
Amortization of debt issuance costs | 168 | 29 | ||||||||||||||
Deferred income taxes | 6,160 | — | 1,316 | 1,257 | ||||||||||||
Change in fair value of warrants | 805 | (936 | ) | 583 | 1,165 | |||||||||||
Gain on sale of marketable securities | (243 | ) | — | |||||||||||||
Loan discount amortization and fee accretion | (2,260 | ) | (2,551 | ) | ||||||||||||
Change in fair value of equity securities | — | 547 | ||||||||||||||
Foreign currency transaction gain | (516 | ) | — | |||||||||||||
Loan discount and fee accretion | (2,297 | ) | (780 | ) | ||||||||||||
Interest paid-in-kind | (1,330 | ) | — | (957 | ) | (1,599 | ) | |||||||||
Stock-based compensation | 222 | 285 | 199 | 251 | ||||||||||||
Interest income in excess of cash received | (92 | ) | — | |||||||||||||
Other | 13 | 12 | ||||||||||||||
Depreciation and amortization | 1,285 | 1,330 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (544 | ) | (293 | ) | ||||||||||||
Interest and accounts receivable | (1,287 | ) | (66 | ) | ||||||||||||
Other assets | (26 | ) | (253 | ) | (792 | ) | (256 | ) | ||||||||
Accounts payable and other liabilities | 810 | (195 | ) | (357 | ) | (2,526 | ) | |||||||||
Net cash provided by operating activities | 9,583 | 7,632 | 5,388 | 3,508 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Cash distributions from investment in unconsolidated entity | 17,524 | 5,851 | ||||||||||||||
Proceeds from sale of available-for-sale marketable securities | 345 | — | ||||||||||||||
Cash received from settlement of warrants | — | 1,014 | ||||||||||||||
Proceeds from sale of investments | 13,942 | — | ||||||||||||||
Investment in finance receivables | (36,482 | ) | (36,030 | ) | (13,101 | ) | (25,350 | ) | ||||||||
Repayment of finance receivables | 1,718 | 43,659 | 3,041 | 34,195 | ||||||||||||
Marketable investment principal payment | 76 | 23 | ||||||||||||||
Other | (11 | ) | (4 | ) | ||||||||||||
Net cash (used in) provided by investing activities | (16,830 | ) | 14,513 | |||||||||||||
Corporate debt securities principal payments | 17 | 21 | ||||||||||||||
Purchases of property and equipment | (191 | ) | (111 | ) | ||||||||||||
Net cash provided by investing activities | 3,708 | 8,755 | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Distribution to non-controlling interests | (8,960 | ) | (2,994 | ) | ||||||||||||
Payments for financing costs | (872 | ) | — | |||||||||||||
Net payments on credit facility | (2,445 | ) | (8 | ) | ||||||||||||
Repurchases of common stock, including fees and expenses | (5,130 | ) | — | |||||||||||||
Net cash used in financing activities | (8,960 | ) | (2,994 | ) | (8,447 | ) | (8 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | (16,207 | ) | 19,151 | |||||||||||||
Net increase in cash and cash equivalents | 649 | 12,255 | ||||||||||||||
Cash and cash equivalents at beginning of period | 32,182 | 47,287 | 6,156 | 42,863 | ||||||||||||
Cash and cash equivalents at end of period | $ | 15,975 | $ | 66,438 | $ | 6,805 | $ | 55,118 | ||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
4
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”) was incorporated in July 1996 in California and reincorporated in Delaware in September 1999. In July 2012, the Company commenced its strategy of building a specialty finance and asset management business. In August 2019, the Company commenced a complementary strategy of building a pharmaceutical development, manufacturing and intellectual property licensing business. The Company’s strategy isoperations comprise two reportable segments: “Finance Receivables” and “Pharmaceutical Development.” The Company allocates capital to be a leading healthcare capital provider by offering sophisticated, customized financing solutionseach segment in order to a broad rangegenerate income through the sales of life science companies, institutions and inventors.products by third parties. The Company is primarily focused on monetizing cash flow streams derived from commercial-stage productsheadquartered in Dallas, Texas, and related intellectual property through royalty purchases and financings, as well as through the creation of synthetic revenue interests in commercialized products. The Company has been deploying its assets to earn interest, fees, and other income pursuant to this strategy, andJune 30, 2023, the Company continues to identify and review financing and similar opportunities on an ongoing basis. In addition, through the Company’s wholly-owned subsidiary, SWK Advisors LLC, the Company provides non-discretionary investment advisory services to institutional clients in separately managed accounts to similarly invest in life science finance. SWK Advisors LLC is registered as an investment advisor with the Texas State Securities Board. The Company intends to fund transactions through its own working capital, as well as by building its asset management business by raising additional third party capital to be invested alongside the Company’s capital.had 23 full-time employees.
The Company fills a niche that it believes is underserved in the sub-$50 million transaction size. Since many of its competitors that provide longer term, debt and royalty-related financing options have much greater financial resources than the Company, they tend to not focus on transaction sizes below $50 million as it is generally inefficient for them to do so. In addition, the Company does not believe that a sufficient number of other companies offer similar types of long-term financing options to fill the demand of the sub-$50 million market. As such, the Company believes it faces less competition from such longer term, investors in transactions that are less than $50 million.
The Company has net operating loss carryforwards (“NOLs”) and believes that the ability to utilize these NOLs is an important and substantial asset. The Company believes that the foregoing business strategies can create value for its stockholders, and produce prospective taxable income (or the ability to generate capital gains) that might permit the Company to utilize the NOLs. However, at this time, under current law, we dothe Company does not anticipate that our life science business strategythe Finance Receivables and/or Pharmaceutical Development segments will generate sufficient income to permit usthe Company to utilize all of ourits NOLs prior to their respective expiration dates. As such, it is possible that wethe Company might pursue additional strategies that we believeit believes might result in ourthe ability to utilize more of ourthe NOLs. The Company is unable to assure investors that it will find suitable financing opportunities or that it will be able to utilize its existing NOLs.
As of November 7, 2017August 5, 2023, the Company and its partners have executed transactions with 2650 different parties under its specialty finance strategy, funding an aggregate $374of $725.7 million since 2012 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.
TheDuring 2019, the Company commenced its Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”). Enteris is headquartered in Dallas, Texas.
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.
Basis of Presentation and Principles of Consolidation
The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The unaudited condensed 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 (a) the Company, as the general partner or managing member, exercises effective control, even though the Company’s ownership may be less than 50 percent, (b) the related governing agreements provide the Company with broad powers, and (c) the other parties do not participate in the management of the entities and do not effectively have the substantial 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 unaudited condensed consolidated financial statements, it would have no effect on its operations and/or total stockholders’ equity attributable to the Company.
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, 2017.2023. 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, 2016,2022, filed with the SEC on March 17, 2017.31, 2023.
Use of Estimates
The preparation of the Company’s unaudited condensed 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 unaudited condensed 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,recognition; stock-based compensation,compensation; valuation of interest and accounts receivable; impairment of finance receivablesreceivables; allowance for credit losses; long-lived assets; property and long-lived assets,equipment; intangible assets; goodwill; valuation of warrants and other investments; contingent consideration; income taxestaxes; 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 unaudited condensed 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, and its business offering clinical development and manufacturing services as well as oral therapeutic formulation solutions built around Enteris’ pharmaceutical Peptelligence® platform, which enables the oral delivery of molecules that are typically injected, including peptides and BCS Class II, III, and IV small molecules in an enteric-coated tablet formulation.
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. The Company classifies as current the portion of deferred revenue that is expected to be recognized within one year from the balance sheet date and is included in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets.
Reclassification
Certain prior year amounts have been reclassified to conform to current year presentation. The amounts for prior periods have been reclassified to be consistent with current year presentation and have no impact on previously reported total assets, total stockholders’ equity or net income.
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 consolidated statements of income.
Recent Accounting Pronouncements
In January 2016,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardsStandard Update (“ASU”) No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition2020-04, “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 Measurementexceptions 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 Financial Assetsdebt securities classified as held-to-maturity. ASU 2020-04 was effective upon issuance, and Financial Liabilities.” This guidance changes how entities measure equity investments that do not result in consolidation and are not accounted for under the equity method. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values; however, the exception requires the entity to consider relevant transactions thatprovisions generally can be reasonably known to identify any observable price changes that would impact the fair value. This guidance also changes certain disclosure requirements and other aspectsapplied prospectively as of current GAAP. This guidance is effective for annual periods beginning afterJanuary 1, 2020 through December 15, 2017 and is applicable to the Company in fiscal 2018.31, 2024. The Company has beenidentified existing loans that reference LIBOR and is in the process of evaluating the new guidance and believes ASU 2016-01alternatives in each situation. The Company expects that it will not have a material impact on its consolidated financial statements upon adoption in fiscal 2018.
In March 2016, the FASB issued ASU No. 2016-07, “Equity Method and Joint Ventures (Topic 323).” This guidance simplifies the accounting for equity method investments by eliminating the requirement in Topic 323 that requires an entityelect to retroactively adopt the equity method of accounting if an investment qualifies for useapply some of the equity method as a result of an increaseexpedients and exceptions provided in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interestASU 2020-04 and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. ASU 2016-07 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. ASU 2016-07 did not have a material impact on the Company’s unaudited condensed consolidated financial statements upon adoption.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about:
In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) — Narrow-Scope Improvements and Practical Expedients,” which clarified guidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters. The new guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company has been evaluating the impact of ASU 2014-09 and related ASUs, and aside from enhanced disclosures surrounding revenue recognized from contracts with customers, the Company does not believe theythe adoption of this standard will have a material impact on the Company’s consolidated financial statements.
The Company currently intends to useadopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), as amended, on January 1, 2023 using the modified prospectiveretrospective approach upon adoption.
method. ASU 2016-13 replaced the incurred loss impairment methodology with a methodology that reflects a current expected credit loss (“CECL”). ASU 2016-13 impacted all of the Company’s investments held at amortized cost. At December 31, 2022, the Company’s allowance for credit losses of $11.8 million was the accumulation of allowance for credit losses (“ACL”) applied to specific finance receivables, representing management’s prior estimates of potential future losses on such finance receivables. As part of the Company’s adoption of ASU 2016-13, management reviewed its prior estimates of finance receivable-specific ACL and chose to apply the full $11.8 million ACL under legacy GAAP to the finance receivables such allowance applied. Under the new CECL model, the net GAAP balances of such finance receivables are presented net of previously reported ACL and are included in the Company’s estimated ACL for its Royalties portfolio segment.
Upon adoption of ASC 2016-13 on January 1, 2023, the Company’s transition adjustment included $11.8 million of ACL on finance receivables, which is presented as a reduction to finance receivables, and a $0.4 million ACL on unfunded loan commitments, which is recorded within other non-current liabilities. The Company recorded a net decrease of $9.7 million to accumulated deficit as of January 1, 2023 for the cumulative effect of adopting ASU 2016-13, which reflects the transition adjustments noted above, net of the applicable deferred tax assets of $2.5 million. Results for reporting periods beginning after January 1, 2023 are presented under ASU 2016-13, while prior period amounts continue to be reported in accordance with previously applicable accounting standards. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on finance receivables when placed on nonaccrual status, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. Please refer to Note 3 for more information on how the Company determines its allowance for credit losses on finance receivables.
In March 2016,2022, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation2022-02, Financial Instruments - Credit Losses (Topic 718).”326): Troubled Debt Restructurings and Vintage Disclosures, which removes the accounting guidance for troubled debt restructurings and requires entities to evaluate whether a modification provided to a borrower results in a new loan or continuation of an existing loan. The amendment enhances existing disclosures and requires new disclosures for receivables when there has been a modification in contractual cash flows due to a borrower experiencing financial difficulties. Additionally, the amendments require public business entities to disclose gross charge-off information by year of ASU 2016-09 were issued as part of the FASB’s simplification initiative focused on improving areas of GAAP for which cost and complexity may be reduced while maintaining or improving the usefulness of information disclosed within the financial statements. The amendments focused on simplification specifically with regard to share-based payment transactions, including income tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows.
Effective as of January 1, 2017, the Company adopted a change in accounting policy in accordance with ASU 2016-09 to account for excess tax benefits and tax deficiencies as income tax expense or benefit, treated as discrete itemsorigination in the reporting period in which they occur, and to recognize previously unrecognized deferred tax assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation recognized for financial reporting.vintage disclosures. The change was applied on a modified retrospective basis, and no prior periods were restated as a result of this change in accounting policy.
ASU 2016-09 also eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the associated tax benefit can be recognized as an increase in paid-in capital. Approximately $1.9 million of net operating losses have been attributed to tax deduction for stock-based compensation in excess of the related book expense. Under ASU 2016-09, these previously unrecognized deferred tax assets were recognized on a modified retrospective basis as of January 1, 2017, the start of the year in which the Company adopted ASU 2016-09. The net operating losses recognized as of2022-02 on January 1, 2017, as described above, have been offset by a valuation allowance. As a result, there was no tax-related cumulative-effect adjustment to retained earnings.2023 and incorporated the required disclosures into Note 3, Finance Receivables.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326).” The new standard adds an impairment model, known as the current expected credit loss (CECL) model, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of losses. The ASU describes the impairment allowance as a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be measured in a manner similar to current GAAP; however, the amendments in this update require that credit losses be presented as an allowance rather than as a write-down, which will allow an entity the ability to record reversals of credit losses in current period net income. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. The Company is currently evaluating the new guidance but believes it is likely to incur more upfront loan losses under the new CECL model.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The FASB issued this guidance with the intent of reducing diversity in practice with respect to classification of eight types of cash receipts and payments: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero coupon bonds, (3) contingent consideration payments after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies and bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. For the Company, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company believes ASU 2016-15 will not have a material impact on the Company’s consolidated financial statements upon adoption.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718),” to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting required by Topic 718. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and should be applied prospectively to an award modified on or after the adoption date. The Company believes ASU 2017-09 will not have a material impact on the Company’s consolidated financial statements upon adoption in fiscal 2018.
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Basic net income per share is computed using the weighted-average number of outstanding shares of common stock.stock during the applicable period. Diluted net income per share is computed using the weighted-average number of outstanding shares of common stock during the applicable period, and when dilutive, shares of common stock issuable upon exercise of options and warrants deemed outstanding using the treasury stock method.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator: | ||||||||||||||||
Net income attributable to SWK Holdings Corporation Stockholders | $ | 2,758 | $ | 3,121 | $ | 11,403 | $ | 5,171 | ||||||||
Denominator: | ||||||||||||||||
Weighted-average shares outstanding | 13,043 | 13,132 | 13,036 | 13,127 | ||||||||||||
Effect of dilutive securities | 4 | 3 | 4 | 3 | ||||||||||||
Weighted-average diluted shares | 13,047 | 13,135 | 13,040 | 13,130 | ||||||||||||
Basic income per share attributable to SWK Holdings Corporation Stockholders | $ | 0.21 | $ | 0.24 | $ | 0.87 | $ | 0.39 | ||||||||
Diluted income per share attributable to SWK Holdings Corporation Stockholders | $ | 0.21 | $ | 0.24 | $ | 0.87 | $ | 0.39 |
Schedule of Basic and Diluted Earning per Share
Three Months Ended | Six Months Ended | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 3,934 | $ | 565 | $ | 8,569 | $ | 4,043 | ||||||||
Denominator: | ||||||||||||||||
Weighted-average shares outstanding | 12,741 | 12,835 | 12,787 | 12,833 | ||||||||||||
Effect of dilutive securities | 44 | 50 | 43 | 49 | ||||||||||||
Weighted-average diluted shares | 12,785 | 12,885 | 12,830 | 12,882 | ||||||||||||
Basic net income per share | $ | 0.31 | $ | 0.04 | $ | 0.67 | $ | 0.32 | ||||||||
Diluted net income per share | $ | 0.31 | $ | 0.04 | $ | 0.67 | $ | 0.31 |
For the three months ended SeptemberJune 30, 20172023 and 2016,2022, outstanding stock options and warrants to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 287,000 and 403,000, , respectively, have been excluded from the calculation of diluted net income per share, as all such securities were anti-dilutive. For the ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, outstanding stock options and warrants to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 324,000 and 374,000, , respectively, have been excluded from the calculation of diluted net income per share, as all such securities were anti-dilutive.
Note 3. Finance Receivables, Net
Finance receivables are reported at their determined principal balances net of any unearned income, cumulative charge-offswrite 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 valuevalues of finance receivables are as follows (in thousands):
Portfolio | September 30, 2017 | December 31, 2016 | ||||||
Term Loans | $ | 126,608 | $ | 91,841 | ||||
Royalty Purchases | 38,770 | 36,184 | ||||||
Total before allowance for credit losses | 165,378 | 128,025 | ||||||
Allowance for credit losses | (1,659 | ) | (1,659 | ) | ||||
Total carrying value | $ | 163,719 | $ | 126,366 |
Schedule of carrying value of finance receivables
June 30, 2023 | December 31, 2022 | |||||||
Term loans | $ | 189,283 | $ | 188,836 | ||||
Royalty purchases | 44,771 | 59,565 | ||||||
Total before allowance for credit losses | 234,054 | 248,401 | ||||||
Allowance for credit losses | (11,104 | ) | (11,846 | ) | ||||
Total finance receivables, net | $ | 222,950 | $ | 236,555 |
Allowance for Credit QualityLosses
The 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. As part of the Company’s quarterly assessment of the allowance, the finance receivables portfolio included two portfolio segments: Term Loans and Royalties.
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 June 30, 2023, the $0.4 million liability for credit losses on off-balance-sheet credit exposures is included in other liabilities. Please refer to Note 6 for further information on the Company’s unfunded commitments.
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The following table details the changes in the allowance for credit losses by portfolio segment for the respective periods (in thousands):
Schedule of Allowance for Credit Losses
Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |||||||||||||||||||||||
Term Loans | Royalties | Total | Term Loans | Royalties | Total | |||||||||||||||||||
Allowance at beginning of period, prior to adoption of ASU 2016-13 | $ | — | $ | 11,846 | $ | 11,846 | $ | — | $ | 8,388 | $ | 8,388 | ||||||||||||
Write offs (1) | — | (11,846 | ) | (11,846 | ) | — | — | — | ||||||||||||||||
Recoveries | — | — | — | — | 23 | 23 | ||||||||||||||||||
Effect of Adoption of ASC 326 | 8,900 | 2,886 | 11,786 | — | — | — | ||||||||||||||||||
Provision (benefit) for credit losses | (572 | ) | (110 | ) | (682 | ) | — | — | — | |||||||||||||||
Allowance at end of period | $ | 8,328 | $ | 2,776 | $ | 11,104 | $ | — | $ | 8,365 | $ | 8,365 |
(1) | Reversal of finance receivable-specific ACL recognized in prior periods. No impact to consolidated statement of income for the six months ended June 30, 2023. Please refer to Note 1 for further details. |
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 eachits finance receivables. Recognition of income is suspended, and the finance receivable for impairment. A term loan is considered to be impairedplaced on non-accrual status when based on current information and events, itmanagement determines that collection of future income is determined that the Company will not be able to collect the amounts due according to the loan contract, including scheduled interest payments.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 and collectabilitycollectibility of remaining principal and interest is no longer doubtful. 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.
Receivables associated with royalty stream purchases would be considered to be impaired when it is probable that the Company will be unable to collect the book value of the remaining investment based upon adverse changes in the estimated underlying royalty stream.
When the Company identifies a finance receivable as impaired, it measures the impairment based on the present value of expected future cash flows, discounted at the receivable’s effective interest rate, or the estimated fair value of the collateral, less estimated costs to sell. If it is determined that the value of an impaired receivable is less than the recorded investment, the Company would recognize impairment with a charge to the allowance for credit losses. When the value of the impaired receivable is calculated by discounting expected cash flows, interest income would be recognized using the receivable’s effective interest rate over the remaining life of the receivable.
The Company individually develops the allowance for credit losses for any identified impaired loans. In developing the allowance for credit losses, the Company considers, among other things, the following credit quality indicators:
The following table presents nonaccrual and performing finance receivables by portfolio segment, net of credit loss allowance (in thousands):
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Nonaccrual | Performing | Total | Nonaccrual | Performing | Total | |||||||||||||||||||
Term Loans | $ | 19,040 | 107,568 | $ | 126,608 | $ | 19,040 | $ | 72,801 | $ | 91,841 | |||||||||||||
Royalty Purchases | — | 37,111 | 37,111 | — | 34,525 | 34,525 | ||||||||||||||||||
Total carrying value | $ | 19,040 | 144,679 | $ | 163,719 | $ | 19,040 | $ | 107,326 | $ | 126,366 |
Schedule of analysis of nonaccrual and performing loans by portfolio segment
June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
Nonaccrual | Performing | Total | Nonaccrual | Performing | Total | |||||||||||||||||||
Term loans | $ | 11,356 | $ | 169,600 | $ | 180,956 | $ | 11,304 | $ | 177,532 | $ | 188,836 | ||||||||||||
Royalty purchases | 6,670 | 35,324 | 41,994 | 6,736 | 40,983 | 47,719 | ||||||||||||||||||
Total finance receivables, net | $ | 18,026 | $ | 204,924 | $ | 222,950 | $ | 18,040 | $ | 218,515 | $ | 236,555 |
As of SeptemberJune 30, 20172023, the Company had three finance receivables in nonaccrual status: (1) the term loan to Flowonix Medical, Inc. (“Flowonix”), with a net carrying value of $11.9 million; (2) the Best royalty, with a net carrying value of $2.8 million; and (3) the Ideal Implant, Inc. (“Ideal”) royalty, with a net carrying value of $4.3 million. Although in nonaccrual status, none of the finance receivables were considered impaired as of June 30, 2023. The Company collected $0.2 million on its nonaccrual finance receivables during the six months ended June 30, 2023.
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 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.
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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 might be placed on non-accrual. While there is a potential for future principal impairment, we may refrain from placing borrower on non-accrual due to enterprise value coverage, continued receipt of interest payments, and/or anticipate a near-term capital raise.
3: Borrower performing inline-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 inline-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 and Red reflective of underperformance relative to plan.
The following table summarizes the carrying value of Finance Receivables by origination year, grouped by risk rating as of June 30, 2023:
Schedule of Financing Receivable by origination year
June 30, 2023 | ||||||||||||||||||||||||||||
2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | ||||||||||||||||||||||
Term Loans | ||||||||||||||||||||||||||||
5 | $ | — | $ | — | $ | 13,629 | $ | — | $ | 6,396 | $ | — | $ | 20,025 | ||||||||||||||
4 | 4,971 | 57,478 | — | — | — | — | 62,449 | |||||||||||||||||||||
3 | — | 5,194 | 19,270 | — | 31,600 | 26,494 | 82,558 | |||||||||||||||||||||
2 | — | — | 12,372 | — | — | — | 12,372 | |||||||||||||||||||||
1 | — | — | — | 11,879 | — | — | 11,879 | |||||||||||||||||||||
Subtotal - Term Loans | $ | 4,971 | $ | 62,672 | $ | 45,271 | $ | 11,879 | $ | 37,996 | $ | 26,494 | $ | 189,283 | ||||||||||||||
Royalties | ||||||||||||||||||||||||||||
Green | $ | — | $ | 13,789 | $ | — | $ | 18,988 | $ | — | $ | 4,883 | $ | 37,660 | ||||||||||||||
Red | — | — | 4,314 | — | — | 2,797 | 7,111 | |||||||||||||||||||||
Subtotal - Royalties | $ | — | $ | 13,789 | $ | 4,314 | $ | 18,988 | $ | — | $ | 7,680 | $ | 44,771 | ||||||||||||||
Total Finance Receivables, gross | $ | 4,971 | $ | 76,461 | $ | 49,585 | $ | 30,867 | $ | 37,996 | $ | 34,174 | $ | 234,054 |
Note 4. Intangible Assets
The following table summarizes the gross book value, accumulated amortization and net book value balances of intangible assets as of June 30, 2023 and December 31, 2016,2022 (in thousands):
Schedule of Intangible Assets
June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
Gross Book Value | Accumulated Amortization | Net Book Value | Gross Book Value | Accumulated Amortization | Net Book Value | |||||||||||||||||||
Licensing Agreement(1) | $ | 29,400 | $ | 22,338 | $ | 7,062 | $ | 29,400 | $ | 21,509 | $ | 7,891 | ||||||||||||
Trade names and trademarks | 210 | 81 | 129 | 210 | 71 | 139 | ||||||||||||||||||
Customer relationships | 240 | 92 | 148 | 240 | 80 | 160 | ||||||||||||||||||
Total intangible assets | $ | 29,850 | $ | 22,511 | $ | 7,339 | $ | 29,850 | $ | 21,660 | $ | 8,190 |
(1) | Prior to the acquisition, Enteris entered into a non-exclusive commercial license agreement (the “License Agreement”) with Cara Therapeutics, Inc. (“Cara”), for oral formulation rights to Enteris’ Peptelligence® technology to develop and commercialize Oral KORSUVATM 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. |
Amortization expense related to intangible assets was $0.4 million for both the three months ended June 30, 2023 and 2022, respectively. Amortization expense related to intangible assets was $0.9 million for both the six months ended June 30, 2023 and 2022, respectively.
The estimated future amortization expense related to intangible assets as of June 30, 2023 is as follows (in thousands):
Schedule of Intangible Asset Amortization Expense
Fiscal Year | Amount | |||
Remainder of 2023 | $ | 851 | ||
2024 | 1,546 | |||
2025 | 1,076 | |||
2026 | 1,076 | |||
2027 | 1,076 | |||
Thereafter | 1,714 | |||
Total | $ | 7,339 |
Note 5. Revolving Credit Facility
On June 28, 2023, the Company had two term loans associatedentered into a new Credit Agreement (the “Credit Agreement”) by and among SWK Funding LLC, the Company’s wholly-owned subsidiary (together with twothe 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 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.
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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 companiesof loan assets will not be less than 4.5%, for such calendar month, (iv) the net charge-off percentage in nonaccrual statusrelation to Borrower’s portfolio of loan assets will not exceed 3 percent for such calendar month, and (v) the weighted average risk rating in relation to Borrower portfolio of loan assets will not be less than 3.00. 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.
As of June 30, 2023, no amounts were outstanding under either credit facility, and approximately $2.4 million was outstanding under the Prior Credit Agreement as of December 31, 2022. During the three months ended June 30, 2023 and 2022, the Company recognized $0.4 million and $0.1 million, respectively, of interest expense in connection with a carryingthe Prior Credit Agreement. During the six months ended June 30, 2023 and 2022, the Company recognized $0.5 million and $0.2 million, respectively, of interest expense in connection with the Prior Credit Agreement.
Note 6. Commitments and Contingencies
Contingent Consideration
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 netat each reporting date until the contingency is resolved, with changes in the estimated fair value recognized in earnings. The estimated fair value of credit loss allowance,contingent consideration as of $19.0June 30, 2023 and December 31, 2022 was $11.2 million. The Company did not collect any cash on nonaccrual loansrecognize a change in the estimated fair value of its contingent consideration during the ninesix months ended SeptemberJune 30, 2017. Of2023 and 2022.
Unfunded Commitments
As of June 30, 2023, the two nonaccrual term loansCompany’s unfunded commitments were as follows (in millions):
Schedule of September 30, 2017, neither are deemed to be impaired. (Please seeABT Molecular Imaging, Inc. andB&D DentalCorporationbelow for further details regarding nonaccrual term loans.)Unfunded Commitments
MedMinder Systems, Inc. | $ | 5.0 | ||
Duo Royalty | 2.4 | |||
Total unfunded commitments | $ | 7.4 |
ABT Molecular Imaging, Inc. (“ABT”)
On October 10, 2014, the Company entered into a credit agreement pursuant to which the Company provided ABT a second lien term loan in the principal amount of $10.0 million. The loan matures on October 8, 2021. The synthetic royalty payment due to the Company on December 15, 2015 was blocked by ABT’s first lien lender pursuant to the terms of the intercreditor agreement by and between the Company and the first lien lender as a result of a forbearance agreement entered into between ABT and the first lien lender. Per the terms of the forbearance agreement,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 first lien lender deferred principal payments until maturitycase of the first lien in March 2016 and ABT raised additional equity capital. loan transactions, are subject to being advanced as long as an event of default does not exist.
In February 2016, ABT violated the terms of the forbearance agreement with the first lien lender. In order to control the work out of the default under the first lien loan and prevent the equity sponsors from taking control of the first lien term loan,On January 1, 2023, the Company purchased fromadopted ASU 2016-13, which replaced the incurred loss methodology with an unrelated partyexpected loss model known as the first lien term loan at parCECL model. See Note 3 for a purchase price of $0.7 million. The equity sponsors funded cash shortfalls intoinformation regarding the second quarter of 2016.Company’s allowance for credit losses related to its unfunded commitments.
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Litigation
Since June 7, 2016, the Company entered into additional amendments to the first lien term loan, which provided for an additional $5.8 million of liquidity under the first lien credit agreement. ABT has drawn down $5.8 million as of November 7, 2017. The Company is currently working with ABT andinvolved in, or has been involved in, arbitrations or various other legal proceedings that arise from the normal course of its advisors to complete a strategic transaction; thebusiness. 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 June 30, 2023, 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 processcapacity, or in other capacities at the Company’s request. The term of the indemnification period is currently uncertain.
The collateral for the loanofficer’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 been individually reviewed,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 that the fair market value of the loan, less costs to sell, was greater than the recorded investments in the loans as of September 30, 2017. Based on the impairment analysis, the Company has determined that recording a provision for credit losses as of September 30, 2017 is not required. The Company considered several factors in this determination, including an independent third-party valuation and developments in ABT’s business and industry.
B&D Dental Corporation (“B&D”)
On December 10, 2013, the Company entered into a five-year credit agreement to provide B&D a senior secured term loan with a principal amount of $6.0 million funded upon close, net of an arrangement fee of $60 thousand. Subsequently, the terms of the loan have been amended, and the Company has funded additional amounts to B&D. As of September 30, 2017, the total amount funded was $8.1 million.
B&D is currently in default under the terms of the credit agreement, and as a result, the Company classified the loan to nonaccrual status as of September 30, 2015. During the first quarter of 2017, the Company executed an additional amendment to the loan to advance an additional $0.1 million to finance the purchase of certain equipment to support its manufacturing operations and to protect the value of the collateral. The Company expects B&D to pay interest and principal on the equipment purchase advance and continues to work with B&D to improve its operational performance and pursue strategic alternatives. The Company is currently working with B&D to review strategic alternatives for the business; the outcome of such process is uncertain.
The collateral for the loan has been individually reviewed, and the Company believes that the fair market value of the loan, less costs to sell, was greater than the recorded investments in the loans as of September 30, 2017. Based on the impairment analysis, the Company has determined that recording a provision for credit losses as of September 30, 2017 is not required. The Company considered several factors in this determination, including an independent third-party valuation and developments in B&D’s business and industry.
Note 4. Marketable Investments
Investment in securities at September 30, 2017 and December 31, 2016 consist of the following (in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Corporate debt securities | $ | 1,488 | $ | 1,564 | ||||
Equity securities | 1,831 | 1,057 | ||||||
Total | $ | 3,319 | $ | 2,621 |
The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale securities as of September 30, 2017 and December 31, 2016, are as follows (in thousands):
September 30, 2017 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Loss | Fair Value | ||||||||||||
Available for sale securities: | ||||||||||||||||
Corporate debt securities | $ | 1,488 | $ | — | $ | — | $ | 1,488 | ||||||||
Equity securities | 1,043 | 1,718 | (930 | ) | 1,831 | |||||||||||
$ | 2,531 | $ | 1,718 | $ | (930 | ) | $ | 3,319 | ||||||||
December 31, 2016 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Loss | Fair Value | ||||||||||||
Available for sale securities: | ||||||||||||||||
Corporate debt securities | $ | 1,564 | $ | — | $ | — | $ | 1,564 | ||||||||
Equity securities | 1,144 | — | (87 | ) | 1,057 | |||||||||||
$ | 2,708 | $ | — | $ | (87 | ) | $ | 2,621 |
Equity Securities
The Company’s equity securities include 661,076 shares of Cancer Genetics common stock and 77,922 shares of Hooper Holmes common stock. During the nine months ended September 30, 2017, the Company sold 75,000 shares of Cancer Genetics common stock, which resulted in a realized gain of $0.2 million. As of September 30, 2017, the Cancer Genetics and Hooper Holmes equity securities are reflected at fair value of $1.8 million and $46 thousand, respectively, as available-for-sale securities.
Debt Securities
On July 9, 2013, the Company entered into a note purchase agreement to purchase, at par, $3.0 million of a total of $100.0 million aggregate principal amount of senior secured notes due in November 2026. The agreement allows the first interest payment date to include paid-in-kind notes for any cash shortfall, of which the Company received $0.1 million on November 15, 2013. The notes are secured only by certain royalty and milestone payments associated with the sales of pharmaceutical products.
The senior secured notes have been placed on non-accrual status as of September 30, 2016. Total cash collected during the nine months ended September 30, 2017 was $76,000, which was credited to the notes’ carrying value. As of September 30, 2017, the notes are reflected at their estimated fair value of $1.5 million and classified as available-for-sale securities.
Note 5. Variable Interest Entities
The Company consolidates the activities of VIEs of which itthese indemnification agreements is the primary beneficiary. The primary beneficiary of a VIE is the variable interest holder possessing a controlling financial interest through (i) its power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) its obligation to absorb losses or its right to receive benefits from the VIE that could potentially be significant to the VIE. In order to determine whetherinsignificant. Accordingly, the Company owns a variable interest in a VIE, the Company performs qualitative analysishad no liabilities recorded for these agreements as of the entity’s design, organizational structure, primary decision makersJune 30, 2023 and relevant agreements.
Consolidated VIE
SWK HP Holdings LP (“SWK HP”) was formed in December 2012 to acquire a limited partnership interest in Holmdel Pharmaceuticals LP (“Holmdel”). Holmdel acquired the U.S. marketing authorization rights to a beta blocker pharmaceutical product indicated for the treatment of hypertension for a total purchase price of $13.0 million. The Company, through its wholly owned subsidiary SWK Holdings GP LLC (“SWK Holdings GP”), acquired a direct general partnership interest in SWK HP, which in turn acquired a limited partnership interest in Holmdel. The total investment in SWK HP of $13.0 million included $6.0 million provided by SWK Holdings GP and $7.0 million provided by non-controlling interests. Subject to customary limited partner protections afforded the investors by the terms of the limited partnership agreement, the Company maintains voting and managerial control of SWK HP and therefore includes it in its consolidated financial statements.
SWK HP had significant influence over the decisions made by Holmdel. SWK HP received quarterly distributions of cash flow generated by InnoPran XL according to a tiered scale that was subject to certain cash on cash returns received by SWK HP. SWK HP achieved the 2x cash on cash return threshold with the November 2016 distribution as such its economic ownership in Holmdel approximated 49 percent.
On February 23, 2017, Holmdel sold the U.S. marketing authorization rights to InnoPran XL to ANI Pharmaceuticals, Inc. SWK Holdings GP received net proceeds from the transaction of approximately $8.0 million. The approximate $8.0 million of proceeds includes a 5 percent incentive fee earned from SWK HP, and SWK Holding GP’s share of the sale proceeds. As part of the transaction, SWK HP and all involved parties executed mutual releases and terminations of all license and supply agreements. SWK Holdings GP received an additional distribution regarding InnoPran XL sales covering the period from January 1, 2017 through the date of sale and does not anticipate receiving any further material distributions in the future.31, 2022.
Unconsolidated VIEs
For the nine months ended September 30, 2017, the Company recognized $10.5 million of equity method gains. The amount of equity method gains attributable to the non-controlling interest in SWK HP was $5.2 million. For the three and nine months ended September 30, 2016, the Company recognized $1.3 million and $5.1 million, respectively, of equity method gains. The amount of equity method gains attributable to the non-controlling interest in SWK HP were $0.7 million and $2.6 million, respectively.
In addition, SWK HP received cash distributions totaling $17.5 million during the nine months ended September 30, 2017, of which $9.0 million was subsequently paid to holders of the non-controlling interests in SWK HP. Changes in the carrying amount of the Company’s investment in Holmdel for the nine months ended September 30, 2017, are as follows (in thousands):
Balance at December 31, 2016 | $ | 6,985 | ||
Add: Income from investments in unconsolidated entity | 10,539 | |||
Less: Cash distribution from investments in unconsolidated entity | (17,524 | ) | ||
Balance at September 30, 2017 | $ | — |
Note 6. Related Party Transactions
On September 6, 2013, in connection with entering into a credit facility, the Company issued warrants to an affiliate of a stockholder, Carlson Capital, L.P. (the “Stockholder”), for 100 thousand shares of the Company’s common stock at a strike price of $13.88. The warrants have a price anti-dilution mechanism that was triggered by the price that shares were sold by the Company in a rights offering in 2014, and as a result, the strike price of the warrants was reduced to $13.48.
Due to certain provisions within the warrant agreement, the warrants meet the definition of a derivative and do not qualify for a scope exception, as it is not considered indexed to the Company’s stock. As such, the warrants are reflected as a warrant liability in the unaudited condensed consolidated balance sheets. The Company recorded a nominal gain for the three and nine months ended September 30, 2017. The Company determined the fair value using the Black-Scholes option pricing model with the following assumptions:
September 30, 2017 | December 31, 2016 | |||||||
Dividend rate | — | — | ||||||
Risk-free rate | 1.6 | % | 1.9 | % | ||||
Expected life (years) | 2.9 | 3.7 | ||||||
Expected volatility | 32.8 | % | 34.1 | % |
The changes on the value of the warrant liability during the nine months ended September 30, 2017 were as follows (in thousands):
Fair value – December 31, 2016 | $ | 189 | ||
Issuances | — | |||
Changes in fair value | 8 | |||
Fair value – September 30, 2017 | $ | 197 |
Note 7. Stockholders’ Equity
Stock Compensation Plans
During the nine months ended September 30, 2017 and 2016, the Board approved compensation for Board services by granting 15,906 and 18,432 shares, respectively, of common stock as compensation for the non-employee directors. During each of the nine months ended September 30, 2017 and 2016, the Company recorded approximately $0.2 million in Board compensation expense. The aggregate stock-based compensation expense, including the quarterly Board grants, recognized by the Company for the nine months ended September 30, 2017 and 2016 was $0.2 million and $0.3 million, respectively.
Non-controlling Interests
As discussed in Note 5, SWK HP had a limited partnership interest in Holmdel. Changes in the carrying amount of the non-controlling interest in the unaudited condensed consolidated balance sheet for the nine months ended September 30, 2017, is as follows (in thousands):
Balance at December 31, 2016 | $ | 3,756 | ||
Add: Income attributable to non-controlling interests | 5,204 | |||
Less: Cash distribution to non-controlling interests | (8,960 | ) | ||
Balance at September 30, 2017 | $ | — |
Note 8. 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 ninesix months ended SeptemberJune 30, 2017. 2023 and 2022.
The fair value of equity method investments is not readily available nor has the Company estimated the fair value of these investments and disclosure is not required. The Company is not aware of any identified events or changes in circumstances that would have a significant adverse effect on the carrying value of any of its equity method investments included in the unaudited condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016.
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, 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.
Securities available for sale
Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices).
Finance Receivables
The fair values of finance receivables are 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 Company recorded contingent consideration related to the August 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement.
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The fair value measurements of the contingent consideration obligations and the related intangible assets 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.
Marketable Investments and Warrants
Marketable Investments
If active market prices are available, fair value measurement is based on quoted active market prices and, accordingly, these securities would be 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 would be 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 would be 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 bench mark 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.
Derivative securitiesInstruments
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 was recorded in other non-current assets and other non-current liabilities in the consolidated balance sheets as of June 30, 2023 and December 31, 2022. The Company recognized $1.6 million of changes in fair value related to its foreign currency forward during the six months ended June 30, 2023.
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of SeptemberJune 30, 20172023 (in thousands):
Total Carrying Value in Consolidated Balance Sheet | 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 | $ | 1,403 | $ | — | $ | — | $ | 1,403 | ||||||||
Marketable investments | 3,319 | 1,831 | — | 1,488 | ||||||||||||
Financial Liabilities: | ||||||||||||||||
Warrant liability | $ | 197 | $ | — | $ | — | $ | 197 |
Schedule of fair value of assets and liabilities measured on recurring basis
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 | $ | 1,459 | $ | — | $ | — | $ | 1,459 | ||||||||
Marketable investments | 59 | — | — | 59 | ||||||||||||
Foreign currency forward contract | 811 | — | — | 811 | ||||||||||||
Financial Liabilities | ||||||||||||||||
Contingent consideration payable | $ | 11,200 | $ | — | $ | — | $ | 11,200 | ||||||||
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The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 20162022 (in thousands):
Total | 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 | $ | 1,220 | $ | — | $ | — | $ | 1,220 | ||||||||
Marketable investments | 76 | — | — | 76 | ||||||||||||
Financial Liabilities | ||||||||||||||||
Contingent consideration payable | $ | 11,200 | $ | — | $ | — | $ | 11,200 | ||||||||
Foreign currency forward contract | 754 | — | — | 754 |
Total Carrying Value in Consolidated Balance Sheet | 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 | $ | 1,013 | $ | — | $ | — | $ | 1,013 | ||||||||
Marketable investments | 2,621 | 1,057 | — | 1,564 | ||||||||||||
Financial Liabilities: | ||||||||||||||||
Warrant liability | $ | 189 | $ | — | $ | — | $ | 189 |
The changes on thein fair value of the warrant assets during the ninesix months ended SeptemberJune 30, 20172023 and 2022 were as follows (in thousands):
Fair value – December 31, 2016 | $ | 1,013 | ||
Issued | 1,392 | |||
Canceled | (205 | ) | ||
Change in fair value | (797 | ) | ||
Fair value – September 30, 2017 | $ | 1,403 |
Schedule of fair value assets measured on recurring basis unobservable input reconciliation
June 30, 2023 | June 30, 2022 | |||||||||
Fair value - December 31, 2022 | $ | 1,220 | Fair value - December 31, 2021 | $ | 3,419 | |||||
Issued | 822 | Issued | 227 | |||||||
Canceled | — | Canceled | — | |||||||
Change in fair value | (583 | ) | Change in fair value | (1,165 | ) | |||||
Fair value - June 30, 2023 | $ | 1,459 | Fair value - June 30, 2022 | $ | 2,481 |
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:
Schedule of weighted average assumptions
December 31, | ||||||||
Dividend rate range | ||||||||
Risk-free rate range | ||||||||
Expected life (years) range | ||||||||
Expected volatility range | ||||||||
As of June 30, 2023, the Company had one royalty, Best, that was deemed to be impaired based on reductions in carrying value in prior periods. As of December 31, 2022, the Company had two royalties, Best and Cambia®, that were deemed to be impaired based on reductions in carrying values in prior periods. The following table presents the financial assetsthese royalties measured at fair value on a nonrecurring basis as of SeptemberJune 30, 20172023 and December 31, 20162022 (in thousands):
Schedule of fair value of assets and liabilities measured on nonrecurring basis
Total Carrying Value in Consolidated Balance Sheet | 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, 2017 | ||||||||||||||||
Impaired loans | $ | 2,945 | $ | — | $ | — | $ | 2,945 | ||||||||
December 31, 2016 | ||||||||||||||||
Impaired loans | $ | 3,338 | $ | — | $ | — | $ | 3,338 |
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) | |||||||||||||
June 30, 2023 | $ | 2,797 | $ | — | $ | — | $ | 2,797 | ||||||||
December 31, 2022 | $ | 3,545 | $ | — | $ | — | $ | 3,545 |
There were no liabilities measured at fair value on a nonrecurring basis as of SeptemberJune 30, 20172023 and December 31, 2016.
2022.
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 other than investment in unconsolidated entity.measured at fair value on a recurring and non-recurring basis.
Schedule of fair value by balance sheet grouping
As of SeptemberJune 30, 20172023 (in thousands):
Carry Value | Fair Value | Level 1 | Level 2 | Level 3 | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 15,975 | $ | 15,975 | $ | 15,975 | $ | — | $ | — | ||||||||||||||||||||||||||||||
Finance receivables | 163,719 | 163,719 | — | — | 163,719 | $ | 222,950 | $ | 222,950 | $ | — | $ | — | $ | 222,950 | |||||||||||||||||||||||||
Marketable investments | 3,319 | 3,319 | 1,831 | — | 1,488 | 59 | 59 | — | — | 59 | ||||||||||||||||||||||||||||||
Warrant assets | 1,403 | 1,403 | — | — | 1,403 | 1,459 | 1,459 | — | — | 1,459 | ||||||||||||||||||||||||||||||
Foreign currency forward contract | 811 | 811 | — | — | 811 | |||||||||||||||||||||||||||||||||||
Financial Liabilities | ||||||||||||||||||||||||||||||||||||||||
Warrant liability | $ | 197 | $ | 197 | $ | — | $ | — | $ | 197 | ||||||||||||||||||||||||||||||
Contingent consideration payable | $ | 11,200 | $ | 11,200 | $ | — | $ | — | $ | 11,200 |
As of December 31, 20162022 (in thousands):
Carry Value | Fair Value | Level 1 | Level 2 | Level 3 | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 32,182 | $ | 32,182 | $ | 32,182 | $ | — | $ | — | ||||||||||||||||||||||||||||||
Finance receivables | 126,366 | 126,366 | — | — | 126,366 | $ | 236,555 | $ | 236,555 | $ | — | $ | — | $ | 236,555 | |||||||||||||||||||||||||
Marketable investments | 2,621 | 2,621 | 1,057 | — | 1,564 | 76 | 76 | — | — | 76 | ||||||||||||||||||||||||||||||
Warrant assets | 1,013 | 1,013 | — | — | 1,013 | 1,220 | 1,220 | — | — | 1,220 | ||||||||||||||||||||||||||||||
Financial Liabilities | ||||||||||||||||||||||||||||||||||||||||
Warrant liability | $ | 189 | $ | 189 | $ | — | $ | — | $ | 189 | ||||||||||||||||||||||||||||||
Contingent consideration payable | $ | 11,200 | $ | 11,200 | $ | — | $ | — | $ | 11,200 | ||||||||||||||||||||||||||||||
Foreign currency forward contract | 754 | 754 | — | — | 754 |
Note 8. Revenue Recognition
The Company’s Pharmaceutical Development segment recognizes revenues received from contracts with its customers by revenue source, as the Company believes 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 six months ended June 30, 2023 and 2022 (in thousands):
Schedule of Revenue Recognized by Revenue Source
Three Months Ended | Six Months Ended | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Pharmaceutical Development Segment | ||||||||||||||||
License Agreement | $ | 10 | $ | 16 | $ | 10 | $ | 132 | ||||||||
Pharmaceutical Development and other | 173 | 98 | 291 | 698 | ||||||||||||
Total contract revenue | $ | 183 | $ | 114 | $ | 301 | $ | 830 |
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 revenues and are included in accounts payable and accrued liabilities in the consolidated balance sheets (in thousands):
June 30, 2023 | December 31, 2022 | |||||||
Pharmaceutical Development Segment | ||||||||
Deferred revenue | $ | 30 | $ | 33 | ||||
Total contract liabilities | $ | 30 | $ | 33 |
During the six months ended June 30, 2023, the Company recognized $0.1 million of 2022 deferred revenue from the satisfaction of performance obligations. The Company did not have any contract assets nor did it have any contract liabilities related to the License Agreement as of June 30, 2023 or December 31, 2022.
Note 9. Subsequent EventsSegment Information
Soluble Systems LLC
SWK Funding LLC, the Company’s wholly-owned subsidiary,Selected financial and Soluble Systems, LLC (“Soluble”), on October 26, 2017 entered into a third amendment to the credit agreement, which extended the maturity of the loan to October 26, 2022, reduced the interest rate to LIBOR plus 10.25 percent, subject to a LIBOR floor of 1.5 percent, and extended the interest only period to two years. The interest only period can be extended an additional six months, subject to a performance threshold. The exit fee remains 5 percent. Interest on the loan for the first three payment dates in 2017 was paid-in-kind per the second amendment, and all future interestdescriptive information is required to be paidprovided 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 cash. 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.
19
The following tables present financial information for the Company’s reportable segments for the periods indicated (in thousands):
Schedule of Reportable Revenue by Geographic Region
Three Months Ended June 30, 2023 | ||||||||||||||||
Finance Receivables | Pharmaceutical Development Services | Holding Company and Other | Consolidated | |||||||||||||
Revenue | $ | 9,278 | $ | 183 | $ | — | $ | 9,461 | ||||||||
Other revenue | 36 | — | — | 36 | ||||||||||||
Provision (benefit) for credit losses | (682 | ) | — | — | (682 | ) | ||||||||||
Interest expense | 363 | — | — | 363 | ||||||||||||
Pharmaceutical manufacturing, research and development | — | 1,509 | — | 1,509 | ||||||||||||
Depreciation and amortization expense | — | 633 | 4 | 637 | ||||||||||||
General and administrative | 137 | 981 | 1,879 | 2,997 | ||||||||||||
Other income, net | 715 | — | — | 715 | ||||||||||||
Income tax expense | — | — | 1,454 | 1,454 | ||||||||||||
Net income (loss) | 10,211 | (2,940 | ) | (3,337 | ) | 3,934 |
Three Months Ended June 30, 2022 | ||||||||||||||||
Finance Receivables | Pharmaceutical Development and Other | Holding Company and Other | Consolidated | |||||||||||||
Revenue | $ | 6,828 | $ | 114 | $ | — | $ | 6,942 | ||||||||
Interest expense | 80 | — | — | 80 | ||||||||||||
Pharmaceutical manufacturing, research and development | — | 1,480 | — | 1,480 | ||||||||||||
Depreciation and amortization expense | — | 625 | 1 | 626 | ||||||||||||
General and administrative | 2 | 905 | 2,111 | 3,018 | ||||||||||||
Other expense, net | (991 | ) | — | — | (991 | ) | ||||||||||
Income tax expense | — | — | 182 | 182 | ||||||||||||
Net income (loss) | 5,755 | (2,896 | ) | (2,294 | ) | 565 |
Six Months Ended June 30, 2023 | ||||||||||||||||
Finance Receivables | Pharmaceutical Development and Other | Holding Company and Other | Consolidated | |||||||||||||
Revenue | $ | 18,538 | $ | 301 | $ | — | $ | 18,839 | ||||||||
Other revenue | 67 | — | 2 | 69 | ||||||||||||
Provision (benefit) for credit losses | (682 | ) | — | — | (682 | ) | ||||||||||
Interest expense | 545 | — | — | 545 | ||||||||||||
Pharmaceutical manufacturing, research and development | — | 2,228 | — | 2,228 | ||||||||||||
Depreciation and amortization expense | — | 1,277 | 8 | 1,285 | ||||||||||||
General and administrative | 167 | 1,709 | 3,661 | 5,537 | ||||||||||||
Other expense, net | (81 | ) | — | — | (81 | ) | ||||||||||
Income tax expense | — | — | 1,345 | 1,345 | ||||||||||||
Net income (loss) | 18,494 | (4,913 | ) | (5,012 | ) | 8,569 |
20
Six Months Ended June 30, 2022 | ||||||||||||||||
Finance Receivables | Pharmaceutical Development and Other | Holding Company and Other | Consolidated | |||||||||||||
Revenue | $ | 17,243 | $ | 350 | $ | — | $ | 17,593 | ||||||||
Other revenue | — | 480 | — | 480 | ||||||||||||
Interest expense | 160 | — | — | 160 | ||||||||||||
Pharmaceutical manufacturing, research and development | — | 3,381 | — | 3,381 | ||||||||||||
Depreciation and amortization expense | — | 1,329 | 1 | 1,330 | ||||||||||||
General and administrative | 104 | 1,940 | 4,134 | 6,178 | ||||||||||||
Other expense, net | (1,712 | ) | — | — | (1,712 | ) | ||||||||||
Income tax expense | — | — | 1,269 | 1,269 | ||||||||||||
Net income (loss) | 15,267 | (5,820 | ) | (5,404 | ) | 4,043 |
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.
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, 20162022 (“Annual Report”), as well as our unaudited condensed consolidated financial statements and the accompanying notes included in this report.
Overview
We evaluatehave organized our operations into two segments: Finance Receivables and invest in a broad rangePharmaceutical 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 healthcare related companies and products with innovative intellectual property, including the biotechnology, medical device, medical diagnostics and related tools, animal health and pharmaceutical industries (together “life science”) and tailor our financial solutionsnotes to the needs of our business partners. Our business partners are primarily engaged in selling products that directly or indirectly cure diseases and/or improve people’s or animals’ wellness, or they receive royalties paid on the sales of such products. For example, our biotechnology and pharmaceutical business partners manufacture medication that directly treats disease states, whereas our life science tools partners sell a wide variety of research instrumentation to help other companies conduct research into disease states.unaudited condensed consolidated financial statements for further information regarding segment information.
22
Finance Receivables Portfolio Overview
Our investment objective is to maximize our portfolio total return and thus increase our net income and book value by generating income from three sources:
In our portfolio we seek to achieve attractive risk-adjusted current yields and opportunities with the potential for equity-like returns with protection that credit provides.
The majority of our transactions are structured similarly to factoring transactions whereby we provide capital in exchange for an interest in an existing revenue stream. We do not anticipate providing capital in situations prior to the commercialization of a product. The existing revenue stream can take several forms, but is most commonly either a royalty derived from the sales of a life science product (1) from the marketing efforts of a third party, such as a royalty paid to an inventor on the sales of a medicine, or (2) from the marketing efforts of a partner company, such as a medical device company that directly sells its own products. Our structured debt investments may include warrants or other features, giving us the potential to realize enhanced returns on a portion of our portfolio. Capital that we provide directly to our partners is generally used for growth and general working capital purposes, as well as for acquisitions or recapitalizations in select cases. We generally fund the full amount of transactions up to $20 million through our working capital.
In addition, we provide non-discretionary investment advisory services to institutional clients in separately managed accounts to similarly invest in life-science finance. We may seek to raise discretionary capital from similar investors in the future.
In circumstances where a transaction is greater than $20 million, we seek to syndicate amounts in excess of $20 million to our investment advisory clients. In addition, we may participate with investors other than our investment advisory clients. In those instances, we do not expect to earn investment advisory income from the participations of such investors.
We source our investment opportunities through a combination of our senior management’s proprietary relationships within the industry, outbound business development efforts and inbound inquiry from companies, institutions and inventors interested in learning about our capital financing alternatives. Our investment advisory clients generally do not originate investment opportunities for us.
As of November 7, 2017, we have executed 26 transactions, deploying approximately an aggregate $374 million since 2012, across a variety of opportunities. In counting our transactions, we generally consider a series of transactions with one partner company as a single transaction. In eleven of the transactions, we participated alongside other investors; our investment advisory clients co-invested in three of these transactions. The other fifteen transactions were completed solely by SWK.
The table below provides an overview of our outstanding finance receivables transactions as of, Septemberand for the three and six months ended June 30, 2017.
2023 (in thousands, except rate, share and per share data).
Royalty Purchases and Financings | License Technology | Footnote | Funded Amount | GAAP Balance | Rate | Revenue Recognized | ||||||||||||||||
YTD | Q3 | |||||||||||||||||||||
Besivance® | Ophthalmic antibiotic | (1) | $ | 6,000 | $ | 2,945 | N/A | $ | 287 | $ | 129 | |||||||||||
Cambia® | NSAID migraine treatment | (2) | 8,500 | 7,954 | N/A | 844 | 271 | |||||||||||||||
Forfivo XL® | Depressive disorder treatment | 6,000 | 5,392 | N/A | 918 | 268 | ||||||||||||||||
Narcan® | Opioid overdose treatment | (3) | 17,500 | 17,115 | N/A | 1,934 | 506 | |||||||||||||||
Secured Royalty Financing (Marketable Security) | Women’s health | (4) | 3,000 | 1,488 | 11.5% | — | — | |||||||||||||||
Tissue Regeneration Therapeutics | Umbilical cord banking | (5) | 3,250 | 3,704 | N/A | 422 | 131 |
Revenue (Loss) Recognized | |||||||||||||||||||||
Royalty Purchases | Licensed Technology | Footnote | Funded Amount | GAAP Balance | 2Q 2023 | Year-to- Date | |||||||||||||||
Besivance® | Ophthalmic antibiotic | (1) | $ | 6,000 | $ | — | $ | 2 | $ | 14 | |||||||||||
Best ABT, Inc. | Oncology diagnosis | (2), (3) | 5,784 | 2,797 | — | — | |||||||||||||||
Coflex®/Kybella® | Spinal stenosis/submental fullness | 4,350 | 3,824 | 87 | 156 | ||||||||||||||||
Cambia® | NSAID migraine treatment | (4) | 8,500 | — | (37 | ) | (119 | ) | |||||||||||||
Duo Royalty | Japanese women’s health/cystic fibrosis | 15,488 | 13,789 | 842 | 1,373 | ||||||||||||||||
Forfivo XL® | Depressive disorder treatment | 6,000 | 1,366 | 239 | 490 | ||||||||||||||||
Ideal Implant, Inc. | Aesthetics | (3), (5) | 4,314 | 4,314 | — | — | |||||||||||||||
Iluvien® | Diabetic macular edema | 16,501 | 15,164 | 507 | 1,051 | ||||||||||||||||
Veru, Inc. | Women’s health | 10,000 | 3,517 | 132 | 264 |
Revenue Recognized | ||||||||||||||||||||||||||
Term Loans | Type | Footnote | Maturity Date | Principal | GAAP Balance | Rate | 2Q 2023 | Year-to- Date | ||||||||||||||||||
4Web, Inc. | First lien | 06/03/23 | $ | 29,411 | $ | 31,600 | 12.8 | % | $ | 1,144 | $ | 2,252 | ||||||||||||||
AOTI, Inc. | First lien | 03/21/27 | 12,000 | 12,033 | 11.0 | % | 486 | 966 | ||||||||||||||||||
Acer Therapeutics, Inc. | First lien | (6) | 03/04/24 | — | — | 12.0 | % | 313 | 1,560 | |||||||||||||||||
Aziyo Biologics, Inc. | First lien | 08/10/27 | 25,000 | 25,426 | 12.0 | % | 966 | 1,933 | ||||||||||||||||||
BIOLASE, Inc. | First lien | 05/31/25 | 13,300 | 13,999 | 10.3 | % | 559 | 1,096 | ||||||||||||||||||
Biotricity, Inc. | First lien | 12/21/26 | 12,364 | 12,372 | 14.5 | % | 616 | 1,144 | ||||||||||||||||||
Epica International, Inc. | First lien | 07/23/24 | 11,750 | 12,495 | 9.5 | % | 660 | 1,062 | ||||||||||||||||||
eTon Pharmaceuticals, Inc. | First lien | 11/13/24 | 6,230 | 6,396 | 10.0 | % | 250 | 498 | ||||||||||||||||||
Exeevo, Inc. | First lien | 07/01/27 | 5,233 | 5,194 | 15.0 | % | 238 | 454 | ||||||||||||||||||
Flowonix Medical, Inc. | First lien | (3), (7) | 12/23/25 | 12,518 | 11,879 | 14.0 | % | — | — | |||||||||||||||||
MedMinder Systems, Inc. | First lien | 08/18/27 | 20,000 | 20,019 | 12.9 | % | 711 | 1,397 | ||||||||||||||||||
MolecuLight, Inc. | First lien | 12/29/26 | 10,000 | 10,142 | 12.8 | % | 457 | 906 | ||||||||||||||||||
NeoLight, LLC | First lien | 02/17/27 | 5,000 | 4,971 | 13.5 | % | 206 | 293 | ||||||||||||||||||
SKNV | First lien | 05/15/27 | 13,497 | 13,629 | 10.4 | % | 511 | 999 | ||||||||||||||||||
Trio Healthcare Ltd. | First lien | 07/01/26 | 9,152 | 9,128 | 12.5 | % | 389 | 749 |
Maturity | GAAP | Revenue Recognized | ||||||||||||||||||||||
Term Loans | Type | Footnote | Principal | Date | Balance | Rate | YTD | Q3 | ||||||||||||||||
ABT Molecular Imaging | First Lien | (6) | $ | 6,383 | 06/30/16 | $ | 6,383 | 7.0% | $ | 218 | $ | 98 | ||||||||||||
ABT Molecular Imaging | Second Lien Royalty | (6) | 10,000 | 10/08/21 | 10,923 | N/A | — | — | ||||||||||||||||
B&D Dental Corporation | First Lien | (7) | 8,148 | 12/10/18 | 8,117 | 14.0% | — | — | ||||||||||||||||
B&D Dental Corporation | First Lien Equipment Loan | (7) | 88 | 03/28/17 | 76 | 16.0% | 8 | 4 | ||||||||||||||||
CeloNova BioSciences, Inc. | First Lien | (8) | 7,533 | 07/31/21 | 7,424 | 13.0% | 107 | 107 | ||||||||||||||||
DxTerity Diagnostics | First Lien | (9) | 7,500 | 04/06/21 | 7,395 | 14.0% | 806 | 273 | ||||||||||||||||
Hooper Holmes, Inc. | First Lien | (10) | — | 04/17/18 | — | 15.0% | 1,251 | — | ||||||||||||||||
Hooper Holmes, Inc. | First Lien | (10) | 8,500 | 05/11/21 | 7,665 | 14.0% | 541 | 380 | ||||||||||||||||
Hooper Holmes, Inc. | Revolving | (10) | 2,000 | 05/11/21 | 2,000 | 14.0% | 93 | 70 | ||||||||||||||||
Imprimis Pharmaceuticals, Inc. | First Lien | (11) | 9,720 | 07/19/21 | 9,125 | 12.0% | 276 | 276 | ||||||||||||||||
Keystone Dental, Inc. | First Lien | (12) | 20,000 | 05/20/21 | 19,910 | 13.0% | 2,131 | 738 | ||||||||||||||||
OraMetrix, Inc. | First Lien | (13) | 8,500 | 12/15/21 | 8,439 | 12.0% | 847 | 290 | ||||||||||||||||
Parnell Pharmaceuticals | First Lien | (14) | 13,500 | 11/22/20 | 14,644 | 13.0% | 2,525 | 875 | ||||||||||||||||
Soluble Systems LLC | First Lien | (15) | 14,695 | 05/30/20 | 14,797 | 13.0% | 1,462 | 554 | ||||||||||||||||
Tenex Health, Inc. | First Lien | (16) | 6,000 | 06/30/21 | 5,736 | 12.0% | 641 | 212 | ||||||||||||||||
Thermedx, LLC | First Lien | (17) | 3,500 | 05/05/21 | 3,975 | N/A | 502 | 241 |
Revenue Recognized | ||||||||||||||||||||||
Marketable Investments | Number of Shares | Footnote | Funded Amount | GAAP Balance | 2Q23 | Year-to- Date | ||||||||||||||||
Secured Royalty Financing (Marketable Investment) | N/A | (2), (3) | $ | 3,000 | $ | 59 | $ | — | $ | — | ||||||||||||
Epica International, Inc. | 25,000 | N/A | — | — | — | |||||||||||||||||
SKNV | 26,575 | N/A | — | — | — |
23
Funded | GAAP | Revenue Recognized | ||||||||||||||||
Other | Footnote | Amount | Balance | YTD | Q3 | |||||||||||||
Holmdel Pharmaceuticals, LP | (18) | $ | 6,000 | $ | — | $ | 10,539 | $ | — | |||||||||
Cancer Genetics (Common Stock) | — | 1,785 | N/A | N/A | ||||||||||||||
Hooper Holmes, Inc. (Common Stock) | — | 46 | N/A | N/A | ||||||||||||||
Number of | Exercise Price per | GAAP | Change in Fair Value | |||||||||||||||||
Warrants to Purchase Stock | Footnote | Shares | Share | Balance | YTD | Q3 | ||||||||||||||
ABT Molecular Imaging | (6) | 5,000,000 | 0.20 | $ | — | $ | — | $ | — | |||||||||||
B&D Dental Corporation | (7) | 225 | 0.01 | — | — | — | ||||||||||||||
CeloNova BioSciences, Inc. | (8) | TBD | 0.01 | — | — | — | ||||||||||||||
DxTerity Diagnostics | (9) | 300,481 | 2.08 | — | — | — | ||||||||||||||
Hooper Holmes, Inc. | (10) | — | — | — | (100 | ) | — | |||||||||||||
Hooper Holmes, Inc. | (10) | 1,317,289 | 0.84 | 566 | (70 | ) | (165 | ) | ||||||||||||
Hooper Holmes, Inc. | (10) | 450,000 | 0.80 | 198 | (22 | ) | (22 | ) | ||||||||||||
Imprimis Pharmaceuticals, Inc. | (11) | 373,847 | 2.08 | 400 | (135 | ) | (135 | ) | ||||||||||||
Keystone Dental, Inc. | (12) | 793,651 | 1.26 | — | — | — | ||||||||||||||
OraMetrix, Inc. | (13) | 690,496 | 0.62 | — | — | — | ||||||||||||||
Soluble Systems LLC | (15) | 1,209,068 | 0.99 | — | — | — | ||||||||||||||
Tenex Health, Inc. | (16) | 2,693,878 | 0.37 | — | — | — | ||||||||||||||
Tribute Pharmaceuticals Canada, Inc. | (19) | 1,843,016 | Various | 239 | (469 | ) | 129 |
Revenue | ||||||||||||
Assets | YTD | Q3 | ||||||||||
Total Finance Receivables | $ | 163,719 | $ | 15,813 | $ | 5,423 | ||||||
Total Marketable Securities | 3,319 | — | — | |||||||||
Total Net Investment in Unconsolidated Entity | — | 10,539 | — | |||||||||
Fair Value of Warrant Assets | 1,403 | — | — | |||||||||
Total Assets/Revenues | $ | 168,441 | $ | 26,352 | $ | 5,423 |
Other Income (Loss) Recognized | ||||||||||||||||||||||
Warrants to Purchase Stock | Number of Shares | Footnote | Exercise Price per Share ($) | GAAP Balance | 2Q 2023 | Year-to- Date | ||||||||||||||||
4Web, Inc. | TBD | $ | — | $ | — | $ | — | $ | — | |||||||||||||
AOTI, Inc. | 92,490 | — | — | — | — | |||||||||||||||||
Acer Therapeutics, Inc. | 150,000 | 2.46 | 113 | 19 | (184 | ) | ||||||||||||||||
Acer Therapeutics, Inc. | 100,000 | 1.51 | 79 | 14 | (131 | ) | ||||||||||||||||
Acer Therapeutics, Inc. | 250,000 | 2.39 | 188 | 31 | (257 | ) | ||||||||||||||||
Acer Therapeutics, Inc. | 500,000 | 1.00 | 422 | 45 | 45 | |||||||||||||||||
Acerus Pharmaceuticals Corporation | — | — | — | — | (5 | ) | ||||||||||||||||
Aziyo Biologics, Inc. | 157,895 | 6.65 | 325 | 124 | (190 | ) | ||||||||||||||||
Aziyo Biologics, Inc. | 30,075 | 6.65 | 35 | (3 | ) | (63 | ) | |||||||||||||||
BIOLASE, Inc. | 22,039 | 9.80 | 1 | (1 | ) | (4 | ) | |||||||||||||||
Biotricity, Inc. | 57,536 | 6.26 | 17 | 5 | 7 | |||||||||||||||||
CeloNova BioSciences, Inc. | TBD | — | — | — | — | |||||||||||||||||
DxTerity Diagnostics, Inc. | 2,019,231 | — | — | — | — | |||||||||||||||||
Epica International, Inc. | TBD | — | — | — | — | |||||||||||||||||
eTon Pharmaceuticals, Inc. | 51,239 | 5.86 | 61 | (9 | ) | 18 | ||||||||||||||||
eTon Pharmaceuticals, Inc. | 18,141 | 6.62 | 22 | (3 | ) | 7 | ||||||||||||||||
Exeevo, Inc. | 930 | — | — | — | — | |||||||||||||||||
EyePoint Pharmaceuticals, Inc. | 40,910 | 11.00 | 170 | 153 | 150 | |||||||||||||||||
EyePoint Pharmaceuticals, Inc. | 7,773 | 19.30 | 26 | 24 | 24 | |||||||||||||||||
Flowonix Medical, Inc. | 155,561 | (3), (7) | — | — | — | — | ||||||||||||||||
MedMinder Systems, Inc. | 72,324 | — | — | — | — | |||||||||||||||||
MolecuLight, Inc. | TBD | — | — | — | — |
Revenue Recognized | ||||||||||||
Assets | 2Q 2023 | Year-to-Date | ||||||||||
Total finance receivables, gross | $ | 234,054 | $ | 9,278 | $ | 18,538 | ||||||
Total marketable investments | 59 | N/A | N/A | |||||||||
Fair value of warrant assets | 1,459 | N/A | N/A | |||||||||
Total assets, gross/revenues | $ | 235,572 | $ | 9,278 | $ | 18,538 |
(1) | |
(2) | |
(3) | Investment on nonaccrual. |
(4) | Royalty was paid off during the six months ended June 30, |
(5) | In July 2023, Ideal Implant assets were sold to an aesthetics company. |
(6) | Loan was sold to a third party during the six months ended June 30, 2023. |
(7) | Flowonix Medical assets were sold to Algorithm Sciences, Inc. during the six months ended June 30, 2023. |
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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Environmental, Social and Governance
As overseers of risk and stewards of long-term enterprise value, our management and Board of Directors (“Board”) play a vital role in assessing, identifying and understanding the potential impact and related risks of environmental, social and governance (“ESG”) issues on the organization’s operating model. Our Board and management are committed to identifying those ESG issues most likely to impact business operations and growth by focusing our investment strategy around supporting innovative, growth-oriented companies in the life sciences industry that maximize both social and investment value.
Among the ESG issues we support within the Company, we are committed to recruiting, motivating and developing a diversity of talent. We promote and foster a company culture where every voice is welcome, heard and respected, regardless of age, gender, race, religion, sexual orientation, physical conditions, cultural background or country of origin. Our commitment to ESG initiatives is an endeavor both the Board and management undertake for the general betterment of those both inside and outside the Company.
The nature of our business supports environmental sustainability by being mindful of products we and our partners use in our businesses. We promote recycling to reduce landfill, and we offer our employees a hybrid work model, which allows employees the flexibility to work remotely, thereby reducing the carbon output from commuting in cars or buses.
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 on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 17, 2017.Report. We believe there have been no new critical accounting policies or material changes to our existing critical accounting policies and estimates during the ninesix months ended SeptemberJune 30, 2017,2023, compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.Report.
Recent Accounting Pronouncements
Refer to Part I. Financial Information, Item 1. Financial Statements, Note 1 of the Notesnotes to the Unaudited Condensed Consolidated Financial Statementsunaudited 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 Septemberthree months ended June 30, 20172023 and 20162022 (in millions)millions)
Three Months Ended September 30, | Change | Three Months Ended | ||||||||||||||||||||||
2017 | 2016 | $ | 2023 | 2022 | Change $ | |||||||||||||||||||
Revenues | $ | 5.5 | $ | 4.2 | $ | 1.3 | $ | 9.5 | $ | 6.9 | $ | 2.6 | ||||||||||||
Impairment expense | — | 0.3 | (0.3 | ) | ||||||||||||||||||||
Provision (benefit) for credit losses | (0.7 | ) | — | (0.7 | ) | |||||||||||||||||||
Interest expense | 0.4 | 0.1 | 0.3 | |||||||||||||||||||||
Pharmaceutical manufacturing, research and development expense | 1.5 | 1.5 | — | |||||||||||||||||||||
Depreciation and amortization expense | 0.6 | 0.6 | — | |||||||||||||||||||||
General and administrative | 1.5 | 0.6 | 0.9 | 3.0 | 3.0 | — | ||||||||||||||||||
Other income (expense), net | (0.2 | ) | 0.5 | (0.7 | ) | 0.7 | (1.0 | ) | 1.7 | |||||||||||||||
Provision for income taxes | 1.1 | — | 1.1 | |||||||||||||||||||||
Consolidated net income | 2.8 | 3.8 | (1.0 | ) | ||||||||||||||||||||
Income tax expense | 1.5 | 0.2 | 1.3 | |||||||||||||||||||||
Net income | 3.9 | 0.6 | 3.3 |
Revenues
We generated revenues of $5.5Revenues increased to $9.5 million for the three months ended SeptemberJune 30, 2017, driven primarily by $5.4 million in interest and fees earned on our finance receivables. We generated revenues of $4.22023 from $6.9 million for the three months ended SeptemberJune 30, 2016, driven primarily by $2.82022. The $2.6 million in interest and fees earned on our finance receivables, and $1.3 million in income related to our investment in an unconsolidated partnership. The increase in revenue isfor the three months ended June 30, 2023 consisted of a $2.5 million increase in Finance Receivables segment revenue and a $0.1 million increase in Pharmaceutical Development segment revenue. The $2.5 million increase in Finance Receivables segment revenue was primarily due to a $2.5 million increase in interest and fees earned ondue to funding new finance receivables. Thisand existing loans, a $0.8 million increase in interest income due to an overall increase in reference rates, and a net $0.5 million increase in royalty revenue when compared to the same period of the previous year. The increase was partially offset by a $1.3 million decrease in interest, royalties and fees earned on finance receivables that were paid off in 2022 and 2023.
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Provision (benefit) for Credit Losses
Our allowance for credit losses is established through charges or credits to income fromin the form of the provision in order to bring our investmentallowance for credit losses for loans and unfunded commitments to a level deemed appropriate by management. Our allowance for credit losses decreased by $0.7 million during the three months ended June 30, 2023 due to an overall decrease in an unconsolidated partnership, which on February 23, 2017 sold its U.S. marketing rights to its underlying intellectual property (pleasefinance receivables. Please refer to Part I.Item 1., Financial Information,Statements, Note 3 of the notes to the unaudited condensed consolidated financial statements for further information regarding the provision for credit losses.
Interest Expense
Interest expense consists of interest accrued on our revolving line of credit, unused line of credit and maintenance fees, as well as amortization of debt issuance costs. Interest expense increased to $0.4 million for three months ended June 30, 2023 from $0.1 million for the three months ended June 30, 2022. The $0.3 million increase in interest expense was due to a higher average outstanding balance under the Prior Credit Agreement with Cadence Bank during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. On June 28, 2023, we terminated the Prior Credit Agreement with Cadence Bank and entered into a new Credit Agreement with First Horizon Bank. Please refer to Item 1., Financial Statements, Note 5 of the Notesnotes to the Unaudited Condensed Consolidated Financial Statementsunaudited condensed consolidated financial statements for further information onregarding the Holmdel transaction).
Credit Agreement with First Horizon.
Provision for Credit losses
Pharmaceutical Manufacturing, Research and ImpairmentDevelopment Expense
We did not recognize any provisionrecognized $1.5 million of pharmaceutical manufacturing, research and development expense for credit losses or security impairment expenses duringboth the three months ended SeptemberJune 30, 2017. 2023 and 2022.
Depreciation and Amortization
We recognized security impairment$0.6 million of depreciation and amortization expense during both the three months ended SeptemberJune 30, 2016 on an equity security2023 and 2022. Depreciation and amortization primarily consists of $0.2 millionamortization expense related to reflect the security at its fair market value asintangible assets of September 30, 2016. We also recorded an impairment chargeEnteris. Amortization expense is aligned with the expected future cash flows of $0.1 million in connection with a write-off of interest receivable associated with a debt security.the intangible assets.
General and Administrative
General and administrative expenses consist primarily of compensation,compensation; stock-based compensation and related costs for management, staff Board of Directors,and Board; legal and audit expenses,expenses; and corporate governance. Generalgovernance expenses. We recognized $3.0 million of general and administrative expenses increased to $1.5 millionexpense for both the three months ended SeptemberJune 30, 2017 from $0.6 million2023 and 2022.
Other Income, Net
Other income, net for the three months ended SeptemberJune 30, 2016, which was due to an increase2023 reflected a net aggregate fair market value gain of $0.4 million on our warrant derivatives and a $0.3 million net gain from the remeasurement of foreign currency transactions into our functional currency, net of changes in compensation-related expenses for additional employees hired in 2017 and an increase infair value of the performance-based bonus accrual.foreign currency forward contract.
Other Income (Expense), Net
Other income (expense),expense, net for the three months ended SeptemberJune 30, 20172022 reflected a net aggregate fair market value loss of $0.2$1.0 million on our warrant derivatives. Otherderivatives and Bioventus common stock. Our Bioventus common stock was sold during the year ended December 31, 2022.
Income Tax Expense
During the three months ended June 30, 2023 and 2022, we recognized income tax expense of $1.5 million and $0.2 million respectively. The increase in income tax expense is the result of higher taxable income for the three months ended SeptemberJune 30, 2016 reflected a net fair market value gain2023 when compared to the same period of $0.5 million on our warrant derivatives.
Income Tax Expense
We recognized $1.1 million of deferred income tax expense for the three months ended September 30, 2017. No deferred income tax expense was recognized for the three months ended September 30, 2016.prior year.
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Comparison of the Nine Months Ended Septembersix months ended June 30, 20172023 and 20162022 (in millions)millions)
Nine Months Ended September 30, | Change | |||||||||||
2017 | 2016 | $ | ||||||||||
Revenues | $ | 26.4 | $ | 18.1 | $ | 8.3 | ||||||
Provision for credit losses and impairment expense | — | 8.9 | (8.9 | ) | ||||||||
General and administrative | 3.1 | 2.3 | 0.8 | |||||||||
Other income (expense), net | (0.6 | ) | 0.9 | (1.5 | ) | |||||||
Provision for income taxes | 6.2 | — | 6.2 | |||||||||
Consolidated net income | 16.6 | 7.8 | 8.8 |
Six Months Ended | ||||||||||||
2023 | 2022 | Change $ | ||||||||||
Revenues | $ | 18.9 | $ | 18.1 | $ | 0.8 | ||||||
Provision (benefit) for credit losses | (0.7 | ) | — | (0.7 | ) | |||||||
Interest expense | 0.5 | 0.2 | 0.3 | |||||||||
Pharmaceutical manufacturing, research and development expense | 2.2 | 3.4 | (1.2 | ) | ||||||||
Depreciation and amortization expense | 1.3 | 1.3 | — | |||||||||
General and administrative | 5.5 | 6.2 | (0.7 | ) | ||||||||
Other expense, net | (0.1 | ) | (1.7 | ) | 1.6 | |||||||
Income tax expense | 1.3 | 1.3 | — | |||||||||
Net income | 8.6 | 4.0 | 4.6 |
We generated revenues of $26.4Revenues
Revenues increased to $18.9 million for the ninesix months ended SeptemberJune 30, 2017, driven primarily by $15.8 million in interest and fees earned on our finance receivables and $10.5 million in income related to our investment in an unconsolidated partnership. We generated revenues of2023 from $18.1 million for the ninesix months ended SeptemberJune 30, 2016, driven primarily by $12.72022. The $0.8 million in interest and fees earned on our finance receivables and $5.1 million in income related to our investment in an unconsolidated partnership. The increase in revenue is primarily driven byfor the net proceeds received related to our investmentsix months ended June 30, 2023 consisted of a $1.3 million increase in an unconsolidated entity, which on February 23, 2017 sold its U.S. marketing rights to its underlying intellectual property (please refer to Part I. Financial Information, Item 1. Financial Statements, Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements for further information on the Holmdel transaction)Finance Receivables segment revenue and a net $3.1$0.5 million decrease in Pharmaceutical Development segment revenue. The $1.3 million increase in Finance Receivables segment revenue was due to $4.9 million increase in interest and fees earned due to funding new and existing loans, a $2.4 million increase in interest income due to an overall increase in reference rates, and a net $0.4 million increase in royalty revenue when compared to the same period of the previous year. The increase was partially offset by a $6.4 million decrease in interest, royalties and fees earned on finance receivables.
receivables that were paid off in 2022 and 2023.
Provision (benefit) for Credit Losses
Our allowance 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 Impairment Expense
We did not recognize anyunfunded commitments to a level deemed appropriate by management. Our allowance for credit losses decreased by $0.7 million during the six months ended June 30, 2023 due to an overall decrease in finance receivables. Please refer to Item 1., Financial Statements, Note 3 of the notes to the unaudited condensed consolidated financial statements for further information regarding the provision for credit losses or security impairment expenseslosses.
Interest Expense
Interest expense consists of interest accrued on our revolving line of credit, unused line of credit and maintenance fees, as well as amortization of debt issuance costs. Interest expense increased to $0.5 million for six months ended June 30, 2023 from $0.2 million for the ninesix months ended SeptemberJune 30, 2017. We recognized security impairment2022. This $0.3 million increase in interest expense was due to a higher average outstanding balance under the Prior Credit Agreement with Cadence Bank during the ninesix months ended SeptemberJune 30, 2016 on debt and equity securities of $0.7 million and $1.1 million, respectively,2023 as compared to reflect the securities at their fair market values as of September 30, 2016. We also recorded an impairment charge of $0.1 million related to a write-off of interest receivable associated with a debt security. Also, during the ninesix months ended SeptemberJune 30, 2016,2022. On June 28, 2023, we recorded an impairment expenseterminated the Prior Credit Agreement with Cadence Bank and entered into a new Credit Agreement with First Horizon Bank. Please refer to Item 1., Financial Statements, Note 5 of the notes to the unaudited condensed consolidated financial statements for a loan write-off of $5.3 million, and we recognized an allowance for credit loss on a royalty purchase of $1.7 million.further information regarding the Credit Agreement with First Horizon.
Pharmaceutical Manufacturing, Research and Development Expense
Pharmaceutical manufacturing, research and development expense decreased from $3.4 million for the six months ended June 30, 2022 to $2.2 million for the six months ended June 30, 2023. The $1.2 million decrease was primarily due to a was primarily due to a reduction in headcount as well as a reduction in R&D and clinical trial expenditures.
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Depreciation and Amortization
We recognized $1.3 million of depreciation and amortization expense during both the six months ended June 30, 2023 and 2022. Depreciation and amortization primarily consists of amortization expense related to the intangible assets of Enteris. Amortization expense is aligned with the expected future cash flows of the intangible assets.
General and Administrative
General and administrative expenses consist primarily of compensation,compensation; stock-based compensation and related costs for management, staff Board of Directors,and Board; legal and audit expenses,expenses; and corporate governance.governance expenses. General and administrative expenses increaseddecreased to $3.1$5.5 million for the ninesix months ended SeptemberJune 30, 20172023 from $2.3$6.2 million for the ninesix months ended SeptemberJune 30, 2016, which was primarily2022. The $0.7 million decrease included a net $0.6 million decrease in salaries, benefits, general office and maintenance expense mainly due to an increasea reduction in compensation-related expenses for additional employees hiredemployee headcount in 2017our Pharmaceutical Development segment; and an increasea $0.3 million decrease in the performance-based bonus accrual,corporate strategic planning and related professional fees expense. The decrease was partially offset by $0.2 million increase in Board fees due to a decrease in legal fees following the sale of our SynCardia assets in 2016.revised Board compensation plan.
Other Income (Expense),Expense, Net
Other income (expense),expense, net for the ninesix months ended SeptemberJune 30, 20172023 reflected a net aggregate fair market value loss of $0.8$0.6 million on our warrant derivatives and a $0.2$0.5 million realized gain onfrom the saleremeasurement of available-for-sale equity securities. foreign currency transactions into our functional currency, net of changes in fair value of the foreign currency forward contract.
Other expense, net for the ninesix months ended SeptemberJune 30, 2016,2022 reflected a net aggregate fair market value gainloss of $0.9$1.7 million on our warrant derivatives.derivatives and Bioventus common stock. Our Bioventus common stock was sold during the year ended December 31, 2022.
Income Tax Expense
We have incurred net operating losses on a consolidated basis for all years from inception through 2012. Accordingly, we have historically recorded a valuation for the full amount of gross deferred tax assets, as the future realization of the tax benefit was not “currently more likely than not.” We believe that it is more likely than not that we will be able to realize approximately $32.3 million benefit of the U.S. federal and state deferred tax assets in the future.
As of September 30, 2017, we had NOLs for federal income tax purposes of $405.0 million. The federal NOL carryforwards, if not offset against future income, will expire by 2032, with the majority expiring by 2021. We recognized $6.2 million of deferred income tax expense of $1.3 million for both the ninesix months ended SeptemberJune 30, 2017. No2023 and 2022. The nominal increase in income tax expense was recognizedthe result of an increase in taxable income for the ninesix months ended SeptemberJune 30, 2016. We also had federal research credit carryforwards2023 when compared to the same period of $2.7 million. The federal research credits will expire by 2029.
the prior year.
Liquidity and Capital Resources
As of SeptemberJune 30, 2017,2023, we had $16.0$6.8 million in cash and cash equivalents, compared to $32.2$6.2 million in cash and cash equivalents as of December 31, 2016.2022. The primary driver of the net decrease$0.6 million increase in our cash balance was $36.5$31.6 million of interest, fees, principal and royalty payments received on our finance receivables. The increase in newcash and add-on funding,cash equivalents was partially offset by $13.7 million of investment funding, net of deferred fees and origination expenses; payroll, accounts payable and new credit facility closing costs totaled $9.6 million; $5.1 million to repurchase shares of the Company’s common stock in the open market; and net proceedspayments of $8.6$2.4 million received relatedof credit facility draws, principal, interest and fees paid on our credit facility with Cadence Bank.
We entered into a new $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 our investmentexceed $80.0 million, subject to the consent of the Agent and each Lender, at any time prior to the Commitment Termination Date. As of June 30, 2023, no funds have been borrowed, and $45.0 million was available for borrowing under the new credit facility. Our Prior Credit Agreement with Cadence Bank was terminated in an unconsolidated entity and cash generated by our investments in our partner companies.connection with the establishment of the new credit facility. Please refer to Item 1., Financial Statements, Note 5 of the notes to the unaudited condensed consolidated financial statements for further information regarding the Credit Agreement with First Horizon Bank.
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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.inventors, as well as the success of our Pharmaceutical Development segment. We generate income primarily from threefour sources:
1. primarily owning or financing through debt investments, royalties generated by the sales of life science products and related intellectual property;
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 utilizing the Peptelligence® platform; and | |
4. | To a lesser extent, realizing capital appreciation from equity-related investments in the life science sector. | |
2. receiving interest and other income by advancing capital in the form of secured debt to companies in the life science sector; and,
3. to a lesser extent, realize capital appreciation from equity-related investments in the life science sector.
As of SeptemberJune 30, 2017,2023, our finance receivables portfolio contains $163.7$223.0 million of net finance receivables and $3.3$0.1 million of marketable investments. We expect these assets to generate positive cash flows in 2017. 2023. However, 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 with a SOFR, Prime, or LIBOR-based interest rate floor. Changes in interest 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, weour Finance Receivables segment may not be able to generate positive cash flow above what our existing assets willare expected to produce in 2017.
2023. We intend to borrow funds to make investments to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities. We currently do not have access toassume any near-term repayments from borrowers, and as a credit facility or other forms of borrowing though have executed a non-binding term sheet with a potential lender on November 7, 2017. The timing of obtaining such a credit facility is uncertain and is largely dependent upon finalizing terms and conditions acceptable to us.result, no assurances can be given that actual results would not differ materially from the statement above.
Off BalanceOff-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 customers’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 customerpartner 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 SeptemberJune 30, 2017,2023, we had $7.4 million of unfunded commitments. Please refer to Item 1., Financial Statements, Note 6 of the Company had unfunded commitments of $8.3 million. Of the total $8.3 million, $0.3 million is potentially payablenotes to the seller ofunaudited condensed consolidated financial statements for further information regarding the Cambia® royalty. There are no additional earnout payments contracted to be paid by us to any of our partner companies. As of September 30, 2017, our unfundedCompany’s commitments were as follows (in millions):
Cambia® | $ | 0.3 | ||
Tenex Health, Inc. | 3.0 | |||
CeloNova BioSciences, Inc. | 5.0 | |||
Total Unfunded Commitments | $ | 8.3 |
All unfunded commitments are contingent upon reaching an established revenue threshold or other performance metrics on or before a specified date or period of time per the terms of the royalty purchase or credit agreements, and in the case of loan transactions, are only subject to being advanced as long as an event of default does not exist.contingencies.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During the ninesix months ended SeptemberJune 30, 2017,2023, our cash and cash equivalents were deposited in accounts at well capitalized financial institutions. The fair value of our cash and cash equivalents at SeptemberJune 30, 20172023 approximated its carrying value.
Investment and Interest Rate Risk
We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flow.
As we seek to provide capital to a broad range of life science companies, institutions and investors with the majority of our finance receivables portfolio paying interest based on floating interest rates with a reference rate floor, our net investment income is dependent, in part, upon the difference between the rate at which we earn on our cash and cash equivalents and the rate at which we lend those funds to third parties. As a result, we would beare subject to risks relating to changes in market interest rates. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations by providing capital at variable interest rates. We do not currently engage in any interest rate hedging activities. We constantly monitor our portfolio and position our portfolio to respond appropriately to a reduction in credit rating of any of our investments.
We entered into a revolving credit facility. As we borrow funds to make additional investments, our income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we are subject to risks relating to changes in market interest rates. In periods of rising interest rates when we have debt outstanding, our cost of funds would increase, which could reduce our income, especially to the extent we continue to hold fixed rate investments. We generally seek to mitigate this risk by pricing our debt investments with floating interest rates to maintain the spread of our portfolio over the cost of products.leverage. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations, which we have not done. Adverse developments resulting from changes in interest rates or hedging transactions could have a materially adverse effect on our business, financial condition and results of operations. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our investment income, net of borrowing expenses.
Inflation
We do not believe that inflation has had a significantCertain of our partner companies may be impacted by inflation. If such partner companies are unable to pass any increases in their costs along to their customers, it could adversely affect their results and impact their ability to pay interest and principal on our revenues or operations.loans. In addition, any projected future decreases in our partner companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future unrealized losses and therefore reduce carrying value of our net assets.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this report, our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There have been no changes during the ninesix months ended SeptemberJune 30, 20172023 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
We are involved in, or have been involved in, arbitrations or various other legal proceedings that arise from the normal course of our business. We cannot predict the timing or outcome of these claims and other proceedings. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact on our results of operations, balance sheets and cash flows due to defense costs, and divert management resources. Currently, we are not involved in any arbitration and/or other legal proceeding that we expect to have a material effect on our business, financial condition, results of operations and cash flows.
Information regarding the Company’s risk factors appears in “Part I. – Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2022, filed with the SEC on March 17, 2017. With the exception of the below paragraph, there have been31, 2023. There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2022.
The interest rates of many of our term loans to partner companies are priced using a spread over LIBOR
LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in term loans we extend to partner companies such that the interest due to us pursuant to a term loan extended to a partner company is calculated using LIBOR. Most of our term loan agreements with partner companies contain a stated minimum value for LIBOR.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time whether or not LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large US financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities. The future of LIBOR at this time is uncertain. If LIBOR ceases to exist, we may need to renegotiate the credit agreements with our partner companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.On May 31, 2022, the Board authorized a share repurchase program under which the Company was previously authorized to repurchase up to $10.0 million of the Company’s outstanding shares of common stock from time to time until May 15, 2023, through a Rule 10b5-1 trading plan in compliance with all applicable laws and regulations, including Rule 10b-18 of the Exchange Act (the “Prior Repurchase Program”). The purchase period for the Prior Repurchase Program was July 1, 2022 through May 15, 2023.
On May 16, 2023, the Company announced that the Board had authorized the Company to repurchase up to $10.0 million of the Company’s outstanding shares of common stock from time-to-time until May 16, 2024, through a trading plan established in compliance with Rule 10b5-1 and Rule 10b-18 of the Exchange Act (the “New Repurchase Program”). The actual timing, number and value of shares repurchased under the New Repurchase Program will depend on several factors, including the constraints specified in the Rule 10b5-1 trading plan, price, and general market conditions. There is no guarantee as to the exact number of shares that will be repurchased under the New Repurchase Program. Our Board may also suspend or discontinue the New Repurchase Program at any time, in its sole discretion. The purchase period for the New Repurchase Program is May 16, 2023 through May 16, 2024.
The table below summarizes information about our purchases of common stock during the three months ended June 30, 2023:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Number (or Appropriate Dollar Value) of Shares That May Yet Be Repurchased Under the Plan | ||||||||||||
April 1, 2023 - April 30, 2023 | 10,401 | $ | 17.68 | 10,401 | 611,218 | |||||||||||
May 1, 2023 - May 31, 2023(1) | 111,669 | (1) | 16.83 | 111,669 | (1) | 8,305 | (2) | |||||||||
June 1, 2023 - June 30, 2023 | 150,422 | 16.86 | 150,422 | 5,769 | (2) | |||||||||||
272,492 | $ | 16.88 | 272,492 |
(1) | The Prior Repurchase Program expired on May 15, 2023, and the New Repurchase Program began on May 16, 2023. |
(2) | Reflects approximate dollar value of shares available for repurchase under the New Repurchase Program as of the end of the applicable period. |
As of June 30, 2023, the Company has repurchased an aggregate of 113,639 shares under the Prior Repurchase Program and an aggregate of 251,520 shares under the New Repurchase Program at a total cost of $6.3 million, or $17.16 per share. As of June 30, 2023, the maximum dollar value of shares that may yet be purchased under the New Repurchase Program was approximately $5.8 million of shares of common stock. No shares are available for repurchase under the Prior Repurchase Program, which expired on May 15, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
None.
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* These certifications accompany this Quarterly Report on Form 10-Q. They are not deemed “filed” with the Securities and Exchange Commission and are not to be incorporated by reference in any filing of SWK Holdings Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
+ XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 9, 2017.August 10, 2023.
SWK Holdings Corporation | ||
By: | /s/ | |
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ | |
Chief Financial Officer | ||
(Principal Financial Officer) |
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